Select Committee on Treasury Minutes of Evidence


PROGRESS SINCE THE JULY 1999 MEMORANDUM AND FURTHER PROPOSALS FOR A RESOURCE BASED SYSTEM OF SUPPLY AND REPORTING TO PARLIAMENT

RESOURCE BUDGETING

  71.  While Parliament does not bear responsibility for approving the Government's administrative arrangements for the planning and control of public expenditure, the Government is keen to ensure that the Committees are aware that these arrangements are being developed in a way that ensures best use of taxpayer's money. This section provides further details of how the arrangements for introducing resource budgeting are being developed and tested.

"Dry-run" spending review

  72.  In order to prepare government for the move in 2000 to budgeting on a resource basis, the Treasury carried out a "dry run" spending review with departments during 1999. This was the first comprehensive exercise on resource budgeting and went further than previous pilot exercises discussed in earlier RAB Memoranda in two ways:

    —  by involving all departments, it brought in more people who will be working on the 2000 Spending Review; and

    —  it was based on a more detailed set of information requirements and working assumptions; the aim was to test the Government's capacity to make full use of the available material to deliver a coherent set of resource plans and related outputs.

  73.  The "dry run" tested both systems and policies and the Government's ability to handle the information generated. The aim was to review the working assumptions used in the "dry run" as part of the evaluation of the process, leading to final decisions being taken both on the design of the new system and on how to make most effective use of the new resource-based information which will be available for the 2000 Review.

  74.  The main conclusion of the "dry run" review was that it confirmed that a resource-based planning process within the Comprehensive Spending Review (CSR) framework is workable. Departments can budget in resource terms and existing cash baselines can be converted to a resource basis without undue difficulty. The "dry run" also demonstrated that the anticipated benefits of resource budgeting could be delivered, in terms of providing a clearer view of the real cost of delivering individual services, taking account of the full cost of holding assets, and of providing better incentives to departments to plan investment and manage capital assets and dispose of those no longer needed. It confirmed that there is no impediment arising from budgeting on a resource basis to moving to the new resource based system of Supply and accounts as planned.

  75.  However, the "dry run" also highlighted a transitional issue in relation to the large new non-cash elements of resource budgets (depreciation, capital charges and provisions), where there is not yet sufficient experience of forecasting these items three years ahead for them to be included in firm three-year Departmental Expenditure Limits.

  76.  To allow time for a track record in forecasting, monitoring and controlling these items to be established, the Government has decided that it would be sensible to introduce resource budgeting in two stages.

2000 Spending Review

  77.  In the first stage, in the plans drawn up in the 2000 Spending Review, the Government will set Departmental Expenditure Limits extending over three years for current and capital spending in accruals terms, taking account of the full resource information departments will provide. However, during this first stage the large new non-cash elements of resource budgets identified above will be subject to annual review and included in Annually Managed Expenditure (AME) rather than Departmental Expenditure Limits although, as with other voted main departmental programme expenditure in AME, they will form part of departmental resource budgets in Estimates. In stage two, as part of the 2002 Spending Review, the intention is that, in the light of experience, these elements will be moved into Departmental Expenditure Limits.

  78.  In this way, the Government believes that resource budgeting can be implemented in a way that maintains firm control over expenditure while offering appropriate incentives to departments.

  79.  Accordingly, as reaffirmed in Cm 4479, the 2000 Spending Review will, for the first time, incorporate resource budgeting and the use of resource accounting information. This will mean taking account of the full resource costs of providing services, and using in a systematic way information provided by departments on their assets and liabilities.

  80.  The main components of the resource budgeting system which will be used in the 2000 Spending Review, including current working assumptions for resource based expenditure aggregates and key budgeting policies, are set out in the Treasury's recent publication "Resource Accounting and Budgeting: A Short Guide to the Financial Reforms", published in December 1999, copies of which are being sent to the Committees alongside this Memorandum. The starting point for the 2000 Review will be determined by converting the cash baseline for 2001-02 set in the 1998 CSR to a resource basis. The departmental plans announced following the 2000 Review will form the basis of the proposed first full set of published Resource Estimates for 2001-02.

  81.  The Government believes that the approach to the introduction of resource budgeting outlined above will provide for a smooth transition to the new planning and control regime. It offers the benefits of using resource information in the 2000 Spending Review while maintaining robust control of spending in-year. It also fulfils the Government's commitment in the Code for Fiscal Stability to adopt, as soon as reasonably practicable, a resource accounting and budgeting approach for planning and accounting for the costs of resources consumed by government, in a way that is consistent with the proposed timetable for presenting Resource Estimates to Parliament in respect of 2001-02.

In-year control under RAB

  82.  The Treasury's July 1997 Memorandum outlined initial working assumptions for the operation of Parliamentary and administrative controls in-year RAB. The working assumptions were that:

    —  switches between Requests for Resources (RfRs) would require Parliamentary approval through a Supplementary Estimate;

    —  beneath the level of the RfR, switches between functional lines would continue to require Treasury approval, or Parliamentary approval through a Supplementary Estimate if they were significant or involved new services;

    —  "demand led" spending would be ring-fenced in order to prevent underspends leaking into other expenditure; and

    —  existing instruments, such as end-year flexibility, should continue and be applied as now in such a way as to ensure the operational flexibility required by managers and good value for money.

  83.  These working assumptions have been trialed, and validated, through experience of in-year live testing, taking account of subsequent developments since July 1997, notably the announcement in the June 1998 Economic and Fiscal Strategy Report (Cm 3978) of the Government's new public expenditure control framework.

  84.  The working assumptions are fleshed out in more detail in the statement of principles set out in the following paragraphs, and are reflected in the detailed proposals for the operation of in-year control under RAB in the series of tables, covering Supply issues and other in-year control instruments at Annex D. Annex D also contains a summary table showing the proposed timetable for further testing of in-year control arrangements prior to full RAB implementation.

  85.  Beginning with the principles governing the high level Parliamentary controls, the Government has given assurances in previous Memoranda that the following key principles currently underpinning Parliamentary control over the public expenditure will remain under RAB:

    —  No expenditure without relevant powers, including where appropriate the Appropriation Act, but with no undue reliance on the Act.

    —  Absolute, precisely defined limits on spending.

    —  Annual Appropriation Acts.

    —  Supplementary Estimates with Consolidated Fund Bills to authorise additions to or significant variations in Supply, and prior approval of the Comptroller and Auditor General before the release of funds.

    —  Excess Votes to bring overspending to account following Parliamentary scrutiny.

    —  Subsequent Parliamentary approval for authorisation of urgent spending funded from the Contingencies Fund.

    —  Virement to be operated broadly along the existing lines. (The operation of virement under RAB is covered in more detail in Annex D.)

  86.  In respect of the Treasury's administrative controls, it is intended that the general principles for the management of Departmental Expenditure Limits (DEL) set out in Cm 3978 will continue under RAB. Firm multi-year resource-based spending limits will be maintained, involving a clear distinction between capital and current expenditure, in order to meet the fiscal rules and prevent short-term pressures from impacting upon capital investment.

  87.  It is further proposed that end-year flexibility (EYF) will continue to be applicable under RAB across the DEL as a whole, constrained only by the requirements of the regimes for restricting movement across the capital/current and discretionary/non-discretionary boundaries and for controlling administrative spending, and by the overriding need for the Treasury to scrutinise departments' requests for Supply in order to establish need.

  88.  As now, there would be no general EYF entitlement on Annually Managed Expenditure (AME). Thus the large new non-cash items discussed above, which are to be included in AME for a transitional period, will not be eligible for EYF. However, the twice-yearly AME forecasts will provide an opportunity to monitor these items so that any necessary adjustments can be made in-year. This will also allow a forecasting record to be built up for the 2002 Spending Review when it is intended, in the light of experience, to include these items in the three-year forward looking DEL plans.

  89.  It is envisaged that EYF will be expressed in resource terms for both current and capital expenditure. EYF carryover would be determined by the underspend on the total resource DEL or capital DEL as matched against plans set in the biennial review process, including unspent entitlement from earlier years.

  90.  The tables at Annex D set out detailed working assumptions for in-year control and Supply consistent with these principles. The working assumptions will be used to underpin comprehensive testing of in-year monitoring and control on a "shadow" resource basis during 2000-01, with a view to establishing whether they deliver the right balance between maintaining firm control of public expenditure while allowing departments to manage their budgets sensibly.

Resource budgeting manual

  91.  The Government has reviewed its earlier proposal to produce a self-standing resource budgeting manual for use by departments alongside the Resource Accounting Manual, in the light of a developing Treasury strategy for electronic publication of public expenditure guidance. The Government proposes to produce instead a comprehensive set of public expenditure guidance, on an electronic basis, encompassing a number of key documents including Government Accounting, the Guide to Expenditure Work and the Resource Accounting Manual, as well as existing guidance on resource budgeting.

  92.  Issuing guidance electronically will make a key contribution to the Government's objective of modernising government. It will allow guidance to be disseminated more easily, more widely and more quickly, it will allow documents to be searched and cross-referenced; and, through feedback mechanisms such as e-mail links to Treasury contacts, will propagate joined-up working. This process will be implemented to a somewhat longer timescale than originally envisaged for a resource budgeting manual. In the meantime, guidance on policy relating to both resource-based planning and in-year control and Estimates will continue to be issued to departments in the form of desk instructions for staff working on resource-based spending reviews and on in-year monitoring and control on a resource basis.

Conclusion

  93.  As noted in previous Memoranda, the Government believes that piloting and live testing of the planning and control of expenditure on a resource basis should be seen as an integral part of the transitional process to full RAB implementation.

  94.  This approach is designed to ensure that the various complex strands of the RAB project—Parliamentary, accounting, budgeting and systems—are developed and implemented in a co-ordinated way. By modelling on a full resource basis the operational features of both a public expenditure planning review and the management of in-year monitoring and control, dry running also helps to ensure that lessons necessary for the successful operation of resource budgeting and resource-based Supply are learned. Dry running also helps to develop the necessary "hands on skills" for those who will need to manage and operate the budgeting system once RAB is fully implemented. This will be crucial as the Government embarks upon the 2000 Spending Review, which will be conducted on a basis which, for the first time, incorporates resource budgeting and the use of resource accounting information.

  95.  It is envisaged that dry running in 2000-01 will involve all departments undertaking, alongside the resource-based 2000 Spending Review, the full range of procedures associated with monitoring and control on a resource basis, linked to the preparation of shadow Resource Estimates for 2000-01. This process is designed to ensure that the move to a resource-based system of Supply in 2001-02 can be made with full confidence that the new system will be soundly based and will have been fully tested.

  96.  The Government invites the Committees to note its plans for developing resource budgeting, which are designed to ensure that, once it is fully implemented, the new budgeting system will have been comprehensively tested.

STRUCTURE OF RESOURCE-BASED ESTIMATES

  

Recent developments

97.  The Treasury's July 1999 Memorandum contained an illustration of the latest format of a resource-based Main Estimate following the positive and constructive dialogue that had taken place during the early part of 1999 between individual departments and their select committees on the structure of departments' own Resource Estimates.

  98.  The proposed format is reflected in the further illustrative Resource Estimates appended to Annex E, which are based on data for the Department of Social Security (DSS) and the Ministry of Agriculture, Fisheries and Food (MAFF) from the 1998-99 in-year live test. The illustrative Estimates comprise Parts I-III and forecast operating cost and cash flow statements.

  99.  Consistent with the new public expenditure control framework announced in June 1998, individual Requests for Resources (RfRs) within Resource Estimates will, as noted in the examples contained in the January 1999 and July 1999 Memoranda, separately identify the DEL and AME components of resource budgets. The basic structure of Resource Estimates will not change as a result of the transitional arrangements for introducing resource budgeting described earlier in this Memorandum, although there will be some additional AME lines in departments' RfRs for the non-cash elements of resource budgets which are being classified within AME rather than DEL during the transitional period. This will not affect the aggregate RfR totals voted by Parliament.

  100.  This interim treatment of certain non-cash elements of resource budgets in AME is reflected in the Estimate formats at Annex E, which will provide the basis for the shadow 2000-01 Resource Estimates produced for Trigger Point 4 in the Spring 2000.

  101.  As well as resource-based Main Estimates for DSS and MAFF, Annex E also contains further illustrative 1998-99 documentation for those two departments, comprising resource-based Supplementary Estimates and illustrative outturn statements. As with the Home Office examples in the Treasury's January 1999 Memorandum, the aim is to show how data in resource-based Main and Supplementary Estimates flows through to the key elements of an illustrative Resource Account using "real" data for "real" departments. Unlike previous examples, however, these illustrations contain data generated directly from the department's accruals-based systems.

  102.  Accordingly, these examples not only illustrate in a comprehensive way the implications of introducing a resource-based system of Supply, but also demonstrate continuing improvements in the quality of RAB data on which resource-based Estimates and outturn statements are based, thereby providing further reassurance to Parliament on the implications of resource-based Supply for Parliamentary control.

  103.  The key issues which arose in preparing the illustrative Estimates and outturn statements are discussed in the accompanying commentary at Annex E, which also provides further clarification of associated Supply matters, including a number of issues raised by the NAO.

  104.  The Government invites the Committees to note the latest illustrative formats of resource-based Main and Supplementary Estimates at Annex E, which reflect the constructive dialogue that has taken place between departments and their select committees.


 
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