House of Commons - Procedure - First Special Report

Select Committee on Procedure First Special Report

RESOURCE ACCOUNTING AND BUDGETING: GOVERNMENT RESPONSE TO THE SECOND REPORT FROM THE COMMITTEE

We have received the following Government Memorandum in response to the Second Report from the Committee, Resource Accounting and Budgeting, HC 438:

THE GOVERNMENT'S RESPONSE TO THE PROCEDURE COMMITTEE'S SECOND REPORT, 1997-98: RESOURCE ACCOUNTING AND BUDGETING

1. This memorandum sets out the Government's response to the conclusions and recommendations on resource accounting and budgeting (RAB) made by the Procedure Committee in its Second Report "Resource Accounting and Budgeting" (HC 438), published on 31 March 1998.

2. The Government welcomes the Committee's Report. The Government is grateful in particular for the Committee's welcome in principle for the introduction of resource-based Estimates and Accounts and for the Committee's decision not to recommend delay in the timetable for implementing the RAB project.

Financial Procedures of the House of Commons

The introduction of resource accounting and budgeting offers an opportunity for fundamental reform of the House's financial procedures. As we explain, we consider that such reform is needed; we will return to this subject when we have had the opportunity to discuss the issues further, in particular with our colleagues on other Select Committees and with the Liaison Committee (paragraph 5).

We have identified a number of shortcomings in the current system.

There is a very limited time available for discussion of Estimates on the floor of the House.

The motions available do not allow the House to influence the Estimates.

The range of documents in which financial information is presented, and the way in which such documents are considered by Parliament, is illogical.

Although detailed consideration of financial matters falls to Select Committees, there is no incentive for them to spend time on the Estimates or departmental annual reports.

Attempts to encourage Committees to devote more time to finance must be balanced against the need for Committees to have the freedom to pursue their own inquiries.

Many Members lack the technical expertise required to understand the existing Estimates; the new ones will be more complex.

There is little opportunity for individual Members to raise Estimates matters on their own initiative.

Although the House approves Government expenditure and taxation, it does not consider borrowing.

It is our opinion that although the present system ensures that financial information is presented to the House, it does not encourage the House and its Committees to make the best possible use of that information (paragraph 11).

3. The Government welcomes the Committee's decision to undertake an Inquiry into this constitutionally important issue. The Government notes the views expressed by the Committee on the financial reporting procedures of the House of Commons, and will be submitting evidence to the Committee in a separate Memorandum.

The Effects of Resource Accounting and Budgeting

The accounting issues explored in paragraphs 14 to 17 must be satisfactorily resolved before the adoption of resourcebased Supply: we would be profoundly concerned about accounting practices which could introduce unnecessary uncertainty into the figures presented for Parliamentary approval (paragraph 17).

4. The Government welcomes the Committee's observation that the introduction of resource accounting and budgeting should mean a great increase in the information presented to Parliament. The Committee has identified three specific outstanding accounting issues:

(a) Prior period adjustments

The Committee has asked whether it is appropriate for Government accounts to adopt commercial practice on prior period adjustments, whereby "the figures in the previous year's accounts may be changed, for example, if a fundamental error is subsequently discovered.......or if accounting policies are changed and the figures would be substantially different for the prior year". The Committee mentioned the Comptroller and Auditor General's view that the most straightforward course would be to ban such adjustments.

The Government agrees that this is a very important issue. The Resource Accounting Manual currently states that prior period adjustments would be put into effect by restating, in the accounts, comparative figures for the preceding year and adjusting opening balances for the cumulative effect. The prior year's accounts themselves would not be amended.

The Government believes that it is important that accounting treatment accords with sensible budgeting arrangements. The Government is examining how prior period adjustments might impact on expenditure control under RAB, and how they might be accommodated within the Supply process. In the light of this, we will consider whether amendments need to be made to the terms of the Resource Accounting Manual.

(b) Contingent liabilities

The Committee has commented on the treatment of contingent liabilities under RAB, referring to the Comptroller and Auditor General's view that contingent liabilities could lead to the possibility of manipulating voted resources between years.

Departments will not be able to transfer sums between years at will. Accounting for contingent liabilities under RAB will, as noted in the Comptroller and Auditor General's report of October 1997, have to be in accordance with generally accepted accounting practice. This is reflected in the Resource Accounting Manual, which details how departments should prepare their resource accounts, and it is against the Manual that the Comptroller and Auditor General will conduct his audit.

The Government will be keeping the operation of contingent liabilities under review in its programme of live testing, and if a particular budgeting problem emerges in respect of the accounting treatment of contingent liabilities it will be addressed. Draft resource accounts will also provide an indication of the likely scale of the issue, and it is hoped to draw on the experience of other public sector bodies, such as executive agencies and public corporations, to inform policy in this area.

The Committee has also drawn attention to the concerns of the Comptroller and Auditor General and of the Financial Reporting Advisory Board (FRAB) that the Treasury's proposals for accounting for the effect of general price inflation may introduce an element of uncertainty into the Supply process.

Accounting for the effect of general inflation is correct in principle under RAB, since it would reflect more accurately the cost of holding assets and so provide an improved framework for resource allocation. It is consistent with the basis of capital charging, including the cost of capital expressed in real terms. It is not at present a requirement of resource accounting, but ways of how it might be introduced are being examined, taking into account practical issues including the impact on the budgeting process, as well as the Committee's concerns regarding uncertainty in the Supply process. It is worth noting that forecasting the effect of future price rises is not new for the Supply process: under present arrangements changes in specific prices have to be estimated.

Resource-based Estimates

In principle, we welcome the introduction of resourcebased estimates and accounts, which should ensure a great increase in the information available to Parliament. However we trust that our colleagues on the financial committees will keep a close eye on the Treasury's plans to ensure that the figures presented to Parliament remain securely based, and that the new system does not distort them (paragraph 20).

5. The Government is grateful for the Committee's welcome of resource based Estimates and Accounts which, as the Committee notes, will ensure a significant increase in the amount and quality of explanatory information available in support of the Government's spending plans.

6. The Government agrees that it is important to avoid 'perverse incentives' within the budgeting system and associated framework of control. Appropriate budgeting arrangements will, as the FRAB has noted, need to be established to ensure efficient resource use and economic disposal of assets. The arrangements will be kept under review to ensure that perverse incentives do not creep in.

7. In principle, however, the dangers of perverse incentives should be significantly less under resource budgeting than under the present cash-based regime. This is because RAB introduces new information and additional dimensions of control by comparison with the present system. This is particularly true for capital where the present 'single dimension' represented by cash control does not provide good incentives for the full utilisation of assets or explicitly recognise the interactions between assets, outputs and objectives or with ongoing maintenance spend.

8. In contrast, under resource budgeting this information will be available to departments and so will feed into the forward planning process. For instance, plans for acquisitions and disposals will be informed by the existing capital stock and its deployment in serving key objectives and delivering outputs. Likewise, the appropriate balance between new capital spend and maintenance of existing assets will be more apparent and hence easier to strike. Control procedures and the levels at which limits are set will reflect this new information. Resource limits will therefore be set to reinforce the use of resource accounting information with positive — rather than perverse — financial incentives.

Resource budgeting

The Treasury Committee and the Committee for Public Accounts have each noted that the plans for resource budgeting have still been only slightly worked out, and we are surprised that more progress has not been made.[1]

9. The Government recognises the Committee's desire for a fuller analysis of how resource budgeting will operate in practice. However, in large part the focus of activity to date has reflected the important prior process of laying the foundations — in terms of systems and accounting policies — required before the detail of budgeting policy can sensibly be advanced.

10. Moreover, while some of the policies within the Resource Accounting Manual may need subsequently to be revised, they have been drawn up with the needs of both reporting and budgeting in mind. In practice, therefore, the basis of many budgeting policies has already been set out. Once completed, the internal budgeting instructions will be a complement to, rather than a substitute for, the RA Manual since it will focus on policies and processes wholly outside the scope of financial reporting.

11. As in the case of the RA Manual, the development of agreed budgeting policy requires sustained input from many parts both of the Treasury and of other departments. This has been reflected in a pilot resource Survey involving six main departments, and a parallel 'live test' of in year controls involving eleven departments. While these pilots should be considered only as preliminary exercises, they have helpfully identified many of the practicalities surrounding resource budgeting and will be used to inform the forward resource budgeting work programme over the next two years.

12. A further benefit of this approach has been the success achieved in raising awareness of the implementation timetable. This will help ensure that key budgeting issues are identified and addressed, consistent with the existing budgeting implementation timetable. Any decision to delay implementation would inevitably dissipate much of the momentum that has now been built up.

13. The Government will report in July on the outcome of the piloting exercises undertaken since last summer, and will keep Parliament informed of progress on the development of resource budgeting in the light of these and subsequent piloting exercises.

Legislation

The Select Committee on Modernisation of the House of Commons has recognised the advantages of presenting legislation in draft form so that Parliament can give it thorough consideration; we believe that the most extensive version of the amendments which might be made to the Exchequer and Audit Acts should be published in draft as soon as possible (paragraph 24).

14. The Government accepts the Committee's recommendation. The Government agrees that there are advantages in publishing the suggested amendments to the Exchequer and Audit Departments Acts in draft to enable Parliament to give the proposed legislation thorough consideration, and will publish its proposals as soon as possible.

Ambits of resource estimates

Ideally, we would wish each request for resources to have its own ambit. At the very least, ambits should be clearly separable into distinct sections relating to separate requests for resources. At present departments vary widely in the descriptiveness of their ambits; we welcome the Treasury's recognition that the introduction of the new system offers an opportunity to move forward greater consistency between departments and more descriptive ambits (paragraph 26).

15. The Government accepts the Committee's recommendation that ambits should relate directly to individual requests for resources. The current working assumption is that there will be a single Resource Estimate for each department under RAB. Each Resource Estimate will contain one or more Requests for Resources (RfRs), depending on the size or complexity of the department. The number of RfRs is expected to be broadly similar to the number of Votes under the current cash-based system. So the total number of items voted by Parliament under RAB is expected to be broadly similar to that at present.

16. As in existing Supply Estimates, Part I of Resource Estimates will contain the ambit (ie coverage) of the Estimate. As now, all expenditure financed by the Estimate will be covered by the ambit. Where the Estimate contains more than one RfR, the working assumption is that the ambit will be drafted in a way which makes clear how each element of expenditure relates to the individual RfRs. This should ensure both clarity in the relationship between the ambit and individual RfRs and consistency in the format of ambits across departments.

17. As now, the wording of individual ambits will be agreed between the Treasury and the department concerned. Any change to an ambit will require prior Treasury approval and will, as now, be authorised by Parliament through a Supplementary Estimate.

Motions authorising grants of supply

We do not believe that, however much more informative the new system may be than the old, Parliament will be able to make the complex judgements required to express both the cash and resource implications of its proposals (paragraph 27).

18. As the Committee rightly points out, the supporting information available under the new arrangements will be considerably more informative than at present, since under RAB there will be two dimensions to Estimates — resources and cash. The Committee has however expressed concern that Parliament should not be expected to make complex judgements regarding the cash implications of a reduction in resources, or vice versa.

19. It is not the Government's intention that Parliament should have sole responsibility for making these judgements. In its oral evidence, the Treasury observed that the amendment to a resolution proposing a change to the Government's proposals would need to be drafted in such terms that it encapsulated the cash consequences of the change in resources. This was intended to convey the point that there would in many cases be both resource and cash consequences arising from a particular change which would need to be taken into account, not that Parliament would necessarily have sole responsibility for establishing the implications of one for the other.

20. The Government will, as now, continue to provide information necessary to ensure that motions relating to grants of Supply are drafted in such a way that accurately reflects both resource and cash effects.

Implementation timetable

We are unwilling to give the plans our unqualified approval until we are sure the timetable will allow outstanding problems to be identified and resolved before the new system is introduced (paragraph 29).

It is important that the Treasury reports progress against the "trigger points" to Parliament, and that any delay is explained promptly. The decision as to whether the target date for implementation is still viable must not be taken on the basis of information available to the Treasury alone (paragraph 32).

We would be willing to accept the Treasury's proposals for monitoring the implementation of resource accounting and budgeting, as long as Parliament was fully involved in assessing progress. This would mean:

dry run resource accounts should automatically be made available to the relevant departmental Select Committee;

dry run resource estimates should be prepared as soon as possible, and be made available to the relevant Select Committees (our colleagues on the Treasury Committee have suggested that they should be published with the annual reports);

the Treasury should be willing to continue the helpful information briefings already given to "talk through" the Estimates with Select Committees if required;

there should be early publication of proposed amendments to the Exchequer and Audit Acts;

This would in effect, provide a form of dual running in the year before the introduction of the new system. We consider this necessary, as did our colleagues on the Committee of Public Accounts. The delay in the presentation of the Vote on Account offered by the Treasury may allow Parliament to identify problems, but it will not allow time to correct them (paragraph 34).

21. The Government welcomes the Committee's willingness to accept its proposals for monitoring the implementation of resource accounting and budgeting outlined in its earlier Memoranda, provided Parliament is fully involved in assessing progress towards implementation. The three trigger points outlined in the Treasury's February 1998 Memorandum were:

(i) Stage 1 approval (April-December 1998);

(ii) Assessment of departments' opening balance sheets for 1999-00 (April-June 1999); and

(iii) NAO's audit of departments' dry-run 1998-99 resource accounts (autumn 1999).

22. The trigger points are intended to provide Parliament with reassurance during the transitional period leading to full implementation of RAB that satisfactory progress is being made. As each trigger point is reached, it will be possible to assess individual departments' progress towards implementation, take any necessary corrective action and decide in the light of that whether the target date for implementation is still viable. If at any stage during the implementation progress serious problems came to light, an extended period of dual running could be introduced.

23. Each trigger point will therefore provide an opportunity for outstanding problems to be identified and resolved before the new system is fully implemented in 2001-02. The Government is happy to confirm that there is no intention to introduce resource budgeting or resource based Estimates on a piecemeal basis.

24. The Treasury and the NAO will monitor departments' performance carefully against the trigger points. The Government will report progress against each trigger point fully to Parliament and will provide an update on progress against the first trigger point (Stage 1 approval) in the summer.

25. The Government also accepts the Committee's proposals for enhancing Parliament's involvement in the implementation process during the transitional period leading to 2001-02:

(a) Dry-run Resource Accounts

The presumption is that departments will automatically make their dry-run resource accounts for 1998-99 available to the relevant select committees on a privileged basis, although the precise arrangements for how this will be handled will be for discussion between individual departments and their select committees.

(b) Dry-run Resource Estimates

The Government has a number of proposals in hand for preparing dry-run resource based Estimates and for sharing experience in developing such Estimates with the Parliamentary Committees.

For 1997-98, eleven departments have been participating in a preliminary "live test" of Supply and in-year controls. The live test is currently being evaluated and the aim is to report the outcome as part of the further memorandum on RAB which the Government plans to submit to the Parliamentary Committees before the Summer Recess. The Government would also hope to be in a position at that stage to provide the Committees with one or more illustrative examples of "dry-run" Resource Estimates and Accounts based on actual 1997-98 data.

There will be a more extensive in-year live test during 1998-99. The intention is that all main departments should participate for at least part of the year, and that the test should involve a fuller examination of accruals issues, building on the information available from departmental resource accounting systems. The results of this test will also be reported to the Committees in due course, and we would again hope to be in a position to provide illustrative examples of dry run Estimates and Accounts based on actual 1998-99 data once the test is complete.

Consideration is being given to extending further the scope of live testing resource-based Estimates in subsequent years, prior to full implementation of RAB in 2001-02. We will be exploring this in more detail with departments over the coming weeks and will aim to provide further information in the Treasury's next Memorandum to the Parliamentary Committees in the summer.

The Treasury would be very happy to provide further informal briefings if the Parliamentary Select Committees would find that helpful.

(d) Legislation

As noted above, the Government agrees that there are advantages in publishing the suggested amendments to the Exchequer and Audit Departments Acts in draft to enable Parliament to give the proposed legislation thorough consideration, and will publish its proposals as soon as possible.

26. The Committee has commented that the Government's proposal to delay presentation of the 2001-02 Vote on Account from the autumn of 2000 until the spring of 2001 will not allow time to correct problems which arise during that period. The Government made this proposal not because delay would necessarily allow sufficient time to correct any outstanding problems that had arisen, but in order to allow Parliament more scope for assessing 1999-00 Resource Accounts - and the Government more time to satisfy itself and Parliament that implementation was progressing satisfactorily - before Parliament was asked to vote Supply on a resource basis for the first time.

Accounts qualifications