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Progress with VFM savings and lessons for cost reduction programmes

The National Audit Office has today reported on how much the Treasury’s Value for Money savings programme has improved value for money across government. The programme aims to achieve government-wide annual savings of £35 billion from 2008-09 to 2010-11.

Today’s report concludes that the Treasury’s design addressed some weaknesses in earlier savings programmes, and departments have made some progress in their management of their programmes compared with previous spending periods. Nevertheless, departments’ planned programmes did not contain sufficient contingency and it is unlikely that departments will achieve the government-wide target of £35 billion of annual savings, which fully meet the Comprehensive Spending Review criteria, in 2010-11.

To date the NAO has reviewed reported savings amounting to some £2.8 billion from five major departments which are to deliver around 40 per cent of the government-wide total. The NAO has concluded that 38 per cent fairly represented sustainable savings (green); 44 per cent may represent savings but with some uncertainty (amber); and 18 per cent do not represent, or significantly overstate, savings (red). Common problems include the use of unsuitable baselines for the calculation of savings, a lack of transparency over arms-length bodies’ reporting processes, and difficulties in demonstrating links between savings and performance.

Today’s report was accompanied by the NAO’s reviews of the value for money savings reported by three individual departments, as follows:

HM Revenue and Customs

In Autumn 2009, HMRC reported it had achieved savings of some £300 million. The NAO examined reported savings in staffing, estates, IT and procurement which totalled £288 million a year, some 90 per cent of the reported total savings. The NAO rated 42 per cent (£121 million) as green, 45 per cent (£129 million) as amber and 13 per cent (£38 million) as red.

Department for Education

In Autumn 2009, the Department for Education (formerly the Department for Children, Schools and Families) reported it had achieved savings of some £1.017 billion between 2007 and 2009. The NAO examined reported savings, mainly in the schools sector, which totalled £591 million, some 58 per cent of the reported total savings. The NAO rated 9 per cent (£55 million) as green, 89 per cent (£523 million) as amber and 2 per cent (£13 million) as red.

Ministry of Defence

By October 2009, the Ministry of Defence had reported new savings of £944 million. The NAO examined £712 million, some 75 per cent of the savings reported. It rated 42 per cent (£298 million) as green, 45 per cent (£318 million) as amber and 14 per cent (£96 million) as red.

"Public confidence in reported savings is undermined where they do not stand up to external scrutiny. The proportion which do not fully meet the Comprehensive Spending Review criteria is evidence both that the programme was not well enough understood across government and that quality control within departments was not good enough.

"Few of the savings made under the programme represent major departures from previous practice. The scale of savings needed in the current financial situation means that departments will have to think more radically about how to reduce costs and how to sustain them in the longer term."

Mr Amyas Morse, head of the National Audit Office

Notes for Editors

  • At the halfway stage of the Value for Money savings programme, government departments and local authorities have reported annual savings totalling £10.8 billion, 31 per cent of the target of £35 billion of annual savings by 2010-11.
  • The Treasury’s definition of CSR07 savings:

    Sustainable. Savings must exist at least for the current year and continue at the same or a higher level for two subsequent financial years. One-off savings, or savings which delay expenditure, do not help departments live within spending allocations in future years.
    Neutral to service quality. Departments need to demonstrate that reforms have not reduced the overall quality of public services at the level of their strategic objectives and public service agreements. This is to ensure that the savings do not simply represent cuts in services.

    Cashable. Cashable gains involve reducing inputs without affecting service quality. Non-cashable gains, in which outputs are increased for a given level of input, cannot be reported. Departments may reinvest cash savings in higher priority services, so in most cases savings cannot be observed directly in reduced budgets.

    Realised. Savings must have materialised in the year in which they are reported in order to have impacted on overall spending. Future savings cannot be anticipated.

    Net of costs. The upfront and investment costs and additional ongoing or running costs associated with the generation of savings must be subtracted from the value of the benefit to show the overall improvement to the taxpayer.

    Compared to robust cost baseline. Savings must be calculated in reference to projected spend if value for money initiatives had not been introduced. This is known as a counterfactual.

  • The NAO reviews of the value for money savings reported by three individual departments are as follows: Ministry of Defence: independent review of reported Comprehensive Spending Review 2007 Value for Money savings (HC 292, 2010-11), HM Revenue and Customs: independent review of reported Comprehensive Spending Review 2007 Value for Money savings (HC 293, 2010-11) and Department for Education: independent review of reported Comprehensive Spending Review 2007 Value for Money savings (HC 294, 2010-11).
  • Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
  • The Comptroller and Auditor General, Amyas Morse, is the head of the National Audit Office which employs some 900 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

PN: 44/10