House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Memorandum submitted by the Department for Environment, Food and Rural Affairs (DAR 09)

DEFRA'S 2006-07 BUDGET

EXTENT AND IMPACT OF THE 2006-07 BUDGET CUTS

1. Could the Department set out clearly all those areas where resources have been reduced from expected 2006-07 levels, and by what amount (in cash and percentage terms), due to the £200 million reduction in Defra's overall 2006-07 expected budget? In its answer, the Department should provide details and numbers relating to:

any key projects that have, or may be, delayed, abandoned or otherwise affected;

front-line services that have been, or will be, affected; and

reductions in corporate services and back-office functions that do not arise from efficiencies, and so may result in a lower level of service or output.

No key projects have been abandoned but certain programmes and projects have been delayed or scaled back, following the review explained in our response to Question 2, provided below. The impact of that review is set out in the answers to Question 3 and Question 4, below.

In terms of front-lines services, we engaged the Chief Executives of the delivery bodies to ensure that any impact was kept to a minimum. We have not heard of any cut-backs in services.

Some initiatives to streamline corporate services were scaled back to ensure that key services were not compromised.

2. How did the Department decide where the budget cuts should fall?

We conducted a rigorous review of financial allocations during the summer of 2006, which included detailed discussions with our agencies and sponsored bodies to agree where spending might best be reduced.

That review involved consultations and directions from Ministers on both an individual and collective basis. The subsequent adjustments to budgets were therefore based on protecting programmes that support the Department's priorities.

3. For each of its current Public Service Agreement targets, could the Department explain what risk the budget cuts represent to meeting the target?

To start with a general point, in many cases, the PSA targets stretch over long periods and these budget cuts apply to relatively small parts of delivery timescales. Thus the impact should be slight. It is also worth stressing that not all of the Department's activities are covered by Public Service Agreement targets.

Our last delivery report (in October 2006) to the Treasury on progress towards PSA targets confirms that there has been no immediate impact on progress, as there was no change to the overall likelihood of delivery for any of the PSAs. However, the last returns from target owners (which were used to inform our delivery report) included three areas where the target owner had commented on budgetary pressures. These were PSA 3a (Farmland Birds), PSA 3b (Sites of Special Scientific Interest) and the Service Delivery Agreement on Flood Management. In each of these cases, the observations on funding were long-standing and, therefore, not triggered by recent budgetary pressures. Furthermore, many of these issues on funding relate more to future years than the current financial year. Indeed, in the case of PSA 3a, the key issue was the need to secure funding for environmental stewardship schemes for the next Rural Development Programme (which will run from 2007-13).

As set out above, the Department responded to the pressures we faced with a thorough review designed to ensure that the impact on key objectives was minimised. We believe the changes made reflect and largely achieve that aim. Progress in delivering our PSAs is monitored by the Department's balanced scorecard; we can confirm that the status of our PSAs has not been affected by this exercise. Whilst financial pressures will undoubtedly have some impact on the risk of delivery, we believe this impact has been kept to a minimum. The Department has well developed risk management processes, but these do not currently provide a level of sensitivity that would be able to accurately measure and report the relatively small changes to risks that arise from this exercise, given that the approach was designed to reduce such impacts to the minimum possible.

4. Could the Department set out each instance, in cash and percentage terms, in which the 2006-07 budget cuts have resulted in changes in (a) core Defra's and (b) an agency/NDPB's:

2006-07 capital budget;

2006-07 resource budget;

2006-07 non-cash; and

2006-07 near-cash?

Whilst changes will have been made to capital and non-cash resource budgets during the year as apart of the normal ebb and flow of the Department's business, the 2006-07 budget review exercise focused on near-cash Resource DEL (RDEL) expenditure only. Changes are set out below. Near-cash RDEL controls form part of the resource budget, which would therefore reflect the changes detailed here.


		Adjustments
Departmental Report Business Area	Original Budget	Core Dept	Executive Agencies	NDPBs & PCs	Total Adjustment	Revised Budget	% Change

Animal Health and Welfare	289,138	(31,352)	(2,732)		(34,084)	255,054	-12%
Environmental Protection	999,638	(50,046)	(839)	(27,634)	(78,519)	921,119	-8%
Sustainable Farming and Food	114,619	(11,150)		(403)	(11,553)	103,066	-10%
Living Land and Seas	631,441	(11,834)		(14,500)	(26,334)	605,107	-4%
Departmental Operations	272,897	(13,962)		(600)	(14,562)	258,335	-5%
Rural Payments Agency	214,031					214,031	Nil
Other Executive Agencies	125,859		(4,722)		(4,722)	121,137	-4%
Total	2,647,623	(118,344)	(8,293)	(43,137)	(169,774)	2,477,849
Share	100.0%	70%	5%	25%	100%	93.6%
Total Original Budget	2,647,623	1,389,855	514,946	742,822
% of Total	100%	52%	19%	28%
Share of total adjustment		9%	2%	6%


		Adjustments
Agency/NDPB/PC Analysis	Original Budget	Executive Agencies	NDPBs & PCs	Revised Budget	% Change

Gross Controlled Agencies
Government Decontamination Service	3,279			3,279
Marine Fisheries Agency	31,233	(1,722)		29,511	-6%
Rural Payments Agency	214,031			214,031
State Veterinary Service (See Note 1)	91,347	(3,000)		88,347	-3%
Net Controlled Agencies
CEFAS	33,300			33,300
CSL	31,964			31,964
PSD	11,200	(839)		10,361	-7%
VLA	94,769	(2,449)		92,320	-3%
VMD	3,823	(283)		3,540	-7%
NDPBs and Public Corporations
Environment Agency	451,442		(23,700)	427,742	-5%
British Waterways	52,461		(3,934)	48,527	-7%
Food From Britain	5,368		(403)	4,965	-8%
Gangmasters Licensing Authority	3,900			3,900
Kew RBG	18,200		(600)	17,600	-3%
Natural England and CRC (Note 2)	207,751		(14,200)	193,551	-7%
National Forest Company	3,700		(300)	3,400	-8%
Totals	1,257,768	(8,293)	(43,137)	1,206,338	-4%

Notes to table:

1 State Veterinary Service: see clarification at Question 9, which shows no overall change to the SVS budget.

2 The £14,200 is made up of £12,900 for Natural England, and £1,300 for the Commission for Rural Communities.

5. Could the Department list the instances in which money has been transferred between (a) core Defra's and (b) an agency/NDPB's:

2006-07 capital and resource budgets; and

2006-07 non-cash and near-cash?

In the strictest sense of the question, no budgets have been directly transferred between a constituent part of the core Department and an Agency/NDPB. Budget pressures that were identified across the Defra "family" (ie core-Department, its Executive Agencies and sponsored bodies) were subsequently funded by budget savings from across the Defra "family". But Defra is managing the budget at the highest level and it is true to say that financial pressures in one part of the Defra family (such as the need to find an additional £23 million for costs in the RPA) inevitably have to absorbed across the Defra family.

6. What are the specific implications for Defra's services and projects in those cases where a transfer has occurred?

This does not apply—see the reply to Question 5, above.

7. Could the Department provide an approximate time-line to set out what it told those agencies/NDPBs who encountered reductions in their expected 2006-07 budgets about the extent of those reductions, between the first warning that cuts would be made and the latest position on the budget?

Budgetary pressures were brought to the attention of Ministers in May 2006, shortly after the new Ministerial team was formed. The new Ministers very quickly engaged with the issues on budgetary pressures.

Following the identification of problems making Single Farm Payments at the RPA and emergency preparedness work to deal with suspected Avian Influenza outbreaks (Spring 2006) an internal assessment of the budgetary outlook was made by Defra's central Finance Directorate. This was escalated to the Permanent Secretary and Directors General in April 2006.

The budget review was commenced on 18 May 2006 and all parts of Defra (including Agencies/NDPBs) were notified of the problem and action required at the same time. A target range of achieving 7.5% savings from near-cash RDEL was clearly set out as the mean required to address the £200 million-plus budget shortfall.

This target remained constant throughout the budget review that took place over the summer but with an important qualification that this was the overall target required to address the situation. Within this target, there was discretion for Ministers to wholly or partly protect priority programmes/activities so that bespoke adjustments above or below the 7.5% mean could take place. By the time of the conclusion of the budget review in September, most NDPBs accepted the mean 7.5% adjustment.

8. What effect will the Department's budget cuts have on the Government's climate change commitments, especially in light of the publication of the Stern Report?

The Government is committed to addressing the effects of climate change through playing a leading role both nationally and internationally. The budget review was based on protecting Government/Departmental priorities and in particular, Defra's expanding commitment to climate change activities. We have funded in part the creation of the Office of Climate Change and the work to take forward the Energy Review.

Defra's budget for Environmental Protection, including capital, has in fact increased from £930 million in 2002-03 to £1,492 million in 2006-07. Discounting some £321 million in respect of flood defence responsibilities that transferred from the Office of the Deputy Prime Minister to Defra in 2004-05, this represents an increase of £241 million, or 26% over the period.

IMPACT OF BUDGET REDUCTIONS ON THE STATE VETERINARY SERVICE

Responding to Mr Paice's WPQ on 30 October 2006 (HC Debs, 52W), the Department states that, with the exception of the RPA, "no changes have been made to the original capital budgets for 2006-07" of those bodies listed—including the State Veterinary Service (SVS).

In a House of Lords debate the same day, Lord Rooker said that, despite a £3 million reduction in the SVS's expected resource budget, no reduction had occurred in the total budget of the SVS because the resource money had been "swapped from capital" (HL Deb, col 9).

On 2 November, the Parliamentary Under-Secretary of State told the Commons that the SVS had moved £3 million "from revenue to capital" (HC Deb, col 452).

9. In response to a Written Parliamentary Question on 30 October 2006, the Department said that no changes had been made to the State Veterinary Service (SVS) original 2006-07 capital budget. Lord Rooker has said that the SVS had a £3 million increase in its capital budget. Which explanation is correct and why did the confusion arise?

Is there an overall reduction in the SVS's total budget?

No, there has not been an overall reduction to the SVS Budget for 2006-07.

In the Reply to PQ 6461 (Chris Huhne—House of Commons) the Department stated that there had been a £3 million (3%) reduction to the SVS' Resource budget as shown in the table at Question 4. However, this was actually a legitimate reclassification of expenditure from near-cash Resource to Capital. Some costs associated with the SVS Business Reform Programme could legitimately be treated as capital. So whilst the Resource budget was reduced by £3 million to reflect the re-classification, at the same time the Capital budget was increased by £3 million. There was therefore no overall change to the SVS's budget.

10. What process of cross-checking and review has the Department used in preparation for its public statements about the 2006-07 budget changes? Does the Department consider that its public statements have been adequately clear and consistent?

The normal Departmental procedures and processes for making public statements have been adhered to and have involved senior management.

The reply to WPQ 6461 was factually correct in that the response was annotated to signify that the budget adjustments applied to near-cash RDEL only. With hindsight, a further annotation specific to the SVS should have clarified the re-classification issue and corresponding increase in capital budgets.

Regarding the inconsistency in the Oral Debates (HL 30/10 and HC 2/11) it is understandable that Ministers may have confused the direction of travel on a technical re-classification for one budget line item—even more so, given the general complexity of Government finances and the compartmentalisation of expenditure.

CAUSES OF THE 2006-07 BUDGET CUTS

The Committee wishes to understand exactly which factors contributed to the total £200 million reduction in Defra's 2006-07 expected budget, and to what extent. Problems at the Rural Payments Agency, the avian influenza outbreak and changes in Treasury accounting rules are some of the reasons for the reduction that have been given by the Department.

When asked in the Lords on 30 October whether the budget cuts were caused by underspending or overspending, Lord Rooker said it was "both".

11. Could the Department list the factors that contributed to the total £200 million reduction in its 2006-07 expected budget? For each factor, the Department should state:

the exact cost of this problem, and a breakdown of this number;

what proportion of this amount was near-cash DEL, non-cash or capital;

the date when the Department could confirm that this problem would have an impact on the 2006-07 budget; and

any measures that the Department took earlier in the year to address the problem when it first arose?

The Department has not had a £200 million reduction in its budget as set by Treasury. The overall budget for 2006-07 remains the same.

(a) The Department's net DEL budget pressure at any point in time is derived by comparing the sum of the individual budget allocations to core-department business areas, agencies and NDPBs to the Treasury agreed budget, after taking account of additional emerging pressures and savings. Budgets tend to be set in full just before the start of the Financial Year and monitored throughout the year. But Government departments do not routinely change the budget in-year simply because of emerging pressures. In order to eliminate systemic underspend, the department would normally expect to start the year with a net budget pressure which would be eroded by underspends which emerge as the year unfolds. The £200 million plus was largely caused by legacy issues from 2005-06, including pressures within that year from a tighter fiscal environment, as well as some additional pressures that arose in 2006-07. It is not possible to provide a definitive, single list of these pressures, as the situation was being evaluated on a rolling basis, with estimates of expected costs and pressures changing over time, and the position at any moment representing only a snapshot of the situation as it was understood at that instant.

Issues arising during 2005-06 that fed into pressures for 2006-07 included:

(i) £40 million of work (eg Countryside Agency, English Nature, Aggregates Levy and R&D) was re-profiled from last year into this year. This helped to meet various other 2005-06 pressures that had arisen earlier in 2005-06 (eg TB compensation, structural funds, the final costs of foot and mouth disease, property rent increases).

(ii) £55 million of work (eg flood management, waste, IT and R&D) was delayed from last year into this year to be financed by EYF draw-down in 2006-07.

(iii) The Department of Health did not contribute the final £23 million share of the costs of the Over Thirty Months cattle culling Scheme.

(iv) The Department incurred £10 million of additional animal disease emergency preparedness costs resulting from concerns over Avian Influenza.

(v) New Pressures from April 2006, amounting to approximately £50 million. These included some £23 million extra for RPA's running costs (about 11% of the pressures), recognising that the efficiency savings are delayed and to support making timely payments to farmers. Some £10 million extra related to emergency preparedness work for avian influenza (including the costs of the small outbreak in East Anglia). We also faced £10 million for additional rationalisation costs resulting from the Modernising Rural Delivery Programme and the planned creation of Natural England.

(vi) There were/are other miscellaneous smaller pressures and risks that push the projected potential budget shortfall to over £200 million. The Department keeps these budget pressures and costs under regular review.

(vii) Following discussions with HMT, the Department recognised that there was not the flexibility between budget categories to allow the Department to manage pressures as planned. Importantly, this meant we had less scope to accommodate near-cash pressures than we expected.

(b) All of the pressures which prompted the budget review are in near-cash Resource DEL. The review dealt only with near-cash Resource DEL.

(c) When budgets for 2006-07 were confirmed in March 2006 the outlook for the year ahead highlighted that budgets would have to be closely monitored (partly because of the likely financial pressures in the RPA) and there was likely to be agreed budget recoveries to manage known and emerging pressures. The risks involved and prospect of an intensive budget management process was therefore known from the outset. Additionally, there were uncertainties at the start of the Financial Year over the Single Payment System, possible disallowance and the loss of planned efficiencies from the RPA Change Programme. The decision that the Department of Health would not contribute the final share of the costs to the Over Thirty Months Scheme was not confirmed until the very end of FY 2005-06.

It became clear in March 2006 that we would not have the flexibility between budget categories to manage the pressures in the way that we had planned. And the outbreaks of Avian Influenza in April added to these pressures. Ministers were immediately involved in the work to review the budget.

The situation was further evaluated during April and May by central Finance and between the Finance Director and Permanent Secretary. This led to commissioning the formal budget review action from Directorates General on 18 May.

(d) Defra's central Finance Directorate, as part of its routine responsibilities, examined the forecast 2006-07 budget from the outset, as per (c) above.

This entails assessing and reviewing known pressures and risks; examining the propensity of demand-led schemes to deviate from forecast; exploring the potential of accounting re-classifications to ease budget "pinch-points" and using current and historic spending information to evaluate the potential for budget underspends.

All Business Areas were made aware from the time of the budget setting exercise in March that there was a precarious budget situation looming and remedial action through the in-year monitoring procedures would take place. The budget review exercise was formally notified to Defra Business Areas on 18 May.

REMOVAL OF END-YEAR FLEXIBILITY

On 30 October 2006, Lord Rooker said that £55 million of the £200 million cuts were due to the Treasury's decision not to grant Defra its End-Year Flexibility.

12. Could the Department explain why the Treasury did not grant the Department its End-Year-Flexibility (EYF)?

Defra was granted its full EYF entitlement in 2005-06 in that the planned underspend from 2004-05 was added by Treasury to the Department's EYF stock. An unexpected restriction placed on Defra, and all Government Departments in July 2005 was that near-cash EYF stock could only be drawn-down and utilised in the 2005-06 financial year with Treasury approval. In view of the pressures Defra faced in 2005-06, the Department negotiated draw-down of £65 million near cash in 2005-06, leaving a stock of £55 million which could be accessed if necessary in 2006-07 and 2007-08.

13. How confident was the Department that it would receive its EYF? To what extent had the Department's 2006-07 budgeting plans been based on the assumption that it would receive its EYF?

The Department had no reason not to expect to receive its full EYF entitlement in 2005-06. There was no recent occurrence of EYF draw-down being withheld.

Defra's 2006-07 budget included as one of its planning assumptions the utilisation of £50 million of the remaining near-cash resource EYF stock.

14. To what extent is the Department relying on drawing down its remaining EYF in the current revised budget? What is the risk that the Treasury will again refuse any such request?

As part of the restrictions on drawing-down 2005-06 EYF, Treasury stipulated that "up to £50 million" of the remaining stock could be drawn "in 2006-07 and the balance" in 2007-08. The intention is to draw-down £50 million near-cash RDEL EYF in the Spring Supplementary Estimate. This amount has been included in both the budget review arithmetic and our monthly forecasts to Treasury. Whilst Treasury can reject our request in Supplementary Estimates we have no reason or indication to believe this is likely.

TREASURY RE-CLASSIFICATION OF NON-CASH AND NEAR-CASH SPENDING

In oral evidence to the Committee, the Permanent Secretary said that the Treasury's reclassification, within the Department's overall parliamentary vote, of near-cash and non-cash spending, had contributed to the Department's budgeting problems in 2006-07. Lord Rooker said in the Lords on 30 October 2006 that this factor contributed to £65 million of the total £200 million reduction.

15. Could the Department explain clearly, providing numbers to illustrate, how changes in Treasury accounting rules resulted in a reduction in Defra's expected 2006-07 budget?

There has been no reduction to Defra's 2006-07 budget due to the clarification of HM Treasury's accounting rules.

Resulting from the Spending Review Settlement 2004 (SR04) Defra had a non-cash baseline of £315.224 million per annum (2005-06 to 2007-08) after a £15 million adjustment to reflect reclassification of CAP payments from AME to DEL. This baseline budget provides cover for various non-cash expenditure, namely depreciation and capital charges. However further analysis of the baseline and the resource accounting implications of the Department's asset base has determined that a more accurate budget would be around £230 million.

As stated in the Treasury's Resource and Budgeting Guidance, the Department has flexibility to redeploy up to £20 million savings a year on non-cash costs to offset pressures on near-cash where this has resulted from improved decision-making. Defra has made use of the flexibility to switch £20 million non-cash to near cash over the SR04 years but, as set out in the Guidance, a non-cash to near-cash switch of the £65 million described above can only be permitted within the context of the fiscal rules and requires Treasury approval. Even if the remaining £65 million excess (ie after the £20 million flexibility) had been the result of improved management of the Department's asset base, switches of this magnitude are not approvable in a tight fiscal climate.

COMPREHENSIVE SPENDING REVIEW 2007

16. Could the Department provide an update on its involvement in the Comprehensive Spending Review (CSR) 2007 discussions? What is Defra's objective in the CSR round, and how confident is the Department that it will obtain its desired funding for the CSR 2007 period?

Defra is busily engaged in the CSR07 exercise and to date has fully complied with the supply of information in adherence with the HM Treasury timetable.

Since taking office, David Miliband has had two bi-lateral meetings with the Chief Secretary to the Treasury, most recently in the first week of November. Whilst the consideration of Government spending plans under the CSR remains confidential, it is enough to say that Defra is seeking to maximise available resources to promote its overarching goals.

The outcome of CSR07 will ultimately be decided by the Chief Secretary and Chancellor in liaison with Cabinet colleagues.

MEASURES TO PREVENT SIMILAR SITUATION IN FUTURE

17. What measures has the Department taken, or planned to take, to identify all the causes of the current situation and to prevent them occurring again in the future? In its answer, the Department should state what changes have been made, or will be made, to:

internal financial and performance monitoring, and reporting to the Board;

staff training (at all levels);

risk management; and

monitoring of its agencies and NDPBs?

The circumstances that have caused budget difficulties are not confined to 2006-07 as the restriction on EYF draw-down in 2005-06 demonstrated. The restriction and the non-cash baseline correction required continue to define the budget situation for 2007-08. But the remedial action being taken through budget reviews means that the associated problems should not recur on the same scale beyond the SR04 period.

However, any Government Department will always face unplanned and unforeseen pressures on its annual budget. Budgets are not set in stone and they must retain an element of flexibility in order to respond to events and changing circumstances.

In addition to the specific questions raised here, Defra has taken several key steps to improve budgetary control. First, Ministers are closely involved in the prioritisation process. As an example, Ministers will be taking part in a workshop on 11 December to match resources to policies. Directors Generals are playing a major part in explaining options (including those relating to cost) to Ministers. We have also established an accountability framework with clear reporting lines. This is supported by a system of decentralised budgetary control, which has now been strengthened by the appointment financial and business management professionals in each Directorate General.

(a) Defra is continually seeking to enhance and review its internal financial and performance reporting. The track-record of improved financial out-turn (£1 million underspend on a £3.6 billion budget in 2005-06) is evidence of this.

(b) The Department is also upskilling and investing in the financial management of its Directorate-General policy groups through the appointment of finance managers at senior civil servant level.

(c) We see good risk management as integral to effective internal financial and performance reporting, not as a separate exercise. As such, we recognise that there is a high level of inherent risk in managing the Department's budget successfully. Having effective financial controls in place, together with skilled staff and a prioritisation process that is able to understand how the risk balance changes when budgets are cut or distributed differently are key to managing that part of the inherent risk that is within our control. We recognise that there are other elements (such as the potential for HMT to refuse EYF drawdown requests) where we have little control over their likelihood of occurrence. Where this is the case, given what has happened this financial year, the Department will consider using more cautious planning assumptions in future years.

(d) The budget review process and preparations for CSR07 have necessitated a more open and inclusive relationship between the core-Department and its Agencies and Delivery Bodies. For example, the Ministerial team have met with the Heads of all Defra's Delivery Bodies on two occasions in the last three months specifically to discuss budget issues.

The financial monitoring of Executive Agencies and NDPBs has not been a problem area but preparations for the submission of Defra's CSR07 requirements has evidenced an enhanced level of engagement and shared understanding in the planning process.

18. In those cases where factors contributing to the £200 million budget cuts originated in the Department's agencies or NDPBs, what steps has the Department taken to ensure that the bodies concerned implement changes to prevent problems in the future?

The main factors were issues arising in connection with the Rural Payments Agency. A number of reviews of operations, with particular emphasis on the SPS systems, have been or are being conducted. A Recovery Plan to stabilise RPA operations is under consideration and will be implemented accordingly with due regard to affordability and value for money.

Department for Environment, Food and Rural Affairs

November 2006



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