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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