Select Committee on Public Accounts Minutes of Evidence



TREASURY CONTROLS (1997-98/35)

Memorandum by HM Treasury

  1. The Treasury has been examining the controls it exercises over departmental spending decisions to assess which might sensibly be simplified or discontinued in the interests of improved accountability and more effective working in departments and the Treasury. This memorandum seeks the PAC's views on a number of recommendations resulting from this examination.

THE GENERAL APPROACH

  2. In principle, Treasury approval is required for all spending decisions by departments. In practice, it would not be sensible—indeed, it would not even be possible—for the Treasury to be involved in all such decisions. So it has always delegated to departments the authority to spend money within defined limits and subject to various conditions and controls. Examples of such controls include the need for specific Treasury approval for spending decisions which would put pressure on Estimates provision or set a potentially expensive precedent. There are many other controls as well.

  3. This array of controls does not promote good decision-making and effective control over public expenditure if it is at too-detailed a level. Nor does this type of Treasury involvement always sit comfortably with a framework for accountability laid down by the Treasury which imposes on Accounting Officers—normally the senior official in each department—"a personal responsibility for the propriety and regularity of the public finances for which he or she is answerable . . . and for the efficient and effective use of all the available resources". We have therefore been examining Treasury controls with a view to making changes designed to improve decision-making and accountability in departments, while enabling the Treasury to focus more effectively on matters of strategic concern.

THE ITEMS CONCERNED

  4. The annex to this memorandum sets out our proposals to change five controls where, because of the Committee's past or present involvement, its formal approval is sought. These are the controls on gifts; losses and special payments; contingent liabilities; fees and charges; and Treasury Minutes. The annex also sets out our proposals to raise various reporting thresholds—the thresholds above which certain types of financial transaction need to be reported to Parliament. Is the Committee content with these proposals, please?

  5. In addition, the annex:

    —  notifies the Committee of a transfer of responsibility for approval of staff benefits paid by departments and NDPBs from the Treasury to, respectively, the Office of Public Services and sponsor departments;

    —  explains the considerations which have led the Treasury to decide to discontinue or simplify its controls concerning single tendering, financial memoranda for smaller executive NDPBs, and the rules on seeking specific legislation for new and continuing services.

  6. For convenience the proposed or intended changes are summarised in a table at the front of the annex.

  7. The rest of this memorandum outlines how the Treasury approaches public expenditure control and discusses the general rationale for the changes referred to above.

THE TREASURY'S PUBLIC EXPENDITURE OBJECTIVES

  8. The Treasury's objectives for public expenditure relate to the need to control spending totals, to secure high quality, cost-effective public services which deliver expenditure priorities and policies, and to promote high standards of propriety, regularity and accountability.

HOW THE TREASURY EXERCISES CONTROL

  9. The mechanisms used in the Treasury to promote the Treasury's public expenditure objectives include its work in devising and managing public expenditure control regimes, planning spending over the medium-term through annual public expenditure surveys (although we will not be having one this year), the power—reserved to the Treasury alone—to present departmental Estimates to Parliament (seeking Parliamentary approval for most spending by departments), in-year monitoring of agreed departmental control totals, and in—year assessment of additional departmental spending bids. In addition, from time to time, the Government conducts in-depth reviews of spending programmes, in which the Treasury is very closely involved. For example, a Comprehensive Spending Review has recently been launched, involving a zero-based analysis of each individual departmental spending programme.

  10. In order to ensure high standards of propriety, regularity and accountability, the Treasury appoints Accounting Officers in each department and places on them a personal responsibility for ensuring that the public finances for which they are responsible are well and properly managed. While departments are given delegated authority by the Treasury to spend most of the money voted to them by Parliament, they are required to follow guidance published by the Treasury on good financial management (as set out, for example, in the financial control handbook called "Government Accounting"), and need to refer to the Treasury for specific approval in many cases including spending proposals which exceed the delegated levels agreed between the Treasury and individual departments. The Treasury also prescribes how departmental appropriation accounts—showing how public expenditure has been spent—are presented.

A MORE STRATEGIC APPROACH

  11. The Treasury has been considering for some time how it might approach public expenditure control in a more strategic manner. The aim has been to identify those controls and mechanisms which are necessary for achieving the Treasury's objectives most effectively while cutting out those controls which add little or no value. An associated aim has been to improve accountability and decision-making by delegating responsibility for spending decisions to departments except in cases where a clear case can be made for retaining control in the Treasury.

  12. We have focused in particular on the detailed controls over public expenditure set out in "Government Accounting". This aspect of our review was conducted in the knowledge that:

    —  some at least of the controls set out in Government Accounting are unnecessarily detailed and encourage unwarranted second-guessing;

    —  those working in Treasury expenditure teams find that much of the detailed case-work resulting form the requirement to seek Treasury approval in certain cases is not very productive compared with the other activities described in paragraphs 9 and 10 above;

    —  even if it were decided to drop some detailed controls, departments would continue to be free to consult the Treasury when they wanted to do so; they would not be left to operate in a vacuum;

    —  The National Audit Office and the Public Accounts Committee provide an extremely effective check on matters of propriety and regularity, as well as promoting good value for money through a variety of means. Where appropriate, the Treasury can gain additional assurance from the effectiveness of NAO and PAC activities.

THE RESULTS OF THE REVIEW

  13. We decided first of all that the retention of many Treasury controls was important for the achievement of Treasury objectives. In particular, it was essential that Treasury approval should be required for any proposals which:

    —  could increase pressure on Estimates provision;

    —  set a potentially expensive precedent;

    —  cause repercussions for others;

    —  exceed the current delegation threshold for major capital projects.

  14. We also decided it was right that the Treasury should retain the right to introduce—or reintroduce—detailed controls on particular departments or in respect of certain types of transaction if and when we had serious concerns about what was going on.

  15. But we also concluded that a number of the detailed controls applicable to departments in general did not promote good financial management and control and should be simplified or dropped. Some changes have already been made-concerning capital project approvals, banking, land disposals and finance appointments. So far as other changes are concerned, we thought it right to consult or inform the Public Accounts Committee first. These are discussed in detail in the annex.

PARLIAMENT'S INTEREST

  16. We believe that it is in Parliament's interest that Treasury control over public expenditure is exercised effectively, and promotes rather than impedes the achievement of good value for money and high standards of propriety, regularity and accountability. We therefore hope the Committee will support the Treasury's efforts to adopt a more strategic and less meddlesome approach.

  17. The Public Accounts Committee will, however, want to consider the detailed proposals set out in the annex on their individual merits. In doing so, we hope it will pay regard to the following benefits which, we believe, will result from our proposals:

    —  improved accountability from eliminating unnecessary Treasury second-guessing. There will be greater clarity about who took the key spending decisions and why. There will, for example, be less scope for a department to say that "we wanted to do x, but the Treasury wanted to y, so we ended up doing z". It will therefore be easier to hold to account those that took the key decisions, thus ensuring a fuller and clearer explanation of what occurred;

    —  better decision making (and hence better use of resources by departments) by aligning more closely responsibility for decision-making with accountability to Parliament. Departments will take decisions with greater care if they know that responsibility for such decisions rests unequivocally with them. For example, there will be less scope for a department to say "we were not sure whether to do x or y, so we consulted the Treasury to let them decide" in situations where the department concerned was the only party that knew all the facts and was in the best position to take the decision;

    —  better use of resources within the Treasury since we find little scope for adding value in administering many of the detailed controls. Their removal or simplification will allow us to concentrate more effectively on achieving our own objectives, including the objectives for public expenditure set out in paragraph 8. It will in particular allow the Treasury more time to focus on the more productive of those activities outlined in paragraphs 9 and 10;

    —  better relations between the Treasury and departments because, while departments accept the need for the Treasury to be involved in strategic decisions affecting public expenditure control and overall value for money, they tend to regard Treasury involvement in less important decisions as unnecessary meddling, and inconsistent with trends in other areas (such as pay and grading) where delegation to departments has already taken place. Moreover, it is difficult to argue that departments should delegate responsibility within their own organisation (e.g., to agencies) and empower more junior staff while insisting that the Treasury should retain detailed controls over minor spending decisions.

REPORTING THRESHOLDS

  18. Various types of financial transaction above a certain value—the "reporting threshold"—need to be reported by departments to Parliament. For example, new contingent liabilities in excess of £100,000—i.e., cases where the Government may (though it is not certain) have to make a payment at some stage in the future in excess of £100,000, possibly as a result of a guarantee or an indemnity—need to be reported to Parliament in a departmental minute. Notification needs to be 14 days in advance of actually incurring the contingent liability so that Parliament has an opportunity to express a view on it. A similar sort of arrangement applies to gifts of an unusual nature or whose value exceeds £100,000. There are a number of other examples as well.

  19. In some cases, the value of the reporting threshold has not been increased for some years with the result that the number of cases reported to Parliament tends to increase over time. And the reporting thresholds are generally very low bearing in mind the total for public expenditure and revenue (over £300 billion for each). Increases in such thresholds would represent a considerable convenience to departments (since the least important cases would no longer need to be reported) while ensuring that Parliament would still be informed of all significant transactions of the type concerned. There is also a certain logic in aligning the reporting thresholds to parliament with the proposed thresholds for seeking Treasury approval (where this applies—e.g., in respect of contingent liabilities).

  20. The annex contains—and explains—our proposals for raising reporting thresholds. Is the Committee content with these proposals please?

CONCLUSION

  21. Is the Committee content, please, with the proposals set out in the annex concerning gifts, losses and special payments, contingent liabilities, fees and charges, and Treasury Minutes? And is the Committee content with our proposals to raise certain reporting thresholds?

HM Treasury

30 October 1997


 
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