Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 80-99)



  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 future?
  (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 year—and everybody, I am sure, has had experience of this—there 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 foundation—if 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 of it.

Mr Mudie

  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 flexibility—that 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 end-year flexibility.

  82. You mentioned that this is all contained within a White Paper that is released in July. When did you release it?
  (Mr Sharples) We released it on Monday.

  83. Where?
  (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 because—

Mr Mudie

  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 passed over.

  Chairman: Why not write to us on the precise hourly timing? It would be interesting.

Mr Cousins

  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 corporations—areas 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 plans.

  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 numbers—gross investment round about £23 billion or so and depreciation round about £14 billion or so—are 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 what—two-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 that?
  (Mr Macpherson) It is very striking, if you look at the outturns of public sector gross investment relative to plans over previous years, that—I 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 delays—and 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 delivered—subject, 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 programmes—be 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.

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