Examination of Witnesses (Questions 140
- 159)
MONDAY 4 DECEMBER 2006
MS HELEN
GOSH AND
MR IAN
GRATTIDGE
Q140 Chairman: When did you first
start having this?
Ms Ghosh: This is, as it were,
the common form in which you would expect to get departmental
reports.
Q141 Chairman: When did the department
first get this?
Ms Ghosh: In this particular form,
I gather, from about January 2005, but, of course, the management
board gets regular financial reports.
Q142 Chairman: So you have got a
profile against plan versus expenditure available from January
2005?
Ms Ghosh: I am just saying this
particular version is one that, in this particular form, we have
had since January 2005. We could easily give you examples of other
management and financial reports.
Chairman: I apologise for interrupting
you. Go on. We are all following the same thought pattern.
Q143 David Lepper: We have established
that there has always been, as one would expect, a form of financial
reporting to the board?
Ms Ghosh: Yes.
Q144 David Lepper: The format of
it, you were telling us, has changed in a particular point?
Ms Ghosh: Mainly, I think—Ian
will know more than I—in presentational terms, so that it
is clear. For example, to make it clearer and clearer, I think
the key issue which management boards should look at is how is
our spending going against our projected budgets month by month
or lumpy expenditure by lumpy expenditure. This is the information
the board gets, and, if I can reiterate the point, enabled us
to come in practically bang on our budget in 2005-06.
Q145 David Lepper: Thank you for
the offer of copies of that. I think what we might want to do,
Chairman, is request particular copies from the department. Perhaps
if we could let you know which we want, then you could provide
them for us.
Ms Ghosh: Certainly.
Chairman: Peter, as we are on this, do
you want to go back?
Q146 Sir Peter Soulsby: If I could.
If I understand what you have been saying correctly, somewhere
between December last year and March, April, whenever it was,
those began to show you that you were no longer an underspending
department?
Ms Ghosh: What the task was in
2005-06 was to come in on budget and push forward to a reasonable
and prudent amount of spending that we realised we could no longer
afford in 2005-06 into 2006-07. What this showed us, tracked month
by month, was how we were coming closer and closer to the target.
There would have been a number of discussions in management, and
there were a number of discussions because I was present at them,
on how we had adjusted our spend in 2005-06 to fit with new definitions
and to deal with the loss of end-year-flexibility. So what we
were focusing on in 2005-06 was coming in on budget, which we
did. We were very conscious then that in looking forward to 2006-07
we should, as far as possible, learn the lessons of 2005-06. So
we knew when we started to set the budgets for 2006-07 that we
were becoming a department that was, as it were, a more and more
spending-at-budget department and a less and less underspending
department, simply as the squeeze was being placed across government
on spending. The issue, and it is a matter of judgment, is to
what extent and at what point did we decide, as the pressures
began to become clearer in February, March, April of this year,
that we had tipped over into a situation where we could not guarantee
coming in on budget away from a situation, as Ian said, with some
underspend on some of our big spending programmes, with the kind
of underspending across other programmes that frequently happens,
so that we had to adjust budgets; and it is a matter of judgment
as to the extent to which ministers felt, advised by the management
board, that they should, before the year began, say, "Okay,
we will cut budgets", and it would have been, as I say, a
first bite of a cherry we would almost certainly have had to come
back to, against a new projection of what our likely resource
availability would be in the year.
Q147 Mrs Moon: This is just not my
strong point, Chairman, so excuse me if I am a little simplistic.
The picture I get is that you had this budget and you never spent
all of it anyway, but that did not matter because you would just
roll it forward to the next year?
Ms Ghosh: Yes.
Q148 Mrs Moon: There was a degree
of flexibility because you budget for this, but you might not
spend it. The picture I have is that it was more of a guesstimate.
Some things would happen, some things would not but they would
even each other out. Then, in 2004, you were told there were new
rules on near-cash, and then, in 2005, you were told that end
year funds were not going to be used, the underspend was not going
to be used in the same way, and you were not going to be able
to roll it forward. In other words, because of your year-on-year
underspend, the Treasury appears to be taking a view that you
did not need all this money anyway and you were caught out. What
I do not understand is, given the reputation of the Treasury,
why you relied on a generosity of spirit that they might decide,
"Oh, no, why, Defra can keep the money." When you are
told there are new rules on near-cash, you are told there were
new rules on end of year spend and roll-forward, why were you
not getting the message and saying, "Hang on, we need to
revise our budgets here"?
Ms Ghosh: To answer one of your
earlier points, there was no question that Defra was picked out
for particular harsh treatment in relation either to the draw-down
of end-year-flexibility or to the new rules about the near-cash
and non-cash. As Ian has said, the impact of those rules, and
I think you said the end-year-flexibility decision was not made
until the 2005-06 year had actually begun—
Mr Grattidge: It was well into
the year, yes.
Ms Ghosh: So all departments were,
at the same time, told variously that they could not draw down
the full amount of their EYF; so that came to us in 2005-06 once
we had started setting the budget.
Q149 Mrs Moon: But that also means
that you were not the only ones being told this?
Ms Ghosh: No, we were not.
Q150 Mrs Moon: Everybody was in the
same league?
Ms Ghosh: Everybody was in the
same league.
Q151 Mrs Moon: Absolutely everybody
was in the same league, so you should all have been learning the
same lessons?
Ms Ghosh: And we did learn the
same lessons in that we adjusted our expenditure in 2005-06, both
in relation to living within a smaller level of end-year-flexibility
and the new rules about near-cash and non-cash, which, as I said
earlier, other departments had a lot more trouble with than we
did. So, we got to the end of 2005-06, we came in bang on budget.
It was clear to us that the rules were tightening and that the
historic years, where, as you say, we were carrying forward about
150 million, which is not an enormous amount on a budget of 2.4
billion available spending (it was not a vast amount of money,
it was not based on very lose budgeting on our part) were over.
As I say, I can do no more than say we could have agreed at, say,
Christmas 2005 on a budget that took a very prudent view of the
pressures that were likely to arise in 2006-07 and we could have
taken 200 million out of the budget then. So we started the financial
year in that way. It was a matter of judgment,—until we
began to get these key bits of evidence coming from the RPA, AI
and elsewhere—that we probably could, taking one thing with
another, live within our budget, and, of course, the department
wants to spend money on its objectives. A lot of criticism that
the departments have subsequently got is that we have had to take
money back from delivery bodies who would rather be spending money
on some of their objectives. We could have done that earlier,
but the fact is we would have had to have done that at some stage,
so it was a matter of judgment and timing.
Q152 Chairman: I am a bit surprised
actually that you adjudged that you could leave it for as long
as you did. In the explanation that you have given you knew the
pressures were building up, you knew the problems that were unfolding
with the RPA, you knew that you were not going to have the end-year-flexibility
that you wanted and you knew that your department was using up
any flexibility in its 2006-07 budget, because you have just told
us that your management information systems were improving to
enable you to become a spending-on-budget department. So, against
that, it does seem a rather flawed judgment that you left it as
late as you did and, I must say, I do not understand. If the system
is showing you all of these pressures building up, those are the
inescapables, and, as I say, when I added them up—if we
took the 40 million, the 55, the 23, the 10, that all totted up
to £50 million of new pressures from April—that comes
to £168 million.
Ms Ghosh: As I say, it is a matter
of judgment. I am conscious that I will look forward to what we
are doing now for next year. I think if I am pointing personally,
which I will, I think what I had not realised, compared with my
experience in previous departments, is that Defra is a department
which spends all its money, more or less, on day one. Most of
our money leaves the department almost instantaneously, in the
sense that we give the large bulk of our money either to our delivery
agencies within the department or to NDPBs, so I now understand,
in a way, I suspect, I did not then, that the flexibility, for
example, although we have done it very successfully within the
department, to impose moratoria within the department as the year
goes on, without affecting delivery bodies, is relatively small
because our big money basically is spent on 1 April, in the sense
that we give our budgets to delivery bodies.
Q153 David Taylor: You say most,
but in our DAR 3 schedule of near-cash resources in the summer
2006 it shows that the total spend for your agencies and NDPBs,
et cetera, is about 1.2 million out of 2.6 for the department.[3]
That is about 40%; that is not nearly all?
Ms Ghosh: No, but it is spending
that you can turn off quickly. For example, I draw the comparison
with—
Q154 David Taylor: You said nearly
all of your budget was spent on 1 April.
Ms Ghosh: Nearly all of the budget
which you could reasonably expect to reduce quickly.
Q155 David Taylor: You are rewriting
what you said. You said nearly all of your budget was spent on
1 April. It is about 45% of it?
Mr Grattidge: Can I add that there
are a number of factors which tend to make the release of funding
during the course of the year from within the budget fairly difficult
to do. There are, obviously, the delivery bodies which form part
of that. A number of our payments, for example, under the England
Rural Development Programme are the subject of fixed agreements
which run over a number of years. Payments, for example, to the
Rural Development Agencies are, in effect, made as a lump sum
right at the start of the year, and so on, and, in effect, it
is possible to look through the Defra budget and find a number
of line items which are committed early in the year, a number
of other line items which are ringfenced (i.e. we cannot save
money in one area and spend in on another) as well as the fact
that a number of the costs are fairly fixed and they are very
difficult to free up in short-term time horizons.
Q156 David Taylor: About a third
of your agencies budget, etc, is with the Environment Agency?
Ms Ghosh: Yes.
Q157 David Taylor: So they draw that
down from you monthly, quarterly, or do you effectively transfer
the resources into their accounts on that day, as you suggested?
Ms Ghosh: I am sorry, if I can
go back to the point, I was actually trying to explain to you
why I did not understand how our budgets worked. Some departments
who, as it were, spend the money from their own resources rather
than through delivery bodies, it is much easier as the year goes
on simply to say, "Okay, we will just decide to stop spending
money on X and Y. We will have a moratorium. We will be able to
recoup a potential overspend from within our own budgets."
The point I was trying to make, and I am sorry I made it in a
rather more sweeping way than I should have done, was that a very
large amount of the kind of money in other departments that you
could just turn off by simply saying, "We will stop that
programme, we will halt that, we will freeze that for the next
six months", we have already given to delivery bodies. So
in that sense the kind of money which in comparable departments
you might be able to turn off, you have already committed in the
way that Ian describes. You then have other money where to turn
it off actually costs you. For example, if you think of staff
costs, we cannot save money in the year on the staff costs because
to make people either voluntarily or compulsorily redundant costs
us more money in that year. So that is an area where you cannot
turn spending off in the middle of the year. You then have fixed
cost, like estates, where we had plans to release money by moving
out of some of our London offices into others, but you cannot
turn that off over night. So, just to put a gloss on what I said
in the first place, it is not a department where you have easily
got things that you can turn off in the middle of the year and,
therefore, had I realised that, I think perhaps I would have taken
a more cautious approach (and I am taking responsibility for this)
as we went into 2006-07 than we did, but that is a lesson that
we have learnt. That is why we are currently engaged in detailed
debate with ministers, David Miliband is talking to the delivery
bodies, and we will be giving the delivery bodies their budgets
for 2007-08 before Christmas. So, we have learnt the lesson, we
are taking a prudent approach to budgets but they will hear what
those are before Christmas.
Q158 David Taylor: So what you are
saying is that there will be a geared disproportionate effect
of in-year cuts into non-staffing areas, and, secondly, that where
you have a department like Defra with almost half of its expenditure
being through agencies, if you impose in-year cuts over the agencies
who themselves will perhaps be committing into their capital projects,
organisations like British Waterways maybe, it will hit them really
hard if you realise only late in the day that you need to make
some cuts on things that you give to the delivery bodies, to use
your phrase?
Ms Ghosh: I am saying that, given
the nature of the spend of our department, it is programmes, if
you are trying to find money in-year, that you will always have
to look to first. That is not to say that over time (and, for
example, in the CSR period we will be faced with 5% year-on-year
administrative reductions, which includes people budgets) you
cannot get out comparable savings from other parts of the department
spend, but the fact is, the way the money works, you will always
look to programmes first.
Q159 Mrs Moon: I am getting incredibly
confused. You said earlier on that you were hoping there was going
to be money back from delivery bodies, then you were saying you
did not understand how the budget worked in Defra, then you were
saying there are fixed costs that are very expensive, like staff
costs and estates, and you cannot move around with those, but
if, as you say, Defra was not singled out but the changes, the
expectations in relation to end-year-flexibility and near-cash,
all of those, you knew about at the same time as everybody else,and
others also had problems in adjusting to the rules, how come it
is only Defra that has got this massive budget cut for 2006-07?
Ms Ghosh: I can only say I do
not know whether that is true. Our budget cut has of course had
a great deal of coverage and our delivery bodies, as is absolutely
their entitlement, have talked a great deal about impacts. However,
I think you need to go back to the Treasury to inquire whether
it is only true of Defra. I think a number of departments are
making adjustments to their budgets in year, and I do not think
we are the only department that is doing it. It is not for me
to speak about other Government departments.
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