Appendix 1 Government response
Introduction
1. The current problem is not the House's
powers but the willingness and (even more) the ability of the
House and its Members to scrutinise financial matters in the degree
of detail required to hold the Government to account. (Paragraph
8)
2. We define the purpose of financial scrutiny
as follows:
- to make the Government's
financial decisions transparent, including the relationship between
its stated priorities and its funding decisions;
- to engage bodies and individuals outside Parliament
and give them the opportunity to comment;
- to have the opportunity to influence the Government's
financial decisions;
- to hold the Government, individual Departments
and other public bodies to account for their financial decisions
and financial management; and thereby
- to contribute to an improvement in the quality
of Departments' financial decisions and management and improved
value for money in public services. (Paragraph 9)
3. Financial scrutiny is not a narrow exercise
of poring over figures on a balance sheet but is about ensuring
the effective management of finite resources to achieve purposes
such as better hospitals or better-equipped troops. Better financial
scrutiny would have advantages for the Government as well as for
the public and for Parliament. (Paragraph 10)
The Government fully endorses the importance of financial
scrutiny by the House and recognises the value of such scrutiny
to Government, Parliament and the public.
The Government has in recent years implemented a
number of significant changes in the way in which financial information
is reported, with the aim of making the public expenditure system
more transparent. These changes have included:
- the publication of three year
spending plans, following each Spending Review, linked to the
achievement of clear objectives set out in Public Service Agreements;
- the implementation of Resource Accounting and
Budgeting (RAB), which brought the highest standards of the private
sector into financial reporting by the public sector and created
new value for money incentives for departments. The implementation
of International Financial Reporting Standards (IFRS) in 2009-10
will build on this;
- significant improvements in the closing of departmental
resource accounts, so that resource accounts are available much
earlier in the year. This is enabling an increasing number of
departments to publish combined Departmental Reports and Resource
Accounts before the summer recess, providing more coherent information
about the department's spending, akin to the annual report and
accounts produced by private sector companies.
- Building on these improvements, the Government
has further committed, in the "Governance of Britain"
Green Paper (Cm 7170 of July 2007), to simplifying its reporting
to Parliament by ensuring that it reports in a more consistent
fashion, in line with the fiscal rules, at all stages from plans
through to outturn. The Alignment Project has been set up to achieve
this and the Government welcomes Parliament's involvement in,
and support for, the project.
4. Knowledge of the Department's finances
should underlie and inform much of a departmental select committee's
activity, including examination of policy and administration,
and knowledge of the Government's finances should similarly underlie
and inform much of the House's own work. (Paragraph 11)
5. The reason why we question the ability
at present of Members to hold the Government to account for its
financial decisions is that, as just indicated, several of the
fundamental requirements for doing so are missing. These missing
requirements are:
- a financial system which
is coherently organised and comprehensible;
- provision to Parliament of information suited
to the purpose set out in paragraph 9 above; and
- the opportunity to debate on the floor of
the House specific items of expenditure or the objectives of expenditure
and if necessary to vote on them. (Paragraph 13)
The Government agrees that understanding of government
finance should underpin the work of Select Committees and of the
House itself. As outlined in the response to recommendations 1-3,
the Government has committed to simplifying financial reporting
to Parliament through the Alignment Project.
The Government also agrees that proper accountability
of the Government for financial decisions depends on the financial
system itself, the information provided to Parliament and (as
the Committee discusses later in the Report) the mechanisms within
the House for scrutiny and debate. As the Committee has noted,
financial scrutiny cannot and should not be regarded as separate
from scrutiny of policy, but it is nevertheless important that
the underlying financial system and documentation provide Parliament
with the detailed information it needs.
Building on previous improvements, the Alignment
Project will aim to modernise the public spending system to make
it more accountable and transparent, enabling the Government to
improve the way it manages the public finances in support of the
fiscal rules and allowing Parliament to scrutinise public spending
more effectively. Specifically, it will aim to:
- bring into line three different
expenditure frameworks
(Parliamentary Estimates, departmental budgets and departmental
resource accounts) to make the financial system more coherent
and comprehensible;
- simplify the financial reports presented to
Parliament, significantly reducing the
number of publication events from the current 12;
- bring the highest standards from the private
sector into public finances. Building
on the introduction of Resource Accounting and Budgeting (RAB)
and the forthcoming implementation of IFRS, the new framework
will incentivise departments to maximise the benefits of their
capital assets and provide commercial-style information about
Government spending.
The Government will continue to involve Parliament
fully in the Alignment Project as it progresses.
History of financial scrutiny
6. There was no golden age in which the House
rigorously scrutinised every line of the Government's Estimates
and accounts and routinely rejected or reduced requests for funding.
(Paragraph 26)
7. Neither scrutiny on the floor of the House
independently of select committees nor scrutiny by select committees
without any link to proceedings on the floor is likely to be as
effective as combining detailed work by select committees with
debate on matters of particular interest on the floor, for example
through select committees choosing financial matters for debate.
(Paragraph 26)
The Government agrees with the Committee's broad
historical analysis and with its conclusion on the role of committees.
Control over expenditure is not in practice often about rejecting—or
even dividing on—individual spending proposals but about
ensuring the House's overall scrutiny of Government is properly
informed, while recognising the importance of the House's fundamental
powers. This is best delivered in cooperation with select committee
activity and debate, as now.
The Government's financial system
8. The overall shape of the Government's finances
and changes in it are matters which could and should be presented
comprehensibly, like the overall finances of any other organisation.
(Paragraph 32)
The Government agrees with this recommendation. As
outlined in the response to earlier recommendations, the Government
has already made significant improvements in this area, including
through the publication by some departments of combined Departmental
Reports and Departmental Resource Accounts. The Government will
build on these improvements through the Alignment Project, which
will aim to simplify and streamline the financial reports presented
to Parliament, reducing them in number and making them more coherent
and easier to understand. The Project will also examine the terminology
used, with a view to making it more comprehensible and in line
with that used in the private sector, where it is appropriate
to do so.
9. We regard removing complexity from the
Government's financial system as fundamental to improving financial
scrutiny, as well as to improving financial management in Departments.
The Alignment Project offers the possibility of achieving this.
In revising the basis of Parliament's financial control and the
system of reporting to Parliament, it is potentially a historic
development in the long story of Parliament's scrutiny of government
finances. (Paragraph 38)
10. We emphasise the magnitude of the prize
which is potentially available: a comprehensible and coherent
system of planning, authorising and reporting government expenditure,
making it possible for the House and select committees to scrutinise
the Government's finances far more effectively. We commend the
Alignment Project to the House. (Paragraph 40)
The Government agrees that the Alignment Project
represents a major opportunity to secure the significant prize
of simplifying and modernising the public expenditure system.
Given the importance of the changes proposed, the Government intends
to adopt a measured approach to implementing the new system, and
will fully consult all those affected. For these reasons, the
new framework is likely to be implemented from either April 2010
or April 2011. Parliament will be fully consulted on all proposed
changes.
Financial reporting
11. We recommend that each Department publish
an annual statement in plain English about its internal financial
planning processes and control mechanisms. (Paragraph 52)
The Government supports the intention behind this
recommendation and is reviewing the content of the existing Statement
on Internal Control (SIC) to consider how to ensure that it presents
information about financial planning and control in an easily
understood way. The Government intends to avoid requiring an additional
statement, since this might have the unintended consequence of
increasing complexity. The strength of the SIC is that it covers
those aspects of control which the organisation considers to be
of greatest significance. For this reason, organisations need
to think hard about their risks and controls. This is preferable
to requiring them to use a centrally determined checklist and
report on each item, irrespective of its importance.
12. We recommend that the management letters
provided to Departments by the National Audit Office identifying
areas of significant weakness in financial control be published
by Departments. (Paragraph 52)
The Government will discuss this recommendation with
the National Audit Office. However, publication of management
letters could potentially reduce the frankness of their content,
and might thus limit their effectiveness, which would appear to
run counter to the intention behind the recommendation.
13. We believe that Departments should move
towards a system where data in their electronic management accounting
and information systems are accessible to Members and Members
are able to interrogate that data. (Paragraph 53)
Electronic management accounting and information
systems are still in their infancy, and the merits and practicalities
of this recommendation would need to be carefully considered,
including in the light of international experience. Such an innovation
would clearly not be possible in the short term, and is unlikely
to be desirable in the long term, not least because of the significant
IT costs and security issues involved. Parliament already has
access to specific data through select committees' discussions
with their departments and through Parliamentary Questions.
14. We recommend that provisions similar to
those relating to the NAO be made in PFI contracts to enable the
Government to pass information to select committees. It is inherent
in the House's right to control expenditure that the House and
select committees should have access to sufficient information
about PFI contracts to make possible an assessment of whether
they offer value for money, of the extent to which public bodies
are locked into long-term commitments and of the extent to which
risk is transferred to the private sector or retained within the
public sector. (Paragraph 56)
The Government will make every effort to provide
any information requested by parliamentary committees in their
investigations of PFI contracts. In common with other areas of
Government, decisions on the arrangements for handling information
relating to PFI contracts are taken on a case-by-case basis to
reflect its sensitivity and the potential commercial impacts of
its release to different audiences.
15. We invite the Treasury to enter into dialogue
with us about how our proposals concerning financial reporting
should be implemented, and suggest that testing them first on
a single Department or several Departments may be the best way
forward. (Paragraph 61)
As set out in response to the Committee's earlier
recommendations, much work has already been going on in this area,
such as the move to combining departmental resource accounts with
departmental annual reports. The Alignment Project will continue,
and enhance, this process. The Government welcomes a continued
dialogue with the Committee on financial reporting in the context
of the Alignment Project, and agrees that testing such changes
with a few lead departments may often be the best approach.
Making financial scrutiny worthwhile
16. In future Spending Reviews the Treasury
and other Departments should publish information about the framework
within which the negotiations are taking place, and this should
include the draft Public Service Agreements and Departmental Strategic
Objectives setting out what the spending is intended to achieve.
We note the Treasury Committee's recommendation, made before the
results of the CSR were published and not accepted by the Government,
that each Department should inform the relevant select committee
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",
and we endorse it. (Paragraph 66)
The Government will consider how best to consult
with and communicate information about processes to stakeholders
in future Spending Reviews. In announcing the start of the 2007
CSR process, the Government publicly set out the scope and themes
of the review and explained how it would proceed. In addition,
departments' bi-annual reports provide a regular update on their
emerging priorities and performance in the current CSR period.
Information about the achievement of PSAs and DSOs is also included
in Departmental Reports and Autumn Performance Reports, and Schedule
5 of resource accounts indicates how resources are allocated to
departments' objectives.
17. It is absurd that the outcome of the Comprehensive
Spending Review was discussed for only an hour and a half in the
Chamber, and makes a mockery of the House's right to scrutinise
government expenditure. We recommend that the results of Spending
Reviews be the subject of a day's debate on the floor of the House
some weeks following the initial announcement, and that the timing
be such that select committees can report on the outcome in order
to inform that debate. (Paragraph 66)
18. Following the completion of Spending Reviews,
select committees should consider examining how the Department
is allocating its spending total across its various programmes.
This will depend on Departments making the necessary information
available earlier, well before the start in April of the Spending
review period, instead of committees having to wait for the next
Departmental Annual Report in May. (Paragraph 66)
The Government welcomes parliamentary scrutiny and
debate over the outcome of the Spending Review. The timing of
discussions on the allocations of individual Departments and the
information made available by Departments is a matter for individual
Departments and select committees to agree.
19. We welcome the fact that the NAO is increasingly
assisting select committees other than the PAC, and we are keen
to see this work develop further. (Paragraph 71)
The Government welcomes the work to support the role
of select committees.
20. We suggest that the opportunities for
debating Departments' future plans, including spending plans and
Estimates, be considered by the Modernisation Committee together,
with the aim of devising a coherent set of opportunities for debate.
(Paragraph 79)
21. We consider it essential that the House
take back the right to debate and vote on individual government
programmes or items of expenditure. (Paragraph 80)
22. We recommend that it should be permissible
to put forward "opinion of the House" motions proposing
increases in future expenditure or transfers in the future between
budgets, in addition to motions proposing reductions in expenditure.
(Paragraph 82)
The Government sets overall totals for spending at
the Budget and Pre-Budget Report, taking into account all relevant
fiscal and economic information, to provide resources for public
services while ensuring the sustainability of the public finances
and maintaining economic stability. At Spending Reviews, the Government
sets spending plans which allocate available resources between
Departments taking into account all relevant information on public
service priorities and needs. Ultimately it is important that
the House takes clear decisions with precise legal effect in granting
expenditure authority, and motions of the kinds suggested by the
Committee would not have such effect.
In respect of increased debate on expenditure, the
outcome of the Alignment Project may well involve changes to current
Supply procedure, and therefore provide a suitable opportunity
for Parliament to consider changes to its own processes for financial
scrutiny. This could be undertaken by the Modernisation or Procedure
Committees, together with any review of the effectiveness of the
proposed arrangements for promoting debates on departmental objectives.
23. We recommend that the Government provide
an explanatory memorandum for each Estimates Day debate explaining
how the figures in the Estimate relate to the subject under discussion.
(Paragraph 83)
Departments already provide 'Estimates Memoranda'
to their select committee alongside each Estimate presented to
Parliament. Such memoranda contain a great deal of information
about the spending plans in the Estimate and how these relate
to departmental budgets and objectives. Nevertheless, for those
cases where the Estimates Memorandum does not already provide
the information requested, the Government is willing to consider
including in the guidance manual on Supply Estimates (that sets
out the policy and the process for departments) a formal requirement
to provide this information through a separate explanatory memorandum.
24. For far too long the House has shirked
the task of providing itself with the means to carry out financial
scrutiny effectively, and it is time that the House was more assertive
in this area. (Paragraph 89)
The Government recognises financial scrutiny as a
prime function of the House of Commons. It welcomes the opportunity
to discuss with the Committee and the House ways in which existing
procedures can be used to best effect or can be improved.
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