Examination of Witnesses(Questions 80-99)|
WEDNESDAY 17 JULY 2002
80. We discussed in previous testimony with
some of your colleagues this issue of underspend. At that time,
HM Treasury officials said that they were concerned about the
underspend in the Department of Education because the Government
was being criticised for not delivering in some of these areas.
Are you concerned that a very high-profile Department, such as
Education, should undershoot by that amount and are you going
to take any action to prevent those kinds of undershoots in the
(Mr Sharples) What we have always been very careful
to say is that what we want is value for money spending; we want
money to be spent wisely. That is precisely why we introduced
a change in the rules to allow departments to carry money over;
if it was not spent in one year they could keep it and carry it
over to the next year. In the old days when people got to the
end of the financial yearand everybody, I am sure, has
had experience of thisthere is pressure to get the money
out of the door, and it does not get spent in a sensible way.
So by changing the rules we allow people to carry underspends
forward. So this is not money which has been lost to education,
it is in the education budget and it is available to spend this
year. What we do not want to do, as the Treasury, is say to departments
"We are going to hammer you if you do not spend money by
the end of the year and we do not care if that means you are wasting
it." That is not our position at all, and if some programmes
take a while to get under way because proper procedures have to
be gone through to ensure that, for example, money is paid to
projects which are set up on a solid foundationif some
time has to be taken to get projects under way properly we would
rather things were done properly so that you got value for money
rather than just pushing the money out of the door for the sake
81. If your total almost balances but education
has underspent £1.2 billion (and there will be other underspends
as a result) who overspends?
(Mr Sharples) In fact, this is a point worth explaining,
because it is a source of misunderstanding sometimes. What happens
at the beginning of the year is that we set a total for Departmental
Expenditure Limits, and that is the sum of the individual department's
spending limits, plus a reserve. During the year we make allocations
from our central reserve for unexpected contingencies and departments
draw down their entitlement to end-year flexibilitythat
is the money that they have carried over from the previous year,
and they can spend this year. When they draw that money down it
goes through estimates (we have to come to Parliament to get approval
for that) and it then gets added to their Departmental Expenditure
Limit. So by the end of the year you are in a position where some
of the individual departmental limits are higher than the total
that we are controlling because they have been drawing down their
82. You mentioned that this is all contained
within a White Paper that is released in July. When did you release
(Mr Sharples) We released it on Monday.
(Mr Sharples) It was presented to Parliament and released
on our website in the usual way.
84. The website. It is not part of these documents
that we are all clutching?
(Mr Sharples) It is indeed part of the documents.
I have a copy somewhere with me.
Mr Mudie: I got these documents from
the Vote Office and they certainly did not give me that.
85. Yes, as part of the package in the Vote
Office that was not there.
(Mr Sharples) I am sorry if that was not the case
86. So perhaps Mr Laws is correct and there
is some suggestion that with the education story he actually slipped
these figures out on the web. Are you absolutely certain those
were in the Vote Office because I went and got my bundle from
the Vote Office and those figures were not there. I spent some
time in the library trying to find those figures in your documents,
especially when I saw this story. Were they given to the Vote
Office at the same time as the other papers?
(Mr Sharples) I am afraid I do not know the precise
hourly timing on Monday afternoon, or at what stage they were
Chairman: Why not write to us on the
precise hourly timing? It would be interesting.
87. Can you just hold that thing up again?
(Mr Sharples) It is Command 5574.
88. In a sense, following on from that (and
maybe this document will answer my questions), looking at underspending,
the underspending is obviously greater when it comes to investment.
That is correct, is it not? You see, if I can draw your attention
to page 171 of the Spending Review, there is an outturn figure
last year on public sector net investment of 9.2, and we have
had earlier witnesses tell us that there is an underspend of £2.8
billion on that. Is that correct?
(Mr Macpherson) I think it is important here to draw
a distinction between public sector net investment and the capital
Departmental Expenditure Limits.
89. No doubt after you have given me my answer
you will give the explanation, but at the moment, Mr Macpherson,
I am looking for the answer. Is it correct that that represents
a £2.8 billion underspend?
(Mr Macpherson) We do not actually
90. I am terribly sorry, Mr Macpherson. I would
like just to be clear about the figures. Is it correct that that
figure, 9.2 public sector net investment, is an outturn underspend
of £2.8 billion.
(Mr Macpherson) It is a lower figure than in the budget.
91. I am sorry, it is reasonable to expect you
two gentlemen to be able to provide the answer to this. We have
just had witnesses tell us that that 9.2 is an underspend of £2.8
billion. Is that right or wrong?
(Mr Sharples) Could I, perhaps, come in on this? In
the budget we published a figure for public sector net investment
of £12 billion. At that stage in the year this is a provisional
estimate which is subject to subsequent revisions. It is, I should
emphasise, a figure which covers the whole of the public sector,
so as well as central government it covers local authorities and
it covers public corporationsareas of spending which are
not within our direct control. The new figure is a revised estimate
by the Office for National Statistics of the outturn for net investment
last year, and they have made some revisions in their figures.
I should say that the revisions have been largely in their estimate
of local government spending and in public corporation spending,
and a revision to their estimate of depreciation. It is unfortunate
to have revision in things like depreciation over a period of
two or three months. So, yes, the outturn on net investment was
lower than we expected at the time of the budget but it was still
very substantially up on the previous year. It is very likely
to be subject to further revision as new estimates come through.
92. Yes, I take your point that there is departmental
spending, there is local government spending, there is spending
by public corporations. Taking those three things together, if
we end up with public sector net investment figures that are of
the order of 20-25 per cent below plan, that is serious, and it
is so serious that it does rather undermine the credibility of
a more than doubling of that figure in three years. If there is
a 20-25 per cent underspend on that figure last year, how credible
is it to say you are going to more than double it in three years?
(Mr Macpherson) I think it is important to focus on
what central government is best placed to control, which is the
capital Departmental Expenditure Limits. My recollection is that
the actual outturn for those is pretty much exactly the same as
we announced at budget time. So it is very much at the depreciation
end of the equation which the ONS are responsible for estimating,
plus what local authorities are doing in terms of capital spend
and the public corporations. Those parts of capital spending which
departments directly control have been very much in line with
93. What underspending is there in the areas
you directly control?
(Mr Sharples) Within Departmental Expenditure Limits,
as I said earlier, the underspend on capital was round about one
billion, but on public sector net investment, which is a wider
concept covering the whole of the public sector, the numbers,
as I say, have come down since the budget. One point I would like
to make, though, is that net investment is the difference between
two large numbers: it is gross investment minus depreciation.
Both of those large numbersgross investment round about
£23 billion or so and depreciation round about £14 billion
or soare subject to revised estimates which, unfortunately,
are not within our control. We rely, at the moment, on the Office
for National Statistics to provide the estimates of depreciation,
but we are looking forward to the time when, as a result of the
move to resource accounting and budgeting, the much more reliable
estimates of depreciation on central government departments' capital
stock will be used as the basis for construction of national accounts.
94. If we forget depreciation (I am still looking
at 171) public sector gross investment rises by whattwo-thirds,
or 70 per cent, to 2004-05 compared to the outturn? It rises by
70 per cent in three years.
(Mr Macpherson) Yes.
95. Are you serious?
(Mr Macpherson) Very serious.
96. What mechanisms have you got for delivering
(Mr Macpherson) It is very striking, if you look at
the outturns of public sector gross investment relative to plans
over previous years, thatI fully accept that in the early
years of the last Parliament there were difficulties in spending
the money. I think that this was a reflection of capacity. Here
was a new government, very committed to investment, coming in
after a long period of, really, very low investment levels and
I think it is clear that the systems were not in place in departments
to plan that investment, to manage the projects, and there were
delaysand there may also have been a degree of optimism
on the part of departments about what was possible. However, it
is clear that over the last year the departments have become far
more effective in terms of ensuring that the money is spent. We
spent a lot of time a year or so ago reviewing with departments
their departmental investment strategies, to ensure that they
did have sensible, taut and credible plans on investment. Through
last year spending was much more in line with plan. As Adam says,
there are always problems around things like depreciation but
these plans reflect extensive discussion with departments. I can
assure you that the Treasury does not enter into these sorts of
expansions lightly; we think the plans are credible and we think
departments now do have the capacity in place to deliver them.
97. So your credibility is behind those figures,
and any failure to deliver those figures will test your credibility?
(Mr Macpherson) I think it is very important that
those figures are delivered. They have been set out in the plans
and we will expect them to be deliveredsubject, of course,
to Adam's earlier point that we do not want money just being chucked
out of the door willy-nilly. This must be cost-effective. We are
interested in value for money but we believe that the infrastructure
in this country needs this level of investment following, really,
quite a long period of under-investment across a whole range of
programmesbe it schools, transport
98. Forgive me, Mr Macpherson, the issue is
not whether it would be lovely if this happened but whether it
is going to. That is the issue.
(Mr Sharples) It is perhaps worth saying that the
average growth in capital spending that is being planned over
the next three years is 10 per cent a year in real terms. That
is both for spending within departmental plans and across the
whole of the public sector.
99. What assumption of inflation does that represent?
(Mr Sharples) The assumption of inflation is common
to all public spending calculations, which is 2.5 per cent. That
is the assumption that the Government uses.