Examination of Witnesses (Questions 20
- 39)
TUESDAY 4 DECEMBER 2001
MR GUS
O'DONNELL, MR
NICHOLAS HOLGATE,
MR ADAM
SHARPLES, MR
ALEX GIBBS
AND MR
JOHN KINGMAN
20. You have reiterated the iterative process
point. It is possible that the Health Secretary did not know on
Monday.
(Mr Sharples) I simply cannot comment on that.
21. Could we turn specifically to the health
pledge of the extra £1 billion. In the March budget document
we were told that the outturn for 2000-01 for NHS spending was
going to be £44 billion[1].
In the document presented last week (that was only a month before
the year ended) it turns out in fact to be £42.8 billion.
There has been a £1.2 billion underspend. That is right,
is it not?
(Mr Sharples) I do not think the underspend is as
large as that. I think there was an underspend last year on health
but it was around about £0.5 billion, not quite as large
as the difference between the two figures you quote.
22. These are your figures.
(Mr Sharples) But the important thing to emphasise
is that that underspend is not money lost to the health service;
it is money which is simply carried forward into this year and
can be spent by the health service this year.
23. That is what I wanted to ask you about,
how the spend is carried forward. But, if I may just clarify,
these are your figures. On page 186 you say the outturn for NHS
was £42.8 billion.
(Mr Sharples) I would have to check the precise figures
you mention, but the figures I can quote are that the underspend
in resource terms for the health service last year was round about
£500 million. In cash terms it was a little bit higher than
that.
24. We are here to discuss the pre-Budget report.
On page 186 you say the outturn was £42.8 billion. In March
2001 you told us that the outturn was going to be £44 billion.
The underspend, therefore, is £1.2 billion, not £0.5
billion.
(Mr Sharples) What I am saying is that my best information
is that the underspend last year was round about £500 million
in resource terms. I would need to check the precise figures you
quote to try and explain the differences between the figures that
you quote and the figure that I am quoting now, but my best information
is that it was a £500 million underspend.
Dr Palmer: Perhaps we could ask for a
letter about this, rather than go round the table.
Mr Fallon
25. Anyway, I think it is £1.2 billion
and you think it is £0.5 billion. Can you clarify for the
Committee how the new billion fits in with the underspend. If
there is an underspend next year, can the underspend be carried
forward, including the extra billion that has now been announced?
(Mr Sharples) The extra billion that has been announced
is for the 2002-03 financial year, so that is for the next financial
year. The figures we have been talking about are for the last
financial year, (2000-01); the underspend from the last financial
year can be carried forward into this financial year, (2001-02);
and if there is an underspend this year that will be carried forward
to next year—and, indeed added to the £1 billion addition
that the Chancellor announced in the pre-Budget report.
26. Do you expect an underspend in the current
year?
(Mr Sharples) It is difficult to say at this stage
in the financial year what the outcome will be. Our best expectation
is that budgets will be pretty close to being spent this year.
There will therefore be a smaller underspend than there was last
year. But I would emphasise that at this stage of the financial
year it is very difficult to make accurate forecasts of this.
27. If this is part of the underspend and simply
carried forward, is it right to describe it as new money?
(Mr Sharples) It is new money. The £1 billion
is an addition to the plans for the health service in the 2002-3
financial year.
28. So that the health service is not in any
way penalised for underspend.
(Mr Sharples) Indeed not. This is a feature of the
new public spending framework that was introduced in 1998, that
departments can now carry forward 100 per cent of any underspend.
This means that they have a much better set of incentives. Under
the old regime they lost most of the money arising from underspend
and therefore had a strong incentive to spend up at the end of
the financial year. We felt this was causing a certain amount
of waste in the system and we feel the new framework provides
better incentives.
29. If the underspend last year was £1.2
billion on my figures, and you say it was only £0.5 billion,
that is still quite a chunk of money, is it not?
(Mr Sharples) Well, you have to remember that £0.5
billion is round about one per cent of the total health service
budget, so it does need to be put in perspective. The second point
is that clearly at this stage of the financial year the health
service has to manage in a world of some uncertainty. We simply
do not know at this stage what pressures will hit the health service
over the winter. There may be an epidemic of flu, for example,
that would push up costs over the winter, so it makes sense in
budgeting terms to hold a little bit in reserve to deal with unexpected
pressures over the winter period. If we have a good winter, it
may be that some of that money has not been spent by the end of
the financial year. We would strongly prefer, in those circumstances,
that the health service looks at its spending over the medium
term and uses the money to deliver value for money over its three
year plans, rather than up against the end of the financial year
looking for ways of getting the money out of the door, simply
to spend it by the end of the financial year.
Kali Mountford
30. I actually applaud the idea of year-on-year
roll forwards in budgeting, but do departments, including the
NHS, actually have to demonstrate planned spending for any of
that?
(Mr Sharples) I am sorry, do they need to demonstrate
. . .?
31. Well, at the end of the year previously
there was a mad rush sometimes to buy any old thing to get rid
of the budget. A complete waste of time. If we are rolling forward
budgets, which can help expenditure overall, are we asking them
to account for how they would spend that roll forward?
(Mr Sharples) What happens is that departments carry
forward the underspend from the previous year together with accumulated
underspends from years before that and that forms their stock
of what is called end-year flexibility—a bit of jargon,
I am afraid. That is the stock they can then draw down. When they
draw that money down, they need to present it to Parliament in
the form of a Supplementary Estimate, so that is the opportunity
for Parliament to see the proposals from departments and to discuss
those.
32. Would it be reasonable to use any of that
to fill gaps where in some area health authorities, for example,
there has been underspending? Is it balanced out over the department?
(Mr Sharples) It is up to each department to manage
its budget so that it does two things: it delivers the right incentives
to budget holders at different levels of the system (and for that
purpose it makes sense to pass down end-year flexibility entitlements
to those subsidiary budget holders), but the department also has
to manage its budget to live within its departmental total. That
is obviously important to the discipline of the public expenditure
management system.
Mr Beard
33. The overspend is not just confined to health.
The Financial Times lists the underspend in various government
departments, and, in fact, defence is the only one coming anywhere
near its spending estimates. This is the second year this has
been happening. Here you have a government which is deliberately
trying to increase investment in public services and in two years
we are seeing an increase in the underspend. I do not believe
all of it because people are waiting for winter hazards. What
is going wrong?
(Mr Sharples) You are quite right that there was an
underspend last year on departmental expenditure limits. You are
also right that the underspend is rather larger than we thought
it was going to be at the time of the budget earlier this year.
What is going on? I think two things. One is that we have changed
the rules. What we suspect is that under the old system there
was a certain amount of end-year spending just to get the money
out of the door. Now that we have changed the rules, there is
not the pressure to do that and more money is now being carried
forward. That is probably one reason why there is a bit more underspend.
The second factor is that the Government has launched on a number
of quite ambitious programmes for improving the public services
and delivering new public services, and in some cases these are
taking a little bit more time to get up and running than had previously
been anticipated. Clearly it makes sense to run those services
in such a way as to deliver value for money. We do not want to
see departments rushing at it and doing things poorly and doing
things in a way that wastes money: we would much rather that they
set proper plans in place and they built those plans up gradually
over time. That is one of the virtues, I think, of the Government's
approach to public spending over the medium term: we set three
year plans; we set targets for what we expect departments to deliver
in return for that money; and then it is up to departments to
manage their business over that three year period. We think that
is a better way of managing public spending.
34. The argument you have just given us, Mr
Sharples, is exactly the argument that was given last year, that
really the civil service machine has not got itself into gear
for spending these large amounts of money. These underspends are
against plans that the departments themselves have drawn up, so
there is no reason why they should not be spending in that year
because they have presumably assessed all the difficulties there
are in spending it or getting the projects going. So this is indicative
of a failure over and above anything that was involved in the
estimates. To say that people can roll this over, we cannot keep
on doing that. I mean, we are rolling over more this year than
last year at this rate, and, although you are not going to waste
it in the end, you are wasting the time opportunity because you
have not got the money spent and the projects going at the time
you anticipated. Is this not indicative of a failure to control
projects and to control capital investment? If it is, what remedy
is there for the future? We do not want to go on for the next
three years seeing these roll-overs increasing and increasing,
and less and less being invested than we ever anticipated.
(Mr Sharples) The first thing to say is that the underspends
that we have been talking about do need to be put into perspective
against the size of departmental budgets. The total underspend
on departmental expenditure limits last year was round about 2
per cent of the budget. We should not come away with the view
that somehow there is some massive hole in the delivery of government
programmes: 98 per cent of the money is being spent and, as budgets
increase, increases in spending on the ground are being delivered.
But are we entirely satisfied with the situation? Well, no. We
want departments to draw a very clear distinction between, if
you like, the good reasons for underspending and the bad reasons
for underspending. The good reasons for underspending might be
that they have found a cheaper and more efficient way of delivering
the service. We certainly do not want departments to stick with
old ways of spending money just to keep the spending up. If there
is an efficiency gain to be made, we would like that to be made.
Other good reasons for an underspend might be that a capital project
has been re-profiled, the spending over the life of the project,
over the construction of the project, has shifted, perhaps for
good reasons. On the other hand, there may be less good reasons
for underspend, because departments have not organised things
effectively to deliver services or because money has got stuck
in the system, it has not been passed down to the budget holders
at the front line who need to deploy the resources. We are very
actively discussing with departments how we can make sure those
potential blockages, both on current spending and capital spending,
can be removed and how we can get the money flowing through most
effectively.
Mr Palmer
35. Despite what you are saying, it is very
striking that every department is underspending. I suggest that
there is a systemic reason for this: a department which overspends
is in trouble; a department which underspends is merely asked
for an explanation. Would it not be healthier if departments were
told that a reasonable variation around the target would be acceptable
if there was good explanation for it, rather than this systematic
approach that you do not have to explain away an underspend to
the same extent as you have to explain an overspend.
(Mr Sharples) I think we would be a bit uncomfortable
and I suspect Parliament would be a bit uncomfortable with us
trying to run a system in which we were relaxed about departments
going above budgetary limits. Any system for public spending control
and allocation needs to have well recognised disciplined limits
within it. We feel that is what the departmental expenditure limit
system provides. Can I say that the issue you raise about asymmetry
in the system, that departments will tend to come in below the
limit, is one which is actually absorbed at the level of the total,
because the sum total of what departments could spend if they
drew down all their end year flexibility is actually greater than
our total for departmental expenditure limits. We balance out
the expectation that some departments will draw down end-year
flexibility against the expectation that others will underspend
to ensure that the total is managed within our total for departmental
expenditure limits.
Kali Mountford
36. Can I just ask you to explain to me something
in the report which I do not understand on pages 11 and 19. I
am trying to understand where tax credits are shown in your figures.
Are they included in the social security figures?
(Mr Sharples) I can tell you that tax credits are
included in our total for public spending, total managed expenditure.
They appear within the category known as "annually managed
expenditure". There is a table on page 185 which gives the
detailed breakdown of the contribution of tax credits to total
managed expenditure. You will see line 4 of the table on page
185 gives those figures.
Kali Mountford: When we get the departmental
reports, where will I find it then? It is not easy to track down,
is it?
Chairman
37. We have the Hansard reply to Mr Blunt's
question from the Chief Secretary to the Treasury on tax credits.
Perhaps that will help you on it. It says: "The Treasury's
calculation of net taxes and social security contributions treats
all tax credits as reductions in tax collected since the working
families and business tax credits appear as reductions in their
tax bills. The Treasury's calculation of public sector receipts,
drawn from ONS's national accounts treats some tax credits as
public expenditure—mostly WFTC and DPTC."
(Mr Sharples) Exactly. Where the tax credit is going
to some families who are not otherwise tax payers, then, for the
purposes of national accounts, on internationally agreed conventions,
the tax credit scores as part of your public spending, which is
why we show it in the annually managed expenditure and the figures
are set out in table B15.
Mr Laws
38. Mr O'Donnell, we have had this confusion
recently in the Government about the policy on health in relation
to the EU average that the Government is supposedly aiming at
or not aiming at. There is the suggestion that there is some division
between the Prime Minister's view on this and the Chancellor's.
You seem to be the perfect person to ask about this, given your
wonderful contacts with both and the headhunting the Prime Minister
has been engaged in to try to get you out of Treasury. Can you
confirm whether or not it is the case that the Government is seeking
to bring NHS spending as a share of the GDP up to the European
average by 2005?
(Mr O'Donnell) I will pass that on to the director
of public spending who is in charge of these matters.
(Mr Sharples) The position on health spending is that
we have set out our plans up to 2003-04. They provide for quite
substantial increases in health spending, round about 5.5 per
cent in real terms over that period. For the years beyond 2003-04
we will be setting plans in the course of the spending review
next year.
39. Hang on a second, the Prime Minister last
week at Prime Minister's Questions was asked the specific question
whether or not it was the policy of the Government to bring NHS
spending up to the EU average by 2005. You are the Treasury officials.
You must know what the policy of the Government and Treasury is.
Is it, Mr O'Donnell, to bring it up to the EU average by 2005
as the Prime Minister has said or not?
(Mr Sharples) Clearly we are working—
1 Note by Witness: This was in fact the figure
for the Department of Health. The equivalent figure for the NHS
was £43.2 billion. Back
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