Managing Budgeting in Government - Public Accounts Committee Contents

Conclusions and recommendations

1.  Political and contractual commitments limit the ability to allocate resources to achieve best value. In the 2010 Spending Review, political commitments to protect certain budgets such as health and international development meant that the brunt of departmental spending cuts had to be focused on just 40% of controllable expenditure. Inflexible programmes and existing contract commitments also limited the Government's ability to make changes. The Treasury and departments should identify, before each spending review, existing commitments and future funding pressures to make sure overall expenditure plans are realistic and sustainable in the longer term.

2.  The Government does not fully understand the impact of cuts as it focusses on short-term priorities rather than the longer term view. The last spending review cut planned capital spending significantly, from £60 billion in 2009/10 to a planned £38 billion in 2014/15, a decision based partly on what could be cut quickly rather than an assessment of the likely impact of the cuts, for example, on economic growth. The Government subsequently reversed some of these capital cuts, increasing infrastructure spend by £6.3 billion. Other spending cuts were ill-thought through, for example, the UK Border Agency reduced staff too quickly and had to rehire staff to help with the resulting backlog of immigration case work. Departments should model the financial and operational implications of different spending options to support their bids for funding in the next spending review.

3.  The Treasury struggled to assess the cost effectiveness of proposed spending. The Treasury's exercise ranking capital spending compared proposals on the basis of cost-benefit analyses, but these covered only 6% of total planned spending and some of the data was of poor quality. Departments often lack information on unit costs or benchmarks and struggle to compare spending options in terms of their value. Therefore, the Treasury could not make meaningful comparisons between spending options because the information required to do so was not available. Such information gaps cannot easily be closed in the brief period of a spending review. The Treasury needs to enforce requirements for departments to assess the cost-effectiveness of their spending; analyse in aggregate how well departmental proposals address key government objectives such as growth and fairness; and work with the Cabinet Office to make sure current information reforms reflect the need for informed budgeting.

4.  The Treasury does not promote cross-government budgeting. The budgetary system still encourages departments to focus on their own interests and does not incentivise planning across departmental boundaries. This means that departments can make decisions without considering the cost implications for other departments, for example the higher rents proposed under the Affordable Homes Programme may well impact on the housing benefit bill. The Treasury, together with permanent secretaries, needs to address the technical and cultural barriers to joint working. This will include making sure that the budgetary system does not penalise departments bidding to increase budgets in order to lower overall government costs; and creating incentives for departments to pursue novel proposals which cross departmental boundaries.

5.  High staff turnover and lack of commercial skills undermines the Treasury's ability to scrutinise departmental budgets effectively. Staff turnover in the Treasury is too high: 44 of the 52 staff that worked in the Treasury's spending teams covering the five departments we examined had left within 20 months of the Spending Review. On the Department for Energy and Climate Change team only one of the thirteen team members remained. In past hearings on the Private Finance Initiative we have raised wider concerns over the lack of commercial skills in departments and the Treasury. The lack of corporate memory, relevant skills and sector knowledge means that the Treasury is not as effective as it could be in challenging departments - allowing some to engage in game-playing, for example, by deliberately withholding information from the Treasury. The Treasury should be clear about the skills it needs to be effective in challenging departments on their spending plans and subsequent performance, and put in a place a strategy to secure and retain staff with the appropriate skills and experience.

6.  The Treasury remains unable to demonstrate how it is enabling departments to learn from past experience to ensure better value for money. There is little or no learning across departments and Treasury has yet to demonstrate leadership in this area. For instance, lessons learnt from PFI were not used to frame the contracts to transmit energy from off-shore wind farms. Treasury should consider how it will establish effective mechanisms to enable departments to use previous experience across Government in framing current and future programmes.

7.  There is too little external scrutiny in the budgetary process. Parliament does not examine spending proposals, which would help to drive up their quality. Select committees could provide more challenge to departmental spending plans but lack the information to do so effectively. The Treasury should identify what information it could provide to select committees to enable them to scrutinise departmental spending plans and discuss with the Liaison Committee what might be done to encourage select committees to undertake this work.

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Prepared 8 March 2013