Examination of Witnesses (Questions 120
- 139)
MONDAY 4 DECEMBER 2006
MS HELEN
GOSH AND
MR IAN
GRATTIDGE
Q120 Chairman: We are going to go
and find how the Treasury muddied the water, but let us start
off with what did you hope you had?
Mr Grattidge: We expected to be
able to draw down up to the 150-160 million or so of our end-year-flexibility,
if we wished to use it in 2005-06. As regards the decision to
restrict how much of that we could draw down in 2005-06, we did
not lose the overall entitlement, just part of the entitlement
moved to a future year. So there was a restriction on how much
we could take in 2005-06, and I think it was up to about 90 million,
but not all of it, as I said earlier, is in the form of resource
near-cash.
Q121 Chairman: So that is 90 million
of things you could have spent pretty quickly turning into cash
that you did not have?
Ms Ghosh: In 2005-06.
Q122 Chairman: And that obviously
carries forward into the next financial year?
Ms Ghosh: Yes.
Q123 Chairman: What were these rule
changes? As I say, when we asked the Treasury, or our "agents"
asked the Treasury, they said, "Nothing really has changed.
There was a bit of clarification. You had better ask Defra. They
will tell you." So, what did change?
Mr Grattidge: The two significant
changes in 2005-06, firstly, were that the Treasury modified the
rules on end-year-flexibility; so they gave to departments no
loss of overall entitlement but they restricted the amount that
could be drawn down in any one particular year. So that was not
so much a rule change on the budgeting, it was just the way that
they wished to operate the end-year-flexibility rules. The second
change was around the introduction of resource budgeting rules,
which were phased in over the course of 2005-06, and saw something
of the introduction of near-cash resource expenditure, which I
explained earlier to the Committee, and some restrictions on the
way that near-cash and non-cash spending could be switched between
budget lines.
Q124 Chairman: You had no idea that
these changes were coming?
Mr Grattidge: We had an idea that
they were coming. What I think is true to say is that the issue
of the end-year-flexibility which arose in the summer caused a
significant review of our budgets.
Q125 Chairman: Which summer are we
talking about?
Mr Grattidge: 2005-06. Subsequently,
later in the year, in the light of the restrictions on end-year-flexibility,
we began to draw down, we began to look again at the impact of
the new resource budgeting rules on the department's final outturn.
Ms Ghosh: Just to add a postscript
to that, it was our successful management, both on the restriction
on draw-down on EYF and adjustment to the new rules as they came
in, that enabled us to come in at one million pounds below our
resource budget. I want to emphasise this. We successfully managed
the changes to the regimes that happened in 2005-06, and that
is a tribute to Ian and his team. There were then the push-on
impacts into 2006-07, which are the ones that are described in
(i) to (iv) here.
Q126 Chairman: If you could see what
was coming along for 2006-07—you had lost a certain amount
of your end-year-flexibility, you had got this list of cost-push
pressures that were coming through, when we turned round the corner
into January 2006, and you knew you were facing a worsening financial
position—why did you not sort out this position until July?
Ms Ghosh: As I said earlier on,
Chairman, we started sorting out this position in March and April
of the year. I would just comment on two things. Had we decided
in January to adjust future budgets, which we were already in
the process of giving to delivery bodies, among others, then we
would almost certainly have had to have two bites of the cherry.
It is always a matter when you are managing a departmental budget
to make a judgment about what is unmanageable pressure and what
is manageable pressure. Again, to go back to comments I made earlier,
we were a department that traditionally underspent rather than
overspent, we had delivery bodies with large capital programmes
which often slipped from year to year. They had shown considerable
flexibility and success in doing that in previous years. There
was no reason to suppose, until the evidence began to harden up
through February, March, April that we would be unable to manage
within the resource figure that we had. The moment it became clear
from, as you say, this relatively small but actually marginally
very important evidence coming out of the RPA and, later on, additional
pressures coming out of avian influenza, I think at that point,
March/April, we decided that we needed to have a serious look
at the budgets. We started to do the internal reviews. I think
even at that stage we were beginning to talk to delivery bodies.
We took the views of ministers in May and in May and June had
a number of detailed discussions with delivery bodies about the
prospects and about their preferred options for going forward
so that by July we were in a position to give them budgets for
the year; and I should say now (you might like to discuss this
more later) the budget monitoring is showing that things are going
smoothly and, with good financial management, we should be able
to get through to the end of the year within our budget, as we
are planning to do.
Q127 Chairman: For the record, just
to go back, so that we are entirely clear, when was the first
notification from the Treasury given to Defra that the rules on
the end-year-flexibility were changing?
Mr Grattidge: I may have to come
back to the Committee on that. I think it was May 2005.
Ms Ghosh: It must be spring 2005.
Q128 Chairman: The other near-cash
changes, when were they advised?
Mr Grattidge: The first signal
of the near-cash changes, I think, would have been part of the
guidance that was provided in the 2004 Spending Review. It would
not have been clear what the impact of the near-cash, non-cash
splits were until the 2004 Spending Review settlement, but I think,
more importantly, the departmental assessment of the impacts in
2005-06 were not fully clear until after we had conducted negotiations
with the Treasury on our end-year-flexibility in 2005-06.
Q129 Chairman: Just to be clear,
you understood the rules but you did not understand the impact
until you had talked to the Treasury?
Mr Grattidge: We understood the
rule changes, we did not understand the impact on the departmental
budgets, ie what potential pressures we might have across the
budget, until we had resolved with the Treasury, firstly, our
end-year-flexibility draw-down in 2005-06.
Q130 Chairman: When did you resolve
that with the Treasury?
Mr Grattidge: That was resolved
in the autumn of 2005. We then had a number of residual issues
about the operation of the new budgeting rules.
Q131 Chairman: When you say autumn,
you mean September, October or November?
Mr Grattidge: I think it is October.
Ms Ghosh: Again, that is not unusual,
in the sense that draw-down of EYF is, as it were, a balancing
item. Not to know your EYF draw-down at that stage in the year
would not be an extraordinary certainty to have.
Q132 Chairman: I find quite difficult—in
the 2005-06 financial year you have got some clarity towards the
end of the calendar year 2005—what all of this was actually
meaning to the numbers that were building up in Defra, both in
terms of the cash pressures on current and future expenditure
and the amount of flexibility that you actually had to deal with
this, and yet you could not, by the end of the financial year,
or shortly thereafter, actually come to a real world conclusion
as to what this would mean on the budget for 2006-07 and ended
up by changing it mid year.
Ms Ghosh: Just to posit the counterfactual,
of course you are absolutely right, and David Miliband has said
on a number of occasions, yes, it is a pity that we could not
give the delivery bodies, in particular, earlier notice. We were
involved in discussion with them, and we can come back to you
with the particulars, certainly from April, May, June on what
the likely outcomes for their budgets would be, and I know (I
think it came through in some of the notes that have been going
around on the impact of the budget changes) that they were, nonetheless,
operating on a prudent budget even before we finalised the budgets
in July. For example, we had given notice to the Environment Agency
on the likely outcomes and they were not committing beyond a certain
percentage level of their expenditure. So, it is not the case
that the July statement came as a bolt from the blue from them,
the discussions we were having with them were enabling them to
budget reasonably. I would just stress a point I think I have
made to the Committee before. Even if we had realised (and it
would have required a bit of clairvoyance, particularly in relation
to the RPA and AI) in February or March exactly what the implications
were, we would still have had to make the cuts on the budgets
that people were expecting against the envelope that we had. It
would not have changed the £200 million figure, we would
just, as you say, have been able to give people earlier notice,
but we worked very hard to give them as early as possible notice
as we could. As I say, having done so in July, management of our
finances is going forward very smoothly.
Q133 Sir Peter Soulsby: Can I just
go back over what you have just been telling us. Am I right in
understanding that you as a department were aware, whether it
was as a result of tighter rules or of you beginning to understand
what the rules were as a result of clarification, that there were
issues about the near-cash and the non-cash expenditure and the
end-year-flexibility in the spring/summer 2005?
Ms Ghosh: Yes.
Q134 Sir Peter Soulsby: Without,
at that stage, having actually quantified what that might mean
for you because that required further discussion?
Ms Ghosh: Exactly.
Q135 Sir Peter Soulsby: And you were
aware of the likely figures towards the end of 2005?
Ms Ghosh: Yes, absolutely, because
by then (and again you may want Ian to give some particular examples
about this) the end-year-flexibility figure was, in one sense,
a clear straightforward, "You will be getting this much,
you will be getting that much." I would not like to leave
you with the impression that deciding what counted as near-cash
and non-cash expenditure was actually a simple thing to decide,
and there were very detailed discussions between Ian and the Treasury
team on what, for example, counted as, variously, capital spending,
near-cash spending and non-cash spending. So, actually, the way
the rules would apply to a budget like ours was not a simple thing;
we could not have worked them out for ourselves, it required a
lot of discussion; but, yes, by the time I arrived in the department
in November, it was pretty clear (a) we knew what our end-year-flexibility
was and it was becoming increasingly clear what these new rules
about near-cash and non-cash would mean in terms of adjustments
to our budget in 2005-06.
Q136 Sir Peter Soulsby: These two
issues, taken together, equate to about 65 million out of the
200 million deficit. I am right in that understanding, obviously?
Mr Grattidge: The reclassification
issue certainly does contribute about £65 million worth of
difficulty to the Defra budget because of this near-cash, non-cash
distinction where the rules on switching are fairly tightly drawn
and where departmental ability to move money into near-cash spending
from non-cash spending is explicitly forbidden by the Treasury
rules—
Ms Ghosh: Beyond £20 million.
Mr Grattidge:—up to about
£20 million.
Q137 Sir Peter Soulsby: What I am
still struggling to understand, Chairman, is how, if that was
clear to you at about this time last year, it was not dealt with
at an earlier stage and developed into a crisis midway through
the current financial year.
Ms Ghosh: I think we are looking
at this through a curious end of the telescope. In 2005-06 we
were aware that we had, effectively, for the reasons that Ian
describes, to live within a smaller budget than we had hoped.
We therefore consciously, as a result of the reduction in the
draw-down of end-year-flexibility, the increasing inflexibility
about the distinction between near-cash and non-cash, reached
a position in 2005-06 where we lived within our budget. We consciously
knew we were carrying forward into the following year (2006-07)
some further pressures, and those are the ones that are listed
here. It was not at that stage black and white that we would not
be able to live within our 2006-07 budget. We knew we would have
some of level of end-year-flexibility (£50 million) which
we are still aiming to draw down, we knew we would be able to
do some transfers from non-cash into near-cash (the £20 million),
we have this tradition of underspending, overprogramming and,
as it were, underspends emerging where we were not expecting them
to. We have to emphasise, it was a matter of judgment in January/February
of this year whether or not the pressures that I had pushed forward
into 2006-07 were ones that we could not live within. Of course,
we hoped, for all the reasons that you would understand, that
we would be able to live within our budget. It began when the
drip-drip of marginal additional costs began to come through and
become clearer that we realised that the totality of resource
that we would have in 2006-07 was not one that would cover all
the things that ministers thought that they wanted to do, and
that is when we put together options, went back to the new team
of ministers, when they arrived at the very beginning of May,
with a set of options which we had worked out, to say: this is
the position. Again, absolutely we would rather have been able
to give delivery bodies final budgets much earlier in the year,
but almost at the very beginning of the financial year we knew
that we would not be able to live safely within our resources
and went to them with a plan. So I would defend the department
strongly against the idea that it took us a long time to realise.
We very quickly realised once these final bits of evidence had
come in and we took action.
Q138 Sir Peter Soulsby: You say that
you were only really aware of that at the beginning of the financial
year. Is it not really the case, from what you have told us, that
you were actually aware of the looming crisis at about this time
last year and that you kept your fingers crossed and hoped something
would turn up and continued with business as usual?
Mr Grattidge: We certainly did
not quite continue with business as usual. Our business planning
exercise going into 2006-07 still required some of our spending
programmes to be reviewed and for the budgets to be adjusted.
I think it is true to say that going into 2006-07 we had made
a degree of over-provision in the budget, which was, in a sense,
what we normally did because spending programmes as a whole tend
to underspend by the time we reach the end of the year. I think
what did become very clear in the spring was that we were no longer
an underspending department, we were a fully spending debt, as
our outturn for last year has shown. As Helen has pointed out,
we were only one million pounds underspent on a very significant
budget, and I think that was one factor which confirmed that this
was no longer a department that could rely on underspends emerging
in year. If we then add to that the pressures that have emerged
as a result of new budgeting rules, it was also clear, I think,
that pressures were emerging from other areas, particularly potential
pressures on the RPA. A fuller draw-down of end-year-flexibility,
or a contribution from the Department of Health, for example,
for the "over 30 months' scheme", which we were not
able to draw down, also added to the pressures. It is not one
of those cases where there was a huge hole and it was obvious
in November. There was a series of events between November and
March which led us to conclude that an overoptimistic budget assumption
could not be justified, and that was, I think, the point at which
we said we have got to go back to these numbers again and revisit
them.
Sir Peter Soulsby: Which raises all sorts
of questions about your monitoring of the budgets during that
period, but perhaps those are questions for later on, Chairman.
Chairman: I think we do need to cover
that, because, I must say, I find it quite hard to understand
why you did not see some of these things coming in a meaningful
sense down the track.
Q139 David Lepper: Does the department's
board receive regular financial reports?
Ms Ghosh: We certainly do. In
a different form before that, but from certainly the beginning
of the calendar year 2005, we receive on a monthly basis financial
reports that look like this, which we would be happy to show the
Committee, which monitor the expenditure of the department month
by month against monthly profiles of spend. Ian does a narrative
account. We look at the breakdown between admin and programme.
We also look at—that nice coloured chart—year-on-year
variants between what is expected and what is actually being spent.
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