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Mr. Edward Davey (Kingston and Surbiton): Clause 5(2) gives the Treasury the power to direct in respect of accounts, and hon. Members on both sides of the House are concerned about the possibility of that discretionary power being used improperly. Will the right hon. Gentleman consider establishing an independent body to set and determine accounting standards?

Mr. Smith: The Bill confers no direction powers on the Treasury that do not already exist under current legislation; the Bill merely transposes those powers. The powers are subject to all the normal protections and safeguards in the interests of the House, the public and parliamentary scrutiny. The idea that the Treasury will have unfettered discretion is nonsense: if anything, the Bill imposes slightly greater constraints on the Treasury than the existing arrangements.

Mr. Andrew Tyrie (Chichester): Given that explanation, why does clause 10(2) state:

Mr. Smith: Again, the Bill simply transposes and updates existing powers to the accruals format.

The accounts will be scrutinised, undertaken to professional standards and subject to independent oversight. That is accepted not only by Members of Parliament with a knowledge of such matters, but by those who follow such matters closely from outside the House. As I have said, everything in the Bill is in line with generally accepted accounting procedures. That is the basis on which we should proceed. We are mindful of the importance of our accountability to the House and the proper powers of the House over supply.

I shall say more about how resource accounting works.

Mr. Campbell-Savours: I am sorry to press my right hon. Friend again. He referred to the powers of the House over supply. The National Audit Office has asked that the Bill

Is that the Government's position as well? Do the Government intend to listen to the Public Accounts Committee on this matter and not proceed with implementation in all Departments before the PAC has signified that it is content?

Mr. Smith: Yes. As I said earlier, I am ready to discuss these matters with the PAC whenever it sees fit. However, the existing arrangements already provide for the PACto consider, for example, the Treasury's six-monthly memorandums on progress, and the PAC does so. I would expect the next memorandum, which will appear in January or February of next year, to report to the PAC on

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progress in relation to trigger point 3, which is the readiness of the Departments to which my hon. Friend the Member for Workington (Mr. Campbell-Savours) refers.

Mr. David Davis (Haltemprice and Howden): I want to make two points to the Chief Secretary. First, it is disappointing that the trigger-point structure is not implicit in the Bill. It is a Treasury decision rather than anybody else's. Secondly--this is not a synthetic intervention--in August 1999, the National Audit Office was expecting 53 dry-run accounts, but received only 22. The Chief Secretary is right to say that this is an important reform, and it would be a disaster if it got off to a broken start.

Mr. Smith: I acknowledge, as does the right hon. Gentleman--notably in his capacity as Chairman of the PAC--the importance of having a thorough procedure. A thorough procedure is in place and the Government take it extremely seriously, notwithstanding the status of the trigger-point mechanism that he describes. I assure the right hon. Gentleman that while the system is being introduced I shall ensure that the mechanism is adhered to in the interest of proper accountability. The system needs to command the confidence of Parliament as well as the wider public, including people of all political persuasions.

Resource accounting applies accruals accounting techniques to central Government by focusing on resources consumed rather than cash spent. The main change, therefore, is to the treatment of fixed assets. Resource accounting will reflect the costs of consuming fixed assets and of holding them through a charge for depreciation, and the cost of capital, rather than just the cost of acquisition as under a cash-based system of accounts. As I have said, resource accounting is based on generally accepted accounting practice in the United Kingdom. It reflects the accounting and disclosure requirements issued by the Accounting Standards Board and the Companies Acts to the extent that that is appropriate for central Government.

Resource accounting will form the basis of resource budgeting so that we can plan and control central Government expenditure on an accruals basis. Subject to parliamentary approval, supply will be voted on an accruals basis under resource accounting and budgeting, and resource accounts will replace appropriation accounts but will fulfil essentially the same function.

Resource accounting and budgeting applies the private sector's best financial reporting practices to central Government so that, for the first time, we shall produce the equivalent of the main financial statements from commercial accounts. That is, a balance sheet, an operating cost statement, a statement of recognised gains and losses and a cash flow statement.

Of course, resource accounting and budgeting goes even further than that. Under the new system, there will be a summary of resource outturns reflecting parliamentary control and, critically, a statement of resources by departmental aims and objectives under their public service agreements. That will enable us to focus on outcomes, not just on inputs--on the products of our spending, not just the size of our investment. We can thereby ensure that future public spending is planned and controlled prudently.

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Throughout the life of the resource accounting and budgeting project, there has been regular contact between the Treasury and Parliament. I referred earlier to some of it. It included the publication, under the previous Government, of a Green Paper in July 1994 and a White Paper in 1995, the submission of memorandums to Parliament, parliamentary hearings and subsequent publication by the Public Accounts Committee and Treasury Joint Committee. The matter was also covered in the Procedure Committee.

All along the way, Parliament has played an important role in the development of this new and important process. I can assure the House that reporting to Parliament will continue throughout the implementation phase. As the availability and relevance of information of interest to Parliament increases, memorandums will be submitted to provide regular updates on policy and implementation.

I am sorry that timing difficulties denied us the opportunity to consult Parliament on the Bill in advance, as we had intended, but last March the Treasury submitted a memorandum to the Public Accounts, Treasury and Procedure Committees, setting out the Government's intentions for the legislation.

Resource accounting and budgeting makes two important improvements to the outdated and outmoded present system of cash-based accounting. First, it will ensure that the full economic cost of the Government's activities is measured properly by including costs such as capital consumption, which are not reflected in cash-based accounts. It will also match the costs to the right time period, providing the Government with a better basis for allocating resources. Secondly, it will bring about improvements in the treatment of capital spending, so that instead of simply identifying the cost in full in the year of acquisition, the cost of capital will be spread over its useful life, which is obviously sensible.

In the longer term, our aim is for resource accounting and budgeting to lead to whole of Government accounts, which are the natural next step. That will enable us to fulfil the commitment given in the code for fiscal stability to produce accounts for the whole public sector on a consolidated basis, if possible.

Mr. Tyrie: Will that basis extend to defence capital spending?

Mr. Smith: Yes, indeed, it will.

That will enable us, as I said, to fulfil our commitments under the code for fiscal stability. Moreover, audited whole of Government accounts will improve the information available to support the control and monitoring of fiscal policy. The accounts will also improve accountability to Parliament and provide greater transparency to taxpayers. However, to produce whole of Government accounts fully audited, we will need greater conformity of accounting policies, systems and procedures, and those are major challenges.

The Government have decided to adopt a staged approach. We shall first concentrate on delivering audited accounts covering central Government--Departments, agencies and non-departmental public bodies--and only then will we be in a position to make a final decision to extend coverage. Incidentally, that staged approach is entirely consistent with what was said by the previous Government and with the 1995 White Paper.

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The purpose of the whole of Government accounts clauses in the Bill is to enable the Treasury to prepare as efficiently as possible by adopting relevant best practice consolidation procedures used in the private sector. In particular, we want to maximise the use of electronic communication and data submission.

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