Financial Scrutiny Uncovered How the Government Manages Its Finances and How Parliament Scrutinises Them

Financial scrutiny uncovered How the Government manages its finances and how Parliament scrutinises them

A guide for Members by the Committee Office Scrutiny Unit March 2007 This guide was written by staff of the Scrutiny Unit. The Scrutiny Unit forms part of the Committee Office in the House of Commons. It exists to strengthen the scrutiny function of the House. It provides specialist expertise to select committees, especially (but not exclusively) on financial matters and draft bills.

Contact details: Committee Office Scrutiny Unit, 7 Millbank, London SW1P 3JA. Telephone: 0207 219 8365 Email: [email protected] http://www.parliament.uk/about_commons/house_of_commons_scrutiny_unit.cfm er O temb ctob Sep er

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Budget cycle 1 Must be approved by 6 February 2 Consolidated Fund Act authorises winter supplementary estimates and vote on account 3 Must be approved by 18 March Estimates cycle 4 Appropriation (No. 1) Act authorises spring supplementary estimates and excess votes 5 Main supply estimates is for the coming financial year Must be approved by 5 August Reporting cycle 6 Appropriation (No. 2) Act authorises main estimates and summer supplementary estimates 7 The Spending Review process takes place every two to three years It occurs over a number of months and its outcome is usually published in July

Based on Dod's Handbook of House of Commons Procedure, page 109 Timings are approximate and may vary year on year Foreword by the Rt Hon Alan Williams MP, Chairman of the Liaison Committee and Chairman of the Public Accounts Commission

Parliament’s scrutiny of government finance is a vital part of its role in holding the Government to account. This is because, ultimately, weaknesses in financial and performance management will lead to failures in formulating and implementing Government policy. The work of select committees is the most important way in which Parliament carries out its financial scrutiny. The core tasks of departmental select committees include examining and reporting on the Government’s estimates, annual expenditure plans and annual resource accounts, as well as monitoring performance against targets in Public Service Agreements. Effective financial scrutiny by Parliament requires Members to have a sound and up-to-date knowledge of how the Government manages its finances. I therefore warmly welcome this booklet as a clear and accessible guide to the way the system operates. I hope it will encourage Members—in their work on select committees and otherwise—to play a greater part in the scrutiny of the Government’s financial and performance management. Contents

1. Introduction 5 2. The financial cycles – parliamentary scrutiny of finance 6 3. The planning cycle - the Spending Review 9 4. The Budget cycle 13 5. The estimates cycle 15 6. The reporting cycle 19 7. The efficiency programme 24 8. The Private Finance Initiative 27 9. Initiatives in financial management and scrutiny 31

Glossary 33 Bibliography 42 Acronyms 43 Scrutiny Unit Introduction

1 Introduction

Why financial scrutiny matters Each year, Parliament authorises around £500 billion of public expenditure and the taxes necessary to fund that expenditure. The amount of money that the Government spends, how it spends that money and the value for money achieved strongly influence the effectiveness of the Government’s policies. Parliament and select committees have a crucial role to play in financial scrutiny and in holding the Government to account in this respect.

What financial scrutiny involves Effective financial scrutiny has wide implications. It involves understanding how the Government decides on its strategic priorities and the levels of expenditure required to achieve those priorities, how it measures performance and how cross-departmental initiatives such as the Gershon efficiency programme affect departments.

What this guide provides This guide aims to provide Members’ with an outline of the Government’s financial management and parliamentary scrutiny of it. It looks specifically at: • The role of Parliament and other bodies in • The Private Finance Initiative: how the private scrutinising government finances and performance; sector has been involved in financing and manag- • The planning cycle: the Spending Review – the ing public sector capital investment projects; framework within which the Government plans its • Initiatives with an impact on financial management finances in the medium term; and financial scrutiny, including capability reviews, • The Budget cycle: how Parliament approves the financial management reviews, Regulatory Impact Government’s taxation plans each year; Assessments, and Whole of Government Accounts. • The estimates cycle: how Parliament approves the Government’s expenditure plans each year; • The reporting cycle: how departments report on their expenditure and performance; • The efficiency programme: the implications of the efficiency programme for departments; Scrutiny Unit The financial cycles

2 The financial cycles – parliamentary scrutiny of finance

An overview The chart inside the front cover shows how government finances are planned and managed and how the House engages with different aspects of finance over the parliamentary year. The process can be described in terms of four cycles:

• The planning cycle: The Government plans its • The estimates cycle: The estimates cycle (some- finances in the medium term through the Spending times known as the supply cycle) is the process Review process. Reviews take place every two or by which Parliament approves departments’ three years. Departments agree three-year plans resources and cash provision for the year. Depart- for expenditure and performance targets. The re- ments submit Supply Estimates which set out how sults of the Review are presented to Parliament in they plan to spend their funding and seek approval July (see chapter 3 for details). The Spending Re- from Parliament for the necessary funds. A few view for 2007 will take place three years after the of the Supply Estimates are debated in three previous Review. It is a Comprehensive Spending Estimates Day debates in each parliamentary year Review, which involves a more detailed review of (see chapter 5 for details). departments’ expenditure than the usual Spending • The reporting cycle: The reporting cycle is Reviews. the process through which the performance of • The Budget cycle: The Budget cycle is an annual departments is reported to Parliament and other process through which the Government makes stakeholders. Departments’ resource accounts give its assessment of the state of the economy and details of departments’ financial performance. The plans how it will raise revenue in the coming year. annual Departmental Reports also give financial (Athough the term Budget is generally understood information as well as an account of departments’ to refer to revenue and expenditure, only revenue progress in meeting their performance targets and is managed through the parliamentary Budget an indication of future plans (see chapter 6 for cycle.) The Budget sets out the Government’s details). plans for taxation, fees and levies. Members vote on it and have the opportunity to debate specific aspects of the Budget (see chapter 4 for details). Scrutiny Unit The financial cycles

Financial and parliamentary year

• The parliamentary year which runs from November to November is not the same as the Government’s financial year, which runs from April to March. Therefore the parliamentary year covers the estimates or supply process for two financial years. • In one parliamentary year, Parliament will discuss aspects of a range of financial years, including: – Possibly spending plans for the next three financial years (in the Spending Review process); – Taxation measures for the forthcoming financial year; – Expenditure in the current financial year; or previous year (excess votes); or next year (vote on account); – Performance of departments in the last financial year or current year.

Other aspects of financial scrutiny Organisations involved in financial scrutiny The chart inside the front cover depicts the systematic A variety of bodies, both inside and outside Parliament, formal ways in which the House of Commons reviews contribute to Parliament’s financial scrutiny. government finances. There are additional, ad hoc • The Committee of Public Accounts (PAC): The ways in which Members undertake financial scrutiny: main work of the Committee is the examination • Members can ask Parliamentary Questions on of the reports produced by the National Audit financial matters; Office (NAO). The Committee typically examines • Departmental select committees examine Depart- 50 value for money reports each year, as well as mental Reports and resource accounts. Moreover, reports on some departments’ resource accounts, many of their inquiries involve financial scrutiny in by taking oral evidence from the departments some form. concerned. • Departmental select committees: The core tasks of the select committees include examining and reporting on estimates, annual expenditure plans and annual resource accounts and monitoring performance against targets in the Public Service Agreements. • Scrutiny Unit: The Scrutiny Unit was set up in 2002 within the Committee Office to assist departmental select committees, particularly in the areas of finance and draft legislation. In the financial area, it examines the Supply Estimates and publications reporting departments’ performance. Scrutiny Unit The financial cycles

• The National Audit Office (NAO): The NAO is headed by the Comptroller and Auditor General Scrutiny in practice (C&AG), an Officer of the House of Commons. How effective is parliamentary scrutiny? The C&AG, supported by the staff of the NAO, audits the accounts of all government departments Parliamentary scrutiny of finance has significant and agencies, and many other public bodies. The constraints. The process by which revenue is raised C&AG also produces around 60 value for money and allocated is politically charged. In principle, the Commons could reject the government’s taxation studies each year on the economy, efficiency and and spending proposals. However as the majority effectiveness of public expenditure. of MPs are members of the governing party, the • The Audit Commission: The Audit Commission House is most unlikely to take that option. This places audits and reports on local public spending in Eng- increased importance on the work of the depart- land. Its areas of responsibility are predominantly mental select committees in reviewing departments’ local government, criminal justice, housing, fire spending proposals and the economy, efficiency and and police services and health trusts. effectiveness of their expenditure and making them account for their stewardship of public funds. • Other audit institutions in the UK: Responsibility Select committees have been given more resources for auditing and reporting on public sector bodies to enable their financial scrutiny to become more in Scotland, Wales and Northern Ireland rests with systematic. The Scrutiny Unit, set up in 2002, was Audit Scotland, the Wales Audit Office and the part of this process and has accountants who assist Northern Ireland Audit Office. These bodies com- the select committees with scrutiny of estimates, bine the roles played by the NAO and the Audit Departmental Reports and other financial matters. Commission in England. A paper by the Hansard Society on parliamentary scrutiny, The Fiscal Maze: Parliament, Government and Public Money (2006) reported that “The [Scrutiny Unit] is able to take an overview of the quality of financial performance and reporting across the full range of government activity. This enables a more systematic appreciation by the House as a whole of the areas of good and bad practice and relative success in applying resources to achieve policy outcomes.” It recommended that: “There should be a move towards a deeper notion of accountability to ensure that individual lessons are translated into general reforms of public institutions that are found to be flawed.” Scrutiny Unit The planning cycle – the Spending Review

3 The planning cycle – the Spending Review

In recent years, the Government has used the Spending Review process to plan Government finances in the medium term. Departments agree three-year plans for expenditure and performance targets. Between 1998 and 2004, Spending Reviews took place every two years. Because of this the third year of the Spending Review was usually reviewed by the subsequent Spending Review before it began. The next Spending Review, which was originally planned for 2006, was deferred until 2007. It will set out departments’ plans for 2008-09, 2009-10 and 2010-11. It will be a Comprehensive Spending Review, like that in 1998, which will involve a more detailed review of departments’ budgets than a normal Spending Review. The Spending Review process largely determines the content of the estimates for the years covered (see Chapter 5).

Why the Spending Review was introduced Prior to the introduction of Spending Reviews in now required to agree Public Service Agreement 1998, Governments announced their spending plans (PSA) targets with the Treasury as part of the Review. annually, in the Autumn Statement. Spending Re- These targets show what the department aims to views were introduced in order to: achieve with the money it spends. • Encourage government departments to take a more medium-term perspective How the Spending Review works Financial planning was perceived as being too The over-arching framework – the fiscal rules short-term. There was also pressure on depart- From 1998, the Spending Review has operated in the ments to spend all their funding by the end of the context of the Treasury’s fiscal rules, which determine financial year. Departments are now permitted to the total expenditure which can be agreed. The fiscal carry unspent funds forward to the next financial rules are: year through a system of End-year Flexibility • The Golden Rule: Over the economic cycle, the (EYF). The amounts that can be carried forward Government will borrow only to invest and not to under EYF and how they are spent are subject to fund current spending; and Treasury approval. • The Sustainable Investment Rule: Net public debt • Strengthen the linkage between policy objectives as a proportion of GDP will be held over the eco- and departmental budgets nomic cycle at a stable and prudent level. Other Financial planning was seen as placing too much things being equal, net debt will be maintained be- emphasis on the amount of funding a department low 40 per cent of GDP over the economic cycle. would receive, rather than what would be delivered with that funding. To address this, departments are 10 Scrutiny Unit The planning cycle – the Spending Review

The appropriateness of the Golden Rule and the The negotiation process Treasury’s application of it has been subject to de- The negotiation process for the Spending Review bate. In the 2006 Budget, the Treasury changed its begins when departments submit their spending plans forecast of the end date of the economic cycle from to the Treasury. The process results in (i) three-year the financial year, 2008-09 to early 2007. This fol- spending plans and (ii) Public Service Agreements for lowed two other changes to the Treasury’s estimates each department, usually published in July of the year of the start- and end-dates of the current economic prior to the start of the three-year period. cycle in the past two years. In July 2005, the Treas- (i) Spending plans ury changed its estimate of the start-date of the eco- Each plan sets out total planned expenditure – ef- nomic cycle from 1999–2000 to 1997–98, a change fectively the department’s financial budget – for that which arose from the upward revision of figures on department for each of the next three financial years, the United Kingdom’s economic growth in 1997 and expressed as a Departmental Expenditure Limit 1998 by the Office for National Statistics. At the time (DEL). DELs are totals of expenditure that depart- of the 2005 Pre-Budget Report, the Treasury revised ments can control, even though some elements may the end-date of the economic cycle from early 2006 be demand-led. to 2008–09 as a result of a downward revision of growth forecasts at that time for 2005–06. These Departments also have Annually Managed Expendi- changes sparked a debate over whether they were ture (AME), which covers expenditure that is less being made in order to make it easier for the Govern- predictable or controllable than DEL because it is ment to comply with the Golden Rule. In its Report demand-led, e.g. social security and Common on the 2006 Pre-Budget Report in January 2007, the Agricultural Policy payments. Accordingly, AME provi- Treasury Committee stated: sions are not used by the Treasury to hold departments to account for their financial management “There is a tension between fiscal planning, which performance. is a forward-looking process, and the assessment of DEL and AME together make up Total Managed Ex- whether or not the golden rule stands to be met in penditure (TME). AME and therefore TME are revised the present cycle, which is primarily a backwards- annually and sometimes in-year. looking exercise. We recommend that the Treasury review the golden rule and consider the merits of (ii) Public Service Agreements whether that rule could be made more forward-looking Departmental objectives are presented in Public Serv- and its application less dependent on estimates of the ice Agreements (PSAs). PSAs are three-year agree- dating of the economic cycle.” (para 35) ments negotiated between individual departments and the Treasury, indicating what is to be obtained for the money spent. Each sets out a department’s high-level aim, priority objectives and key performance targets. Scrutiny Unit The planning cycle – the Spending Review 11

The Treasury has traditionally concentrated on money by 2020” (Department for Work and Pensions); and resources (inputs) rather than what the activity and produces (outputs) or what effect was intended to • “a greater impact of European Commission (EC) be achieved (outcomes). PSA targets are intended to external programmes on poverty reduction and switch the focus from inputs to outputs and out- working for agreement to increase the proportion comes. of EC Official Development Assistance to Low Examples of targets from the 2004 Spending Review Income Countries from its 2000 baseline figure include: of 38% to 70% by 2008” (Department for Interna- • “Improve levels of school attendance so that tional Development). by 2008, school absence is reduced by 8% compared to 2003” (Department for Education and Skills); • “Halve the number of children in relative low- income households between 1998-99 and 2010-11, on the way to eradicating child poverty

How effective are PSA targets?

PSA targets have been criticised on several grounds: • Robustness of the data systems for measuring progress towards PSA targets: In its report on data systems, the NAO concluded: “In just over 20 per cent of cases we found Departments faced measurement problems that could not be addressed cost-effectively…For 29 per cent, we found weaknesses in the systems that need addressing… For 12 per cent of systems, we found that the arrangements that Departments had were not fit for monitoring and reporting progress against their PSA targets... For 6 per cent of 2003-06 targets, Departments had not established the necessary data systems to report progress at the time of our review”. (Report by the Comptroller and Auditor General, Second Validation Compendium Report 2003-06 PSA data systems, March 2006, page 1). • Impact of targets on organisational behaviour: Goodhart’s Law suggests that objective indicators of performance which are used as targets may be subject to statistical manipulation, or cause behavioural change, and so lose their force as objective indicators. This is because if people are assessed on indicators, this creates incentives for them to manipulate the measurement of the indicator or change their behaviour so the performance is no longer relevant. There is some evidence that this has happened with targets within the National Health Service (NHS): “Insiders believe NHS finance directors are suffering from an overwhelming pressure to fiddle with statistics to meet stringent performance targets, following the political push to improve the NHS…[a former finance director] believes this is putting an insurmountable pressure on hospital management to present positive figures” (Accountancy Age, 24 April 2003). Ultimately setting effective targets is a balancing act. Targets need to strike a balance between being stable enough to allow trends in performance to be monitored and being revised often enough to ensure that they remain relevant. They also need to be challenging and encourage departments to excel but at the same time should not divert resources from other areas not subject to targets. 12 Scrutiny Unit The planning cycle – the Spending Review

Scrutiny in practice Parliamentary scrutiny of the Spending Review process

There is no systematic mechanism for parliamentary scrutiny of the Spending Review, unlike the Budget and estimates cycles, as the Spending Review is principally a process of negotiation between the Treasury and departments. However there are ways in which Members can be involved in scrutiny of the Spending Review: • Some elements of the Spending Review may be announced in the Budget, which means that they can be scrutinised by the Treasury Committee in its review of the Budget or in other ways. For instance, the 2006 Budget announced that “the Department for Work and Pensions, HM Revenue and Customs, HM Treasury and the Cabinet Office have already agreed to deliver ambitious value for money reforms over the CSR period enabling them to continue improving services within De- partmental Expenditure Limits (DEL) that will fall by 5% in real terms per year in 2008-09, 2009-10 and 2010-11” (Budget 2006, page 136). • Departmental select committees can be involved in the consultation process on the Spending Review. Some select committees, for example, have already asked departments for details of their draft Com- prehensive Spending Review 2007 PSA targets. In its recent report on financial scrutiny,The Fiscal Maze: Parliament, Government and Public Money, the Hansard Society recommended that “Parliament should become fully involved in the process leading up to the Comprehensive Spending Review (CSR) 2007” (page 3). Scrutiny of the Spending Review is important because it largely determines the expenditure requested in the Supply Estimates. Scrutiny Unit The Budget cycle 13

4 The Budget cycle

The Budget cycle is an annual process through which the Government makes its assessment of the state of the economy and plans how it will raise revenue in the coming year. (Although the term “budget” is generally understood to refer to revenue and expenditure, only revenue is formally managed through the parliamentary Budget cycle.)

How the Budget cycle operates alcoholic drinks and petrol) under the Provisional Col- Pre-Budget Report lection of Taxes Act 1968. This enables the new rates The Budget cycle starts with a Pre-Budget Report, of duty to take effect immediately, before the Finance published every November or December. The Pre- Bill, which formally approves the Budget resolutions, Budget Report outlines the Government’s assessment has become law. Because the Provisional Collection of the state of the economy, and shows how its taxa- of Taxes Act allows taxes to be levied without full tion and spending plans are linked into its broader statutory authority only for a specified period, it is economic strategy. It may also trail tax measures essential that the Finance Bill receives Royal Assent which could be introduced in the following Budget. before that period ends. There is also an accompanying report by the National Audit Office which validates the assumptions underlying Finance Bill the Treasury’s fiscal projections. A Finance Bill is brought in to give permanent legal effect to the Budget resolutions. It deals with the The Budget revenue side of government finances, including: The Chancellor’s Budget speech is delivered in March • changes to levels and types of taxation and duties; and generally falls into two parts: a resumé of the • changes to the administration of the tax system; economic situation and a detailed account of the • renewal of taxes already in force. measures needed to raise the funds required. The Finance Bill’s second reading debate is usually a On Budget day, the Treasury publishes the Financial single day. The Bill is then divided. Clauses relating to Statement and Budget Report (FSBR), often referred the most significant and controversial proposals are to as the “Red Book”. The FSBR is combined with taken in Committee of the whole House. The rest of an Economic and Fiscal Strategy Report, which the Bill is referred to a standing committee, typically describes the features of the national economy in comprising thirty to forty members. a global context, and reports on a wide range of economic and financial measures. Again, the NAO The report stage and third reading usually take two also validates some of the underlying assumptions. At days in the House. After the Bill goes through the the end of the Budget speech, a resolution is usually House of Commons, it goes to the House of Lords. moved to give immediate provisional effect to certain Consideration there is essentially a formality because proposals (for example, increases in duty on tobacco, of the convention that the House of Lords cannot alter or reject the Bill. Finally the Bill receives Royal Assent. 14 Scrutiny Unit The Budget cycle

Scrutiny in practice Parliamentary scrutiny of the Budget process

As set out above, the Budget and the Finance Bill are debated in Parliament. The Commons could reject the government’s taxation proposals, but as this would be equivalent to a vote of no confidence in the Govern- ment and with the majority of Members belonging to the governing party, it is unlikely to happen. There is also scrutiny of the Budget and Pre-Budget Report by the Treasury Committee. The Treasury Com- mittee receives both written and oral evidence from academics, the private sector and the Treasury on the implications of the Budget and produces a report. It does the same for the Pre-Budget Report. Scrutiny Unit The estimates cycle 15

5 The estimates cycle

The estimates cycle (sometimes known as the supply cycle) is the process by which Parliament approves departments’ resources and cash for the year.

Supply Estimates Supply Estimates are the means by which departments Supplementary Estimates seek parliamentary authority to spend money for Supplementary Estimates are used where depart- particular purposes and draw down financing from the ments wish to: Consolidated Fund (which is the Government’s main • Draw down additional funding beyond that already current account). The constitutional practice is that authorised in the Main Estimates; or • the Government requests money, • Transfer funding between RfRs. • the House of Commons grants that money, and Supplementary Estimates can be submitted three times a year – Summer (May), Winter (November) • the House of Lords assents to the grant. and Spring (February) (see chart inside front cover). Supply Estimates for each department can be submit- In practice, Summer Supplementaries are rare ted up to four times a year. because they must be presented to Parliament very soon after the Main Estimates. Main Supply Estimates At the same time as the estimates are placed A large proportion of the Main Estimates derive directly before Parliament, departments send an explana- from the Spending Review process. The Main Supply tory memorandum on their estimate (the Estimate Estimates are presented to Parliament after the Memorandum) to the relevant select committee. The Budget, usually in April or May. Each department’s memorandum should explain differences between the estimate is expressed in terms of one or more separate current and previous estimate, as well as the impact allocations, referred to as a Request for Resources, of the changes sought, and enables committees to (RfR). Each RfR relates to a different area of the carry out a more rigorous scrutiny of estimates. The department’s expenditure. Departments may not use Scrutiny Unit assists departmental select commit- funding under one RfR to fund expenditure on another tees to scrutinise the memoranda and improve their RfR without Parliament’s authorisation. quality. Estimates are debated in the Commons in Estimates Day debates (see below). 16 Scrutiny Unit The estimates cycle

Structure of the estimates

The estimates process sets : • Resources and cash limits for DEL and AME (see page 10). Although government accounting is on a resource basis (see Chapter 6), a cash limit is also set because of the need to control the Consolidated Fund’s cash flow. • Revenue and capital limits for each RfR. Treasury rules stipulate that revenue funding can be used for capital purposes, but capital funding may not be used for non-capital purposes without prior approval by the Treasury; • Administration budgets. Administration budgets are set for all departments and are a component of DEL. The limits exist to ensure sufficient resources are used to fund the provision of public goods and services rather than funding departments’ running costs. In recent years, administration cost limits have been reduced in order to encourage economy and efficiency savings in departments. Around half of administration costs are accounted for by civil service pay. A further 40 per cent is accounted for by procurement of goods and services (e.g. accommodation, equipment, travel). • Income limits. A Department may be permitted to retain income from specified sources, and, up to a set limit, to use such income to fund its expenditure programmes. This income is known as Appropriations in Aid (AinA). Income from other sources, or above the set limit, must be surrendered to the Consolidated Fund. This is known as Consoli- dated Fund Extra Receipts (CFER). In practice departments can usually request Treasury approval for virements (transfers of funds) to prevent revenue and capital limits being breached. However they must obtain approval from Parliament if they want to amend resource, cash and income limits. Breach of any of the limits (other than income limits), identified through the resource accounts, is a breach of parliamentary authority and results in a qualified audit opinion and a report by the Comptroller and Auditor General to Parliament. Qualified audit opinions tend to arise from a breach of the revenue or capital limits in the RfR, when departments have incurred unexpected expenditure and have not requested changes through a Supplementary Estimate. ‘Non-vote’ expenditure There are elements of DEL and AME which are not funded through Supply Estimates. These are referred to as non-vote expenditure and include expenditure funded directly from sources other than the Consolidated Fund, such as the National Insurance Fund and expenditure by public corporations and some NDPBs. Non-vote expenditure also includes Departmen- tal-Unallocated Provisions (DUP), which are a specific proportion of the department’s budget set aside as a contingency. ‘Non-budget’ expenditure Non-budget expenditure is expenditure which is funded through the Supply Estimates but not included in a department’s DEL or AME, and includes grants from departments to devolved administrations such as the Scottish Executive, to local authorities or to non-departmental public bodies (NDPBs). Scrutiny Unit The estimates cycle 17

Excess votes Scrutiny in practice Excess votes seek retrospective authorisation when Estimates Days a department’s spending in a financial year has ex- ceeded what Parliament authorised (or has been Three days in each session are allotted for the House incurred for a purpose that was not authorised). to debate the estimates. The Liaison Committee, which Excess votes are examined by the NAO, which ad- comprises the Chairmen of all select committees, pro- vises the Public Accounts Committee. No excess vote poses an estimate (or part of an estimate) for debate may be put to the House for approval without debate on each of these days or half-days. The estimate is unless that Committee has no objection. Excess votes usually used as a peg for a debate on a select committee report that may be as much about policy as about are presented to Parliament in the Statement of the funds sought, but at their best, Estimates Days can Excesses. It sets out the amounts of resource and be used to explore a major financial issue in depth. For cash that the Government requests Parliament to instance, the Department of Health’s 2005-06 Spring grant in Excess votes. Supplementary Estimate requested more than £500 million, including more than £195 million of End-year Votes on Account Flexibility, to be used as loan capital for NHS and pri- Votes on Account come before the House in Novem- mary care trusts. This Supplementary Estimate acted ber. They cover about 45% of the estimated expendi- as the basis for a debate on NHS deficits. However the fact that Estimates Day debates do not systematically ture of each government department in the coming scrutinise every estimate places increased importance financial year. The Vote is needed as there is a time on the work of the select committees in reviewing lag of about four months between the beginning of Estimates Memoranda to ensure that the requests for the financial year in April and the Appropriation Act, funds are justified. which gives effect to the Main Estimates. Without the Vote on Account, the Government would have no authority to spend funds between April and July.

Consolidated Fund and Appropriation Bills The estimates, excess votes and votes on account are given legal effect through Consolidated Fund or Appropriation Bills. The latter are usually formally titled Consolidated Fund (Appropriation) Bills, but are generally referred to as Appropriation Bills. When enacted, they authorise the release of cash and the use of revenues from the Consolidated Fund. There is usually only one Consolidated Fund Bill in a session, but “Consolidated Fund Clauses” with a comparable function are included in the subsequent Appropriation Bills. 18 Scrutiny Unit The estimates cycle

Bills What they approve Relevant estimate day debate Consolidated Fund Bill Votes on Account 1st Estimates Day Winter Supplementary Estimates (around December) Consolidated Fund (Appropriation) Bill Spring Supplementary Estimates 2nd Estimates Day (sometimes known as the Excess votes (in most cases) (around March) Appropriation (No. 1) Bill) Consolidated Fund (Appropriation) Bill Main Estimates 3rd Estimates Day (sometimes known as the Summer Supplementary Estimates (around July) Appropriation (No. 2) Bill) Revised Estimates (reductions in the Main Estimates) Scrutiny Unit The reporting cycle 19

6 The reporting cycle

Reporting by departments on their performance is through Departmental Reports and Autumn Performance Reports, which departments publish themselves. Departments also produce resource accounts, which are audited by the head of the NAO, the Comptroller and Auditor General (C&AG). The C&AG also produces value for money reports, most of which are examined by the Public Accounts Committee (PAC).

Departmental Reports Departmental Reports are usually published in April/ Scrutiny in practice May each year. They summarise: Parliamentary scrutiny of Departmental Reports • performance against the Public Service Agreement (PSA) targets. Progress is reported using standard A core task for departmental select committees is to monitor performance against PSA targets. This is terminology which enables the reader to compare achieved through reviewing Departmental Reports and progress across targets and between Departments; Autumn Performance Reports. They are assisted in this • progress in delivering the efficiency programme task by the Scrutiny Unit. Most departmental select (see chapter 7); committees have an oral evidence session in which • provisional outturn spending for the previous financial senior civil servants and sometimes Ministers are questioned about the Departmental Report. The Scrutiny year and the actual spending for the four years Unit also analyses all Departmental Reports to identify before that; examples of best practice and ways in which depart- • forecast expenditure for up to the next three years ments can improve their Reports. covered by the last Spending Review (broken down in more detail than in the Spending Review). NAO Value for Money reports Departmental Reports should not be promotional The NAO presents around 60 reports to Parliament material but should give a balanced and accurate as- each year on the value for money (VFM) of spending sessment of departments’ performance. Good Depart- by departments and other public bodies. The NAO mental Reports will identify and analyse weaknesses proposes topics for examination based upon monitor- in policy implementation and any limitations in data ing and analysis of the risks to value for money across systems for monitoring progress towards PSA and Government. The PAC and individual Members can efficiency targets, as well as the department’s suc- also request the NAO to follow up on a particular cesses. The Treasury issues guidance to departments issue. on the format and content of the Reports. VFM is measured in terms of the 3 Es: Autumn Performance Reports • Economy : minimising resources required – Autumn Performance Reports are interim Departmental spending less; Reports and are published around December. They • Efficiency : the relationship between the output report departments’ progress against PSA targets and of goods or services and the resources used to in implementing the efficiency programme. produce them – spending well; and 20 Scrutiny Unit The reporting cycle

• Effectiveness : the relationship between the in- be recognised in resource accounts in the financial tended and actual outcomes from public spending year in which the cost was incurred. It is referred – spending wisely. to as an accrual. The same cost would only have been recognised in cash-based accounts in the following year, when it was actually paid. Scrutiny in practice • matching the cost of capital assets to the period How the PAC investigates VFM in which they are used or consumed, by charging Each year around 50 of the NAO’s VFM reports are in- depreciation on them. Depreciation is the measure vestigated further by the PAC. The PAC takes evidence of the reduction in the value of assets. In resource from Accounting Officers (senior officials, normally a accounts assets are recorded in the balance sheet body’s Permanent Secretary or Chief Executive), who and depreciation is charged as a cost. Previous have been designated by the Treasury and have a per- cash accounts did have an assets and liabilities sonal responsibility to ensure the prudent stewardship statement but did not charge depreciation, which of public funds. The PAC then issues its own report. By convention, the Government must reply to recom- means that they did not reflect wear and tear of mendations within two months. The NAO and/or the assets. PAC can decide to conduct a follow-up investigation of The use of resource accounts has led to a system the issues raised and of progress in implementing the of dual authorisation for estimates. There is authori- Committee’s recommendations. sation both for the resources to be used during a financial year and for the cash to be paid out of the Consolidated Fund. Resource accounts The Government Resources and Accounts Act 2000 requires almost all government departments to produce resource accounts, audited by the NAO, Scrutiny in practice based on accruals accounting. Public expenditure Parliamentary scrutiny was previously planned and subject to parliamentary of resource accounts control solely on a cash basis. Resource accounts are The NAO audits the resource accounts of departments similar in many respects to private sector accounts: and will report to Parliament if the C&AG qualifies the both these and resource accounts are prepared accounts or if there are issues of particular note. Under according to GAAP (Generally Accepted Accounting the Faster Closing initiative, it is a requirement that Practice) and follow the concept of accruals. resource accounts for 2005-06 onwards be laid before The principal advantage of accruals accounting is that Parliament before the summer recess, which should enable more timely scrutiny. it allows better financial management and scrutiny by: The Scrutiny Unit analyses resource accounts for • matching expenditure in any period to revenues committees so that key issues can be raised with the earned and obligations incurred in that period. For department. In addition, the Unit runs training for example, a department may have used electricity Members and staff on how to interpret resource and received an electricity bill in the year, but may accounts for themselves. pay it after the financial year ends. The cost would Scrutiny Unit The reporting cycle 21

What do resource accounts contain?

All departmental resource accounts have the same format. There have been some small changes in the format in 2005- 06. The new format is as follows: • Annual Report (including a Management Commentary) • Statement of Accounting Officer’s Responsibilities • Statement on Internal Control • Audit Certificate and Report • The Primary Statements – (see below) • Notes to the Accounts.

The Primary Statements supply the financial information about the department and consist of the following: (i) Statement of Parliamentary Supply (formerly Schedule 1) This gives a useful overview of how the department spent funds against estimates provided. It compares outturn (actual expenditure or “actuals”) with the estimate for both resource expenditure and the overall cash requirement. The sum- mary also reconciles the cash figures to the resource figures. In addition, the statement provides an explanation of any large variances between expenditure and estimates and an analysis of extra income. This schedule is provided only for central government departments and not other public bodies. (ii) Operating Cost Statement and Statement of Recognised Gains and Losses (formerly Schedule 2) This is similar to the profit and loss statement in a company’s accounts. It shows how much the department is spending on its administration and how much directly on programmes. (iii) Balance Sheet (formerly Schedule 3) This shows the assets and liabilities of the department at the year-end. The composition of the balance sheet will vary significantly amongst departments. For instance the Department for Constitutional Affairs owns a great many physical assets in the form of court buildings, whereas the Treasury has fewer. (iv) Cash Flow Statement (formerly Schedule 4) This analyses a department’s cash flows during the year resulting from operating activities, capital expenditure and from financing. Departments and the Government as a whole need to manage their cash position in order to minimise pressure on the Consolidated Fund and the national debt while ensuring their suppliers are paid promptly. A significant reduction in the cash balance may indicate that the department is having problems with revenue collection; a significant increase in the cash balance may indicate that payments to suppliers are not being made promptly. (v) Net operating costs by Departmental Aim and Objective (formerly Schedule 5) This shows net expenditure categorised by departmental objective. 22 Scrutiny Unit The reporting cycle

How to do a quick review of resource accounts

1. Audit Certificate and Report as a provision or a contingent liability depends on the The “opinion” section tells you: probability of the pay-out (a provision is more likely to • If the accounts are true and fair; result in a pay-out than a contingent liability). They may include, for example, restructuring costs (early retire- • If the accounts were prepared in accordance with ment, redundancy etc.), or legal claims and obligations legislation and Treasury directions; to clean up waste (e.g. nuclear decommissioning). • If income and expenditure have been applied for the The three Notes to look at are: purposes Parliament intended. • Provisions for liabilities and charges; If the accounts do not satisfy the above requirements they will be qualified. There are different types of qualification. • Contingent liabilities disclosed; However any type of qualification indicates weaknesses in • Contingent liabilities not required to be disclosed the financial management of the department and means under Financial Reporting Standard 12 (see glossary) you cannot rely on some or all of the accounts. but included for parliamentary reporting and accountability purposes. 2. Statement of Internal Control Accounting Officers are required to make an annual 5. Losses Register “Statement of Internal Control”. This summarises the The Losses and Special Payments note is sometimes ways in which staff are trained to manage risk and how called the Accountability Disclosure note. Departments risk has been identified, evaluated and controlled. must disclose the total amount of losses and special It also confirms that the effectiveness of the system of payments made. Some of the losses may relate to internal control has been reviewed and that the results previous years and may not have been disclosed earlier of that review have been discussed. The review of if they were undiscovered or an attempt at recovering effectiveness section is the most important one to read. the money was being made. It will detail any failures in the department’s systems and what is being done to address them. 6. Big changes Unless the core business of a department changes it is 3. Statement of Parliamentary Supply reasonable to expect that most figures in the accounts (previously called Schedule 1) will not change significantly from year to year. Small This compares the department’s actual spending changes are reasonable due to inflation and normal (outturn) with the amount voted by Parliament in the business fluctuations, but unexplained large changes Main and Supplementary Estimates. Large variances may be worth investigating. (differences between the outturn and the estimates) Almost any of the statements and notes in the accounts may indicate problems with the department’s budgeting could display changes which raise questions but the and financial management, or that there has been main areas to look at are: expenditure, staff numbers slippage in the delivery of its programmes. and costs, debtors and creditors. For some public bodies, income, fixed assets or stock may also be 4. Provisions and Contingent Liabilities significant. An event which may require the department to pay out money at some point in the future will result in a provision or a contingent liability. Whether it is classified Scrutiny Unit The reporting cycle 23

Role of the Financial Reporting Advisory Board (FRAB) in resource accounts preparation

The resource accounts need to be prepared in accordance with GAAP (Generally Accepted Accounting Practice), subject to such adaptations as are necessary in the context and with particular regard to the standards issued by the Accounting Standards Board (ASB). The FRAB’s statutory function is to advise HM Treasury on how this should be done. It therefore reviews changes proposed to the Government’s Financial Reporting Manual (FReM), which all central government bodies are required to follow in preparing their resource accounts. The FRAB reports to Parliament annually on its activities and highlights any departure from UK GAAP in the FReM, together with its views on any such departures. The FRAB has an independent chairman and includes representatives from the ASB, the NAO, the Audit Commission, the Treasury, departments, devolved administrations, the Office for National Statistics and the academic sector. FRAB also has a Parlia- mentary Observer, a Member of the House, who is supported by the Scrutiny Unit.

International convergence – what it means for resource accounts

There have been moves to standardise accounting practice across the European Union (EU). From 2005, all listed companies in EU member states have been required to adopt International Financial Reporting Standards (IFRSs). A common set of International Public Sector Accounting Standards (IPSASs) is also being developed. The Accounting Standards Board in the UK has started a convergence project to align UK GAAP (Generally Accepted Accounting Practice) better with IFRSs. The Government is committed to the eventual application of IFRS requirements. The Treasury is currently updating the Financial Reporting Manual to reflect how IFRSs would apply. However, there are currently no international standards in key areas such as accounting for Private Finance Initiative/Public Private Partnership schemes. International convergence of accounting standards would make it easier to compare the UK Government’s financial performance with those of other countries. Moreover the speed with which the Treasury is able to adopt international accounting standards could be an indication of the soundness of its financial management. 24 Scrutiny Unit Efficiency programme

7 The efficiency programme

The Chancellor’s Budget speech in spring 2003 announced a review of efficiency in the public sector by Sir Peter Gershon. The aim of the review was to ensure that resources were released to front-line services. The outcome of the review formed an important part of the Spending Review 2004. Having accepted the Gershon Review’s recommendations, the Chancellor announced an efficiency programme from April 2005 designed to achieve £21.5 billion of efficiency gains a year across the public sector by 2007-08. The way in which departments generate efficiency savings has important implications for the delivery of public services. The Chancellor has also announced a target of reducing the workforce within the civil service and military adminis- trative and support posts by 84,150 by 2007-08 (this includes a redeployment of 13,550 posts to front-line services). The Lyons Review forms part of the efficiency programme. It has identified scope for relocating a substantial number of public sector activities from London and south-east England to other parts of the United Kingdom.

Efficiency targets and Efficiency Cashable and non-cashable gains Technical Notes Efficiency gains are divided into cashable and non- Departments now have efficiency targets, which cashable gains. show how much efficiency savings they will have to • Cashable gains: Consist of reductions in inputs generate within the Spending Review period. Most which do not adversely affect the quality of out- main departments also have headcount reduction tar- puts. For example, reforms which allow schools gets and relocation plans, which will generate some to purchase the same quantity and quality of of their efficiency savings. Progress against targets computers at lower cost would generate cashable is reported in Departmental Reports and Autumn efficiency gains. Cashable efficiency gains free up Performance Reports. cash which can be used for front-line services. Each department has drafted an Efficiency Techni- Around two-thirds of the £21.5 billion efficiency cal Note, which shows how it will meet and how it target is for cashable savings. will measure its efficiency targets. The Efficiency • Non-cashable gains: Occur where the quality of Technical Notes are publicly available on the Treasury outputs increases while cash inputs remain the website. The Government’s efficiency programme is same. A hospital which reduced waiting times and monitored and supervised by the Office of Govern- improved patient care, with no additional costs, ment Commerce (OGC), part of the Treasury. would achieve a non-cashable efficiency gain. Although no cash has been freed up, the hospital is using its resources more efficiently. Scrutiny Unit Efficiency programme 25

Classification of efficiency gains Progress so far The Gershon Review identified six different ‘work By the end of September 2006, departments and streams’ through which the efficiency gains will be local authorities reported annual efficiency gains delivered (Report by the Comptroller and Auditor of £13.3 billion (HM Treasury, Pre-Budget Report General, Progress in improving government efficiency, 2006, para. 6.18). This is more than half-way February 2006, page 16): towards the target of £21.5 billion by 2007-08. • Procurement: The public sector spends over £100 These include: billion each year on procurement of goods and • £300 million by the Ministry of Defence for a services. There is therefore potential for efficien- reduction of 40% in the costs of providing human cies through more effective procurement practices resources services; and finding cheaper suppliers. • £300 million by the Department of Health for a • Productive time: This includes freeing staff from reduction in the costs of reimbursing pharmacists time spent on unproductive tasks. for drugs dispensed; • Policy funding and regulation: This includes set- • £445 million by the Home Office for delivering ting standards and targets and improved monitor- efficiency gains in asylum support. ing activity to ensure compliance with them. • Corporate services: This relates to the efficient de- Effectiveness of efficiency targets livery of finance, IT, human resources and property The effectiveness of efficiency targets and the way in management services to all government organisa- which they have been applied is a subject of debate, tions, on which almost £30 billion a year is spent. especially as regards measurement. A recent NAO An element of this is seeking to develop shared report (Progress in improving government efficiency, services between government departments, and February 2006, pages 5-6, paras 12-13) found the between departments and their non-departmental following: public bodies (NDPBs). • deficiencies in departments’ management informa- • Transactional services: This relates to the efficiency tion systems mean that their ability to measure in the delivery of services, which currently costs changes in output quantity and quality as well as over £10 billion annually. inputs still lags behind the needs of a programme • Other : Some efficiency gains do not fit easily into that is aiming to deliver real efficiency gains rather the work streams. These are often department- than just spending cuts. specific, such as restructuring the armed forces so • some efficiency gains are reported without taking they can better meet the UK’s defence needs at into account additional capital costs incurred to lower cost. generate these gains, even though it would be accurate to reflect those costs. There are also concerns about whether departments’ attempts to meet efficiency targets have led to a decline in public services. For instance the Work and Pensions Committee’s Report on the Efficiency 26 Scrutiny Unit Efficiency programme

Savings Programme in Jobcentre Plus March 2006, (para 104) stated: “The DWP has acknowledged Scrutiny in practice that the efficiency savings programme is having ‘a Reporting of efficiency savings detrimental impact’ on accuracy levels [of Income Support]”. Savings which result in declining standards Departments’ progress against efficiency targets of public service cannot be defined as “efficiency is set out in the Departmental Reports and Autumn savings”. Performance Reports. These are reviewed by select committees. The usefulness of some of the targets has also been A review by the Scrutiny Unit of efficiency reporting in questioned. For instance at the Treasury Committee Autumn Performance Reports in 2005 found that oral evidence session on 27 March 2006, Professor Treasury guidance had been inconsistently applied by Colin Talbot of Manchester Business School questioned departments and the quality of reporting of efficien- the usefulness of targets for reducing the number of cies was highly variable as a result, both in terms of civil service staff, stating: “the key issue is how much content and presentation. The Unit could not identify are we spending on public services and what do we any department’s efficiency reporting as an example of get for them. The number of people employed is neither all-round good practice. It found that: “It was not clear here nor there” (Question 94). in most cases whether departments were on course to achieve efficiency targets” and that headline efficiency targets and reported results were insufficiently analysed by financial year or work stream to allow evaluation of progress. This indicates that continuing scrutiny of progress against the efficiency targets and of the targets themselves is required. Scrutiny Unit The Private Finance Initiative 27

8 The Private Finance Initiative

PFI projects form a relatively small but growing proportion of capital expenditure. They made up around 10 to 15% of total government investment in public services in 2005-06 (HM Treasury, PFI: strengthening long-term partnerships, March 2006). They are a controversial and complex topic.

What are PFIs? PFI projects are a specific type of public-private With PFI, the government department contracts for partnership (PPP), used to fund major capital invest- a service with the private sector and, although the ments. In traditional public sector provision, the Gov- service depends on capital assets, this should be of ernment builds or purchases physical assets, retains secondary importance because the private sector ownership and uses public sector employees or a is responsible for obtaining the assets it needs to private contractor to deliver the required service. provide the contracted service. This type of arrange- ment is now common for roads, prisons, hospitals and schools.

Public sector provision PFI • Government is purchaser of assets • Government is purchaser of services • Government generally designs or builds the asset • Private consortia generally design, build, to its own specification own and run physical assets • Government directly funds the cost of designing • Private consortia fund the design and build, and building the asset through tax incentives in the expectation of recovering the cost through or government borrowing the charges that the Government will pay for the service

When are PFIs suitable? According to the Treasury (HM Treasury, PFI: ensure that procurement costs are not a large strengthening long-term partnerships, March 2006, proportion of the project; page 32), the PFI is likely to generate value for money • the technology and other aspects of the sector are where: stable, and not subject to rapid change; • the assets and services identified as part of the • planning horizons are long-term, with assets intended PFI scheme are capable of being costed on a to be used for long periods into the future; and whole-life, long-term basis; • the private sector can be given robust incentives • the value of the project is sufficiently large to to perform. 28 Scrutiny Unit The Private Finance Initiative

The Treasury consider that PFIs are not likely to be How to evaluate PFIs? suitable where: When deciding whether to opt for a PFI contract, • the project has to deliver equitable and the department has to demonstrate that it will deliver accountable public services, as in value for money. This involves both a qualitative most forms of front-line service; assessment and a quantitative assessment, which • public authorities require a lot of short-term flex- are considered together. The qualitative assessment ibility due to fast-changing requirements. It is for examines the “viability”, “desirability” and “achievability” this reason and on the basis of past projects that of the PFI project, which includes an evaluation of the PFI is now not usually used for information the risks to be managed by the private sector technology projects; and (HM Treasury, Value for Money Assessment Guidance, November 2006, Table 3.1). The quantitative assess- • the investment is small and the benefits of PFI ment asks whether the cost for the taxpayer under do not justify the significant costs of the PFI the PFI project is less than under normal public sector procurement process. For projects of less than procurement. £20 million in capital value, other procurement routes will be more appropriate. In the case of a road, for example, the quantitative assessment compares two values: • On the one hand, it calculates the cost if the public sector procures and owns the road. • The alternative assesses how much the Govern- ment would have to pay a private sector contractor Scrutiny in practice for providing a service of a well maintained road Parliamentary scrutiny of PFIs available for use over the life of the project. This is the PFI alternative, where the government is buy- The National Audit Office (NAO) has published over ing services and the private sector contractor owns 50 value for money reports on PFI/PPP and has a the road. department with PFI specialists. The reports have The resulting values of each approach over the life examined: how individual contracts were awarded; of the project are then estimated at constant prices how the deals are working in practice, either as individual deals or group projects such as PFI hospitals; and discounted at 3.5%, which is the official discount and thematic subjects such as refinancing, managing rate. PFI relationships and PFI construction. PFIs can be scrutinised by select committees. The Hansard Society’s report on parliamentary scrutiny of finance,The Fiscal Maze: Parliament, Government and Public Money (2006) recommended that “PFI contracts should be subject to full select committee scrutiny and commercial confidentiality should not be used to block full parliamentary scrutiny” (page 4). Scrutiny Unit The Private Finance Initiative 29

Refinancing Accounting treatment Refinancing is an established technique whereby The accounting treatment of PFIs is controversial. improved financing terms can be obtained in projects Most PFIs are treated in the department’s accounts once the initial risk of introducing the required service as “off balance sheet”. However, accounting guidance has been successfully managed. stipulates that those PFIs where governments bear Only one in four of the early PFI contracts, however, the risk and rewards of the assets should be “on bal- had clear arrangements to share refinancing gains ance sheet”. with the public sector. A new voluntary code of Whether the PFI should be on the balance sheet of practice, which the Office of Government Commerce the public-sector “purchaser” or of the private-sector launched in October 2002, states that departments “operator” depends on which party bears the risks should generally receive a 30 per cent share of future and rewards associated with the asset. This tends to refinancing gains on these early PFI deals and that depend on which party is most able to influence the gains from refinancing deals on new projects should asset’s design, cost, specification, up-keep, third- in general be shared 50/50 (Report by the Comptroller party use and eventual disposal. If a public-sector and Auditor General, PFI Refinancing Update, purchaser has most of these risks and rewards then, November 2002, page 11). whatever the contract may say, the PFI should be on its balance sheet. Whether a PFI is on or off the balance sheet has an impact on a department’s capital budget. It is important that the accounting treatment of a PFI (whether “on balance sheet” or not) is not the main reason for opting for a PFI, since this decision ought to depend on value for money.

Scrutiny in practice Aspects of PFI schemes which require scrutiny When scrutinising a PFI project, it is important to ensure: • Risks have been identified and that they are managed by the party who is best able to manage them • Any refinancing gains are shared equitably between the private and public sector • “Value for money” rather than accounting treatment is the key reason for choosing PFI as a procurement method 30 Scrutiny Unit Initiatives in Financial Management and Scrutiny

9 Initiatives in financial management and scrutiny

Capability reviews Financial management reviews A programme of capability reviews of government In the Spending Review 2004 White Paper (Cm departments was announced in October 2005. 6237), the Chancellor announced a programme of The reviews will assess three key areas – leadership, reviews of the effectiveness of financial management strategy and delivery. Each review aims to identify in departments. Reviews of 17 larger departments where departments need to improve and will include and 27 smaller departments were completed by the an action plan to address findings. Reviewers include Treasury in 2005. Financial management reviews chief executives from local government and others have highlighted areas for improvement in: systems in the public, private and voluntary sectors, includ- and data processes; people skills; corporate struc- ing senior civil servants. The methodology has been tures; and management data. developed with input from the National Audit Office Each review has resulted in an action plan agreed (NAO) and Audit Commission. between the Treasury and the Permanent Secretary All 17 main departments will be reviewed by 2007. or chief executive of the department. The capability reviews are available on the civil service The action plans may include exploring opportuni- web-site (http://civilservice.gov.uk/). ties for departments to share services. The Cabinet Office e-government unit is currently taking the lead on plans for departments’ corporate services such as finance and human resources to be shared within department groups and between departments.

Scrutiny in practice Scrutiny in practice Relevance for Parliamentary Scrutiny Relevance for Parliamentary Scrutiny The results of the capability reviews will be a useful Financial management reviews provide an assesment source of information for departmental select commit- of departments’ financial capabilities and departments’ tees about departments’ ability to implement policy. progress in implementing the action plans and Departments’ internal strengths and weaknesses, indicate their commitment to improving their financial identified in their capability review, will have a bearing management. Some select committees have obtained on their financial management and ability to meet PSA copies of their departments’ financial management targets. reviews. Scrutiny Unit Initiatives in Financial Management and Scrutiny 31

Zero-based budgeting (ZBB) Whole of Government Accounts (WGA) The Treasury has announced “a set of zero-based The Government is committed to providing an annual reviews of departments’ baseline expenditure to asset of consolidated financial statements covering the sess its effectiveness in delivering the Government’s whole of the Government. WGA will include the ac- long-term objectives” for the 2007 Comprehensive counts of central government funds, departments and Spending Review (Budget 2006, page 129). agencies, non-departmental public bodies, trading Incremental budgeting is normal practice in organisations: funds, local authorities, health care trusts, fire au- organisations usually take their budgets from the previous thorities, police authorities, waste disposal authorities year and adjust them according to new circumstances for and passenger transport authorities. the current year. In contrast, ZBB starts from the premise Advantages of WGA include: that no costs or activities should be included in a budget • improving the transparency of public finances. just because they were in budget for previous periods. The present systems make it difficult for anyone Instead, everything must be considered and justified. to obtain a full overview of the scale and scope of The advantages of zero-based budgeting are that it public sector finances; questions current practice and can lead to more ef- • improved data on public sector assets. The Office fective use of resources. The disadvantages are that it of National Statistics has already begun using is very time-consuming and its questioning of current department data consolidated by the Treasury to practices can be seen as threatening by staff. For the inform estimates of capital stock for the central Government CIPFA has recommended (CIPFA Zero- government sector; based Budgeting, Page 3): • improved data on public sector liabilities, such as • A phased introduction of ZBB, concentrating pension and PFI liabilities; initially on less complex areas, in order to build up a foundation of skills and experience; • the possibility of benchmarking and comparisons across different groups within the public sector; • Confining the use of ZBB to activities that are truly discretionary; • improved accountability to Parliament and the • Adapting the approach, so that it becomes a public. consideration of the impact of step changes up or down in resources on the delivery of services. The details of the zero-based reviews to take place in central government departments are not yet known. Scrutiny in practice Relevance for Parliamentary Scrutiny The promptness with which the Government publishes Scrutiny in practice the Whole of Government Accounts (WGA) will give an Relevance for Parliamentary Scrutiny indication of its financial management capabilities. Also The progress of zero-based reviews and the impact of the WGA will make certain financial information more these reviews on departments’ allocation of resources transparent, such as pension fund and PFI liabilities, and in the Comprehensive Spending Review 2007 is a services which are delivered by a mix of central and potential area for parliamentary scrutiny. local government. 32 Scrutiny Unit Initiatives in Financial Management and Scrutiny

Regulatory Impact Assessments (RIA) • start impact assessment early and use the RIA In 1998 the Prime Minister stated that no proposal to project manage the decision-making process; for regulation with an impact upon businesses, • make greater and earlier use of departmental charities or voluntary bodies should be considered expertise and, as far as possible, embed expertise without a Regulatory Impact Assessment (RIA) being into policy teams; prepared by the department concerned. RIAs evaluate • ensure that policy ‘thinkers’ and policy ‘implement- the impact of a proposed regulation, and should be ers’ have the skills necessary to undertake their carried out on all forms of regulation, primary legisla- respective roles and are not operating in separate tion, statutory instruments (including fee orders), silos; and Codes of Practice, information campaigns etc. They • consider the training requirements of policy makers should consider the full range of impacts, whether who only undertake RIAs once a year or less.” economic, social or environmental, and also where (Evaluation of Regulatory Impact Assessments, the impact may fall - business or the public sector, June 2006, page 3) the voluntary sector or other affected groups. RIAs should indicate why the regulation is needed and whether the benefits of the regulation outweigh the After a consultation process, the Better Regulation costs. The development of RIAs is the responsibil- Executive published The Tools to Deliver Better Regu- ity of the Cabinet Office and the Better Regulation lation– Revising the Regulatory Impact Assessment: Executive (part of the Cabinet Office). A Consultation. The proposed revisions aim to increase The NAO’s evaluation of RIAs (Evaluation of Regulatory the transparency of RIAs so that the costs and benefits Impact Assessments Report 2005-06, June 2006 of new proposals are clearer and updated throughout page 11) identified three types of RIA: the policy making cycle. Recommendations include changing the name of RIAs to Impact Assessments • Pro-forma RIAs that have little impact on policy and improved training and support to departments. and are produced only because there is an obliga- tion to do so; • Informative RIAs that have a limited impact on policy and have probably been started late, yet are Scrutiny in practice useful as a communicative tool; Relevance for Parliamentary Scrutiny • Integrated RIAs that inform and challenge decision Departmental select committees can use RIAs to making. The NAO notes that these have led to review the impact of new policy initiatives. They could changes in policy and even to non-regulatory also review the thoroughness and comprehensiveness of RIAs themselves, to ensure that departments have measures being introduced. really assessed the impact before adopting a new policy or regulation. In addition they could look at the The NAO recommends that departments: department’s procedures for post-implementation review of regulations. The Scrutiny Unit examines RIAs • “make clear that the RIA is necessary and that the associated with draft bills as part of its work on pre- level of effort put in to preparing the RIA reflects legislative scrutiny. its importance; Scrutiny Unit Glossary 33

Glossary

Accounting boundary The accounting boundary indicates which entities are included in the consolidated resource accounts of the department.

Accounting officer A person appointed by the Treasury or designated by a department to be accountable for the operations of an organisation and the preparation of its accounts. The appointee is, by convention, usually the head of a department or other organisation or the chief executive of a non-departmental public body (NDPB).

Accounting policies The way the organisation applies GAAP (Generally Accepted Accounting Practice) and the guidance set out in the Financial Reporting Manual (FReM). Accounting policies are set out in the notes to the accounts. An example is how a department is depreciating fixed assets.

Accounting standards Accounting standards are intended to ensure that the financial statements of an organisation present a true and fair view of its state of affairs and its income and expenditure. The Financial Reporting Manual (FReM) adapts private sector accounting standards to the public sector. – FRSs – Accounting standards developed by the Accounting Standards Board (ASB) are contained in Financial Reporting Standards (FRSs). – SSAP – These are Statements of Standard Accounting Practice, which were set by the Accounting Standards Committee before 1990. Some of them have been superseded by FRSs. – IAS – Statements of International Accounting Standards (IAS) were issued by the Board of the International Accounting Standards Committee (IASC) between 1973 and 2001. – IFRS – The accounting standards issued by the IASC after 2001 are designated International Financial Report- ing Standards (IFRS).

Accruals accounting A method of recording expenditure as it is incurred, and income as it is earned, during an accounting period, rather than when cash is paid or received. Private sector accounts generally use accruals accounting. Resource accounting is the term used for accruals accounting in the public sector.

Administration budget Administration budgets, set by the Treasury, limit the running costs of the department within its Departmental Expenditure Limit (DEL). The other part of DEL is referred to as programme expenditure. The Operating Cost State- ment in the resource accounts separates administration and programme expenditure. 34 Scrutiny Unit Glossary

Ambit The description of the services included in the estimate. Departments are not allowed to incur expenditure on services which are not mentioned in their ambit.

Annually Managed Expenditure (AME) AME is public expenditure that is less able to be controlled by departments than Departmental Expenditure Limit (DEL) expenditure. Departments’ budgets for AME can be revised frequently, unlike DEL, which is set for a three- year period in the Spending Review. An example of AME is unemployment benefit expenditure incurred by the Department for Work and Pensions.

Appropriation Act Appropriation Acts give parliamentary authority for net resources requested to be used, for income that can be appropriated and used for further expenditure, and for cash to be issued from the Consolidated Fund. In addition, they limit the way in which resources can be used by prescribing how the overall amounts are to be appropriated to particular departmental Requests for Resources (RfRs).

Appropriations in Aid (AinA) Income that a department is authorised to retain and spend (rather than surrender to the Consolidated Fund). The income offsets related expenditure in the same financial year. This income is voted by Parliament in the Estimates and is accounted for in the Statement of Parliamentary Supply in the resource accounts.

Audit certificate An audit certificate is issued by the auditor and forms part of the accounts. For central government departments, the audit certificate is issued by the Comptroller and Auditor General. The audit certificate contains the audit opinion, which states whether the accounts have been qualified.

Audit Commission The Audit Commission audits and reports on local public spending in England. Its areas of responsibility are predominantly local government, criminal justice, housing, fire and police services and health trusts.

Autumn Performance Reports These are published around December and act as interim Departmental Reports. They show departments’ progress against PSA targets and in the efficiency programme.

Balance sheet A financial statement which shows the assets, liabilities and capital of an organisation on a particular date, normally the end of the accounting period.

Capability review The Cabinet Office is currently undertaking a programme of capability reviews of Government Departments. The aim is to improve the capability of the civil service to deliver policy. Capabilities are being reviewed in the areas of leadership, strategy and delivery. Scrutiny Unit Glossary 35

Cash accounting A method of accounting which records cash payments and cash receipts as they occur in an accounting period, rather than when the expenditure was incurred or the income earned. Prior to the financial year 2001-02, public expenditure was planned and subject to parliamentary control solely on a cash basis.

Cash flow statement A statement of cash inflows and outflows during an accounting period.

Comptroller and Auditor General (C&AG) The Comptroller and Auditor General (C&AG) is head of the National Audit Office.

Consolidated Fund The Consolidated Fund essentially acts as the Government’s current account. Government revenue from taxes and other sources is collected daily into the Fund. Payments from the Fund finance central government spending and grants to local authorities.

Consolidated Fund Act Consolidated Fund Acts give parliamentary authority for total resources requested to be used and cash to be issued from the Consolidated Fund.

Consolidated Fund Extra Receipts (CFERs) Income which exceeds a department’s Appropriation in Aid (AinA) limit or is outside their ambit. CFERs have to be paid into the Consolidated Fund

Contingent liabilities See provisions and contingent liabilities.

Cost of capital The Government as a whole incurs interest on borrowing to finance investments by departments. To improve transparency and to ensure the full cost of services is reflected in departmental accounts, departments incur a “capital charge” representing this borrowing cost. This is also described as the Government’s cost of capital. In general terms, the capital charge is calculated as a percentage of the department’s net assets (assets less liabilities). It is a notional charge for departments i.e. it uses up some of their budget but no cash actually changes hands.

Departmental Expenditure Limit (DEL) DEL covers expenditure which departments can control overall, though some elements may be demand-led. The limit for each department is set in the Spending Review. DELs have separate elements for capital and current spending.

Departmental Report Departmental Reports (sometimes referred to as Departmental Annual Reports or DARs) explain to Parliament and the public how the department is organised, what it is spending its money on, what it is trying to achieve and how it is performing. 36 Scrutiny Unit Glossary

Depreciation A measure of the wear and tear of a fixed asset in a particular period arising from its use. It spreads the cost of an asset over its useful life. The most common depreciation policy is “straight-line”, dividing the value of an asset equally over the whole of its estimated useful life.

End-year flexibility A mechanism to allow unspent provision within the Departmental Expenditure Limit in one year to be carried forward to the next.

Estimates Days These are days which are allotted in the House of Commons to consider estimates.

Estimates See Supply Estimates

Excess vote The means by which Parliament retrospectively authorises departmental overspends (in terms of resources or cash). Excess votes result in qualified accounts.

Finance Bill The Finance Bill gives permanent legal effect to the Budget Resolutions and is generally presented on the same day. It deals with the revenue side of government expenditure, including changes to levels and types of taxation, changes to administration of the tax system and renewal of taxes already in force.

Financial Reporting Manual (FReM) The authoritative statement of accounting guidance against which resource accounts are prepared and audited. The manual is based on UK Generally Accepted Accounting Practice (GAAP), adapted where appropriate to take account of the public-sector context. The manual is endorsed by the independent Financial Reporting Advisory Board.

Generally Accepted Accounting Practice (GAAP) Within the UK, this is the accounting and disclosure requirements of the Companies Act 1985 and pronounce- ments by the Accounting Standards Board (principally accounting standards and Urgent Issues Task Force ab- stracts), supplemented by accumulated professional judgement.

General Fund The General Fund is the total assets less the liabilities of the department, to the extent that it is not represented by other resources and financing items. In a commercial setting, it would represent accumulated profits.

Government Accounting A manual which provides guidance on the proper handling and reporting of public money. Scrutiny Unit Glossary 37

Grant Money voted (i.e. granted) by Parliament to meet the services detailed in Supply Estimates. Also used in individual subheads of Supply Estimates to describe a payment to an individual body, in the private or public sector, which does not need to be paid back (unless not used for its specific purpose).

Grant-in-aid A grant from voted money to a particular body, usually a non-departmental public body (NDPB). Grant-in-aid can be used in any way towards an NDPB’s objectives. Grants are usually for specific purposes and should be repaid if not used.

Impairment A permanent reduction in the recoverable amount of a tangible fixed asset to less than the value recorded in the accounts.

Losses and Special Payments This is one of the notes to the accounts. In the case of departments, it would show losses due to fraud and error, any damages due to theft and any compensation paid.

Main Estimates The Main Estimates are the largest of all the estimates and cover most of departments’ spending in the year. They are presented to Parliament within three weeks of the Budget – usually in April. Each department’s estimate is expressed in terms of one or more separate allocations, referred to as a Request for Resources (RfR).

National Audit Office The National Audit Office scrutinises public spending on behalf of Parliament. It audits the accounts of all central government departments and agencies, as well as a wide range of other public bodies, and report to Parliament on the economy, efficiency and effectiveness with which they have used public money. It is independent of Govern- ment. The NAO is headed by the Comptroller and Auditor General, who is formally an Officer of the House of Commons.

National Loans Fund The Government’s account with the Bank of England through which all government borrowing transactions (including payment of debt interest) and most lending transactions are handled.

Net cash requirement The cash authorised to be issued from the Consolidated Fund in respect of the year to each department. The actual cash used during the year is described as the outturn net cash requirement.

Net operating cost The sum of the net administration costs and the net programme costs included in the Operating Cost Statement. 38 Scrutiny Unit Glossary

Net resource outturn Comprises the net voted resources (including operating costs net of income and excluding expenditure on capital).

Non-budget expenditure Non-budget expenditure is funded through the estimates and provided as a grant payment but is not included in a department’s DEL or AME. It is mostly the resources for devolved administrations and non-departmental public bodies.

Non-departmental public body An entity that has a role in the process of government but is not a government department and does not form part of a department. It can incur expenditure on its own account and is usually financed at least in part from public funds via grant-in aid from a sponsor department.

Non-vote expenditure There are some elements of DEL and AME which are not funded through Supply Estimates. These are referred to as non-vote expenditure and include central government expenditure funded directly from sources other than the Consolidated Fund Account, such as the National Insurance Fund and expenditure incurred by public corporations and some NDPBs. Non-vote expenditure also includes Departmental Unallocated Provisions, which are a specific proportion of the department’s budget set aside as a contingency.

Operating Cost Statement This is part of a department’s resource accounts. It is similar to the profit and loss statement in a company’s accounts and shows resources consumed during the year in providing services. It separates administration and programme expenditure.

Private Finance Initiative (PFI) PFI projects are a type of public-private partnership (PPP). They provide a way of funding major capital investments. The government department contracts for a service with the private sector, which is responsible for securing the assets it needs to provide the contracted service.

Programme expenditure This is the resource that the department uses directly to deliver its policy objectives.

Provisions and contingent liabilities An event which may require the department to pay out money at some point in the future will result in a provision or a contingent liability. Which of these it is depends on the probability of the pay-out (a provision is more likely to result in a pay-out than a contingent liability). Provisions and contingent liabilities may include, for example, restructuring costs (early retirement, redundancy etc.), legal claims, or obligations to clean up waste (e.g. nuclear decommissioning). Scrutiny Unit Glossary 39

Public Dividend Capital (PDC) Loan capital given to trading funds and public corporations which are expected to be both fully viable and subject to cyclical fluctuations in their returns as a result of their trading conditions. Dividends on the capital can be paid to the sponsoring department at a variable rate depending on financial performance.

Public-Private Partnership (PPP) PPP refers to any collaboration between public and private bodies.

Public Service Agreements (PSAs) PSAs describe what a department plans to deliver in the form of measurable targets over the public expenditure review period, in return for its resource budget.

Qualified accounts Accounts are qualified when the auditor deems: there is insufficient appropriate audit evidence obtained; the financial statements have not been prepared in accordance with accounting standards; the financial statements are affected by significant uncertainties; the financial statements do not give a true and fair view; or there is irregular expenditure.

Regulatory Impact Assessments (RIA) RIAs are carried out before a regulation is approved. RIAs should consider the full range of impacts of the regulation, whether economic, social or environmental, and also where the impact may fall - business, the public sector, the voluntary sector or other affected groups. RIAs should be carried out on all forms of regulation, e.g. primary legislation (including draft bills), statutory instruments (including fee orders), Codes of Practice and information campaigns.

Request for Resources (RfR) An accruals-based measure of current expenditure which forms part of a Resource Estimate. RfRs will group the costs of similar activities within a department together. They are the basic unit of Parliamentary control.

Resource accounts Resource accounts are prepared annually and, in the case of government departments, present the financial results of a department for the relevant financial year on an accruals basis.

Spending Review The public expenditure framework setting firm three-year plans. The most recent Spending Review, SR2004, set out departmental budgets for the years 2005-06 to 2007-08. The current Spending Review, SR 2007, will set budgets for 2008-09 to 2010-11.

Subhead Expenditure within a Request for Resources that is separately identified in Estimates and the resource accounts. 40 Scrutiny Unit Glossary

Supplementary Estimate These contain departments’ requests to Parliament for approval for additional expenditure (above that in the Main Estimates) in the present financial year. Supplementary estimates are usually presented in May/June (Summer Sup- plementaries), November (Winter Supplementaries) and February/March (Spring Supplementaries).

Supply The means by which parliamentary authority is secured for most government spending.

Supply Estimates A statement presented by the Treasury to the House of Commons in which a department seeks approval for its spending for the coming financial year. The estimate summarises both the resources and the cash required. There are Main Estimates and Supplementary Estimates.

Supply Resolution Supply Resolutions form the basis of Consolidated Fund and Appropriation Acts.

Total Managed Expenditure (TME) All current and capital spending carried out by the public sector (i.e. not just by central departments), including both DEL and AME.

Trading Fund These are bodies established under the Government Trading Funds Act 1973 as amended. Organisations that are so designated normally earn their income from fees and charges, with more than 50% of their income coming from trading activities.

Value for Money Studies Value for Money studies examine the economy, efficiency and effectiveness of public spending. The National Audit Office (NAO) is primarily responsible for value for money audits in central government. The Audit Commission has a similar responsibility in relation to local government.

Votes on Account Money granted by Parliament to carry on public services from 1 April of the next financial year until the passing of the Appropriation Act (before August).

Whole of Government Accounts These will be an annual set of consolidated financial statements covering the whole of the public sector. WGAs will cover central government, departments and agencies, non-departmental public bodies, trading funds, local authorities, fire authorities, police authorities, waste/waste disposal authorities and passenger transport authorities. WGAs have yet to be published. Scrutiny Unit Glossary 41

Working capital Working capital is the difference between the current assets and current liabilities included in the balance sheet.

Zero-based Budgeting Zero-based Budgeting (ZBB) is an approach to budgeting that starts from the premise that no costs or activities should be included in plans for the coming budget period just because they figured in the costs or activities in the current or previous periods. Instead, everything to be included must be considered and justified from first princi- ples. ZBB can be compared with ‘incremental budgeting’ which takes current or previous budgets as its starting point. 42 Scrutiny Unit Bibliography

Bibliography

Accountancy Age, NHS Targets pile on pressure, 24 April 2003 Alex Brazier and Vidya Ram, Inside the Counting House: a Discussion Paper on Parliamentary Scrutiny of Government Finance, Hansard Society, 2006 Alex Brazier and Vidya Ram, The Fiscal Maze: Parliament, Government and Public Money, Hansard Society, 2006 Cabinet Office Better Regulation Executive, The Tools to Deliver Better Regulation Revising the Regulatory Impact Assessment: A Consultation, July 2006 CIPFA, Whole of Government Accounts CIPFA, Zero-based Budgeting Report by the Comptroller and Auditor General, Audit of Assumptions for the 2005 Pre-Budget Report, HC (2005-06) 707 Report by the Comptroller and Auditor General, Evaluation of Regulatory Impact Assessments, HC (2005-06) 1305 Report by the Comptroller and Auditor General, PFI Refinancing Update, HC (2001-02) 1288 Report by the Comptroller and Auditor General, Progress in Improving Government Efficiency, HC (2005-06) 802 Report by the Comptroller and Auditor General, Public Service Agreements: Managing Data Quality - Compendium Report, HC (2004-05) 476 Report by the Comptroller and Auditor General, Second Validation Compendium Report 2003-06 PSA Data Systems, HC (2005-06) 985 General Report of the Comptroller and Auditor General 2004/05, HC (2005-06) 1015 Andrew Coulson, Value for Money in PFI Proposals: a Commentary on the 2004 UK Treasury Guidelines for Public Sector Comparators, School of Public Policy, University of Birmingham, 2004 Dod’s Handbook of House of Commons Procedure, Fifth Edition, 2004 Carl Emmerson, Chris Frayne, Sarah Love, The Government’s Fiscal Rules, Institute for Fiscal Studies, Briefing Note No.16, April 2001, updated November 2006 Paul Grout, Is the Private Finance Initiative a Good Deal?, Leverhulme Centre for Market and Public Organisation, 2001 House of Commons Information Office, Budgets and Financial Documents, Factsheet P5 House of Commons Information Office, Financial Procedure, Factsheet P6 Robert Rogers and Rhodri Walters, How Parliament Works, Fifth Edition, 2004 HM Treasury, Budget 2006, HC (2005-06) 968 HM Treasury, Delivering the Benefits of Accruals Accounting for the Whole Public Sector, December 2005 HM Treasury, Evidence on the UK Economic Cycle, July 2005 HM Treasury, PFI: Strengthening long-term partnerships, March 2006 HM Treasury, Pre-Budget Report 2006, December 2006, Cm 6984 HM Treasury, Stability, Security and Opportunity for All: Investing for Britain’s Long-term Future, 2004 Spending Review, Cm 6237 HM Treasury, Value for Money Assessment Guidance, November 2006 Treasury Committee, Oral and written evidence on the 2006 Budget, HC (2005-06) 994-II Treasury Committee, Report on the 2006 Pre-Budget Report, HC (2006-07) 115 Work and Pensions Committee, The Efficiency Savings Programme in Jobcentre Plus, HC (2005-06) 834-I Scrutiny Unit Acronyms 43

Acronyms

AinA Appropriations in Aid AME Annually Managed Expenditure ASB Accounting Standards Board C&AG Comptroller and Auditor General CIPFA Chartered Institute of Public Finance and Accountancy CSR Comprehensive Spending Review DEL Departmental Expenditure Limit DUP Departmental Unallocated Provision EYF End-year Flexibility FReM Fnancial Reporting Manual FRAB Financial Reporting Advisory Board FRS Financial Reporting Standards FSBR Financial Statement and Budget Report IAS Statements of International Accounting Standards IASC International Acounting Standards Committee IFRS International Financial Reporting Standards NAO National Audit Office NDPB Non-departmental public body PAC Public Accounts Committee PBR Pre-Budget Report PFI Private Finance Initiative PPP Public-Private Partnership SR Spending Review SSAP Statements of Standard Accounting Practice TME Total Managed Expenditure WGA Whole of Government Accounts © Parliamentary Copyright 2007 Produced by Print Services, Vote Office, House of Commons First Edition, March 2007