What lurks between leaked lines?: Michael Portillo's letter tells much about flawed spending procedure, says Graham Mather

HOW exciting is yesterday's leaked letter in which Michael Portillo berated Michael Heseltine for his sluggish approach to spending cuts? Is it, as Robin Cook claimed, a shock horror attempt to wipe out legitimate public sector support of British industry? Or an interesting leak for a slow Monday morning at the start of the media's silly season?

The deeper interest lies in the fact that the letter is part of the fundamental review of public spending set in motion in early 1993. It is the first significant piece of evidence to emerge from the review, and it suggests that the way Britain handles these questions is still in need of radical reform.

The first problem it throws up is that the chief architect of the review has been moved on to another department before it has been completed, let alone implemented. Mr Portillo's promotion illuminates the weakness in a system which moves its Cabinet ministers around on average after just over two years. If long-term tax and spending plans are important, it seems strange to uproot those supervising them before even the first fruits have appeared.

Professor Richard Rose has demonstrated convincingly that the system makes ministers' grip on their departments briefer than many of our industrial competitors. It is more compatible with a system built around political careers than policy substance.

The second problem concerns methodology. The tone of the Treasury letter is reminiscent of the missives exchanged annually before ministers, in an exercise always trailed as 'blood on the carpets', met to struggle to a conclusion between the rock of long- established and entrenched spending programmes and the hard place of a tax burden alreadytowards the top end of political acceptability.

Of course, in these circumstances it is right for Treasury officials to adopt a zero-based budget approach and to suggest to spending departments that, unless they hear to the contrary by return of post, various cherished departmental budget items will be deemed removed.

The problem is that the system does not seem to work effectively. Departments lobby tenaciously for the status quo. Frequently departmental officials manage to structure the fight, as in this case, around relatively high- profile but small cost-spending programmes. If those programmes have powerful beneficiaries or potential supporters - as, in this case, large sections of commerce and industry - so much the better to fight off real

reform. It is illustrative that as early

as June last year the Financial Times was able to report, apparently after discussions with civil servants, that the review would largely be concerned with 'forgotten corners of departmental expenditure'.

The third difficulty is that an approach which relies upon exchanges conducted behind closed doors encourages selective leaking.

Certainly the Portillo proposals seem in the medium term of greater threat to civil servants than to outside interests. Regional selective assistance, for example, is the small remaining portion of a much larger programme of regional aid which has been scaled down without great political difficulty. The effectiveness of state research and development spending on energy technologies has been widely questioned.

Nor are the sums at stake enormous. Does the UK independent space programme only receive pounds 20m? What relatively small sum would be saved by phasing down the DTI consultancy initiative for small firms? Could it be that the real threat would be to those administering these various initiatives?

In a recent paper, the independent researchers Jonathan Smith and David Gold showed that the Department of Trade and Industry in 1993 still numbered 11,763 officials. It would be very unfortunate if leaks of this nature led some to believe that officials were protecting their interests by unsatisfactory techniques.

What policy lessons emerge from this episode? The first and foremost is that new structures will be necessary if debate is to be more constructive and outcomes less random - and less susceptible to leaking. The main fulcrum of British political debate in the next couple of years may well be the tax, spending and borrowing equation. If that debate is to have credibility, it will need to take place in the open, against properly developed policy aims, choices and trade-offs.

The sums involved, and the issues, are relatively small in Trade and Industry. Yet the financing of welfare, of health care and of education cannot be consigned to tart letters exchanged between ministers in secret. In the reformed public service of New Zealand, ministers each year sign a 'purchase agreement' with their departments, in which they contract to buy service delivery to specified standards.

Under the New Zealand model, policies and spending programmes have to be designed upfront, properly costed before Parliament votes on them, and clearly directed to achieve the government's chosen 'outcomes', which are measured against quantified 'outputs' which departments must achieve. It is a system which is more open, which facilitates change and reallocation of resources, and is compatible with improved parliamentary scrutiny before the money is spent. It is compatible, too, with the greater use of earmarked taxes, a policy innovation attracting interest in think tanks across the political spectrum as a means to give outside voices more of a grip on the destination of government spending.

For all Margaret Thatcher's achievements, her legacy was not one of a durable system of public spending control. Civil servants continue to hope that economic growth will permit gentle annual uprating of departmental programmes and budgets. All experience should warn politicians away from this notion, the more beguiling because it requires less effort and fewer painful choices from them. Spending policies should not assume economic growth: its absence, as a result of the correction to the late Eighties boom, has been the proximate cause of Britain's PSBR problem, tax increases and government difficulties.

Yet the lesson of the Portillo letter is that the traditional resort to annual Treasury attacks on departmental budgets doesn't work either. It leads to shallow debate, public alarm and easy defence of departmental habits.

Only if departments' tasks are more clearly defined, more openly debated, and more precisely costed against the alternatives can Britain break out of its sterile tax/spending debate. New Zealand has produced a working model of how to introduce reform. We should be prepared to copy their example, and the evidence of yesterday's revealed correpondence suggests we have quite some way to go.

The writer is president of the European Policy Forum and MEP for Hampshire North and Oxford.

(Photograph omitted)