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

3  The Treasury as a central department

The role of the Treasury

25.  As a central department the Treasury continues to lead a number of cross-government programmes including the conversion of UK public sector accounts to International Financial Reporting Standards (IFRS), the efficiency programme, the 2007 Comprehensive Spending Review and the alignment project. In addition, the period since January 2008 has seen the Treasury take on new roles and responsibilities regarding the financial services and banking sectors. We reported on the Comprehensive Spending Review in December 2007[22] and plan to consider the efficiency programme in more detail during 2009. In this Section we consider the Treasury's efforts to rise to the challenges of the current economic situation and its role in the management of the nationalised banks. We also review progress towards the introduction of IFRS to UK public sector accounts and the Treasury's efforts to increase the transparency of government budgets, estimates and accounts through the 'alignment project'.

Management of Nationalised Banks

26.  We have previously reported on events which culminated in the nationalisation of Northern Rock[23] and our ongoing Banking Crisis inquiry will report on the recent developments in the financial markets and the resultant impact on the taxpayer. These are not conclusions we wish to repeat or pre-judge in this Report.

27.  The nationalisation of Northern Rock, and the subsequent nationalisation of Bradford & Bingley, has created governance responsibilities for the Treasury while these entities remain under temporary public ownership.[24] The Government's announcements of October 2008 created further responsibilities for the Government regarding the oversight of part-nationalised banks.[25] A new body, UK Financial Investments (UKFI), has been created to manage the investment in financial institutions on an 'arm's length basis'. The overall objective of UKFI will be to "protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way that promotes competition".[26] It is reasonable to assume that this body will require Treasury support whilst it is being established, and Treasury oversight once it is up and running.

28.  All of these developments are additional challenges for the Treasury and arguably require it to act in areas its current staff base may not be fully equipped for or familiar with. We recommend that the Government ensure the Treasury is sufficiently resourced to manage its extended responsibilities arising from the economic downturn, especially those regarding financial stability.

29.  In 2007-08, the Treasury Group's Resource Accounts contained extended disclosures concerning the acquisition of Northern Rock.[27] In addition, Northern Rock separately published its own six monthly results in June 2008.[28]

30.  We note that the disclosures within the Treasury's own Annual Report and Accounts focus on the Government's financial relationship with Northern Rock but do not comment on its performance under temporary public ownership.[29] Given the interest in the fully nationalised institutions of Northern Rock and Bradford & Bingley, and the Treasury's role in their governance, we recommend that the Government publishes key performance information for these institutions within the Treasury Group's own Departmental Report and Resource Accounts.

31.  We expect that the UKFI will report annually to Parliament and be accountable to this Committee. While the establishment of this organisation is under way, we are concerned that the Treasury does not appear to have a clear vision of UKFI's aims and objectives, and the criteria against which its performance will be measured. The Economic Secretary, Ian Pearson, acknowledged that:

We will clearly want to look to develop performance measures but, as I say, we are very much in early days with regards to the establishment of UKFI … It is a little bit too premature for us to give a full detailed explanation of exactly how it is going to operate and what its performance regime is going to be.[30]

32.  In order for effective oversight to occur, clear performance measures and reporting lines must be established. We recommend that the Government identify and publish performance measures for UK Financial Investments and report against these measures on a six-monthly basis.

Implementation of International Financial Reporting Standards

33.  The Government announced in Budget 2007 that public sector accounts would be prepared in accordance with International Financial Reporting Standards (IFRS), "adapted as necessary for the public sector" by 2008-09.[31] The timetable for implementing IFRS has slipped since March 2007: in its response to our Report on the Chancellor's Departments in 2006-07, the Government told us that owing to the "uncertainties around the impact of the introduction of IFRS on public sector net debt" the Government is now committed to implementing IFRS only from 2009-10. [32]

34.  The successful introduction of IFRS by 2009-10 relies upon departments negotiating a series of 'trigger points' laid out by the Treasury. The first of these trigger points was 30 September 2008. By this date departments were required to submit restated IFRS-compliant 2007-08 balance sheets to the NAO.

35.  We were informed that around half of departments had not met the 30 September 2008 deadline for preparing their dry-run IFRS balance sheets at the time of our meeting with Treasury officials.[33] In their written submission of 6 November 2008, the Treasury told us that by November 2008 all but five departments had submitted their restated IFRS balance sheets.[34] Louise Tulett admitted that the Treasury had not imposed serious sanctions on the stragglers:

colleagues have written out from central Treasury to the departments that have not delivered on their trigger point one, reminding them of the requirement to do so and trying to get as many responses as possible by the end of the current month, which will be next week. The sanction is probably fairly limited in reality.[35]

36.  Angela Eagle agreed that some departments, particular those with complex balance sheets such as the Department of Heath and the Ministry of Defence had "a most difficult task ahead of them"[36] but she maintained that she was "reasonably confident"[37] that IFRS implementation would meet the 2009-10 deadline.

37.  The adoption of International Financial Reporting Standards will fail if the Treasury does not assert its authority and aid departments in meeting the agreed milestones. We recommend that the Government take steps to re-emphasise to all departments the importance of meeting IFRS implementation deadlines.

Financial authorisation and the alignment project

38.  The alignment project aims to create greater transparency between Government budgets, supply estimates and accounts. As Angela Eagle explained:

the clear line of sight initiative is an attempt to create a simple more transparent system, to make it easier for the estimates to encompass all of the expenditure rather than just, at the moment, some of it … I know there has been a memorandum sent to the Liaison Committee about how parliament would start to change the way it examines estimates in order to deal with the alignment project or "clear line of sight" project as it is called. It is really for parliament to decide how best it wishes to change the way it scrutinises estimates going forward. The idea of the project is to try to encompass, in a much more coherent way, in one system government expenditure.[38]

39.  We note that under current arrangements the House normally considers Estimates on three Estimates Days (Winter, Spring and Summer). On these days debate is usually confined to Estimates or aspects of Estimates which have been the subject of Select Committee reports and in practice relatively little mention of the relevant estimates themselves is made during the debate. While it is for Parliament to decide how best to scrutinise expenditure, for those estimates not relating to a Select Committee report selected for discussion there is no possibility of any debate. We recommend that the Treasury considers not only the presentation and authorisation of expenditure but also the way in which the revised documents might best facilitate parliamentary scrutiny.

40.  Under current arrangements, Departmental Supply Estimates include both gross expenditure amounts and amounts net of the income generated by departments. This means that when Parliament votes to authorise the Estimate, it is voting to authorise both the gross and net figures directly, authorising limits on both operating and non-operating appropriations-in-aid. The alignment project intends to focus parliamentary controls on the net expenditure figure in order to "line up with budgetary controls",[39] thus surrendering some elements of formal control.

41.  We acknowledge that the requirements of the alignment project mean that it is not possible for parliament to maintain control over gross totals. We are concerned that without adequate levels of information regarding income, parliament's authority may be diminished. We recommend that the new estimates provide appropriate levels of information relating to income. We do not wish to impose an unreasonable administrative burden on the departments and hope that a pragmatic solution can be adopted.

22   Treasury Committee, First Report of Session 2007-08, The 2007 Comprehensive Spending Review, December 2007, HC 55 Back

23   Treasury Committee, Fifth Report of Session 2007-08, The run on the Rock, January 2008, HC 56-1 Back

24   HM Treasury, Resource Accounts 2007-08, HC 539, July 2008, p 80 Back

25   "Financial Support to the Banking Industry", HM Treasury press notice, PN 100/08, 8 October 2008 Back

26   Ev 111 Back

27   HM Treasury, Resource Accounts 2007-08, HC 539, July 2008, p 80 Back

28   Northern Rock, Half Year Results, six months ended 30 June 2008 Back

29   HM Treasury, Resource Accounts 2007-08, HC 539, July 2008, p 80 Back

30   Q 475 Back

31   HM Treasury, Budget 2007, para 6.59, p 154 Back

32   HC (2007-08) 564, p 5 Back

33   Q 269 Back

34   Ev 76 Back

35   Q 273 Back

36   Q 480 Back

37   Q 482 Back

38   Q 466 Back

39   HM Treasury Memorandum, Alignment ("clear line of sight") project,, p 2  Back

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Prepared 23 January 2009