Examination of Witnesses (Questions 100
- 119)
MONDAY 4 DECEMBER 2006
MS HELEN
GOSH AND
MR IAN
GRATTIDGE
Q100 Chairman: What went wrong?
Ms Ghosh: I would not say that
anything went wrong. As the Committee is aware, the fiscal position,
the spending position, has tightened significantly in recent years
to a stage where the relative luxury that we had had in previous
years of carrying forward an underspend from year to year and
then applying it to the next year's spend was simply squeezed
out of the system. There is still some end-year-flexibility left
in the system, and, as you will know from the note, we are anticipating
drawing down 50 million of resource end-year-flexibility in this
year's budget.
Q101 Chairman: But that was not as
much as you had planned for?
Ms Ghosh: Absolutely.
Q102 Chairman: You said in your opening
remarks that the Treasury accounting rules had changed. Could
you explain how they had changed, when you were advised they were
changed and under what terms you were advised that they were changed?
Ms Ghosh: This was a change that
went on (and I will hand over to Ian, who can give you chapter
and verse in terms of dates, through 2005-06) with a first impact
on 2005-06 which then had a forward impact in 2006-07. Ian, you
are the expert on dates.
Mr Grattidge: The first indication
we got of significant changes in the accounting work and, in particular,
proposals to distinguish in our current spending between near-cash,
that is current expenditure which has a fairly early cash flow
consequence, and non-cash expenditure, which covers non-cash related
items in our current spending, like, for example, depreciation.
SR2004 Guidance was the first sign that this would be part of
a new regime which would kick in, in full, from 2006-07 but elements
of which would be introduced over the course of 2005-06. Having
a set of guidance which distinguishes between near-cash and non-cash
and actually managing the budget through the particular impacts
of that change are two slightly different things. We had a theoretical
set of guidelines for SR2004, but it was not until early 2005-06
that we began to realise the full impact of the changes and how
they would impact on the Defra budget.
Q103 Chairman: Why did it take you
so long to wake up? If these were clearly defined by the Treasury,
why did it take you so long to work out what the impact was?
Mr Grattidge: The rules were not,
in all cases, clearly defined, and it is one thing to appreciate
that a set of rules are coming on, it is another thing to see
how they will impact on the departmental budget. For example,
the 2004 Spending Review gave allocations for near-cash and non-cash.
Actually the impact of the new non near-cash accounting rules
made it clear that there was an imbalance in the budget, but working
those through took some time because it is a large department
and it has a very fragmented budget.
Ms Ghosh: I should say, although
comparisons are odious, there were similar challenges across a
wide number of other departments and we were ahead of the game,
rather than behind the game, in terms of catching up with the
realisation of what these changes meant.
Q104 Chairman: What I find a bit
odd about all that is that, when our colleagues in the Scrutiny
Unit asked the Treasury about what these rules were, they said
they had not really changed, and the next thing they said was
that Defra would explain them to us. I am still a bit fuzzy about
what the changes are. It seems to be that you were alerted to
something that was happening in 2005-06, you did not really know
what the impact was, but certainly you woke up in 2006-07 to realise
that you were being squeezed. Perhaps you could clarify to us
how it works?
Mr Grattidge: It is worth reflecting
on the impacts in 2005-06, and there were two. The first one was
that the Treasury came to us and said that the rules in terms
of—
Q105 Chairman: I will tell you what.
Let us just do it simply and with some numbers. If we take the
financial year 2005-06, how much end-year-flexibility did you
hope you would have?
Mr Grattidge: The figure, I think,
was about 160 million.
Q106 Chairman: So you hoped you would
be able to spend 160 million in the financial year 2006-07. That
was your expectation, was it?
Mr Grattidge: We expected to be
able to draw down about £90 million worth of end-year-flexibility
in the first year.
Q107 Chairman: When you say "the
first year"?
Mr Grattidge: 2005-06. Not all
of that, actually, would have been in the form of resource near-cash,
it would have been a mixture of different funding sources. It
is important to recognise that what happened in 2005-06 was not
that we lost entitlement to end-year-flexibility, it was that
the Treasury imposed restrictions on the amounts that we could
draw down.
Q108 Chairman: When did you get sight
that these restrictions were coming along. You have just said
that the 90 million was for 2005-06. When were you going to spend
that 90 million?
Mr Grattidge: If I can go back,
the point about entitlement to end-year-flexibility is that it
is there to help the department absorb pressures as they come
through the year.
Q109 Chairman: But you have got a
track record as a department of underspending. So if you are sitting
there in your financial comfort zone thinking: "The job is
getting tight, but I have got, potentially, £160 million
of end-year-flexibility. This will get us out of some of our future
problems", then, all of a sudden, the Treasury supposedly
change the ground rules and the comfort zone gets removed. I am
trying to understand, and, please forgive me, but if I do not
understand you tell me. You have got £160 million that you
did not spend in 2005-06. If I have understood what you are saying,
you thought you could use 90 million of that to help you out in
2006-07. Is that right?
Mr Grattidge: No. The planned
draw-down in 2006-07, I think, was about 60 million—50 near-cash
and 60 overall. The point about it was that a wider pool of entitlement
then restricted in terms of draw-down means that, if pressures
came through the year, the department would have to manage with
what was effectively a tighter overall spending ceiling, and part
of the explanation that we gave to the Committee in answer to
its questions was that part of the way that we were able to mitigate
that was to defer some spending planned for 2005-06 into 2006-07.
Q110 Chairman: I am trying to get
this in a picture that I understand with real numbers, and I am
still struggling here a bit. Clearly, if you thought you were
going to be able to carry a sum of money forward and you could
not, then, by definition, that starts the process?
Ms Ghosh: Yes.
Q111 Chairman: The reason I am asking
that it is that, Permanent Secretary, in your comments you have
talked about the RPA problem and avian influenza, but of the £200
million that only represents 16% of the money and I am trying
to understand what constitutes the rest of the 200 million. Do
you want to have another go at explaining to us how your hoped-for
spending in 2006-07 by this end-year-flexibility was actually
diminished?
Ms Ghosh: If you look at the explanation
on page seven of our note, it has essentially two elements to
it, and what Ian was describing, in terms of the impact of reductions
in the availability of EYF from the EYF store that we had, first
started to have an impact in 2005-06. So, as you will see, the
first four elements of what was building up pressure in the pressure
cooker in 2005-06 are shown there. So in 2005-06 we had, again,
some re-profiling of activity which put pressure on the 2005-06
budget.
Q112 Chairman: I am sorry, you are
describing the pressures, and that comes, because I added it up,
to £168 million worth of pressures on the budget?
Ms Ghosh: Yes. That arose from
2005-06 because of the pressure on the budget from, for example,
changes in availability of end-year-flexibility. These first four
are things that we knew were "carried forward" pressures
into 2006-07, before we began to recognise (and that is from (v)
onwards) the things that we could only know about, effectively,
once we get into the March, April, May period.[1]
So we knew that there were pressures that we needed to carry forward
into the following year (from 2005-06 into 2006-07) the question
was at what point (and this is back to your question, Chairman)
did it become clear that we needed immediately to do some re-profiling
of spend, in particular to redraw the budgets, for example, for
our delivery bodies and for Defra. The point I was making at the
beginning was we knew that we had these 2005-06 arising pressures,
we thought that we could cope with them. However, it became clear,
as the pressures increased from March and April onwards, that
we could not, and that is why we went into the re-profiling exercise.
It is a matter of judgment as to what point you think: Can we
cope with this? Will good management help us get there?
Q113 Chairman: Part of your get-out-of-jail-free
card, you hoped, would be the end-year-flexibility, because you
are saying that in 2005-06 £40 million, £55 million,
£23 million and £10 million and the other monies listed
here, were building up?
Ms Ghosh: It is building up a
pressure which we knew we would have to—
Q114 Chairman: That is going to be
money you are going to have to find again in 2006-07?
Ms Ghosh: Exactly; yes.
Q115 Chairman: But you hope that
you might be able to get away with that with some end-year-flexibility.
Yes?
Ms Ghosh: That would have been
one of the—. This is where I think we did not think there
was just one answer. We could have got through it with some end-year-flexibility
if we had had significant underspend in another part of the budget,
if projects and programmes slipped a bit. There are two or three,
or even more than that, things that we had to shuffle.
Q116 Chairman: That is not what you
said publicly. What you said publicly is that it has been a combination
of these pressures and a change in Treasury accounting rules,
and the change in the Treasury accounting rules affect the end-year-flexibility,
which Mr Grattidge was trying to explain to us. What I am anxious
to know is that you might have thought in 2005-06, "We can
cope with this list of extra pressures because we have got some
end-year-flexibility", and it turned out, because the rules
had been changed, that you could not carry forward as much of
that flexibility as you had thought. Is that right?
Ms Ghosh: Or, indeed, some of
the pressures that we were carrying forward from 2005-06 into
2006-07 also arose from the fact that there was less flexibility
to use in 2005-06 itself, which caused us to push it forward.
Q117 Chairman: We are trying to understand
how much of this money from the flexibility you hoped you were
going to carry forward. Was it the 160 million?
Mr Grattidge: No. If you look
at indent (ii) on page seven of our answers to the Committee,
you will see that we allocated about £55 million worth of
expenditure, which we deferred from 2005-06 into 2006-07, to cover
the loss of EYF draw-down that we would have taken otherwise in
2005-06.[2]
So, because some of our EYF pool was pushed into future years,
some of our spending followed into those future years as well.
Q118 Chairman: I follow that. Maybe I
am not asking the right question. End-year-flexibility is about
what a department did not spend out of what it had budgeted originally
to spend. Let me ask the question again. For the financial year
2005-06 what was that number?
Ms Ghosh: You mean that we were
expecting to be able to draw down in 2005-06 against our pool.
Q119 Chairman: Yes.
Ms Ghosh: And what did we actually
get in end-year-flexibility in 2005-06.
1 Ev 48 Back
2
Ev 48 Back
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