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


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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