Examination of Witnesses (Questions 1
- 19)
THURSDAY 11 MAY 2000
SIR ANDREW
TURNBULL, MR
JOHN GIEVE,
MS MARGARET
O'MARA AND
SIR STEVEN
ROBSON
Chairman
1. Good morning, Sir Andrew. I wonder whether
you could introduce your colleagues?
(Sir Andrew Turnbull) On my far right is Steve Robson,
Managing Director of the Financial Regulation and Industry Group,
on my immediate right is John Gieve, Managing Director of the
Public Services Directorate and on my left is Margaret O'Mara,
Managing Director of Personnel, Accommodation and Information
Services Directorate.
2. I wonder if I could begin by just asking
a very general question, we will come back to detail later on.
I really wondered what the changes and responsibilities the Treasury
now has have meant in terms of the general structure and the way
that the job is being done on the ground? Can you give us any
feel for how things have changed in the Treasury as a result of
the change of responsibilities?
(Sir Andrew Turnbull) Let us define the time-scale,
let us go back to 1994, the fundamental Expenditure Review, which
involved a number of important changes. This was a rather shocking
revelation to us, in a way, that certain core things we were doing
we were not doing well, the macro-economic function. There were
a number of other functions, such as the micro-control of the
Civil Service where the sense was that we should not be doing
that at all, that it was more appropriate for the Cabinet Office.
There was a change, a re-drawing of the borderline between us
and the Cabinet Office at that point. Secondly, we recognised
that the Treasury has a dual role of the Finance and Economics
Department and we are gradually trying to give greater emphasis
to the economic function, to make a reality of it and to do it
well. That has grown progressively. The third change then comes
in 1997, which is the change in the relationship with the Bank
of England, where we are no longer organising the monthly process
of monetary analysis. We no longer hold the Chancellor/Governor
meetings, providing the secretariat for that and the analysis
for that. That has meant that one of the teams, the Inflation
Team, was disbanded. It has not meant that we have given up the
need for a high class macro-economic analysis; we still need that
for briefing purposes. The exercise of our fiscal policy function
and our macro-economic analysis is still needed as much as ever.
I do not know the number of people doing it but the quality and
depth of the analysis is as important as ever. Those are probably
the main areas. In this process we only really lost one—apart
from the people who went to the Civil Service department in 1995—team,
which was the monetary analysis team. We have created several
others. We have created something called the Economic Growth Unit.
We created a Work Incentive Poverty Analysis Team, a Welfare to
Work Team, a European Taxation Team, and a team which looks after
productivity in the public services. Overall there has been a
substantial net increase in the work we are doing.
3. One explanation for that could, I suppose,
be, having left the real world on financial matters you become
more interventionist on the management of the Department's affairs
and therefore you need more people for that, that is one interpretation.
Is that fair?
(Sir Andrew Turnbull) More interventionist on Departments'
affairs, I would hope not. Not in one sense. The whole process
of setting three years spending limits, departmental spending
limits and PSAs, you may say that is more interventionist at that
level but it is at quite a high strategic level. This is accompanied
by less micro second-guessing about detailed expenditure proposals
and departments' ability to shift money from one part of their
budget to another. I would not say that necessarily means we are
more interventionist. Rather than getting into the detail of Departments'
affairs, we are trying to exert a strong influence about maintaining
that high strategic level.
(Mr Gieve) In terms of numbers only, there has been
a reduction in the spending teams since 1994. One of the changes
that was brought about there was the thinning out of the top hierarchy.
For example, when Steve Robson was in charge of Defence some years
ago there was a grade three with two grade fives, there is now
one grade five who does Defence and Foreign Affairs. In that sense
we have slimmed our intervention brigade but we hope we are directing
them better.
4. Why do you think all this has happened? Obviously
it was a political decision to move some of the financial responsibilities
but why the move towards more intervention, I use the word again,
more involvement in departmental management in recent years?
(Sir Andrew Turnbull) A recognition that the supply
side, the performance of the economy, in a world in which we actually
achieve macro-economic stability, is where rising prosperity comes
from. In a sense, there was criticism of a Treasury that was always
bogged down in a series of macro-economic crises and that it was
never able to devote the effort that it should make to looking
at the longer term on the supply side and performance of the economy.
Mr Beard
5. The Treasury now has the responsibility for
the negotiating public service agreements and monitoring performance
as well as the function of a finance ministry. What are the advantages
of combining those roles?
(Sir Andrew Turnbull) The main advantage is that many
of the issues that you deal with in public spending do have major
incentive effects on the performance of the economy. For example,
the way welfare benefits are constructed has incentive effects
that are hugely influential in the way the labour market works.
Somebody who is looking at social security purely as amounts of
money that we are going to be spending is not going to see anything
like the full picture. Similarly public spending as a proportion
of GDP is reported to be just under 40 per cent. The actual value
added in the national accounts of GDP is about 20 per cent. So
if you were trying to the raise productivity performance of the
economy as a whole you have to attack the 20 per cent just as
much as the 80 per cent. The efficiency with which public services
are delivered is a big factor in the efficiency of the private
sector, for example how quickly we can turn planning appeal around.
Service delivery can have important benefits for the private sector's
performance. What we have is people who in the course of a typical
Treasury career will work both on public spending issues and on
industry supply side issues and see the way that these two interact.
(Mr Gieve) Can I add a point on the PSAs? Why is the
Treasury taking on the function of co-ordinating and setting the
Government's objectives and monitoring achievement against them?
Because the Treasury has always been engaged in the budgetary
negotiations about how money is spent as well as how much. We
cannot decide how much to put in Defence and how much to put in
Health without looking at the outputs we are getting. The PSAs
are a development of the normal value-for-money allocative role
that we have always undertaken. What is new about them is that
they are making explicit the targets and objectives in a systematic
way and in a way we have not done before. We have always been
engaged in the question of how people spend their money as well
as how much they have.
6. I understand the virtue of having Public
Service Agreements and also monitoring them, the question is the
combination of that with the finance function. For instance, if
you were a public company would the role of securing performance
from different subsidiaries be the role of the headquarters or
the corporate office rather than the finance department? Would
there not be an analogy in this case that the role of monitoring
and setting up the Public Service Agreement really might be a
role for the Cabinet Office rather than for the Treasury?
(Sir Andrew Turnbull) There are systems like that.
Australia is an example where the budget function and the financial
control function is separated out from finance and possibly the
economic function may be somewhere different. The British system
has brought these three elements together. In a world where we
talk more and more about joined-up Government we see more and
more advantage in so doing. What we observe actually is other
countries moving to a point where the finance function and the
economics supply side function are coming closer together rather
than being pushed further apart. I think we would see disadvantage
in dividing something up into a pure budget department dealing
with the public finances and spending because you would lose the
dimensions of the impact of that on the wider economy.
(Mr Gieve) Were you suggesting that split between
the economics and the budget ministry or were you suggesting you
should split the setting of the budget from the setting of the
targets? I think that would be very difficult. We co-operate with
the Cabinet Office and, obviously, with the Policy Unit in Number
Ten very closely. These Government objectives are set in a collective
way. I think it is impossible to have a sensible budgetary allocation
process in the public sector without considering objectives. A
finance division in a company has as much to do with raising revenue
and borrowing as it does with allocating resources. It is difficult
to the have an allocating process that does not look to see what
the money is being allocated for. These things have to be done
together. To split them out and say the Cabinet Office deals with
what departments should be aiming to do and the Treasury deals
separately with how much money they have would just lead to confusion.
7. For instance New Zealand have just done that,
they have a separate department for heads of contracts and voluntary
performance. They obviously see some merit in separating these
roles off. I would be interested in your critique of that against
the arrangements that we now have in the Treasury?
(Sir Andrew Turnbull) I think we have given you our
answer. They may be able to make the new arrangements work. It
is a different scale of operation, I suspect. You will find that
they are working extremely closely together. We would lose some
important interactions, both in terms of policy but also in terms
of the experience and the outlook of staff.
8. Have you seen, observing what has gone on
in New Zealand, drawbacks that would have led you to this solution
in the Treasury?
(Sir Andrew Turnbull) I am not criticising the New
Zealand model, they may be able to make that separation work,
they probably do. It has been a rather impressive story, the New
Zealand restructuring of its public sector. I am simply saying
in our circumstances we see advantages in doing things the way
we currently do them.
(Mr Gieve) Can I saying something about New Zealand?
I am not an expert on New Zealand, although we have recruited
several New Zealand people to work in the Treasury. If there is
a criticism it is that they have tried to over-contractualise
their system. The weight of paper in contracts has outweighed
the full value they are getting from that. It remains true that
the Treasury has a big part to play in setting the key targets,
and so on, and I think that is inevitable. If you were re-drawing
the boundary it probably would be, as in some other countries,
economics versus budget rather than splitting the budget function
between how much money you get and what you do with it. It is
very difficult to make that split.
9. Are there any circumstances where you would
conclude it would be useful to split the Treasury up? If you go
on over the next year or two, do you see things developing? In
what circumstances do you think it would be right to split things
off again?
(Sir Andrew Turnbull) It depends who you are talking
about. With its present responsibilities I think the answer is
no. With its present responsibilities I do not think anybody is
contemplating an option of splitting. Responsibilities could change
on the borderline between benefits and tax, through, for example,
the arrival of an integrated child credit. But there is more likely
to be a change elsewhere in the Chancellor's Departments than
the Treasury itself.
10. In the paper we have you claim both to be
taking a more strategic approach to public expenditure control
and influencing departments individual programmes. How do you
reconcile those two ambitions with a more strategic, high level
approach and a more interventionist approach?
(Sir Andrew Turnbull) I am not sure it is necessarily
more detailed. It is interventionist, in the Chairman's terms.
In drawing up a PSA agreement we are trying to get departments
to specify quite precisely what are the outcomes that they are
intending to deliver. These are necessarily at quite a high level.
Health outcomes, such as heart disease, and cancer, in education,
a certain level of qualifications, that is more detailed but it
is a level of the department as a whole and what it is trying
to achieve at the national level. It is not getting down into
the particular detailed schemes and financing mechanism, issues
of detailed control of pay, detailed control of timing of expenditure.
There is a lot more flexibility there that has been given.
11. Could you give us an example of what value
the Treasury adds to the detailed work that is being undertaken
by the Department on its own programme in that process?
(Sir Andrew Turnbull) A department will put forward
as part of the Expenditure Review a proposal for an output or
an outcome target. Our job is to scrutinise that, first of all,
as regards the degree of ambition; secondly, whether it is sufficiently
robustly specified so that you can measure it and establish performance
against it. That is the kind of proper challenge function. In
both of those we managed to push departments to deliver more and
to tie them down more to do something for which you can get proper
accountability.
(Mr Gieve) It is very difficult to give specific examples
without reviewing debates within Whitehall, which are still going
on, which are for Ministers to deal with. You could say, for example,
in the field of Legal Aid that major reforms have been taking
place under both Governments to which we have contributed a great
deal, in terms of economic analysis, looking at the Legal Aid
system in terms of where the incentives are and are those incentives
likely to produce good value-for-money. The Treasury has contributed
a great deal to that analysis, although, of course, it has done
that with the Lord Chancellor's Department. More recently we had
a report from the Productivity Panel from John Makinson about
the use of team bonuses as a way of getting incentives for better
value-for-money and better performance into large office networks.
The Departments do their own negotiations with their own unions
and are responsible for their own pay systems. But we have played
a part in encouraging them to take-up this idea as well. We are
encouraging them to take-up the ideas in this report because we
believe they will create incentives for better value-for-money.
Obviously we can help because we are looking across a number of
departments and because we can draw people together and make this
a common theme, and because we still have some control over the
amount of money available.
12. Is there not a danger in all this that individual
departments then become essentially your agents, responsible for
spending the money the way you say it should be spent.
(Sir Andrew Turnbull) They, I think, really see themselves
as drawing up a kind of contract with the Prime Minister or the
Government as a whole. This is what they commit themselves to
deliver collectively. It is the Treasury who are agents, in effect
agents of the Prime Minister, in seeing that this process works.
They are not subcontractors of the Treasury; this is something
which they commit to as part of the government as a whole.
13. They often put the case against over-central
controls as it de-motivates people who are at the sharp end, then
they cease to take initiatives because they are waiting for someone
to prompt them.
(Sir Andrew Turnbull) One of the things we are trying
to do is set public expenditure programmes up so that control
is not simply exercised by the setting of the money but that there
are incentive structures which encourage the behaviour of the
people, whether it is in the Education Service or the Health Service,
so that they are themselves motivated and incentivised and accountable
for better performance. That is part of our design of programmes.
We try and make sure we have those characteristics in them so
that you do not have incentives, for example, between the Health
Service and Social Services to try and pass costs from one to
the other in a way that, when taken in the aggregate, is dysfunctional.
Quite a lot of the work of the Treasury is to try to look at the
system of incentives, the system of inspection and the system
of reporting, which encourages the pursuit of value-for-money
and discourages the kinds of behaviour which may flatter your
budget but actually reduce the quality of service or pass costs
on to other people. The design of programmes is as important as
the quantity of the money.
(Mr Gieve) Can I add a point on PSAs? David Blunkett
does not see himself as an agent of the Treasury. These are his
targets in Education, they are not the Treasury's targets. Most
departments would complain, looking back over the years, that
what has been most damaging to value-for-money and delivery has
been constant chopping and changing and second-guessing from the
centre and a lack of clarity, if you like, a lack of long-term
clear sense of direction. What the PSA is about is not imposing
a Treasury template on everyone, it is about getting an agreement
between ministers and officials at the centre and in departments
about what is really important and what people should be doing
over a number of years. In that way it is the opposite of what
you fear. It is reducing the risk of constantly having your elbow
jogged and being told, "That was important two months ago
but now we have decided it is something completely different".
(Sir Steven Robson) On the point you raised about
people setting their own targets and creating their own incentives,
if one looks in the economy as a whole one observes that most
organisations have external drivers in them. If you are a company
in the private sector you will have competition bearing down on
you, you will have the demand of your shareholders bearing down
on and you will have external forces, of one sort or another,
bearing down on you, which, in general, are encouraging you to
perform better. What happens in the public sector organisations
is they have rather muted external forces by and large. If I look
back to my time, as John Gieve was saying I was dealing with Defence
and Nationalised Industries in the 1980s, and 1970s too. In a
sense there was not this transparency, this clarity about what
the money was seeking to achieve and it did rather dull the performance.
If something did not happen it was unfortunate, it was something
that people wished was different, but there was not a strong driving
concern about it. By creating PSAs, by creating this public transparency
we are creating some external drivers, they are external forces,
and it is not that different from what many organisations in the
economy would experience as well. I guess in many ways what we
are doing here is separating what an organisation is seeking to
achieve and creating external forces at that level. How they go
about achieving it is still left very much to them, as it would
be for a firm who was experiencing the sort of external forces
a firm experiences. How they respond to it is up to them.
14. How does the Treasury's role in this respect
relate to the role of the Cabinet Office, which also has responsibility
for monitoring the cross-departmental application of Government
policy? How do you avoid duplication or do you duplicate?
(Sir Andrew Turnbull) Firstly, we avoid duplication.
We make sure we have discussed clearly with each other what is
happening. They have a responsibility for the Modernising Government
Programme as a whole and the generation of a set of ideas. They
also have the responsibility for the Civil Service component of
that, Modernising the Civil Service, and the four reports that
were produced leading up to Richard Wilson's Report just before
Christmas. Much of that falls on the Treasury to carry that forward.
They also have a number of units. They are a generator of ideas
through the Performance and Innovation Units and the Better Regulation
Units. Where significant expenditure is involved that will be
taken forward to us. We do need to be careful eg in pursuit of
public sector efficiency, that the two of us are not doing the
same thing. John Gieve's team have talked to Brian Bender in the
Cabinet Office to establish a clear understanding of what each
of us is supposed to be doing.
15. Are there any areas of greyness where there
is a conflict of responsibilities?
(Sir Andrew Turnbull) The Efficiency Unit was originally
in the Cabinet Office. Effectively that work has been transferred
and it is now being carried out by the Public Services Productivity
Panel in the Treasury. We have this migration and it is being
done by agreement. We try to avoid them continuing that and they
have recognised that it makes more sense to base this work in
the Treasury.
(Mr Gieve) I do not think there is much overlapping
in practice. The Cabinet Office does not have the equivalent of
our spending teams, a Health team or a Social Security team. It
does have responsibility for national level negotiations. It has
things like the Citizen Charter Unit and units that try to promote
best policy making through the new CMPS. There is not the sort
of duplication in the sense you are worried about.
Chairman
16. One quick question that arises out of Mr
Beard's questioning, if the process of conversion of benefits
into tax credits continues, do you see the case for the Treasury
in terms of joined-up Government taking over the DSS?
(Sir Andrew Turnbull) No. I do not think we really
want to see a Treasury which is a major spender in its own right.
You need to set up a proper dichotomy between people who have
a programme and a responsibility for executing it and people who
then challenge it.
17. The argument is that it would be a revenue
issue rather than a spending issue if the process continues.
(Sir Andrew Turnbull) Yes. I do not think that would
be the Treasury. The impact of that would be on the nature of
the Inland Revenue as a department.
Mr Fallon
18. Could we focus on the PSA specifically?
When you started this a year ago there was over 600 PSAs and now
we are told there are only going to be 200. How did you get this
so wrong?
(Mr Gieve) We discussed this yesterday. The fact that
there is scope for improvement does not necessarily mean we got
it wrong.
19. If you launch 600, Mr Gieve, and now it
is only going to be 200. Yesterday the Chief Secretary said, "Some
of our targets are not very good". Who is responsible for
this?
(Mr Gieve) I do not know that I can go much beyond
what the Chief Secretary said yesterday. We launched the PSAs
two years ago, it was a major reform programme. It was a real
step forward and there are ways we can improve it. There was a
general consensus within Whitehall and externally that we had
too many targets, that we did not draw a sufficient distinction
between the key priorities and supplementary operational targets.
We have decided this time around to make that separation, so as
to draw out the top priorities for each department in the PSAs
and have a supplementary service delivery agreement, which sets
out the more operational targets. At the same time we are trying
to build on what we did in 1998 and improve some of the measures
of success. I do not accept that because we are constantly trying
to improve the way our mechanism works, that we have been in great
error at the beginning. That is like saying to a factory, "Why
are you now 10 per cent more productive, what were you doing wrong
last year?"
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