Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160-169)

14 JULY 2004


  Q160 Chairman: I notice in your Spending Review 2004, page 28, you mention that increased consultation with a wide range of stakeholders will be undertaken. Why was this Committee not consulted regarding the Treasury's PSA targets? Do you not consider we are an important stakeholder?

  Mr Macpherson: I regard you as a very important stakeholder. That is—

  Q161 Chairman: An omission?

  Mr Macpherson: Clearly an omission.

  Q162 Chairman: Excellent. So you will rectify that omission?

  Mr Macpherson: I would hope we can continue to have a very good dialogue with you.

  Q163 Chairman: So that is a "yes"?

  Mr Macpherson: That is a "yes".

  Q164 Chairman: Could you give us an idea of what mechanism you use to increase consultation with others?

  Mr Macpherson: I would give two examples. There was an event which Sir Nigel Crisp the Chief Executive of the Health Service has laid on where, actually, there was some very active discussion between the senior management of the Department of Health and the NHS, and a wide number of clinical experts and chief executives of health trusts and strategic health authorities. Another example I would give is the dialogue which the Home Office has had with some of the criminal justice agencies. To give an example of somewhere where that consultation has resulted in a different target is the crime target. You will recall that the previous targets identified different sorts of crime—vehicle crime, robbery and so on. Particularly in response to the representations of the police, the target this time does not distinguish targets in terms of separate forms of crime because of the potential this had to distort behaviour. So there is a tension here. On the one hand you want to have continuity, because it is only by having continuity of targets that you really embed, focus and change. On the other hand, you have got to listen to what people are telling you about the effects of targets, and adjust them accordingly.

  Q165 Chairman: Some departments have built up—at least according to last year's figures, which are the latest we have—quite a sizeable amount of under-spend, which they can take forward to next year. Does this give the department, in effect, a reserve additional to the contingency reserve held at the Treasury If so, might this weaken the financial controls on departments by reducing their incentive to manage their spending tightly?

  Mr Macpherson: I think it is a very good question and it is one which we spend a huge amount of time in the Treasury debating. I am absolutely convinced that the end-year flexibility regime has resulted in a better quality of spend, but we were surprised by how the stock of EYF (as we call it) has built up over time. Each year, round about late autumn, we start to worry about: "Is this going to be the year when it is all finally spent" and the whole fiscal arrangements will be put under pressure. We seem to be reaching, I would not quite say, a steady state but in every year some departments do continue to rack up under-spends and others do not. You always think "It is all going to be spent" and it never quite is. So I think there is a trade-off here and the stock is fairly stable, is it not, Chris?

  Mr Martin: It is. It is worth pointing out that for most departments the stock is around about 1% of their DEL which is the sort of amount you would sensibly expect to be carrying over as part of the incentives that Nick is talking about. There are a couple of areas where the stock has been larger—education was one that was highlighted last year and indeed after SR 2000. In the case of education that was about not school spending, which was bang on the money, but new programmes, in particular SureStart and Children's Programmes, that had recently been introduced and, in the end, were taking slightly longer to get going than we had anticipated. We put the money in there hoping they would be able to get the grant quickly, but in the end they lagged a bit. However, the key thing about the EYF system is that it means that that spending power is still there, and that spending will still go through to frontline services.

  Q166 Chairman: So it is a good question but there is no real answer yet; it is work in progress. Is that what you are telling us?

  Mr Macpherson: This regime has been up and running now for four to five years. Over time one will begin to be able to really sort of model what is going on. I think the days of huge under-spends are behind us, mainly because, as Chris said, a lot of the problem was actually about getting new programmes up and running where I think there was optimism about how you could do that. Equally, there is no sign that I have seen—and it may be that new statistics will show something different—that departments are now beginning to seriously draw down that EYF in a way which is destabilising.

  Q167 Chairman: Last question: What constraints are there on the extent to which departments can carry forward under-spends? Where funds have been allocated but not spent for more than a specific period is there a case for transferring the funds to other departments which are in a position to spend them? Is that another good question?

  Mr Macpherson: It is a good question but I will try very rapidly to answer it. In terms of re-allocation, the Spending Review provides an opportunity. Sometimes—and I think we did this with SureStart in 2002—you can re-profile the spending. The other question was how do we manage it? The one thing which we do have the opportunity to do is if a department makes a reserve claim—a claim against a contingency reserve—and it then turns out that it under-spends, we dock the under-spend from the contingency reserve claim because otherwise they would actually have an incentive to pretend they needed all this extra money when they did not. That is the main mechanism we use.

  Q168 Chairman: Is there a case for transferring that under-spend to other departments?

  Mr Macpherson: As I say, I think the Spending Review is the time you can do that. Implicit in the re-profiling of SureStart was saying, "SureStart took some time to get up and running, so let's re-profile it, therefore, at the margin, and reallocate some money to other programmes."

  Q169 Chairman: There is little flexibility in that; it has to be done—

  Mr Macpherson: On the whole we do not try and do it month-by-month, but every two years, say, in the Spending Review we take an overview of where we are and set budgets accordingly. For example, the Northern Ireland Office, this time round, has built up a very large amount of EYF and the plans for the Northern Ireland Office reflect that. They look very much as if the Northern Ireland Office has been very much cut, if you look at its change on plans, but actually that is just us saying, "You have got all this EYF, kindly spend some of that."

  Mr Martin: It is important we do only look at it every two years. To be honest, it has probably taken departments about four or five years to really trust the Treasury on EYF—that we were not going to take it away from them. So the incentives only work if there is a measured, set out process, for example, and that is what the Spending Review represents.

  Chairman: Thank you very much for your time, Mr Macpherson, and we look forward to you and your boss coming back tomorrow. Thank you.

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