Administration and expenditure of the Chancellor's departments, 2007-08 - Treasury Contents

2  The Treasury Group's own resources


4.  The Treasury Group includes HM Treasury, the Debt Management Office (DMO) and the Office of Government Commerce (OGC). HM Treasury's Annual Report and Resource Accounts include information about all three group entities.[3] In addition the DMO issues its own Annual Report and Accounts and the OGC issues an Annual Statement. In line with the Committee's rotating scrutiny methodology, the DMO's separate Annual Report and Accounts is considered in Section 4 of this report.

Under-spending and End-Year Flexibility

5.  For the sixth consecutive year, the Treasury Group underspent against its expenditure limits. The underspend in 2007-08 was £24m (7.4%), as shown in Table 2.

Table 2: Treasury Group expenditure outturns compared with limits set, 2002-03 to 2006-07


Initial limit on expenditure

£ million

Outturn of expenditure

£ million

Difference between (2) and (3)

£ million

Difference (4) as percentage of initial limit (2)


Sources: HM Treasury Resource Accounts 2002-03, HC 999, July 2003; HM Treasury Resource Accounts 2003-04, HC 920, July 2004; HM Treasury Resource Accounts 2004-05, HC 93, June 2005; HM Treasury Resource Accounts 2005-06, HC 1344, June 2006; HM Treasury Resource Accounts 2006-07, HC 518, June 2007; HM Treasury Resource Accounts 2007-08. HC 539, July 2008.

6.  The issue of underspending is one we have discussed with Treasury officials over a number of years. In November 2007, Nicholas Macpherson, Permanent Secretary of HM Treasury, admitted that there had "been a tendency to underspend" within the Treasury but assured us that the Department were working "intensively to try and get people (a) getting a taut estimate… but (b) to ensure that people generally spend the money they are supposed to spend".[4]

7.  During our discussion of the 2007-08 performance, Mr Macpherson informed us that:

I continue to find the degree of under spending, certainly on people and pay, slightly frustrating … I am very keen to look at whether, by either over budgeting or over recruiting, we can get closer to our spending limit.[5]

8.  Supply estimates are the funds authorised for spending by Parliament and therefore represent the amounts which Parliament considers appropriate to deliver the planned public service programme. While overspending is rightly subject to scrutiny, underspending is also of concern to Parliament. Three possible conclusions can be drawn from underspending: unexpected efficiencies have been found; the original estimates were flawed; or the promised programme of services has not been delivered.

9.  We note the ongoing underspending against estimate by the Treasury Group and we are concerned that this may represent under-delivery or poor estimate preparation. We recommend that the Government takes steps to ensure that the Treasury presents an accurate estimate to parliament and delivers against the approved estimate.

10.  As we noted in our Report on the administration and expenditure of the Chancellor's Departments in 2006-07,[6] repeated underspending by HM Treasury may have resulted in the accumulation of large stocks of End-Year Flexibility. In its response to our earlier Report, the Government suggested that these stocks might be used to fund the outcome of the Civil List renegotiation and to finance the Pathfinder on Money guidance work.[7] It appears to us, however, unlikely that these elements would use up a significant amount of the Treasury's End-Year Flexibility. We recommend that, in its response to this Report, the Government indicates whether any of the Treasury Group's End-Year Flexibility will be transferred to other Departments or how else it might be used.

The Gershon efficiency programme in the Treasury Group

11.  Following the recommendations of Sir Peter Gershon's 2004 report on public sector efficiency,[8] the Government set a target of achieving £20bn of efficiency savings gains and 70,600 net workforce reductions across government by 2007-08. The Treasury Group has been responsible for managing this programme since its inception, although this responsibility transferred internally from OGC to the Treasury Group Shared Service in April 2007.

12.  In November 2008, the Treasury reported that the Government had exceeded these targets, delivering efficiency gains of £21.5bn and net workforce reductions of 86,739 over the 2004 spending review period. Together the Chancellor's own Departments contributed £0.68bn of efficiency gains and delivered a 16,218 headcount reduction, exceeding their combined target of £0.55bn efficiency gains and 13,350 net headcount reductions.[9]

13.  The Treasury Group itself reported £26m of efficiency savings, exceeding its target of £18.7m.[10] The Treasury Group also made more than double the required number of headcount reductions (316 reductions against a target of 150).[11] When the scale of this reported over-achievement against target was put to him, Mr Macpherson conceded that the Treasury "did overshoot a bit"[12] on its headcount reductions target and was now actively recruiting. He went on to suggest that the demands of the economic situation had stretched the Treasury, stating that "What has been striking over the last year, especially over the other weekend, is that we are really operating at our limits".[13]

14.  In November 2007, Mr Macpherson argued that in order to meet its future efficiency target "the Treasury is going to get a whole lot smaller in the coming period".[14] When we met him in October 2008, he accepted that the demands arising from the economic situation might mean that further headcount reduction plans needed to be revised:

I am keen to step back and look at how we spend our resources. At the margin, it may be that our plans for people set out on page 91 of the report—1,006 [staff members] it says … in 2011-—[perhaps] … that number should be a little higher. Although people are our main cost, there are other ways you can reduce spending.[15]

15.  While we recognise that the quantity of staff is not the only factor in the delivery of services, we are concerned that continued headcount reductions in the Treasury Group may now leave its constituent organisations unable to provide the required economic support and management during the economic downturn. We recommend that the Government reconsider any planned further headcount reductions in the Treasury Group in the light of the demands on the Group of the economic downturn.

Financial reporting

16.  In 2006-07 we congratulated the Treasury on publishing a combined Annual Report and Accounts and we were assured that we could expect a combined document in 2007-08.[16] Unfortunately this expectation was not met, and the Treasury Group's Annual Report and Resource Accounts were published separately on 3 July 2008 and 16 July 2008.

17.  By way of explanation for the separate publication, Mr Macpherson cited some "particularly tricky accounting issues around Northern Rock … [and the] real possibility that we would not resolve those accounting issues with the National Audit Office this side of the summer".[17] These issues were resolved and the Annual Report and Accounts were published only two weeks apart.

18.  Northern Rock was taken into temporary public ownership on 17 February 2008 and the Treasury Resource accounts were published on 16 July 2008, suggesting that it took five months for HM Treasury to identify an accounting treatment of Northern Rock which the National Audit Office (NAO) would accept as true and fair.

19.  It is already apparent that the Treasury Group's 2008-09 Resource Accounts will throw up a number of equally complex accounting issues: the treatment of the Government's revised equity stake in Northern Rock; the transactions with Abbey Santander and Bradford & Bingley; and its investment in the part-nationalised banks.

20.  Louise Tulett, HM Treasury's Director of Finance, Procurement and Operations, told us that the accounting treatment of the Treasury's transactions with Abbey Santander and Bradford and Bingley had not yet been agreed with the NAO.[18] From this we must infer that the treatment of the part-nationalisation of the banks also remains to be addressed. The nationalising transactions of 2008-09 raise some complex accounting questions for the Treasury. In order to ensure that the Treasury Group's 2008-09 Annual Report and Accounts can properly be laid before Parliament before the summer adjournment, we recommend that the Treasury engages early with the National Audit Office to agree appropriate accounting treatments for the transactions surrounding the nationalised and part-nationalised banks.

21.  We were disappointed to note that the Treasury Annual Report was published separately to its Resource Accounts in July 2008. We recommend that, in order to aid users of the accounts, the Treasury publishes future Annual Reports and Resource Accounts in a single, combined document prior to each summer adjournment.

22.  In its report on the Performance of HM Treasury in 2007-08, the NAO highlighted that no fewer then five liabilities relating to Northern Rock were disclosed in the Treasury's Resource Accounts as contingent liabilities but listed as 'unquantified'.[19] These are shown in Table 3.

Table 3 - undisclosed liabilities relating to Northern Rock
Contingent liability disclosed Potential financial impact for the Treasury
HM Treasury announced guarantee arrangements in respect of retail and uncollateralized wholesale deposits in Northern Rock together with certain other wholesale obligations. Unquantified
HM Treasury has indemnified the Bank of England against any deficit it should face as a result of its arrangements with Northern Rock. Unquantified
HM Treasury has confirmed to the FSA that it will take appropriate steps to ensure that Northern Rock will continue to operate above the minimum regulatory capital requirements. Unquantified
HM Treasury has provided guarantee arrangements for Northern Rock's new and existing Directors for the period that the company has been in temporary public ownership, indemnifying them against loss and liability incurred in pursuit of their duties. Unquantified
In accordance with the Banking (Special Provisions) Act 2008, a Compensation Scheme was established by the Northern Rock plc Compensation Scheme Order 2008. Unquantified (as any amounts due to shareholders would be a matter for the valuer)

Source: National Audit Office, Performance of HM Treasury 2007-08 as summarised from HM Treasury, Resource Accounts 2007-08, p 79, Note 27 Contingent Liabilities.

23.  By nationalising financial institutions, the Government has taken on responsibility for significant liabilities. In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed. We recommend that the Treasury quantify and disclose the liabilities involved in the nationalisations and part-nationalisations of financial institutions. These disclosures should appear in the Treasury Group Resource Accounts, must be at least as comprehensive as those made by major banks and should go further then meeting the minimum acceptable accounting standards.

24.  We also note that the Treasury's Resource Accounts for 2007-08 included improved disclosures of senior management bonuses.[20] However the total amount of bonus payments made to all staff was not disclosed in the accounts. Mr Macpherson accepted that these figures could be disclosed in the accounts.[21] We recommend that in future years the Treasury disclose the total bonus payments made to staff in their Resource Accounts.

3   The expenditure of the group includes the coinage and the grants awarded to the Statistics Commission and four Parliamentary bodies: The Commonwealth Parliamentary Association (UK branch); the British American Parliamentary Group; the Inter-Parliamentary Union and the British-Irish Inter-Parliamentary Body.  Back

4   Treasury Committee, Seventh Report of Session 2007-08, Administration and Expenditure of the Chancellor's Departments 2006-07, HC 57, Ev 19, Q194 Back

5   Q 180 Back

6   HC (2006-07) 57, p 11 Back

7   Treasury Committee, Ninth Special Report of Session 2007-08, Administration and Expenditure of the Chancellor's Departments 2006-07: Government response to the Committee's Seventh Report of Session 2007-08,HC 564, p 1 Back

8   Gershon Report, Releasing resources of the front line - Independent Review of Public Sector Efficiency, July 2004 Back

9   HM Treasury, 2004 Spending Review: final report on the efficiency programme, November 2008, p 3 & 9 Back

10   HM Treasury, Annual Report 2007-08, Cm 7408, July 2008, p 119 Back

11   Ibid., p 121 Back

12   Q 228 Back

13   Q 226 Back

14   HC (2006-07) 57, Ev 20, Q 201  Back

15   Q 235 Back

16   HC (2007-08) 564, p 6 Back

17   Q 158 Back

18   Q 157 Back

19   National Audit Office, Performance of HM Treasury 2007-08, p 12, Figure 6 Back

20   HM Treasury, Resource Accounts 2007-08, HC 539, July 2008, p 35 Back

21   Q 168 Back

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Prepared 23 January 2009