Select Committee on Treasury Sixth Report

Conclusions and recommendations

The evolution of the 2007 Spending Review

1.  The decision to announce the outcome of the 2007 Comprehensive Spending Review in the autumn—and almost certainly in October—offers potential benefits to the House of Commons. An announcement in mid-July is not conducive to timely and effective parliamentary scrutiny. However, the benefits of an autumn announcement will be reduced if inadequate notice is given of the date of the announcement. We recommend that a final date for the announcement of the outcome of the 2007 Comprehensive Spending Review be set and made public before the Summer Recess. We recommend that the outcome itself be announced when Parliament is sitting and not during a recess. (Paragraph 9)

2.  We recommend that the Government hold a debate in Government time in the House of Commons on the outcome of the Comprehensive Spending Review. We further recommend that such a debate be held at least one month after the announcement itself, to allow time for initial scrutiny by this Committee and others to inform the subsequent debate. (Paragraph 10)

The context

3.  Public spending is projected to rise in real terms during the period covered by the current Comprehensive Spending Review as a whole at half the rate of growth provided for during the period covered by the four preceding Spending Reviews taken together. (Paragraph 21)

4.  The forecasts for Annually Managed Expenditure up to 2010-11 set out when the final outcome of the 2007 Comprehensive Spending Review is announced will be crucial in determining the total amount of resources available within Departmental Expenditure Limits for allocation among departments consistent with the Total Managed Expenditure ceilings established in the 2007 Budget. In recent years, outturns for Annually Managed Expenditure have exceeded initial forecasts, and the initial forecasts for 2006-07 and 2007-08 made at the time of the 2004 Spending Review may prove over-optimistic. We recommend that the Government ensure an appropriate margin of caution in its equivalent forecasts in the 2007 Comprehensive Spending Review for the period up to 2010-11. (Paragraph 28)

5.  In the periods covered by earlier Spending Reviews, initial limits on spending within Departmental Expenditure Limits have been subject to subsequent upward revision. In some cases, this has been as a result of the use of the flexibility offered within the fiscal framework. In the period to be covered by this Comprehensive Spending Review, the Government's freedom to increase such public expenditure beyond initial allocations while continuing to comply with its fiscal rules is likely to be more constrained than has been the case during much of the last decade. (Paragraph 35)

6.  In view of the long gestation period of the Comprehensive Spending Review and the extent to which the Government has sought to promote debate on and analysis of long-term challenges, the Government could have provided more information on the likely impact of net migration on demand for public services over the period covered by the Comprehensive Spending Review. We note the Government's implied view that the overall fiscal effect of net inward migration will be positive over this period, with benefits in terms of revenue receipts outweighing the costs of additional public expenditure. However, public spending and tax receipts are different in kind. Increases in receipts are a matter for Treasury forecasting. Public expenditure is subject to firm limits, and must be planned for by Government departments, local authorities, health bodies and others. We recommend that, in advance of the final outcome of the Comprehensive Spending Review, the Treasury commission an analysis of the impact of net migration on demand for individual public services, to be published as part of the final announcement on the outcome. (Paragraph 42)

The allocation of spending between departments

7.  The value of early spending settlements on a departmental basis for the Home Office and the Departmental for Constitutional Affairs may be diminished as a result of the subsequent decision to transfer some Home Office functions to a new Ministry of Justice. The original spending settlement for the Home Office with zero real terms growth may well have been posited in part on the potential for savings within the National Offender Management Service and the Criminal Justice System IT programme, matters which are no longer the responsibility of the Home Office. A recent Ministerial statement could be interpreted as implying that the financial settlements for the Home Office and the Department for Constitutional Affairs might now be re-opened. We recommend that the Government clarify its funding intentions with regard to the Home Office and the Ministry of Justice at an early stage and in advance of the final outcome of the Comprehensive Spending Review, stating clearly whether the new Departments will be bound by the combined totals agreed by the Home Office and the Department for Constitutional Affairs and providing a breakdown of the expenditure allocation between the Departments. (Paragraph 49)

8.  We recommend that the Government make clear the relationship between the budget of the Department for International Development and total official development assistance and that it provide a clear statement of its calculation of official development assistance and quarterly statements tracking its growth. (Paragraph 53)

9.  With the exception of the Department for Education and Skills, the early settlements have tended to be reached by departments which fared less well in the last Spending Review and so may have entered the current process with lower expectations. This suggests that many of the most challenging settlements lie ahead. Furthermore, all departments that have so far agreed settlements have done so at levels significantly below the rates of growth provided for in the 2004 Spending Review settlements. (Paragraph 58)

10.  The level of the resources available to be allocated to most of the departments that have not reached early settlements depends on three key variables: first, the rate of increase in health spending; second, the prospective rate of increase of Annually Managed Expenditure; and, third, the number of additional larger departments that agree settlements with real terms reductions in spending. (Paragraph 59)

Embedding efficiency

11.  The Government has set out targets for a highly ambitious value for money programme for the period covered by the Comprehensive Spending Review. The targets set for the period covered by the 2004 Spending Review were varied to reflect an assessment by Sir Peter Gershon of each department's capacity to secure efficiency savings. The Government is now adopting a different approach, imposing a minimum requirement to meet an annual target of savings of 3% of total departmental budget on an across-the-board basis for all departments. (Paragraph 71)

12.  We note the Government's decision to require all savings during the period from 2008-09 to 2010-11 to be net of implementation costs and cash-releasing. We expect the Government to put in place measures to ensure that this is reflected in the framework for verification and reporting. In particular, we recommend that the Government clarify, at the time the final outcome of the Comprehensive Spending Review is announced, the reporting requirements relating to implementation costs, indicating whether standard accounting conventions will be used for identifying and distributing such costs. (Paragraph 72)

13.  The Gershon efficiency programme involved a government agency outside the Treasury mainstream in supporting and monitoring the programme and involved efficiency savings which did not need to show on the bottom line. There are signs of a reversion to a more traditional Treasury approach in the future, with efficiency matters being part of "routine departmental financial management" overseen by the Treasury's Public Spending Directorate, and with all efficiency savings intended to be cash-releasing. (Paragraph 77)

14.  Even though the Government has established the principle that all efficiency savings from 2008-09 onwards should be cash-releasing, we are not convinced that monitoring and support from within the Treasury will be sufficient. We recommend that the Government ensure that a clearer performance measurement framework is established for the efficiency programme from 2008-09 onwards, including a greater role for external audit of service quality than hitherto. We further recommend that the Government ensure that a coherent framework for the verification and reporting of savings on a consistent basis is established as part of the post-2008 programme and that the Government set out the details of such a framework in publishing the final outcome of the Comprehensive Spending Review. We consider it essential that these arrangements include regular summaries of departmental achievements against targets in each Budget and Pre-Budget Report. (Paragraph 78)

15.  We remain to be convinced about the value of further, explicit targets for reductions in Civil Service numbers for the period covered by the Comprehensive Spending Review. The Government's highly ambitious target for reductions in all departmental administration budgets of 5% a year in real terms over the period from 2008-09 to 2010-11 is likely to exert downward pressure on Civil Service numbers. A separate target for Civil Service reductions runs the risk of distorting the efficiency programme, encouraging the replacement of civil servants with external consultants who may prove more expensive. If further targets for reductions in Civil Service numbers are adopted, we recommend that such targets be set with a clear and consistent baseline and that progress against targets be measured using statistics on Civil Service numbers compiled by the Office for National Statistics from 1 April 2008 onwards. We further recommend that any such targets be based solely on actual numbers serving in each department, so that re-allocations to "front-line" posts and increases related to what are classified as policy measures, both of which are open to subjective interpretation, are not treated as relevant to the performance against targets. (Paragraph 87)

Public Service Agreements and beyond

16.  We welcome signs that the Government is seeking to learn lessons from the operation of the framework of Public Service Agreements in the years since 1998. In particular, we welcome the commitment to fewer, but better Public Service Agreements. The proposed reduction must be genuine; its value would be undermined if new Agreements simply brought together diverse topics within a single Public Service Agreement or if a reduction in the number of Public Service Agreements did not lead to a matching reduction in targets down the delivery chain. We are also concerned that some of the data measurement issues relating to targets seem unresolved, and we recommend that, in finalising Public Service Agreements, the Government has regard to the importance of ensuring that targets are measurable, that there is clarity about the methods of measurement and that data used for measurement is of adequate quality. We further recommend that the Government set out, in a single document, a public statement of how the Public Service Agreements, the Delivery Agreements and the Departmental Strategic Objectives fit together and form a coherent framework for enhancing the performance of Government departments and of public services. (Paragraph 95)

The national debate and the role of Parliament

17.  The Government has been too timid in taking forward the national debate on the Comprehensive Spending Review to which it committed itself as long ago as March 2006. If a genuine debate is to take place, the Government must take the risk of putting in the public domain clear indications of some of the decisions it is considering taking, including those areas to which the Government proposes to accord a lower priority in the forthcoming Spending Review. It must also seek to engage the public in the debate about spending priorities. (Paragraph 100)

18.  We recommend that the Treasury, no later than mid-July 2007, send this Committee a draft of each proposed new Public Service Agreement for which it has direct responsibility for delivery, explaining its thinking in relation to each Public Service Agreement providing further information about the proposed data to be used for measuring progress against targets in each Agreement and seeking this Committee's views. (Paragraph 102)

19.  We recommend that each Government department consult the relevant select committee or select committees of the House of Commons about both proposed new Public Service Agreements for which that department will have lead responsibility and about Departmental Strategic Objectives. We further recommend that the process of consultation be started by each department sending drafts of those documents with accompanying commentaries no later than mid-July 2007. (Paragraph 103)

20.  We recommend that each Government department inform the relevant select committee or select committees of the House of Commons no later than mid-July about the Government's emerging views on those past objectives which have been achieved and those supporting programmes from which spending is potentially available for reallocation. (Paragraph 104)

21.  We recommend that, before mid-July 2007, the Treasury provide to this Committee and make publicly available a full list of the early settlements agreed as part of the 2007 Comprehensive Spending Review, including in each case the baseline figure for 2007-08 that will be used for determining subsequent increases or reductions expressed in percentage terms and, where appropriate, an indication of the consequences for those early settlements of any subsequent machinery of Government changes. (Paragraph 105)

22.  The Government, in its accounts of public spending, appears to use the term "front-line" in three different contexts—to refer to expenditure within Departmental Expenditure Limits as opposed to that within Annually Managed Expenditure or to certain components of Annually Managed Expenditure, to distinguish spending on services to the public from expenditure within administration budgets, and to distinguish spending on high priorities relating to investment broadly understood from lower priority expenditure. Each of these concepts are legitimate distinctions to make, but the varying use of the term "front-line" blurs rather than illuminates these distinctions. We recommend that the Government, in reporting the outcome of the Comprehensive Spending Review, adopt a single and consistent use of the term "front-line". (Paragraph 108)

23.  We recommend that the Government set itself the ambition to replace the current system of authorisation based primarily on Estimates with one linked more clearly with the public expenditure planning and control system, so that the House of Commons would eventually be in a position to consider and, should it so choose, authorise Departmental Expenditure Limits and an annual total for Annually Managed Expenditure, giving greater relevance to subsequent consideration of expenditure in excess of such limits requiring subsequent approval. We further recommend that the Government commit itself to working with select committees of the House of Commons, the National Audit Office and other interested parties to improve the clarity, consistency and comprehensibility of the documents placed before the House of Commons to seek authorisation for expenditure and to report on that expenditure. (Paragraph 110)

24.  We recommend that, in announcing the outcome of the 2007 Comprehensive Spending Review, the Government clarify whether the subsequent Spending Review will take place in 2009 or 2010. (Paragraph 111)

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