Examination of Witnesses (Question Numbers
20-39)
HM TREASURY
8 SEPTEMBER 2010
Q20 James Wharton: You will be relieved
that I do not want to explore further the idea of putting crocodiles
in job centres. I was struck by the departmental variance that
was thrown up in the figures we have seen, and Jackie has touched
on the difference between DCLG, which is down below 5%, and DEFRA,
which is up around 60%, even before you look at qualitative issues.
Within that, the approach that different Departments take is something
that I would like to explore a little bit more. My concern is
that, particularly now that we are entering a time when Departments
are required to find savings that are somewhat more significant
than they were when this was brought in and value for money was
being implemented, one of the things that the Report has identified
is that around 50% of the savings are where central Departments
are pushing their savings down to the bodies that they then fund—effectively,
what we might term as front-line services—rather that the
Department finding efficiency itself. What is the Treasury doing
to try and control that tendency of a Department, where it needs
to find a saving and just pushes it onto somebody else's budget.
Sir Nicholas Macpherson: The point
about the 50% is partly a function of where public spending takes
place. A huge amount of spending takes place at the level of schools,
local authorities and hospitals. I do not think it is fair to
say that savings have been pushed down to the front line disproportionately;
if anything, the reverse is true. Some of the central Government
Departments have had some of the biggest cuts, and in that context
I would mention both the Department for Work and Pensions and
Revenue and Customs. There is an interesting question about whether
a central programme should take credit for savings in schools,
and the Report makes some good points about that, relating to
how much to devolve and how much you centralise. I do not think
you can leave schools and so on out of the equation.
Q21 James Wharton: Within the context
of the lessons you are drawing from the value for money programme,
what have you learnt that the Treasury can do going forward, when
we are looking at future spending decisions, to mitigate the impact
on frontline services and the actual things that people see and
our constituents come and talk to us about, and ensure that central
Departments take their fair share of the difficult spending decisions
that we are heading into?
Sir Nicholas Macpherson: Successive
Governments have attached a very high priority to protecting and
improving service delivery. Our starting assumption is that it
is the intermediate tiers and the headquarters which should be
reduced the most, and there are two reasons for that. One is that
they are a source of cost in themselves, but also they are a potential
burden on the services themselves. The more bureaucrats you have
in Whitehall, the more they have to justify their activity by,
for example, requiring libraries to have a library plan. It must
be a priority to reduce the size of the civil service and the
headquarters function of Government. On the whole I think those
parts of Government have been reduced more, certainly because
the Treasury has more direct control over those as it is possible
to keep a better control on thing like pensions and wages. I think
that should be the priority, but equally in determining the settlement
for local government, schools and so on, you have got to assume
that there is capacity there to drive up efficiency. The question
then is, should central Government hold schools directly to account?
I think not, because that changes the fundamental relationship
between the central Government Department and the devolved body.
If I may come back to the Chairman's point very briefly, I do
not accept that I said that you can only get efficiency by cutting
budgets. I think it is easier to measure it sometimes, but as
this Report sets out, there are a lot of areas, in particular
the police, where there have been clear efficiency improvements
against the background of rising spending provision. I do not
want you to think that the Treasury institutionally thinks that
increasing spending is pointless and can have no effect on anything.
That is simply not the case.
Chair: I was reflecting what I thought
were your words, which were that if budgets were going up it was
very difficult to get value for money savings out of it.
Q22 Joseph Johnson: Can we just turn
to the measurement and reporting of savings? A casual read of
the NAO Report makes it seem as though the Departments have been
pulling the wool over your eyes—they have been reporting
savings which in reality are not there. I am concerned that the
Treasury was not more alert to this going on. The NAO Report states
quite clearly that 18% of the savings did not represent or significantly
overstated savings and that only 38% were sustainable, with this
great amber area—44% of the savings—where we do not
know either way. I am just worried that the Treasury lost track
of what was going on.
Sir Nicholas Macpherson: I do
not think the Treasury lost track of what was going on, but an
18% red figure is not one that I am hugely proud of. I would like
to see a lower figure than that. One of the problems we are dealing
with here is that you are looking at this massive programme which
is designed on the basis of some fairly rough and ready assumptions
around what the baseline is. I was explaining earlier about how
the baseline was constructed by attaching an estimate of inflation
to spending in the initial year. It has been quite difficult to
nail down efficiency given the definitions used here. On the plus
side, the National Audit Office acknowledged that this was a more
robust programme that its predecessor, which followed on from
the Gershon review. We set the bar a lot higher in terms of quality
of reporting, and what this study shows is that we have failed,
against this more demanding bar, to make as much headway as we
would have liked. There is plenty of room for improvement.
Q23 Chair: What is going to change?
What are you going to change?
Sir Nicholas Macpherson: I think
we are going to change quite a few things. Coming back to the
issue Mr Bacon raised, we are setting up a new efficiency reform
group in the Cabinet Office, which is going to play a critical
role. It is going to play a role in holding Departments to account
but it will also be a source of expertise in terms of encouraging
more sensible approaches to bulk procurement, say. One of the
problems that the Treasury has incurred in running this programme
is that, on the one hand, the Treasury's role is to control and
plan public spending, but it also has a role in ensuring that
there is some measurement of the output which the spending on
the services gives rise to. When you then bring efficiency into
the equation, the Treasury can play a reasonable role in some
of the measurement issues, but once you get into quite deep, arcane,
areas around delivering public services, there is a benefit I
think in having a source of expertise which is not in the Treasury.
This is something which, over time, has either been in the Treasury
or the Cabinet Office; it was in the Cabinet Office in the 1990s
and then the Office of Government Commerce was created. On the
face of it, the efficiency and reform group looks like an exciting
development. They have recently recruited Ian Watmore as their
new chief executive, and he has a background in running large
projects. I would hope that a partnership between the Treasury
and the Cabinet Office may result in better outcomes next time.
Q24 Eric Joyce: Sir Nicholas, can
I just ask you something about targets? You characterised targets
earlier as "pump-priming devices" and said that they
"concentrate the mind". Whether there is a rising or
reducing baseline, would it be fair to say that is their primary
function and that of themselves they do not actually have any
meaning?
Sir Nicholas Macpherson: Targets?
Eric Joyce: Yes. For example, at the
moment the Government has set its own new target which is higher
than the previous Government's target. Under the last Government's
target, we made savings substantially below what we had hoped—not
to put to fine a point on it—so in essence, when the Government
sets a target, it is of itself not a meaningful statement; it
is simply something that concentrates the mind. Would that generally
be the Treasury view?
Sir Nicholas Macpherson: That
is quite a deep question. I do not think that there will be a
single Treasury view. One of the lessons of the last decade is
that you have got to approach targets with massive discipline.
There is a risk that you create targets for everything, and the
more targets you have, the more people responsible for delivering
them become cynical and slightly detached from them. All sorts
of business school analysis suggests—I am sure Amyas would
know more about this than I do—that once you get beyond
having more than five or six objectives no one can possibly measure
performance against them and people lose interest. You have got
to be focused. When you want to create a step change, you need
to administer a shock to the system, and against a background
when spending was increasing, targets had a perfectly respectable
role to play in that that context. Obviously when spending is
falling, you are going to have your work cut out to maintain and
improve services anyway, so perhaps targets are less relevant.
The problem with targets is their proliferation. It is always
tempting to announce a new one. I have seen Chancellors from both
political parties come and go. Occasionally they have had one
or two targets, like getting the basic rate of income tax down
to 25p; sometimes they have had 20. I think you have just got
to be quite continent. The basic problem for Government is that,
for a company, there is only one target which is the bottom line;
it is about profit, earnings per share, which you can monitor
and you can hire and fire people on that basis; with Government,
for all Departments you have a multiplicity of objectives. Obviously
where you can marketise things, that can help drive performance
where there are very clear metrics of unit cost—for example,
the amount of income tax brought in compared to the amount or
people employed to bring it in is quite an obvious metric. But
if you take something like the Treasury, which has a multiplicity
of objectives, it is actually very difficult to measure output
in a way which can really help drive performance. Sometimes targets
can help, but I do not think they are a sustainable way of driving
performance year after year.
Q25 Eric Joyce: I was just thinking
of the one target of £41 billion. Should we regard that as
something that should just concentrate the mind or is it something
meaningful?
Sir Nicholas Macpherson: The spending
review will determine whether there are any targets at all. On
the whole, this Government has made clear that targets are not
their preferred way of driving performance. They have taken the
view that transparency is the best way of driving performance.
We will see how the precise mechanics of that play out in the
spending review. I am not aware that this Government is seeking
to drive performance on efficiency through targets; in fact it
is rather the contrary. At the moment, performance is being driven
by the fact money is being taken out of your baseline, so you
have got to make some decisions to live with it. Chair:
I want to bring in Stephen, but I have just got to pull you up
on that. If you are going to cut spending, you must measure the
impact it has on services. It is crazy not to. I am not sure what
you would call it, but we in this Committee will be watching the
cuts in spending and the impact it has on services. I am assuming
you, the Treasury, and the Government are developing some mechanism
to enable us to do that—or the NAO will have to assist in
that. Certainly the NAO is providing a framework, part of which
will be, if you cut x what impact does it have on front-line
services. I bring in Stephen again; you may want to comment on
that.
Q26 Stephen Barclay: You mentioned
a moment ago setting up a new group to hold Departments more to
account, but appendix 2 suggests that the NAO reported in 2006
that "The central challenge function within the Treasury
has been reduced" and "Savings continue to be insufficiently
challenged". The Commons Treasury Committee in 2007 also
said, "We recommended that the government ensure that a coherent
framework for the verification and reporting of savings is established."
Why would you not take more heed of those recommendations?
Sir Nicholas Macpherson: We did
take heed in some important respects. One of the criticisms of
the Gershon programme was that Departments did not own it sufficiently.
The risk is that the bigger the Treasury role, the more the centre
of Government second-guesses Departments, the less the Department
owns the challenge. If you are working in a Department and it
feel like things are being done to you, your main objective is
just to feed the centre whatever will keep the centre quiet.
Q27 Stephen Barclay: Taking that
then, previously you were saying that it was for the Departments
to own. You are saying at the time, previously in the last few
years, the Departments were owning this, this was part of the
objectives for the accounting officer. If you turn to figure 6
and we look at, as was referred to earlier, the Department for
Communities and Local Government. If they were owning that, what
has happened to the accounting officer for that Department? Have
they been promoted to be the top civil servant in Scotland or
are they being managed in some way? What I am driving at is: how
are they held accountable? How are they owning that target?
Sir Nicholas Macpherson: As I
said earlier, I do not think you should read too much into the
DCLG figures. They are reporting with a greater lag because of
their responsibility for local government. Let's take in abstract—
Q28 Stephen Barclay: Can we take
that in specific if we can, because you also said earlier that
was actually due to a time lag. If one looks at the element as
to whether it is a time lag, in the "Department for Communities
and Local Government Core Financial and Performance Tables Report"
of July 2010, it says, in explanation of why it has only achieved
£40 million of the target of £987 million; in note 2,
"There continues to be a considerable risk that the Department
will not achieve the planned affordable housing saving",
which is the majority one—£734 million of the initial
£887 million. It is saying that even in July 2010, not that
there was a time lag, but that because of the housing market,
it was unlikely to achieve its target and it is reporting at the
halfway stage that zero savings had been made. It is further reporting
that for the reduction in costs for running the Department, its
target was £43 million and it had made zero savings. It is
actually saying it is not about a time lag; the Department was
not expecting to deliver this.
Sir Nicholas Macpherson: If you
are asking what does the Treasury do if it feels a Department
is underperforming, I would prefer not to get into individual
specific cases.
Q29 Stephen Barclay: I am trying
to understand the element of oversight. Was it that the Department
were owning this and did not perform, but they were not held accountable;
or that it was a lack of oversight from your central team, and
you are saying, "We did not have the central oversight. We
ignored the earlier recommendations because we relied on the Department
to own it—and they did own it. It is just a time lag in
the data, and that is why we are not there."
Sir Nicholas Macpherson: I do
not accept your premise that we chose to ignore it. Conversations
around efficiency tended to take place between individual Treasury
spending teams and the Department rather than through some separate
central unit. Where the Treasury has concerns about the performance
of a Department there are a number of ways of trying to change
things. The previous regime had a programme of departmental capability
reviews and the Treasury would make it very clear if it did not
think much of Department X's finance function or approach to efficiency.
If there is a view in Treasury that the permanent secretary or
the accounting officer of the Department is failing to promote
the efficiency agenda, that will be fed into the—
Q30 Stephen Barclay: They are not
saying that, are they? They are saying it is out of their control
and due to the downturn in the housing market. The irony is that
the Governor of the Bank of England was saying on 26 June 2008,
in response to a question on this, question HM, "Governor,
if you were to sum up how you think the housing market will be
in the next 12 to 24 months, what message do you have publically
here?" Mr King: "It is very difficult to know, it is
very, very hard to judge". What I am driving at is you are
setting a target—£734 million of an £887 million
target. Subsequently, when that is clearly off track, you are
increasing that target by a further £100 million, and you
are saying, "There is a time lag, so there is a potential
they will deliver that". Yet back in 2008, when this target
was being set, the Governor was saying, "We cannot rely on
that criteria." So what did you know in the Treasury that
the Governor did not know, because clearly this target was only
going to be delivered subject to house price movements?
Sir Nicholas Macpherson: There
is no point in me trying to give you the detail of this particular
case because I do not have the information at my fingertips. If
you want to understand the background to the target, I would be
happy to write to you.[1]
Q31 Chair: Some principal things
that are coming out of that. There is a target established by
a Department, they then say they cannot reach it, Government increases
it and they never get there. Are we writing off the value for
money in DCLG under this programme?
Sir Nicholas Macpherson: There
are two things here. One is, do changing circumstances make you
miss targets? Clearly they do. The Treasury used to have a target
for fiscal rules and on many bases it missed those by huge amounts.
That reflected world factors and no doubt reflected the Treasury,
too. Circumstances change. The next issue is: what determines
changes in a target? If you are saying that you think the Treasury
made a fundamentally wrong judgment in changing a target given
the circumstances, I would happily come back to you to explain.
Q32 Chair: Have you written this
off?
Sir Nicholas Macpherson: I have
not got sufficient detail in front of me to tell the answer to
that question.
Q33 Stephen Barclay: I was merely
asking whether it was a lack of oversight from the Treasury that
is at the root of the issue; whether it is that the target was
never realistically achievable or within the gift of the Department
because they were reliant on other factors; or whether it is actually
the fact—you were the one that used the phrase, "We
are ensuring that senior management own the objectives"—that
the person that was owning them has just been promoted. I am trying
to establish where responsibility lies. Even the £40 million
that they do report as savings is relating to the Fire and Rescue
Service, and the NAO have produced Report 285, which is pretty
damning and flags that the whole board of Firebuy Limited has
just been fired; that the Department established an arm's-length
body which was flawed; the procurement was unnecessary and expensive—it
goes on and on. People can read it for themselves—it is
set out in paragraphs four, five and six. And that is the only
£40 million that is reported at the half way stage. Clearly
something has gone wrong either with the setting of the target,
with your oversight, or with their delivery, and it seems a little
unclear to me where responsibility sits.
Sir Nicholas Macpherson: As I
said, I would be very happy to come back to you with a considered
answer to that question.
Q34 Matthew Hancock: I want to talk
about the future because we have heard and read the Report about
how you improved between Gershon and the CSR07. We have also heard
about some very clear flaws in the CSR07 plan and how it was delivered;
they are in the Report too. I think what most of us are worried
about is the future and the fact that we are about to go into
an absolute corker of a spending review. There are two questions
I want to ask. The first is that you have talked about the Treasury
getting into every nook and cranny versus letting the Departments
do it for themselves, which could be the command and control against
an incentive-based structure. You said you had made a bit of a
change from Gershon to CSR07 on that. How much of a change have
you made in terms of the next one and do you think that will work?
Sir Nicholas Macpherson: I think
where we are heading goes with the grain of evolution. First moving
to a more transparent framework, in terms of trying to publish
more information both on inputs and also, I would assume, outputs,
is going to create stronger accountability. This has been already
seen in a number of areas and some of which goes back to the previous
Government—simple things like publishing people's salaries
and their expenses and so on doesn't half concentrate minds. I
recognise that can cause problems, but transparency actually encourages
better decision making, so there's that.
Q35 Matthew Hancock: What do you
mean by, "there's that"? That is a change? How much
of a change and will it help?
Sir Nicholas Macpherson: I think
it will. The critical thing on this is to get the balance right.
It is how you translate data into information or information into
data—I cannot remember which way round it is. It is trying
to come up with some metrics that actually bite—that's the
first thing. There are some things which enable comparison across
Departments and programmes—common metrics on how big is
the HR function, in proportion to the unit of delivery, how big
is finance division and so on. Then there are things which give
you assurance around efficiency—that is going to be important.
I think the incentive regime is about what actually motivates
people to drive efficiency through? Pay incentives play some role,
but quite frankly there is not going to be that much pay around,
so I think we have got to try and develop a structure that rewards
people who are doing the right thing and freeing up resources.
I think the most rewarding thing for many public servants is being
able to free up resource to spend on things which management within
the organisation and the people who work there think are priorities.
The third thing comes back to the efficiency and reform group,
which I think is important. There are some things which you should
just devolve. I do not think central Government should be seeking
to influence how schools spend their money. Even if the central
Government is right, by the time it had passed a message through
various intermediate stages, the world would have moved on. You
cannot just run things from the heart of Whitehall. But there
are some things that should be run very tightly from the centre,
so you can mandate things like procurement of commodity bulk goods.
You can lay down the law on recruitment freezes in the civil service;
you can look at IT projects in the round. This was my point earlier:
the centre can only do that if it has a credible group doing it.
I think historically Treasury, when it has got a clear spending
constraint to impose, is pretty good at controlling spending.
What Treasury is less good at doing is credibly telling people
how to procure goods. Historically when the Treasury had an internal
procurement unit it was regarded as pretty second-rate. The challenge
of the role of the centre is to create a centre of expertise which
can genuinely add value and where the centre can make a difference.
Again, I am not claiming that the world changed overnight following
the election—under the previous Government the Office of
Government Commerce was an important step forward in managing
procurement, projects, property and so on—but I think the
group which has been set up in the Cabinet Office takes that one
step further. In the fullness of time, when I am called back to
account for performance on efficiency I would hope that you would
call me and Ian Watmore, because I think the Treasury and the
Cabinet Office working in partnership are a lot stronger than
when they are working on their own.
Q36 Matthew Hancock: Is what you
have described is what we have read about as the tight-loose approach
to the centre's control?
Sir Nicholas Macpherson: It is.
I think it is known in the trade as tight-loose. It is not an
expression I find trips off the tongue, but I understand why people
find it attractive.
Q37 Matthew Hancock: The second question
I want to ask is why so many things went wrong, no matter what
the direction of travel. You have accepted the 18%, where the
Treasury did not seem to know where the money went, and some of
the other examples that we have been talking about. Why did it
go wrong and why could only £15 billion savings after two
years be identified, even on the Departments basis? Is that because
there was not the will to it? Is it because the number had been
plucked out of the air without any thought about how to get to
it? Why did it go wrong and why have we got such a negative Report
on the £35 billion attempted savings?
Sir Nicholas Macpherson: I do
not accept it is a totally negative Report. I think there are
some positives and there are some negatives in it. What you are
asking is why is there—
Matthew Hancock: Yes, because if we are
going to improve in the future we need to understand why it went
wrong in the past. Sir Nicholas Macpherson:
I think for both Treasury and Departments—again Chairman
I do not want you walking away from this meeting saying that Treasury
is blaming Departments and abdicating responsibility, I think
we are all responsible—this has been, in a sense, a journey.
Coming back to things like financial management which are absolutely
critical to this, I think we have made progress on financial management
but there is a hell of a lot still to go. I was mentioning earlier
that we have got more professionalism, but the data underpinning
a lot of the financial systems is still not nearly good enough.
One of the things which this Report highlights, and actually comes
out in a lot of other Reports the NAO have been doing that will
be relevant, such as structured cost reduction, is that we need
to achieve far better data and have far stronger financial systems.
There is an agenda to improve that.
Q38 Ian Swales: I have a specific
question: to what extent have external consultants been involved
in all of this programme, both in the Treasury and in the Departments?
Sir Nicholas Macpherson: I think
they have been involved, but with the passage of time, we are
trying to do rather more of it ourselves. Consultants can only
take you so far, and it is very important that you should really
employ consultants only where it is genuinely cheaper to bring
people in on a temporary basis to help you with something, then
seek to build up that capacity in house. To use the example that
I have used in this Committee before, on the whole, if I need
legal advice—if I am taking over a bank—there is no
point in having in-house investment bank capacity in the Treasury;
you want to buy that in, and that makes sense. It may give rise
to a large cost. But I think consultants can give you some assistance.
If this programme is going to deliver on efficiency, it has got
to be embedded in the civil service. You cannot just buy in financial
management; it has to be owned by the board of the Department.
Q39 Ian Swales: Sorry can I just
do a supplementary on that? Have you got the balance right? Have
you got the people who are actually coming in and asking the difficult
questions? A lot of people say you should not have consultants,
but actually there is a reason why they exist, and is because
often because people do not ask themselves the difficult questions.
Have you got the balance right?
Sir Nicholas Macpherson: I think
the balance is broadly right, but it is very difficult to get
wholly right. For example, at the moment there is a notion that
targets help create ambition; there has been a presumption you
do not employ consultants at the moment to try and get a step
reduction in costs. I think it is a good thing to do but I would
hope, in the medium term, Departments could be trusted to allocate
their budgets in a way which is sensible. The centre can have
a role in utilising consultants as necessary and I remember the
original Gershon review was supported by a mixed team at the Treasury
under a guy called Paul Kirby, who I think had been at the Audit
Commission and then moved to KPMG. You can have a bit of mixed
economy sometimes; you do need access to new ideas.
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