Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Q1  Chairman: Mr Macpherson, welcome to the Sub-Committee. I congratulate you on your appointment as Permanent Secretary and ask you to introduce your team formally, please.

  Mr Macpherson: Thank you. From my left: John Oughton, Chief Executive, Office of Government Commerce; Jonathan Stephens, Managing Director, Public Services Directorate; Mary Keegan is Managing Director of the Government Financial Management Directorate, also Finance Director of the Treasury and Head of the Government Accountancy Service; Sue Owen is also multi-tasking and is standing in as Director of Operations while Samantha Beckett is on maternity leave, and is also a Director in relation to our Macroeconomic Policy and International Finance Directorate.

  Q2  Chairman: In the departmental reports, the basis for our session today, there is no summary by the Chancellor or your predecessor or you of the Treasury performance in 2004-05. How would you characterise it?

  Mr Macpherson: I would characterise it as a good performance. We are continuing to make good progress on a broad front. The rate of growth continues to be encouraging; employment is at a very high level; there is a high degree of stability; indeed, the OECD recently described the British economy as a paragon of stability. We have made progress on the international front and we continue to make progress, working with other departments on the public services; so it has been a good year. However, we are always, obviously, aiming to improve.

  Q3  Chairman: You have announced this morning the appointment of a new Second Permanent Secretary. Can you clear up the mystery of the departure of the previous Second Permanent Secretary, Sir Nicholas Stern? What happened to him?

  Mr Macpherson: I would be very happy to describe what has happened there. You will recall just before the summer the Chancellor announced a review of the economics of climate change. Sir Nicholas Stern is leading that review. Given that the review was clearly going to cut across government as a whole, it was decided to make Sir Nicholas the Government adviser on the economics of climate change and also of development, following on from his highly successful contribution to the work of the Africa Commission. In that context it has made sense for Nick to be based in the Cabinet Office, reflecting his cross-governmental role. However, he remains head of the Government's Economic Service and a key member of the Treasury Board. He continues to be located in the Treasury, although his climate change team is of the Cabinet Office, so we continue to benefit from his advice.

  Q4  Chairman: So he is still in the Treasury, but not of it—is that right?

  Mr Macpherson: Yes. A good comparison is the Prime Minister's Delivery Unit, which is also located in the Treasury. Location alongside the Treasury can certainly facilitate cross-departmental working.

  Q5  Chairman: Why was all this not publicly announced?

  Mr Macpherson: It was publicly announced; it was announced in a press release in October.

  Q6  Chairman: You have not appointed a new Second Permanent Secretary; you have simply re-badged John Cunliffe as the Second Permanent Secretary. Does that mean that you are counting the saving of the Second Permanent Secretary's salary as an efficiency saving?

  Mr Macpherson: Let me just be clear about the status of Second Permanent Secretary. Over the last 10 years the Treasury has had as many as five Second Permanent Secretaries at one go as in 1997, and it has had as few as one; so there is not some iron rule about how many Second Permanent Secretaries you have. If you go back to the 1960s, not only did the Treasury have two Permanent Secretaries, it had something like five Second Permanent Secretaries and 20 Third Secretaries. The reason why John Cunliffe was being made a Second Permanent Secretary is to reflect the special nature of his job, where he is representing the UK in a wide range of very important international fora. He has an extremely heavy workload, and is responsible for macroeconomic policy as well. One of his predecessors, Sir Nigel Wicks, who was Second Permanent Secretary, only dealt with the international side! Turning to efficiency, insofar as we have fewer managing directors and second permanent secretaries, and we are continuing to achieve a high-level output, then that must result in an efficiency improvement.

  Q7  Chairman: Turning to table 5 of your report, we see quite a significant jump in your administration costs, even including the setting-up of the Office of Government Commerce and the higher running costs of the new Treasury building, which have jumped from 96 million five years ago to 167 million this year, which I make a 74% increase. On table 6A, which follows, mysteriously there was a similar increase from 67 million six years ago to 112 million, a 67% increase. How can you tell us you are becoming more efficient if you are spending roughly twice as much on yourselves as you were five years ago?

  Mr Macpherson: There are a number of issues here. The first most important issue is around the refurbishment of the Treasury building. You will recall that this took place round about 2001-02, and we could, I suppose, have knocked the building down and built a new, cheaper one, which would probably have cost less than refurbishment. We could have moved away from that part of Whitehall. However, as with many office buildings which are deemed to have architectural merit, that would all have been quite difficult. English Heritage would not have liked it if we had knocked it down and so on. Inevitably the cost of refurbishment was more than the value of the building at the point when we occupied it. One of the reasons for the lumpy increase in our spending in that year was that difference between the cost of refurbishment and the value of the building, which was based on London rents. At the point we occupied it, London commercial rents were very low. One of the reasons why our spending turned out to be lower last year, in terms of the outturn in our resource accounts, than the numbers in the departmental report was that rents rose and therefore the value of the building rose, which gave rise to an exceptional credit on our accounts.

  Q8  Chairman: Can we cut through all this mandarin prose? If it was 67 million five years ago and now it is 112 million, what is the increase attributable to that which is not attributable to the new building? Between 112 and 67, what is not the new building?

  Mr Macpherson: The main change since 2000 was, in the run-up to—I think the best way of looking at this—

  Q9  Chairman: Can you not just answer my question? If it is the new building, and it was 67 million a year to run the Treasury and now it is 112 million, what is the bit that is the new building? How much is the new building adding to the burden?

  Mr Macpherson: The key thing to look at in table is the core underlying costs, which is the top line. It shows an increase through the early part of this decade. It may be helpful if I tried to explain that. I was going to say that it relates to a decision to increase the numbers of people in the Treasury round about 2000-01. Until that point we were carrying quite a large number of vacancies. People were working excessive hours. We took a decision to increase the number of staff by around 140 in the early part of the decade. Since then, obviously, we have also taken on board a significant transfer of people from the Revenue and Customs—

  Q10  Chairman: That is a separate line, with respect.

  Mr Macpherson: No, that is—

  Q11  Chairman: It is not in the top line.

  Mr Macpherson: Absolutely. I am just trying to explain the context of the staff numbers. The fact is that for the core Treasury the main driver of spending is people.

  Q12  Chairman: Then you have got more people.

  Mr Macpherson: As I say, in the early part of the decade we increased the numbers of people working in the department.

  Q13  Chairman: My colleagues may pursue that. Are you able to offer the Treasury Committee further news on the date of the Pre-Budget Report?

  Mr Macpherson: I think an announcement on the date of that will be made very, very shortly.

  Q14  Chairman: You will recall that the Committee has recommended two months' notice, but that seems to be only weeks away. You are not able to help me any further?

  Mr Macpherson: I recognise that it must be irritating, planning the work of the Committee but not having a date. Equally, it would help to have a date in terms of planning our work. Part of the problem through the end of this year are issues around international meetings, G7 meetings, ECOFIN meetings, some of which are changing, which means it has not been possible to announce it yet. I am mindful of your recommendation, and, as I say, I am optimistic that an announcement will be made very shortly.

  Q15  Chairman: Has the announcement ever been as late as this?

  Mr Macpherson: If you would find it helpful, I would be happy to check when we have announced previous PBRs and when they have taken place.[1]

  Q16 Peter Viggers: The setting of targets is a central and increasing essential part of the Treasury's management of the economy. It is stated that the Treasury encourages departments to provide full and clear reporting against its public sector agreement targets. What form does this encouragement take; how do you encourage departments to report to you?

  Mr Macpherson: We encourage them to do it by creating a reporting framework. The most important elements of that framework are departmental reports, which are generally published in the spring, and autumn performance reports, which are published towards the end of the year, which set out in detail current performance against targets.

  Q17  Peter Viggers: Did I understand that to mean that the initiative for setting the targets comes from the department itself, or is it something imposed by the Treasury?

  Mr Macpherson: Targets have to be owned by departments. We would never seek to impose them. The principle of good management is that people who are delivering the relevant services understand the targets and buy into them, and are motivated by the targets. We would not impose them, but, inevitably, as part of the Spending Review process we are keen to ensure that the taxpayer is getting something important and concrete and ambitious in exchange for the resources that the Treasury is putting in to services.

  Mr Stephens: Targets are agreed between the Treasury and the department and adopted collectively by the Government as part of the Spending Review process. It is a well-understood part of the process now that departments and the Treasury agree targets.

  Q18  Peter Viggers: When they report on the meeting of targets, how does the Treasury monitor whether the statement of meeting of targets is correct or not? Do you have internal mechanisms to check the meeting of targets?

  Mr Stephens: The primary responsibility and accountability on reporting of targets is for the department to do so. The data systems underlying targets are validated by a process involving the NAO and Audit Commission. They have published a useful report covering some of the data systems already, and I gather that they are planning to publish a further one in due course. Of course, a lot of the information that is reported on is publicly-available statistics.

  Q19  Peter Viggers: Local authorities' targets are monitored and independently validated by the Audit Commission, and Health Service targets are independently monitored by the Healthcare Commission. Are there similar external monitors for public sector?

  Mr Stephens: The National Audit Office and the Audit Commission are involved in validating the underlying data systems, and earlier this year the National Audit Office published a report covering, from memory, a number of Government departments' data systems. A number of the performance indicators used, not least reporting performance on Treasury targets on the economy, are of course produced from national statistics information, which has its own independent verification procedures.

1   Note by the Witness: The Government has undertaken to give as much advance notice as possible of the date of the Pre-Budget Report and of the Budget. The House of Commons received 18 days' notice of the date of the PBR in 2005. 13 days' notice was given in 1998, 15 in 2000 and 12 in 2002. Back

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Prepared 30 December 2005