Examination of Witnesses (Questions 180-199)
MR JON
CUNLIFFE, MR
JONATHAN STEPHENS,
MR NICK
HOLGATE, MR
DAVE RAMSDEN
AND MR
CHRIS MARTIN
14 DECEMBER 2004
Q180 Mr Mudie: You were introducing reforms
to encourage the levelling of spending. Can you give us two or
three examples and tell us how they have worked?
Mr Stephens: Those reforms involve
long-term spending plans, greater certainty over the long term
to enable better planning of expenditure, the move to resource
accounting and budgeting and the production of 100% end-year flexibility
so that departments and others are able to carry over any unspent
budget from one year to the next.
Q181 Mr Mudie: The House of Commons Scrutiny
Unit estimates that the remaining stock of end-year flexibility
amounts to £9 billion. There is some worry that if the departments
had spent that in the last two years it would have an adverse
effect on you meeting the golden rule. Would you care to comment?
Mr Stephens: The figure I have
is about £8.8 billion, just very slightly less. That stock
has risen in a number of successive years. It rose by £1.9
billion last year, £0.5 of a billion the year before and
£2.2 billion the year before that. From the introduction
of end-year flexibility we see a pattern of continual increases.
You would expect, having introduced end-year flexibility, that
departments will want to operate with a certain level of stock
in order to maximise their flexibility and freedom over the operation
of their budget. I think the prospect of the £8.8 billion
being drawn down in totality is remote and indeed the pattern
over the past five years has been of the stock building up.
Q182 Mr Mudie: So you are not tempted
to cap it, to level it in any way, because if you are building
up to almost £9 billion, it is a fair bit of uncertainty
being pushed forward and putting you at the mercy of spending
departments. Do you not have any unease about that?
Mr Stephens: There are clear advantages,
in terms of the management and delivery of public services, in
giving departments the freedom within budgetary controls to re-profile
spending from one year to another to get away from the analysed
cycle, the end year surges which we all know did not lead to generally
good value for money spending. This is a matter of balancing the
clear advantages in terms of good management of public services
and the delivery of public services with the sort of issues that
you highlight. This is something that we keep under regular review.
We are watching as the stock rises. We will keep that under review.
One also has, of course, to consider the incentive effects on
departments.
Q183 Mr Mudie: I accept that.
Mr Stephens: What one has to consider
with a cap is whether departments spend up to that cap.
Q184 Mr Mudie: It is a question of balances.
If departments have got £9 billion of money that they are
carrying forward, does anyone at any stage in the exercise look
at what is being carried forward? It can be very, very important
if they are carrying that amount forward. I would be tempted to
have a look at it to see what was genuinely sensible and what
is just money that is floating about in the department looking
for a reason to be spent.
Mr Stephens: We do keep it under
close monitoring. We publish the available totals.
Q185 Mr Mudie: Do you ever take any back?
Mr Stephens: Yes, we do. It is
a factor that can be taken into account in spending reviews and
has been taken into account in spending reviews. It is also a
factor that can be taken into account when, for example, a department
comes with a reserve claim or a new item of spending which otherwise
they might look for more central funding for and we quite frequently
examine the state of end-year flexibility to see whether they
can absorb it within their flexibilities.
Q186 Mr Mudie: I would be happy with
that answer if you indicated in the spending review document that
this £9 billion was in some way affected by the spending
review that had come down to £7 billion or £5 billion
because you had taken stuff out and put it back in a different
way. Is there any way a Public Accounts Committee or a Treasury
Committee could pick that up because otherwise that could just
be words you are using?
Mr Stephens: We do publish annually
the available stock of end-year flexibility by departments, so
one can see the changes in the stock.
Q187 Mr Mudie: Where do you publish that?
Mr Stephens: In the outturn White
Paper. There are different ways in which we can take this into
account in the spending review. One does not only have to reduce
the EYF stock, one can reduce the allocations to the department.
Q188 Mr Mudie: Let us go back to forecasting
investment levels by government departments. In the Pre-Budget
Report 2002-03 you were going for a 30% increase in investment,
in the Budget this year it was down to 17 and in the Pre-Budget
it was down to 15. What on earth is happening? You have come from
30% down to 15%. What is happening with these departments?
Mr Stephens: I think you are talking
about investment in 2003-04 and it is worth pointing out that
we are still looking at a 21% increase in overall public net investment.
Q189 Mr Mudie: You were looking at over
30%.
Mr Stephens: That is quite correct.
Our forecast over public sector net investment has come down by
about £2.5 billion overall. Most of that is actually lower
investment outside of Central Government by public corporations
and local authorities.
Q190 Mr Mudie: I am not sure about that.
I would like you to give us the figures because when I look at
the amount of capital expenditure in the book I would be surprised
if they could have that effect by pulling back their spending,
but I am happy to get figures from you on that. In the Budget
book, when we come to this stage in the proceedings, you then
go on to outline the state of play of the PFI finances, but this
is noticeably lacking in the Pre-Budget report book. Is there
a reason for that?
Mr Stephens: I do not think so.
There is some reference to the mix of how investment is made up.
In chapter 6 there is a chart, 6.1, and an accompanying paragraph,
paragraph 6.3.
Q191 Mr Mudie: I looked at the Budget
book and it is spelt out "signed deals", "deals
in negotiation" etcetera, in a fairly extensively way, but
that is noticeably lacking in the Pre-Budget Report. Why do you
take the PFI out of the Pre-Budget Report?
Mr Stephens: We have not covered
that sort of detail before in the Pre-Budget Report. With investment,
I am not sure that looking at it on a six monthly and twice a
year basis will tell one an awful lot more, but we are committed
to publishing that sort of information regularly.
Q192 Mr Mudie: How much compared to the
capital budget is PFI?
Mr Stephens: PFI is a relatively
small proportion of the overall sum, about 10% or so.
Q193 Mr Mudie: It is no great hardship
to include the same figures in the Pre-Budget Report because it
lets us know where you are. When you put something in the book
I always think it matters, there is a reason for it. There is
reference on two occasions to the NHS trusts moving from public
corporations to government expenditure. When I look at the expenditure
tables I do not see any violent changes to suggest that matters.
What is the expenditure of the trusts, approximately?
Mr Stephens: I do not know the
expenditure of the trusts offhand. I can write to let you know
that.[2]
Mr Cunliffe: The offset to expenditure
will come in under the Department of Health. So when they were
classified outside the public sector, they were payments from
the Department of Health to trusts. Now they are classified inside.
It is about the taxable income. So the taxable income of the trusts
has gone but, on the other hand, that amount of the payment to
the trusts for the Department of Health who has to pay the tax
has also gone.
Mr Stephens: Paragraph B68 suggests
that this change has reduced both current expenditure and receipts
by about £1.5 billion.
Q194 Mr Mudie: It suggests it balances
out. Therefore, if I am looking for National Health Service expenditure,
do I look in the Department of Health and the NHS?
Mr Stephens: Yes.
Q195 Angela Eagle: Why are local authorities
so bad at spending the allocations that have been given to them
in this period of expanding public service investment? What I
am trying to find out is, is it rules that you have put into place
and hoops they have to jump through that are holding them up or
is it just that they have got out of the habit of investing very
much and they are just not used to it?
Mr Stephens: This is a matter
for local authorities; we do not control that directly. Investment
is expanding very significantly as a matter of conscious policy
decision and investment by local authorities along with other
elements of Central Government public corporations is still expanding
significantly. In the context of achieving the sort of expansion
that the Government is committed to we do also want to ensure
that the quality of investment and the quality of investment decisions
is maintained as well as the quantity, and if indeed people are
taking a bit longer to be sure of the quality of decisions but
still planning to invest in due course we would not object to
that.
Q196 Angela Eagle: Is this what the end-year
flexibility changes are about, and do they apply to local authorities?
Mr Stephens: Local authorities
do have flexibility to re-profile their spending and we are increasing
their flexibility with proposals to delegate three year budgets
reflecting the three year spending settlements on which I believe
the ODPM will be consulting shortly.
Q197 Angela Eagle: How are you getting
on with measuring the effectiveness of public service investment
and output because clearly it is very difficult to define and
some of our definitions of this are very, very out-of-date and
even paradoxical in their effect?
Mr Stephens: This is an issue,
as you know, where Len Cooke, the national statistician, set up
the Atkinson review for exactly that purpose. They published an
interim report in the summer, I think they are planning to publish
a final report in due course early next year and that has resulted
already in some significant improvements in the coverage and quality
of data, for example, in respect of health outputs. I think the
Atkinson interim report points up in a number of other areas,
including in education, in criminal justice, a significant programme
of work going forward for the statisticians to improve the coverage
and quality of data. I think it is worth noting that there are
significant problems in measuring some elements of public sector
output, problems that are well recognised and faced internationally,
and even with the conclusion of the programme of work set out
in the Atkinson report there will be significant areas of
public sector output which are not covered and, indeed, some
significant objectives of the Government and outcomes which the
Government seeks to achieve in terms of the distribution of public
expenditure and in terms of improvements in the quality of public
services that are inherently very difficult indeed to measure.
Q198 Angela Eagle: I want to take you
on to the labour market. There is some puzzlement in the MPC and
at the Bank of England as to why average earnings are not growing
faster given that we have what, in previous eras, would have been
defined as quite a tight labour market with very high levels of
participation and an extra two million jobs. Does anyone have
a view on what is actually going on?
Mr Cunliffe: Lots of people have
views on what might be going on. With all these things, you will
not know until some time after it has finished what has been happening.
I think there are a number of elements here. When you say we have
a very tight labour market, I am not sure I would agree with that.
We have more people in employment than we have ever had before,
but that is partly to do with the demographics and it is because
we have less people in unemployment. If you look at recruitment
surveys, some show a tight labour market, some show there is some
slack there and the picture is quite difficult to read as to whether
the labour market is tight or not. There could be a number of
reasons why the labour market can operate at this level and not
see an increase in average earnings. One might be that there is
some slack there. A lot of people have drawn attention to immigration
and particularly immigration from the accession countries of the
EU, where people can come in now and work as a way of relieving
supply side constraints in the economy and there probably is something
in that. The workforce coming in in that way has actually increased
the supply side potential and that has kept average earnings down.
Some of it might be to do with just the greater perception of
external competitive pressure and the need to compete and compete
internationally is more clear now with all the attention there
has been on outsourcing and off-shoring and the like and that
is holding it down. It could be that the part-time labour force,
which is linked to the point about immigration, is influencing
the NAIRU, the rate of unemployment at which inflation is stabilised.
Q199 Angela Eagle: It is the last remaining
pillar of monetarism really that!
Mr Cunliffe: It is a concept which
I think is intuitive that there are levels of unemployment where
the market is very tight which cause wage inflation and then price
inflation to accelerate, but that level has dropped and my own
view is that it is probably a combination of all those things.
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