Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  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?


  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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