1.  The Committee asked on 10 September about the changes in the Treasury's administration costs between 2001-02 and 2002-03. This note provides a full explanation of the profile for administration costs presented in Annex B of the departmental report, and also provides additional analysis of the information reported in other Annex B tables.

  2.  The data presented describe a stable core Treasury[5] that has seen a rise in administrative spending, mainly incurred as a result of moving from obsolete accommodation and the filling of vacancies.

THE TREASURY'S ADMINISTRATION COSTS, 2002-03

  3.  Table 1 below shows the core or central Treasury's administration costs from 1998-99 and ending in 2005-06, when the current spending review period ends.

Notes:

 (1)  Excludes the Debt Management Office and the Office of Government Commerce

 (2)  The rise in ongoing costs from £66 million to £73 million between 2001-02 and 2002-03 reflects the costs of filling vacancies (£5 million) and general inflation (£2 million). Full details are given in paragraphs 9 and 10 of this note.

  4.  Between 1998-99 and 2001-02 total Treasury administration costs were broadly flat at around £60 million to £65 million. The spike in administration costs in 1999-2000 is due to the writing down to zero of the value of the Treasury's former Parliament Street accommodation (Government Offices, Great George Street or GOGGS). This write down followed an independent valuation of the building's market value, in line with accounting standards (in particular, Financial Reporting Standard 11).

  5.  Total spending on Treasury administration costs increased by £27 million between 2001-02 and 2002-03. Of this £27 million, £16 million is costs related to the move to new accommodation, both recurring and non-recurring:

—  the recurring cost is the unitary payment to the Treasury's Private Finance Initiative (PFI) partner. This comes to £11 million in 2002-03, and rises in future years because the costs in 2002-03 relate only from the period when occupancy began, which was August 2002;

—  the non-recurring costs relate in part to a £3 million charge paid to the Home Office in relation to the lease on the Treasury's former secondary accommodation in Allington Towers, Victoria. This reverse premium was largely determined by the cost of the works needed to bring it back into its original condition. The Treasury also faced costs of removals, and of fitting out the new accommodation of around £2 million.

  6.  The Treasury did not pay any rent on its GOGGS accommodation and its market valuation of zero meant that no depreciation or cost of capital charge was payable, in line with best accounting practice. The total cost of accommodation for the Treasury—reflected in a small charge for the secondary accommodation in Allington Street—did not represent a sustainable position for the Treasury. The GOGGS building was in very poor condition—its valuation at zero reflecting its obsolescence. The capital cost of essential works to bring the GOGGS building to an acceptable standard (as estimated independently in 1999) was well above £50 million. Such works would simply have made the existing building safe for occupation, and would have done nothing to modernise the Treasury's working arrangements.

  7.  The National Audit Office have examined in detail the value for money aspects of the refurbishment project. In its report of November 2001, it noted the success of the innovative competitive funding scheme which produced savings of £13 million over the lifetime of the PFI deal—a view subsequently also recorded by the Committee of Public Accounts.

  8.  Another set of costs relate to the increase in core Treasury staffing, following the filling of vacancies. These costs increased by £5 million in 2002-03 as against 2001-02. As reported to the Committee the Treasury is now fully staffed for the first time in a number of years. [6]Staff numbers are expected to remain at current levels until the end of the present spending review period in 2005-06, but remain around or below the level following the completion of the Treasury's fundamental expenditure review in 1995, when the Treasury employed over 1,100 people, and below the annual average of around 1,150 in the 1990s as a whole.

  9.  There is also an additional factor which is a £4 million reclassification to administration costs from the capital budget. The reason for this is that some expenditure previously counted as capital is now classified as administrative expenditure because the threshold under which certain payments are defined as administration has been increased, in line with revised accounting policy agreed with the National Audit Office. This has no effect on total Treasury spending.

  10.  The staffing costs, along with a general rise in costs not separately identified in this note in line with the rate of inflation, account for the £7 million rise—from £66 million to £73 million—in ongoing costs at the beginning of Table 1.

  11.  In the years following 2002-03, the Treasury's administration costs continue at broadly the same level or slightly above. This is because although some of the costs associated with the new accommodation do not recur, the unitary charge increases to around £16 million to reflect its full year cost, rather than simply the period August to March as in the 2002-03 period. There is also the ongoing cost associated with the new staff recruited to fill previous vacancies. And, for future years, there is provision for some modest spending growth to support the Treasury's modernisation programme. The focus here is on further enrichment of the Treasury's skills mix and continuous modernisation of systems and processes.

  12.  All the expenditure incurred or planned for the period covered by the data is within the Departmental Expenditure Limit (DEL) for the Treasury, and expenditure incurred to date has been voted by Parliament.

OTHER DATA IN THE DEPARTMENTAL REPORT

  13.  To understand more fully the expenditure data reported in annex B of the Treasury's departmental report, it is important to differentiate the core Treasury—the organisation based in 1 Horse Guards—from other bodies included in its accounts. A key point to note is that the figures for HM Treasury presented in annex B of the departmental report actually include a number of items that are not related to the costs of running the core Treasury.

  14.  For example, as the Permanent Secretary's evidence to the Committee noted, more transparent disclosure of expenditure data through the application of resource accounting has an effect. In particular the resource numbers ascribed to the central Treasury include the Bank of England's capital charge and dividend, which are large and fluctuate considerably—the figure was a net credit (¸£15 million) in 2000-01 and a substantial charge (£109 million) in 2002-03. These charges relate to the fact that the Treasury, which is the Bank's sole shareholder, bears the shares of the Bank—which are valued in excess of £1 billion—on its balance sheet and thus incurs a cost of capital charge. [7]Also, the Treasury receives an annual payment in lieu of dividend from the Bank. The reasons for the volatility in the data are the magnitude of the investment, which means that any shift in the valuation of the Bank can have a significant impact on the charge, and the fact that the dividend depends on the Bank's financial statements, which, as with any organisation, will vary from year to year.

  15.  The numbers include:

—  expenditure and receipts incurred by the Office of Government Commerce (OGC), relating to its role in the management and disposal of the residual properties of the former Property Advisers to the Civil Estate in the late 1990s and in the early years of this decade;

—  expenditure relating to the Debt Management Office (DMO);

—  expenditure relating to the coinage supply;

—  the Civil List;

—  the salaries and pensions of UK members of the European Parliament;

—  grants-in-aid to certain Parliamentary bodies such as the Commonwealth Parliamentary Association; and

—  the costs of issuing UK honours.

  16.  The need for greater disaggregation in published data has already been noted by the Treasury's Audit Committee. The Committee, in line with best practice, was reconstituted earlier this year. It now has an independent Chairman from the commercial accountancy sector.

  17.  The detailed annex to this note aims to provide a much greater level of disaggregation and further explanation of changes in the numbers provided in Annex B, and the department commits to explaining in detail developments in the finances of the core Treasury as distinct from other entities in future reports to Parliament.

  18.  The Committee's attention is also drawn to the HM Treasury annual resource accounts, which were laid before Parliament in July 2003 with a clean audit opinion from the Comptroller and Auditor General, the head of the National Audit Office. These are available publicly on the Treasury's website. The accounts are compiled using UK generally accepted accounting practices (GAAP), set by the Accounting Standards Board (ASB) and adapted for Government following advice from the independent statutory Financial Reporting Advisory Board (FRAB). The accounts give a full explanation of all the transactions in the Treasury group over the past financial year, including the costs associated with the new building and its balance sheet treatment, the charges and receipts associated with the Bank of England and the Office of Government Commerce.

  19.  Attached to this note are:

—  Annex 1: a general, publicly available disaggregation of the data in Annex B of the Treasury's departmental report;

—  Annex 2: HM Treasury's resource accounts for 2002-03. [8]

  20.  The department hopes this information on both the specific question of the 2002-03 administration costs, and the wider issue of departmental data reported to Parliament, is of use to the Committee.

15 September 2003

6   At the time of the publication of the Departmental report, the split between pay and non pay costs in Table B5 of Annex B had not fully taken account of this. Back

7   The changes to the valuation of the Bank of England's asset base account largely for the changes in the investments line in Table B4 of the departmental report on total capital employed. Back

8   Not printed. Back