House of Commons - Treasury

Hansard

Archives

Research

HOC Publications

HOL Publications

Committees

Select Committee on Treasury Seventh Report

3 The Treasury as a central department

The challenge

45. In the "vision" which the Treasury Board agreed in January 2007, the department's future role at the centre of government was described as follows:

In 2011, the Treasury will continue to be at the heart of government: a strong, respected and professional economics and finance ministry. As a department, it shall provide consistently accurate and rigorous analysis and honest advice. It will actively encourage open debate, giving weight to the evidence and listening to, and challenging, its wide range of stakeholders. Stakeholders will view the Treasury as competent and prudent, as well approachable, understanding and collaborative.[121]

46. The Capability Review of the Treasury published by the Cabinet Office in December 2007 suggested that the Treasury still had some way to fulfil this vision. That Review concluded that "the Department needs to take early steps to tackle what is perceived by many to be a pressing need for greater inclusiveness and humility in its dealings with others".[122] In response, Mr Macpherson accepted that "a strong internal culture has the potential to impact both positively and negatively in our dealings with our stakeholders".[123] The published Review outlined several steps that the Treasury was taking in relation to this challenge:

The Treasury and the Cabinet Office are jointly developing a compact, setting out how the centre of government and departments will work together in partnership, including best practice on both sides;[124]
In response to a call in the Review for "a clearer and more formal approach to stakeholder engagement and management" and the construction of "a more open and consultative environment that listens and responds to stakeholder concerns",[125] the Treasury will, by mid-2008, develop and begin to implement a "coordinated stakeholder engagement strategy" across the Department;[126] and
Following a proposal in the Review to "consider a more structured and regular assessment of its reputation amongst its principal stakeholders",[127] the Treasury will "undertake annual surveys of stakeholder opinion … and commit to address issues raised within the surveys and report back to stakeholders on what we have done to improve".[128]

47. The Exchequer Secretary drew the Sub-Committee's attention to the many positive aspects of the Capability Review, characterising it as "an extremely good Capability Review".[129] However, she also agreed about the importance of Treasury officials demonstrating "a practical as well as an intellectual grasp of what is going on", drawing attention to efforts being made to raise staff skills across the Department.[130]

48. The Treasury's roles in allocating and controlling public spending and in acting as a guardian of propriety and economy in public services mean that it will never be universally popular amongst other Government departments and other stakeholders. While we would not wish the Treasury to become too inhibited in performing its role at the centre of Government, we welcome the steps that the Treasury is taking in response to the call in the Capability Review for "greater inclusiveness and humility" in the Treasury's dealings with others. We recommend that a summary of the results of the annual surveys of stakeholder opinion and the Treasury's response to stakeholders be published in the Treasury's annual reports. We further recommend that a summary of quantitative evidence from the survey conducted as part of the Capability Review be published in the Government's response to this Report, to serve as a baseline for measuring progress in the subsequent, annual surveys. We recommend that the Treasury take steps to address concerns expressed in the Capability Review to bolster the depth and breadth of their officials' practical experience.

Managing the efficiency programme

49. With effect from 1 April 2007, the team within the OGC responsible for monitoring the efficiency programme across Government was transferred to the Public Spending Directorate of the Treasury.[131] The transfer reflected the Treasury's view that the Government could "mainstream efficiency as part of routine departmental financial management".[132] In June 2007, we noted that, prior to April 2007, the OGC had acted as an agency outside the Treasury mainstream to support and monitor the efficiency programme and that there were "signs of a reversion to a more traditional Treasury approach in the future".[133] We recommended that the Government "ensure that a coherent framework for the verification and reporting" of efficiency savings be established for the period beyond March 2008 and set out the details of such a framework in publishing the 2007 Comprehensive Spending Review.[134]

50. At the time of publication of the Comprehensive Spending Review, no additional information was provided about the proposed role of the Treasury in the central management and monitoring of the efficiency programme for the period from 2008-09 to 2010-11. The Treasury's Departmental Strategic Objectives issued in December 2007 provide little more information, stating that:

Departments are responsible for ensuring delivery of their … Value for Money … commitments. The Treasury's role is one of support and challenge in helping them to deliver.[135]

Mr Macpherson indicated in evidence to the Sub-Committee in November 2007 that the Treasury would not allow savings to be recorded as efficiency savings unless departments could prove to the Treasury that service standards had at least been maintained,[136] but the Government has not yet responded to our recommendation that it clarify whether this practice will continue beyond March 2008.[137]

51. Our own uncertainty about the exact role of the Treasury in relation to the post-2008 efficiency programme appears to be shared in part by others. The Capability Review of the Treasury stated:

Other government departments and stakeholders are particularly unclear about [the Treasury's] role in securing better value for money in other government departments and how this will operate in practice.[138]

We are not convinced that the Treasury's Public Spending Directorate is suitably placed to play an effective role in supporting and challenging departmental efficiency programmes. It is not evident that a role in questioning the validity of claimed efficiency savings is compatible with the task of ensuring that public spending limits are adhered to. The Capability Review of the Treasury demonstrates that our uncertainty is shared by others. We recommend that the Treasury clarify its own role in relation to the efficiency programme for the period from 2008 to 2011 in a swift response to this Report.

Financial management in Government

52. One of the Treasury's objectives is to "achieve world-class standards of financial management in government".[139] The Sub-Committee has considered progress in relation to this objective by examining three specific issues—the quality and timeliness of departmental Resource Accounts, the position of qualified Finance Directors in Government departments and the relationship between objective-setting and resource allocation.

53. Audited Resource Accounts may only be published when they have been laid before the House of Commons in final form by the Comptroller and Auditor General on a day when the House of Commons is sitting. The Treasury has long held the objective of securing that all departmental Resource Accounts for the preceding financial year are laid before the House before the Summer recess, thus preventing a long delay before publication.[140] There has been substantial progress in this direction: in 2005-06, 42 of 49 departmental Resource Accounts were laid before the Summer recess, compared with 25 in 2004-05 and 10 in 2003-04.[141] In 2006-07, the proportion rose further to 47 departmental Resource Accounts out of a total of 51 published before the Summer recess.[142] Progress in improving the quality of such Accounts, measured by the number of qualified audit opinions, has been less steady, with six qualified Accounts in 2005-06, compared with two in 2004-05, four in 2003-04 and eight in 2002-03.[143] We welcome progress by the Treasury, other Government departments and the National Audit Office towards the objective of laying all Resource Accounts before the House of Commons before the Summer recess. We look forward to further progress on the quality of such Accounts measured by the number of qualified Accounts.

54. In seeking progress in professionalizing financial management within Government, one measure that the Treasury has used has been progress in appointing professionally-qualified Finance Directors in departments. In 2003, only 20% of those Directors were professionally-qualified. By the autumn of 2005, this proportion had risen to 60%, and Ms Keegan told the Sub-Committee then that her objective was for all departments to have professionally-qualified Finance Directors by December 2006.[144] In October 2006, she told the Sub-Committee that the only two significant spending departments without professionally-qualified Finance Directors were the Foreign & Commonwealth Office and the Ministry of Defence, but she also indicated that recruitment processes for both posts were underway.[145] In those circumstances, it was somewhat surprising that, in June 2007, the Treasury reported that the Ministry of Defence had yet to appoint a professionally-qualified Finance Director.[146] Mr Macpherson assured the Sub-Committee that he had raised the issue with his counterpart in the Ministry of Defence, and the Treasury has apparently received an undertaking that the next Finance Director of the Ministry of Defence will be professionally-qualified.[147] We expect the Government, in its response to this Report, to explain why the Treasury's objective for the appointment of professionally-qualified Finance Directors in all departments by December 2006 was not met. We further recommend that a relevant accountancy qualification be described as an essential criterion in all future advertisements for posts of departmental Finance Directors.

55. As part of what it terms the "finance professionalism agenda", the Treasury has stated that it will promote the development of the finance community in government by "strengthening the capability and capacity of finance professionals" and "supporting and enabling departmental Finance Directors and other senior finance professionals to improve financial and performance management through government".[148] The increasing professionalisation of the finance function within Government as a whole should lead to greater demands upon the Treasury in its relationships with Finance Directors and other senior finance professionals. The Capability Review of the Treasury found that "Other government departments' finance directors, in particular, are looking for greater collaboration and support in capability building, joint problem-solving and sharing best practice".[149] We recommend that the Treasury identify a method of measuring its success in its own role in supporting improvements in financial management across Government, such as the annual survey of stakeholder opinion, and report on performance against that measure in future department annual reports.

56. One clear indicator of progress by the Treasury and Government as a whole in financial management would be the establishment of a clear linkage between the objectives the Government sets for itself and the allocation of resources. Mr Macpherson believed that the quality of the process in this area had "improved hugely" in the previous seven years:

I think departments have far greater focus on their priorities and, consistently with the Better Financial Management agenda, we are getting far better at understanding how our resources break down across the PSA set.[150]

We have previously expressed concern that the Delivery Agreement accompanying the 2007 PSA relating to Child Poverty provides insufficient information about the linkage between targets and the resources available to meet those targets.[151] The Sub-Committee put it to Mr Macpherson that, despite claimed progress, there were few signs of resources being linked to individual PSA Agreements announced at the time of the publication of the 2007 Comprehensive Spending Review. He replied that the nature of departmental responsibilities made it inevitable that some resource reporting would be on a departmental basis and he conceded, based on his own experience at the Treasury, that "there is always a tendency to plan around organisation rather than objective". However, he hoped that, "over time, we can strengthen both planning and reporting around the PSA itself. I think the [2007] CSR was a step improvement."[152]

57. The new performance management framework announced as part of the 2007 Comprehensive Spending Review, which we have considered in detail in previous Reports, was intended to distinguish more clearly than previous frameworks between the Government's "over-arching and main priorities"—expressed in cross-departmental PSAs—and the Government's "business as usual"—expressed in Departmental Strategic Objectives.[153] The extent to which further progress is still required after these changes is hinted at in the call in the Capability Review of the Treasury for the Treasury to "clarify the overall performance management framework for government and then work with departments to implement it in a consistent and risk-based way".[154] We are disappointed by the absence of any meaningful information in Delivery Agreements accompanying the new Public Service Agreements for the period from 2008-09 to 2010-11 about linkages between delivery against outcome indicators and the resources to be applied to each Public Service Agreement. This indicates that there is still some considerable room for improvement in financial and performance management within Government. We recommend that the Treasury set itself a target to ensure that the Public Service Agreements finalised as part of the next Spending Review in 2009 or 2010 include a clear statement about the resources to be allocated across Government to the delivery of each Agreement.

Financial reporting

58. In the 2007 Budget, the Government announced that, from 2008-09, Government "accounts will be prepared using International Financial Reporting Standards (IFRS), adapted as necessary for the public sector".[155] One of the Treasury's priorities for 2007-08 identified in its 2006-07 departmental annual report was to publish a new Government Financial Reporting Manual based on IFRS.[156] In June 2007, the Treasury stated that the new Manual was due by the end of 2007, following consultation with the Financial Reporting Advisory Board (FRAB) and others.[157] In October 2007, we learned that some important issues were not yet resolved between FRAB and the Treasury,[158] and, in mid-November, Mr Macpherson's evidence to the Sub-Committee hinted at possible delays to the timetable for implementing IFRS:

We are committed to applying IFRS. There is an issue around precisely how quickly you can do it, but we are committed to doing that; we are having discussions about it and I am confident that we can do it.[159]

In early January 2008, the Exchequer Secretary said the following about the timetable for implementation:

Work has certainly been done to shift towards this accounting standard in line with the announcements that were made at the Budget. There is a great deal of work still left to do, but it appears to be on track in terms of the announcements that were made at the Budget … It has all got to be done for the start of the new financial year, and that is the target that people are working to.[160]

59. One of the outstanding issues as yet unresolved is the treatment of Private Finance Initiative (PFI) assets under IFRS as applied in the United Kingdom public sector.[161] At the time of the 2007 Budget, we were told that around 54% of PFI liabilities and devolved administrations were off-balance sheet.[162] By September 2007, the proportion off-balance sheet had risen to 58%.[163] In March 2007, Treasury officials were non-committal on the likely impact of the switch to IFRS on the effects of PFI assets and liabilities on public sector balance sheets.[164] In December, the Sub-Committee was told that

No accounting standard yet exists which sets out how the public sector should treat PFI. Until this standard is finalised and agreed with external accounting bodies it is not possible to calculate the balance sheet impact of the move to IFRS.[165]

Mr Macpherson nevertheless told the Sub-Committee that his "guess" was that the application of IFRS would increase public sector net debt.[166]

60. The Treasury's timetable for the changeover of central Government accounts to IFRS, as modified with the approval of FRAB, is for this to take place in 2008-09. In this context, the absence of final confirmation of the accounting rules that will apply is striking. In certain areas, particularly the National Health Service, knowledge of the accounting rules is required to calibrate the funding system and therefore the delays in finalising the PFI accounting rules may pose operational problems in 2008-09 because of the relationship between budgeting, accounting and financial duties such as statutory break-even requirements.[167] If the changeover does lead to reduced timeliness in 2008-09, or to a significant increase in the number of audit qualifications, or both, this might put at risk the latest timetable for the publication of the first Whole of Government Accounts in 2008-09.[168] The accounting rules also may have implications for the calculation of performance against the Sustainable Investment Rule. We will continue to examine the implications of the implementation of International Financial Reporting Standards for Government accounting and for the national accounts.

Financial authorisation and the "line of sight" initiative

61. In June 2007, we drew attention to the disjunction between the resources of Government that the House of Commons is formally expected to authorise through the Estimates process and the spending totals set out in Spending Reviews. We recommended that the Government set itself the ambition of moving to a new system of authorisation linked more closely to the system for the planning and control of public expenditure.[169] The Government responded swiftly and positively, announcing in The Governance of Britain Green Paper in early July 2007 its commitment to moving to a system of more consistent reporting on departmental budgets set in Spending Reviews, in annual Estimates and in resource accounts.[170] However, in October 2007, the Treasury indicated that there would be a process of consultation and that changes were unlikely to be implemented before 2009-10 at the earliest.[171] Mr Macpherson told the Sub-Committee in November:

I am pleased to say that the Prime Minister made a commitment at the time he was appointed to a better line of sight from accounts through to estimates and so on and we are definitely on the case … There is potentially a win-win here, where Parliament can secure better assurance about how money is spent and we can have a more efficient accounting system. We are not there yet, but we really want to make progress.[172]

The Chief Secretary wrote to the Chairman of this Committee on 19 December indicating that a Steering Committee and Project Board for the initiative had been established, and that planning and consultation was underway with a view to implementation from 2010-11 onwards.[173] We welcome the Government's positive response to our recommendation relating to improved alignment of parliamentary authorisation of public expenditure and the planning and control processes for such expenditure within Government. We look forward to examining progress of this "line of sight" initiative as it develops and, as part of this examination, we expect to consider whether the proposed timetable for implementation could be expedited.

121 HC (2006-07) 518, para 1.13, p 24 Back

122 Capability Review of HM Treasury, p 26 Back

123 Ibid., p 5 Back

124 Ibid., pp 6, 23 Back

125 Ibid., p 26 Back

126 Ibid., p 7 Back

127 Ibid., p 26 Back

128 Ibid., p 7 Back

129 Q 537 Back

130 Q 539 Back

131 HC (2006-07) 518, para 5.4, p 64; HC (2006-07) 279, para 75 Back

132 HM Treasury, Transforming Government Procurement, January 2007, para 2.17, p 20 Back