Finance Committee,

Meeting date: Tuesday, May 4, 2004

Official Report 289KB pdf

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Budget Process 2005-06

Agenda item 2 is further consideration of stage 1 of the budget process 2005-06. I welcome Professor David Heald from the University of Sheffield and Professor Irvine Lapsley from the University of Edinburgh, who have agreed to give us their thoughts on the annual evaluation report. Perhaps it would be best to hear both witnesses' opening statements, after which we will proceed to questions.

I will make a number of comments. In preparing them, I have used the first annual expenditure report, from 2000, as a useful reference point in seeing how far we have travelled in dealing with such documents.

I will comment on the new annual evaluation report's format and style, which are important. The declared intention is to encourage comment on the Executive's spending plans by members of the Parliament and by the public, but the document is 111 pages to download, which is inhibiting and makes comments unlikely.

We see quite a few differences from the annual expenditure report of 2000. From 2000, I especially liked “Investing in You: Summary of The Annual Expenditure Report of the Scottish Executive", which reaches parts that other documents might not reach. The document is small and accessible. I did not obtain such a document when I downloaded the annual evaluation report.

The AER of 2004 is much denser and is packed with more detail on objectives and targets. It also contains more narrative, which some people would welcome. It has a more comprehensive index, which many people will also welcome. It also has an interesting glossary, which is helpful. However, it could go a stage further in examining ministers and their responsibilities by having a statement about how targets sit within budgetary responsibilities. The whole thing is about targets and how they relate to services, and the targets seem to be much clearer in the current annual evaluation report than they were in the 2000 annual expenditure report. In particular, there are fewer of them. For example, there are 12 targets for health and community care as opposed to 16 in 2000.

I also like the classification of whether targets have been met, are on course to be met or are experiencing slippage. That is a significant enhancement, and the AER is making progress. However, if we consider what confronts members of the public or MSPs who wish to examine what the document tells them, we see that there are major difficulties in trying to tease out the relationship of priorities to allocated resources and outcomes—I can return to that, if you wish. It is quite tricky to tease out what is happening in public services.

The annual evaluation report is a helpful document for doing the sums. It is rather large and dense and, although there are definitely things about the document that make it more accessible to someone who knows what they are looking for, it might be quite inhibiting for others to comment on where the stage 1 budget process is going.

I agree with much of what Irvine Lapsley says. I was a member of the financial issues advisory group in 1998 and I am pleased with the way in which the Executive and the Finance Committee have taken on board the spirit of what FIAG wanted. The budget process in the Scottish Parliament is totally different from the experience in the Westminster Parliament. I am a specialist adviser to the Treasury Select Committee and one can learn far more about what will be in the budget by reading what has been leaked to the Financial Times than one can from any consultation process at the Westminster Parliament, so there are many good aspects of the Scottish Parliament's budget process.

When I looked at the draft budget for 2004-05 and the annual evaluation report 2005-06, it struck me that the documents are much more of a style—much more similar—than I had expected. I understand Irvine Lapsley's point that a short, brief document might be more accessible to members of the public, but I would think that what the committee wants at this stage of the budget process and what is best for public presentation might not be the same. The committee needs to get some sensible overall priorities, and there is far too much detail about parts of the budget that do not incur great deals of expenditure. It is almost as if every department has an entitlement to a certain number of pages and targets, whereas the big money and big political issues are in a restricted range of portfolios. At this stage, one needs much more focus on where the big numbers and the big and difficult policy decisions are.

One does not get much sense of the financial context of the Scottish budget from the budget documents. I am extremely embarrassed that, in the late 1990s, I published a lot of papers in academic journals saying that the Scottish Parliament would be pretty short of money when it was established. Essentially, that is what everyone expected in the late 1990s. Instead, there has been a torrent of money down the Barnett pipeline over the past five years, but that will stop. The spending review 2004 will be difficult.

I listened to the evidence-taking session on public sector relocation. During that, nobody mentioned the targets for efficiency savings and big reductions in public sector jobs, although one obvious question to ask is how the Treasury will reflect that in the spending review. Perhaps it will do that through an across-the-board reduction in departments' budgets, which has never happened in the post-devolution period. In a sense, that would be a form of Barnett-formula bypass that would be damaging to the devolved Administrations.

At this stage of the budget process, I would have expected something that was more concerned with the financial context of the budget, and with how to deal with a switch from a position in which everybody is embarrassed about having to use so much end-year flexibility to one over the next three years in which resources are likely to be in pretty short supply.

The committee has struggled to get the Executive to give us information about the run-on costs of policy decisions or the introduction of bills over a two or three-year period, so that one can anticipate the level of need and the financial consequences and build those figures into the equation. We have the impression that we are given a snapshot, with no historical data or projected data to let us know the financial consequences of decisions that have been or are about to be made or the implications for other decisions that could be made. Is the aspiration to move towards that kind of data the right aspiration? Do you know of anywhere internationally where the budget process is sufficiently transparent for that to have been achieved?

The aspiration is entirely admirable and should be pursued. The Executive has faced the difficulty that devolution coincided with big changes in the UK public expenditure system, with a move to departmental expenditure limits and annually managed expenditure and the two-stage conversion to resource accounting. In my research, I have tried to chain-link different spending review settlements to show how you get from the assigned Scottish budget in 2000 to the assigned budget in 2002, and then prospectively to the assigned budget after spending review 2004.

There is an awful lot of noise in the system to do with classification changes and measurement changes. For technical reasons, and because of Treasury domination of the expenditure control system, it is difficult to get a run of expenditure data. With the old commentaries on the Scotland programme that the Scottish Office used to publish in the 1980s, the Scottish Affairs Committee at Westminster managed over a period of time to get the Scottish Office to publish historical data. The great difficulty is in seeing how expenditure has evolved and in seeing future projections. One needs to avoid examining too short a window of expenditure to get a longer historic series. It has been a particularly difficult time.

Clearly, the Treasury is keeping tight to itself what will happen in the spending review 2004. In a sense, the Executive does not know exactly what will happen, but the committee has to put pressure on the Executive to get it to divulge the best data that it can put together.

I agree with David Heald's comments. The task is difficult, and not only in relation to historical data. We have to understand how information has been systematically collated, analysed and presented. Unravelling that is a major exercise. There is the capacity to make forward projections. One is at the whim of competing priorities when there is a pressure point in the budget, but there is the potential to produce projections on the likely impact of expenditure.

The convener asked about an historical record, but obtaining that is difficult. With such records, one is often dealing with things that are unstable. Policy targets shift—they have even shifted over the past four years. A system can be set up to capture data to measure and track targets, but it could all change, so the system is not robust. I sympathise with people who try to produce information on public expenditure for the public domain. We should recognise the difficulties of having high expectations.

I am delighted that you are both here at the committee. I am excited about the work that you are carrying out—we are in a process of change.

I have a specific point that comes from my experience over the past year of dealing with many local constituency groups that receive the cash. The design of the process is front-ended. In a way, this comes back to what Professor Lapsley said about the brief document that was published. Many of the local groups that receive Executive funding and deliver on the ground want to get past that brief document very quickly. They need to have information on processes, the timing of budgeting and the budget cycle—they need to understand the process.

Professor Lapsley said in his research document that MSPs have a limited grasp of the budget process, but many local groups have even less understanding of it. If we want such groups to be involved in the process and feed that up the chain, we must address that. How can local groups feed into the budgetary process? Currently, they have great difficulty in doing so.

The most obvious route in is through the target-setting process. That would be a way to comment, influence the process and shape things. We are talking about work in development. We have refined the work on target setting, although I would not say that we have arrived. You have introduced another dimension, which is the wider stakeholder interests. The target-setting process would be the most obvious route in for groups to say what they want and how to get there, but for the reasons that we have mentioned, it is difficult to relate such targets to expenditure. It is difficult to set a target, identify a programme of expenditure and establish how it impacts on the target. Considering targets individually or in aggregate might not capture the entirety of what a programme is about. However, the target-setting process would be an obvious point of entry for people who are keen to be involved in the process of setting the budget.

You said that there were closer linkages in the 2000 report. Can you explain what has happened? Perhaps we have moved back a step.

We have not quite gone back a step. My comment on the closer linkages is that the 2000 report had clear sets of objectives and targets and also tried to weave in the expenditure. If you are numerate, it is clearer. The benefit of the current annual evaluation report is that there is greater explanation, which some people might be more comfortable with, but that is just my take on it.

I think that the 2000 report made a more deliberate attempt to link objectives, targets and expenditure than the 2005-06 annual evaluation report does. In the current AER, there are targets and there is a current programme of expenditure, but the big issue is how one relates to the other and how we make sense of it. That is the challenge.

Let us put the issue into context: establishing such linkages is the biggest challenge that faces any public sector organisation, whether it be the Executive or local health trusts.

A combination of finance experts and public relations professionals can design good explanations of the numbers and how the process works in short, brochure-form documents. One is lucky because now one can make references to what is available on the web. Life is much easier than it used to be in respect of disseminating information to people who want to find it; it used to be difficult to get documents.

The problem with involving local groups is that the groups that are interested are probably those that want to spend money, who are likely to be disillusioned if they do not get as much money as they want. One of the messages that one has to put to people when consultation takes place is that there is an overall spending envelope and the money is constrained. If more money is spent on skills, less money will be spent on something else. Not only because of the method of funding the Parliament—although that is relevant—in essence the message is that resources are constrained and people have to make choices.

I believe that you both accept the AER's priorities. Professor Lapsley said in his written submission that

"The four key challenges are hard to contest as strategic priorities for Scotland."

If we take that as given, and if we are to see a difference in outcomes and outputs, many of the deliverers will be local bodies, such as NHS boards, local authorities and voluntary organisations, which are in receipt of funds and want to be in receipt of more. With the experience of the financial issues advisory group and so on, how do we shape the budget process to bring in local deliverers such as local authorities and NHS boards? The boards—which have a non-executive element to reflect local circumstances—and local authorities might choose priorities that do not match the overarching Scottish Executive priorities.

It is hard to contest objectives such as growing the economy or achieving excellence in public services, because they are so broad and laudable—no one would dispute them. They are things that everyone in the community should want. The real issue is about moving from the broad, high level, ambitious statements that we as a country should want, to getting policies to work and establishing linkages. That is where the difficulty comes in. Essentially, Jeremy Purvis is pleading for a more bottom-up approach to setting the budget, as opposed to the Executive's top-down approach. It is difficult to have a bottom-up approach with a centralised Government service such as the health service; it is much easier to have such an approach in parts of other public services.

I find it hard to contest the strategic objectives; I would not do so and I believe that most people would not do so. The next stage is to establish linkages to targets, and some kind of bottom-up involvement, which raises issues about the entire process. All the FIAG indications were that there should be some kind of public involvement, but we should acknowledge that it is very difficult to do that.

I am particularly interested in the emphasis on organisational and process targets that permeates the AER. Some 36 per cent of the targets are organisational or process targets. Is there merit in having such targets?

There are issues about volume and about how meaningful the targets are to the people who must deliver them, which is fundamental. There is also an issue about how all the targets sit together; often, they do not do so. If we asked whether AER targets represent the objectives of, for example, the NHS in Scotland, it would be hard to aggregate them and state that they capture those objectives. That is not a criticism, but a statement about how difficult such a task is. Targets have their place, if they are applied with sensitivity.

A sensible approach is to change processes and try to improve public services. When we go for targets that can be quantified easily and quickly, there is an issue about displacement—I cited examples of that in my written submission. Other targets are incredibly difficult to deliver on. For example, there are health targets to reduce smoking and alcohol consumption, which are clearly about individuals' lifestyle choices. I would find it difficult to hold the Minister for Health and Community Care accountable for such matters. It is difficult to tie broad overarching aims to targets. I see no problem in having process targets, which improve services.

To continue on that, our adviser broke down the targets into three broad categories: output, outcome and organisational targets. My view is that outcome targets that do not have quantifiable achievement criteria are really output targets. Should we have fewer outcome targets and have them tend towards the macro level of managing the health and well-being of Scotland's social and economic fabric?

The key is to establish a hierarchy in which all the targets interrelate. That is the challenge that we face. Non-quantifiable outcome targets are entirely legitimate. I have not seen the committee adviser's paper, but measurement of output in public services is fraught with difficulty. We end up with hybrid measures that are often input derived, or some other variation. The idea of organisational targets is interesting if we are trying to track results and responsibilities.

The number of targets is an issue. David Heald made an interesting observation about the size of the budget document and whether every part of the entity that is the Executive should have the same space in it. A case can be made that the budget should be more targeted on big spend and that it should examine more elaborate relationships between outcomes and targets.

I believe in targets—they are useful. However, at the end of the day, there will always have to be an informed political and managerial judgment about the combination of targets that is used. We all know that whenever the higher examination results get better, the exams must be getting easier and that whenever the results get worse, the education minister should resign. We must guard against such cynicism about targets. Targets are useful, but they cannot substitute for informed judgment. It is incredibly difficult to measure whether student performance is improving or whether standards are getting lower. We must be careful not to put too much emphasis on targets, and we must regard them as a useful benchmarking exercise and not as a substitute for political and managerial judgment.

Let us consider the absence of a target. Overall public expenditure in Scotland has increased by 41 per cent since 1999, but the spending on the number 1 target—economic growth—has increased directly by only 19 per cent, and by 22 per cent if we take into account related support activity. Last week, Andy Kerr in effect told the committee that the Executive should not sign up to targets over which it has no control. I note the absence of a specific target on economic growth and that Andy Kerr is reluctant to take on such a target. What could we do to remedy that situation and achieve a focus on economic growth that would be meaningful and transmittable down the pyramid that Professor Lapsley described?

If I try to look into Mr Kerr's mind I can, in a sense, see where he is coming from. A strong relationship exists between the efficiency of the public sector and the aim of economic growth, but many issues to do with economic growth are entirely beyond the Minister for Finance and Public Service's control. We are in a global economy. In recent times, we have felt a cold draught or whatever many times. Some levers are beyond the minister's control. There is a sense in that there should be aims in respect of those, but not measurable targets. The key way in which we can promote economic growth is by having efficient public services and by trying hard to ensure that we deliver value for money for every pound that we spend. That is how I would try to make progress.

That relates back to the point that Professor Heald made about the absence of targets on savings and efficiencies in the public sector. We are between a rock and a hard place: we have aspirational rhetoric on growing the economy, but no tangible measures to squeeze out savings and efficiencies in the public sector. Without real targets that create the pressure to squeeze out efficiencies, I fear that efficiencies will never be garnered.

Before I answer that question, I return to the previous one and associate myself with Professor Lapsley's comments. The best thing the Scottish Executive can do is improve the efficiency of Scottish public services and their basic human and physical infrastructure. I am not sure how to classify which expenditure is to promote economic growth and which is not. Within the current constitutional setting, it is much more important for the Executive to concentrate on what I regard as its core tasks.

The point that I made about efficiency savings was a criticism not of the Executive, but of the UK Government. The efficiency savings that are proposed by the Gershon review and which were leaked in advance of the budget were magic numbers that were intended simply to make spending pressure look less acute. If you are asking me whether the Executive should concentrate on improving the efficiency of public services and of the state administrative machine in Scotland, my answer is yes, absolutely. However, that is an on-going task. I am much more convinced by a strategy in which that is seen as an on-going task than I am by rhetoric around the time of a budget.

Do you have any thoughts about how we can liberate more efficiencies and savings from public services?

That can be done only by long-term hard graft. Among the tensions that emerged from the previous evidence session was the tension between the social reasons for job relocation and the business efficiency of government. An obvious question is: How great are the up-front financial costs of relocation and the costs in disrupted service provision? I accept that taking activities out of Edinburgh—like taking activities out of the south-east of the England—makes long-term economic sense, but if there is enormous staff turnover at the time, there can be a conflict between relocation and improving efficiency of services as we go along. Politicians are always accused of using short time horizons. Given the remarkably big increases in public spending that have taken place over the past five years, results must be seen now, rather than in five years. I would not want relocation of public sector jobs out of Edinburgh to happen at the expense of efficiency of service delivery.

I have studied the public sector in Scotland over the past 20 years. For much of that time there have been pressures. The pressure for efficiency gains and cost savings has been relentless. We enjoy some economic success and there have been reverses, but those are very recent. Part of the story is the attempt to get a set of robust measures that can inform people—not only members of the committee, but managers at the top and middle levels of the public services—about how they are doing. So far, that goal has been elusive for all concerned, but it is the key to moving forward. I see the AER as contributing to progress in that.

It is comforting to have the experts emphasise the complexity of what the committee is trying to do. I want to take a step back and to seek advice.

The difficulty that the committee has is that it is trying to perform two functions. The first, to which you point, is to meet its straight financial accountancy obligations and to determine what is being spent. David Heald and others have pointed out that considerable progress has been made towards meeting the aspirations of FIAG—four years on from the first Scottish budget, there is a high level of transparency.

There is a difficulty with trend data; you rightly point out that the level of change in public accounting is the reason for that, but there is movement. The first question is about what is being spent, and we can be pretty optimistic about that. The second question asks what is being achieved for that spend, in relation to tracking performance review. Given the resource-constrained environment, that question will become increasingly significant during the second session of Parliament.

In England, the Treasury Committee focuses on financial accountancy—what is being spent. The Public Accounts Committee has done most of the work on performance review and outcomes. I ask you, as experts who know both systems, whether is it possible for one committee to perform both functions effectively; that is, to track what is spent and what is achieved with that. If that is possible, how do we set an agenda for the Finance Committee around that second objective? The most effective committee work happens where such objectives about what we are trying to achieve exist. You have both worked with other committees, and I would welcome a top-level view. Is it appropriate for one committee to perform both functions? If we accept that we have made considerable progress on the first function, what is the best way to pursue the second objective, and what should our role be in that during the second session of Parliament?

I agree with your earlier comments about FIAG and about transparency— we have certainly made significant progress with that.

It is a tough call. The Audit Committee has the support of the Auditor General for Scotland; it is much more investigative and has considerable resources with which to deliver on that investigative role. The Finance Committee is well advised, but the Audit Committee has a quite exceptional resource and there is rigorous scrutiny of what is spent, although there might be a wider issue about engagement throughout the Parliament and about people not relating to the documentation.

If the committee's aim and desire is to consider value for money and what is delivered on services in more detail—which, to David Heald and me, is key to the future success of the Scottish economy—an obvious institutional arrangement would be to bring together audit and finance. That would provide a powerful body that would be able to consider all the issues that you mentioned.

I disagree with that. I think that there is a useful distinction between the role of the Finance Committee and the role of the Audit Committee. The public accounts committees in Westminster and Northern Ireland are serviced by the public auditor and, as a rule, party partisanship is pretty minimal. Essentially, the committees perform an entirely parliamentary function. Although I have criticisms of the way in which the United Kingdom system works, that basic idea is correct.

At Westminster, the Treasury Committee has a macro-monetary role, and much of its activity relates to matters that are not devolved to the Scottish Parliament, such as the euro. The advantage of the Finance Committee's being separate is that it can get more political in its discussions about expenditure priorities or job relocations, which are intensely political areas. There is much more to be done on the distinction—which Wendy Alexander made—between getting accounting right and ensuring that there is transparency in that accounting.

We do not know as much about the operation of the Barnett formula; we do not know about comparable expenditure in England and the UK Treasury never understands the questions that are put to it. There are important issues there. Furthermore, the Finance Committee has an important role in orchestrating or bullying the functional committees of the Scottish Parliament into taking an interest. Inevitably, the performance of those committees will differ with respect to how involved they are in responding to budget issues. There is a useful separation of roles there.

Those are very helpful observations. We might come back to you on the subject, because it goes to the heart of the dilemma in what the Finance Committee does.

We are about to hear from Executive officials. To some extent, we need to be led by the Executive. We are struggling with the question of whether one set of documentation can fulfil two functions: being the key instrument of providing financial accounting transparency; and fulfilling the management accounting function of measuring improvement and performance in public services. That has become a live issue for us in recent months—it can cut either way. We will probably come back to you to seek advice on how we should manage the issue in the light of the Executive's views.

I was going to cover similar issues. You have touched on the fact that the documents have high-level aspirations, which have changed since the partnership agreement was signed a year ago. The targets that were inherited from the spending review 2002 had been identified from a different set of priorities. You have commented that the current priorities are not desperately different to what the Executive wanted to do previously; they are just expressed differently.

Our problem is to do with linkages. We know what the Executive is trying to do. The targets are set out for us, but it is difficult to assess whether those targets are the best way to measure whether aspirations are being achieved. It is difficult to link targets to how money goes along the various pathways in order to achieve them. Is the information available that would allow us to do that? Is it a matter of presentation, which, as you have commented, has changed? Is there enough information in the public domain for us to see those pathways and for us to be able to make judgments as to whether value for money is being achieved, which is one of our functions?

The way I see it, there are essentially two different streams of information. First, there is a stream of information about the targets that have been set. That is very useful, although some of the targets are beyond the control of the ministers concerned, which is important. The targets are important for tracking what is happening in public services.

Secondly, on the financial side—as Wendy Alexander said—it is a matter of scrutinising what has been spent, how it has been spent and whether it has been spent appropriately. That does not necessarily tell us whether the money has been spent well. To judge whether it has, one must somehow connect the financial numbers with the targets, which is difficult. The targets are inherently unstable and the accounting system is not designed to capture that information. As an accountant, I say that it is very hard to capture precisely the information that would inform the targets as you would like it to do.

My take on the AER is that it is an important progression along the road to improved performance management information. It is a step in the right direction, but we are not quite there yet and we should recognise the difficulties that are involved in getting there.

There are also issues around public services. In your preliminary remarks, you commented on the importance of public services to economic growth. We have heard from other commentators, who have said that Scotland is over-reliant on public services. The debate about the number of civil servants who are employed by the Scottish Parliament, for example, is partly about the Parliament employing people directly, rather than contracting out jobs that are contracted out in other legislatures. It is not necessarily my view that Scotland is over-reliant on public services, but I would like to hear your comments on whether the Scottish economy is over-reliant on public expenditure and public services.

The point that I was trying to make was that the key lever for the Minister for Finance and Public Services is the public services lever. The economic growth lever is kind of wonky. He can pull it, but he does not know what will happen; there are too many intervening variables that might confound his aspirations. Public services are the key lever, but even in respect of those it is not the case that one can just pull and things will happen as you want them to. Nevertheless, that is the focus.

The size of the public sector gives rise to an interesting debate about whether or not the public sector in Scotland is too large. We might need a considerable time to answer that question.

Thanks to the work that the Scottish Executive has done in the context of "Government Expenditure and Revenue in Scotland 2001-02", we know a lot more about the size of public spending in Scotland. I refer the committee to a paper that Andrew Goudie published in Scottish Affairs in November 2002, which has time-series data of Scottish public expenditure in relation to gross domestic product. Much better information is available about Scotland than about Wales, Northern Ireland or the English regions. Thanks to the work of the Executive, we have much better information.

Scottish public expenditure is substantially higher as a proportion of GDP than is the case for the UK, but it is equally true that public expenditure in most of the English regions—as well as in Scotland, Wales and Northern Ireland—is also much higher than the UK figure. Essentially, it becomes an argument about the structure of the economy and the role of the public sector, which goes beyond what we are talking about today. However, whatever decisions are taken about the size of the public sector, running that part of the public sector that is devolved as efficiently as possible will allow more services to be provided to the people of Scotland than would be provided if it were run inefficiently.

I suspect that, in the earlier evidence session, there was some confusion about Executive employment figures. I suspect that all sorts of classification issues mean that some jobs, possibly related to prisons, are being included in the Executive figures but were not included in previous figures. I would be suspicious of such numbers without checking what classification changes have taken place.

I have three fairly basic questions. First, what aspects of the Scottish budget are flexible enough to be changed? Are you able to respond to that?

That is an inherently political question—it is for policy makers to decide where they want to switch resources. I would have thought, looking at the declarations and at where this Parliament has come from, that the primary areas with which people would identify are health and education, which would mean that other parts of the budget would have to be considered to be flexible. I cannot give a specific answer. To say whether an area is more flexible than others is acutely political.

Are there programmes that you consider to be overfunded or underfunded? Are you able to answer that?

One cannot say, on the basis of the information that we are considering, whether some areas are acutely underfunded or otherwise.

I shall see whether I have more luck with my third question. What is your opinion of the balance between capital and revenue expenditure, as outlined in the AER?

The entire issue of capital versus revenue has become clouded by the business of how we record the information and how we attract it. It is sometimes hard to tease out what is actually happening, for example in respect of capital-intensive roads. I do not think that there is a huge imbalance, although I have certainly heard people say that there is an imbalance between capital and revenue, that too much is spent on revenue services and that revenue is regarded as investment. Technically, there is an issue around measurement of human capital, which could be seen as the major resource or asset of the public service, but which no one can capture at present.

I shall take all three questions together. The point about flexibility is that, if you spend £27 billion a year, there is flexibility, but it depends on time horizons and how you move forward. Flexibility will obviously depend on size. If you have a very big budget—as you have in health or education, where you count the local authority expenditure in—the changes that you make in that budget, upwards or downwards, will have much bigger effects on the assigned budget as a whole than would be the case in relatively small areas. Flexibility will also depend on whether the Executive is prepared to take unpopular decisions.

On flexibility to change expenditure priorities, you have had more flexibility in the past, because of all the money coming down the Barnett pipeline, than you will have in future. With relative price effect, the cost of the inputs that the public sector buys is going up faster than the gross domestic product deflator, which is likely to be a problem in relation to the size of nominal increases in expenditure over the next few years. Increases in one programme are much more likely to require reductions in other programmes than was the case in the first five years of the Parliament's life.

The second question, about whether programmes have been overfunded, is a political one. If each part of the portfolio of activities is equally efficient—and I doubt whether that is the case—the decision is essentially political. There is a trade-off between educating young people and looking after old people, or between prisons and transport. I can give you a refined economic formula for trying to make that trade-off, but ultimately the decision is a political one. Politicians are elected to make decisions on that kind of trade-off. The issue is whether we are getting sufficient efficiency from the individual components.

On the third question, about the balance between capital expenditure and revenue expenditure, the picture is complicated by the use of the private finance initiative. PFI expenditure has been considerable; when considering capital expenditure series, one has to watch carefully what has been happening to PFI expenditure. That is one area in which transparency could be much improved at the United Kingdom level, as well as at the Scottish level. There seem to be a consensus that public capital investment has been neglected in the past 20 years. One of the chancellor's priorities at the UK level is to increase the rate of capital investment. However, because of changes in public functions, with extensive privatisation of capital-intensive public services, we have to be careful with data series.

As you pointed out, there has been an opportunity over the past five years to use the additional slack within the system—the additional resources that have been available—to reshape public services in particular directions and either to reorientate the balance of public services or to use investment resources that might be available for a limited period to improve mechanisms for efficiency. I guess that the same argument applies in capital spend: the best time—or the easiest time, at any rate—to divert resources towards capital projects of one kind or another is while additional resources are coming into the system. My perception is that that opportunity might not have been sufficiently taken over that five-year period. If that is the case, does it present problems for us, as we move towards a tighter expenditure framework, if, instead of making the appropriate capital investments between 1999 and 2004, we are looking to make them between 2005 and 2010? The same applies in the context of the reshaping of public services.

I agree with that. Life will get much more difficult. There is a remarkable disjuncture between what I know to be the case from the numbers—even though the numbers are difficult to put together on a consistent basis—which is that we have been going through a period of utterly unprecedented public expenditure increases on a planned basis, and what is perceived to be the case. The Government has not lost control of public spending; that spending has been deliberate and planned. We have never seen anything like it before, but the public perception is that public bodies are short of money. There will be a managerial and political problem of adjusting to much lower rates of nominal and real increases in spending and there will be the problem of tackling perceptions that are far out of line with what has actually been happening.

There is a classic problem, which is that, when we inject additional funds, we do not know the exact impact of those funds or the precise outcomes. That is the inevitable result of not being able to tie down precisely the means, ends and outcomes. We also have to bear in mind the fact that we have had a cumulative impact of efficiency gains and cost savings. A lot of public service managers see the recruitment of front-line staff as an investment; they subscribe to a particular way of operating public services, which holds that human capital and expertise are some of the most important things that those services have to offer. That is an important dimension, which is not really captured by the classifications of money into capital and revenue.

This answer will be more cheerful than my previous one was. If we suddenly inject large amounts of money into public services in the context of a generally tight labour market, we would probably expect there to be a lag in the outputs. The committee should be looking to the Executive to show that, even if there is a lag in getting the increased outputs in health, education and transport, they are coming. It is logical to expect a lag, because it takes time for outputs to come through.

At the UK level, there were significant capital underspends after the comprehensive spending review in 1998. Capital had been held down for so long that public bodies had lost the capacity to mount serious capital programmes, so there was a lag. Equally, someone might be allowed to hire more staff, but there would be a lag because there is a tight labour market and it is difficult to hire staff. Even if it is not difficult to hire staff, it still takes time to get people in place, get them trained and bring them to full utilisation. In the next two or three years, while acknowledging that the climate will be more difficult in terms of year-on-year changes, we should ensure that what was done before is seen to be generating the output increases that might have been a bit slow in coming.

In the context of capital spend, perhaps we should try to move towards a situation where intended expenditure results in infrastructure investment. You said that that was an issue in the past, but our perception is that it is still an issue.

The current annual evaluation report lacks thorough explanation of thematic issues such as the impact of the PFI. In the 1980s, the commentary on the Scottish Office programme had good thematic chapters. One cannot look at the capital expenditure figures without putting them in the context of total capital spend. More of the PFI is coming on to the balance sheet of public sector bodies and will be charged to the budget. One of the thematic cross-cutting issues that you need to pursue is the impact of the PFI. An additional chapter on that in a technical document could be helpful.

Do the witnesses have a view on the level of transparency in the budget document regarding the use of PFIs or public-private partnerships as a method of capital asset delivery? From what has been said, there seems to be a train of thought that the more money the Executive throws at a problem, the better the outcome will be. A massive amount of money is being thrown at the Antisocial Behaviour etc (Scotland) Bill. If that is successful, we would expect decreasing amounts of money to be required in the future, but an increasing amount is projected to be poured into the area year after year.

That is not necessarily a fair criticism, because the Executive does not regard the AER as the place to be transparent about the PFI. More generally, there should be more transparency about the PFI. If one throws money at problems in a well-directed and focused way, that may well be beneficial. I am not in any position to comment on the specific case that you mentioned, but it is clear that, if one throws money at problems in an unfocused way, one can commit resources that one does not get much from. That is one of the issues that the Finance Committee and the Audit Committee can pursue with the Executive.

My question is about the reportage of and transparency in the use of PFI/PPP. I know that the civil servants will say that that information is not contained in the current AER, but I have sympathy with Professor Heald's view that it would be useful to have in the document thematic chapters, including one that shows the impact of PFI across the board, perhaps classified by reference to the department in which the particular PFIs—for schools or hospitals, for example—have been taken out. Can the witnesses explain how they would like that information to be presented, whether in the AER document or elsewhere?

Is there any information that is not available at the moment that could be made available? I am thinking in particular of the commercial confidentiality clauses in some PFI/PPP contracts. Although commercial confidentiality is essential during the tendering process, do the witnesses agree that, once the contract has been awarded, the terms of that contract should be published so that the public can see what they are getting for their money, what the terms and conditions are, how much the mortgage will cost over 20 or 30 years and, consequently, how that will impact on the scenario that you have both painted of a potential squeeze in public expenditure three or four years ahead with a growth in the proportion of, for example, health and education budgets that will be spent on repaying PFI contracts?

One of my major concerns about the PFI is the extent to which decisions often seem to be driven by considerations of the accounting treatment of keeping things off the public sector balance sheet. I have nothing in principle against PFI if it represents the best value for money, but what worries me is that people will say completely different things in private from what their organisations say in public. If the PFI is for a prison, road, hospital or school, people down the line feel pressured to get it off the balance sheet because, if the scheme is not an off-balance-sheet PFI, it will not go ahead. My concern is as much about the decision-making process as anything.

I am not competent to answer the confidentiality question, but I suspect that, because there is a lot of repeat business, Governments and firms would be concerned about releasing too much information about contracts in case that damaged their commercial interests. Although I can see what the issues are, I do not know how to resolve them.

You asked about information that could be put in the AER. I am not sure whether the Executive publishes such information elsewhere, but there are summary figures in the Treasury red book about capital spend over a short run of years—although the run of years is not long enough—for the preferred-bidder stage and about the future value of commitments. The significant point that the committee has to watch is what the future payments and commitments under the PFI will be.

We are running a bit short of time.

My question is about future commitments not on PFI and construction, but on the work force, an issue that Professor Lapsley raised. When we questioned the Minister for Finance and Public Services in the previous committee meeting, I asked about breaking down the proportion of budgets spent on public sector pay in a document such as the AER. That would at least allow us to have a different kind of debate.

If you have been following the Audit Committee's work on health, you will know that the two health board areas that I represent have been showing an increasing line of investment but a flat line of outputs. A lot of the budget has been pre-committed because of the general practitioner contract, the working time directive or infection control. The next spending review will be different. We have already committed money, but how can budget documents be presented to allow us to have a different kind of debate?

There is certainly a case for detailing the way in which spend is built up. All sorts of things come into play and new European legislation will affect your flexibility.

At least three committee members have mentioned PFI/PPP. There is a danger that we think in traditional terms about the capital-revenue distinction. If we think in those terms, we tend to think of people as revenue expenditure rather than as capital expenditure. That is an important issue when we have people who are, as it were, locked into the system, where they behave more like capital.

Moreover, people tend to think of capital as physical plant. However, in the past decade or thereabouts, a lot of investment has been made in virtual systems, moving away from the old style of infrastructure. I do not think that that has been picked up on at all.

There is a need for more clarity on PFI/PPP. Having some kind of thematic analysis in the report would be wonderful. I am sure that colleagues in the Scottish Executive would be delighted to do that. It would certainly inform the committee's thinking.

I think that we are just about to ask them.

I can see from here that they are delighted.

Would either of you like to make a final comment on what you think the Finance Committee should consider for the spending review? How can the budget process be improved?

I have no specific comments. The significant point is that we are now getting to a situation in which the rate of growth of expenditure will slow. With the present chancellor in office, it is unlikely that there will be a drastic slow-down in public expenditure growth. However, the economy cannot sustain the rates of catch-up that we have seen in recent years. At the macroeconomic level, the UK economy is running a big budget deficit while the economy is actually performing very strongly. Especially within the Barnett finance system, where what happens depends very much on the assigned budget, one has to acknowledge that important adjustments have to be made for a slower rate of growth.

At the present stage in the cycle, the most obvious focus is the targets. We have to take a hard look at how meaningful the targets are and at what we can learn from them. There may be scope for improving them. That will be part of the debate as we try to ensure that public services are improved.

I thank both witnesses for their evidence.

The committee has previously asked about the Executive's performance and innovation unit. As the Minister for Finance and Public Services and his team indicated last week, today we will be hearing from Andrew Goudie, who is the chief economic adviser. With him are Liz Lewis, who is head of the ministerial support group, and Richard Dennis, who is the finance co-ordination team leader and a regular attender at these meetings. Andrew, I will give you the opportunity to make a brief opening statement.

Thank you for inviting us to talk to you about the way in which the Executive monitors performance and ensures delivery. I am the chief economic adviser and Liz Lewis is the head of the ministerial support group in the Office of the Permanent Secretary. You know Richard Dennis well.

I will spend a few minutes clarifying the main mechanisms for monitoring performance within the Executive—covering, but going much wider than, the role of the new performance and innovation unit, in which the committee has expressed a particular interest. It might be helpful if I set out the general structure at the centre of the Executive, given that new arrangements have been introduced within the past year. In July, we announced the creation of the Office of the Permanent Secretary to draw together existing parts of the Executive whose role was to support the First Minister and the Cabinet in their collective work.

The Office of the Permanent Secretary consists of four elements. The ministerial support group, which is headed by Liz Lewis, is made up of the Cabinet secretariat, the strategy and delivery units—which we used to call the policy unit—and the teams that deal with events, protocol and UK relations. The analytical services group, which I head, includes teams of economists, statisticians and researchers who support the collective work of the Cabinet. The new performance and innovation unit is headed by Nick Parker, who was until recently a senior partner with PricewaterhouseCoopers. Finally, the changing to deliver division supports our internal change programme.

The intention behind the creation of the OPS was to ensure that the Cabinet's collective programme was delivered in a way that was more than the sum of its parts. We want to be sure that the Cabinet's cross-cutting objectives are met and that the organisation as a whole gives appropriate weight to the why as well as to the what. We also want to ensure that the analytical resources of the organisation are fully integrated into the support that is given to ministers.

The OPS is no different from any other Executive department, in that it has a civil service head and reports to ministers. The priorities and direction of the OPS are set by the First Minister, by the Deputy First Minister—when he is operating as such—and by the Cabinet collectively. We are responsible to the Minister for Finance and Public Services and we support his role in ensuring delivery on behalf of the First Minister and Deputy First Minister. The delivery unit and the performance and innovation unit report through Mr Kerr to the First Minister and the Deputy First Minister.

I know that the committee is interested in who does what, so it might be helpful to think of the strategy unit, the PIU and the delivery unit as three layers. At the top, the strategy unit is responsible for long-term thinking and horizon scanning. At the second layer, the performance and innovation unit is responsible for medium-term thinking on issues on which ministers are clear about what they want to do but about which they welcome advice, including input from the private sector, on the best way of doing it. The PIU comprises short to medium-term project teams, which include private sector skills as appropriate, and it is currently focusing on public sector efficiency and improvement of services. It should be noted that the PIU does not have a role in monitoring delivery. That role is filled by the delivery unit, which is responsible for supporting ministers in monitoring the delivery of agreed commitments.

All three layers are assisted by the analytical services group, which audits the plans for delivering the more difficult or cross-cutting commitments. It also audits progress against those plans and advises on their rigour and deliverability. The Cabinet secretariat supports well-informed decision making in the Executive.

The other key player is finance group, which is part of the Finance and Central Services Department. The finance group has a specific responsibility for delivery, because it ensures that resources are used efficiently and effectively and it guides and advises ministers on resource allocation. Aligning resources to the Executive's commitments and providing sufficient resources to ensure that targets can be met are central to processes such as the spending review and any in-year allocations.

In practice, how do we work together to ensure a focus on delivery? The Executive's commitments are set out in the partnership agreement and reflected in the annual evaluation report, which also includes targets. Each minister is responsible for ensuring delivery within their portfolio, but all ministers are collectively accountable for the overall direction of the Executive and for delivery of the programme as a whole. Many of the commitments require collective effort to be delivered successfully.

Given the coalition dimension, there is a particular need for ministers to be consulted and to be content with the way in which policy develops and is implemented. The corollary of that is that officials at the centre of the organisation do not see themselves as separate from or unhelpfully challenging departments. We want to see ourselves more as working with departments towards common goals rather than as second-guessing what they are doing.

The framework to support and monitor progress is set out in the table, which has been circulated; it schematically lays out the way in which we approach that work.

The Executive's commitments were, of course, agreed by the partnership parties in the coalition negotiations. Ministers then translated those commitments into specific objectives and targets. Monitoring progress against targets and commitments is carried out by the delivery unit and the finance group, which work together and are supported by analysts. Analysing progress towards the delivery of targets and commitments is done on the basis of reports to the Cabinet and a continuous overview. We have a monitoring system for the partnership agreement, which is used across the Executive to identify progress and to highlight areas of risk and what is being done to address those areas of risk.

The system is continuously updated and supports ministers and senior management in assessing delivery. It also provides a clear framework for Executive officials to take regular stock of progress. That work is co-ordinated by the delivery unit, which, again, is supported by the analytical services group.

Internally, the Cabinet receives a regular report from the Minister for Finance and Public Services on the delivery of Executive commitments. The Cabinet paper is co-ordinated by the delivery unit. Externally, there are reports from ministers at the end of parliamentary terms and there is, of course, the annual evaluation report, about which I will say more in a moment.

The Cabinet collectively considers the delivery report and identifies areas for further work and challenge. On the basis of the Cabinet's discussion, the Minister for Finance and Public Services has regular bilateral meetings with individual portfolio ministers in order to discuss delivery against plans and to explore risks and what is being done to address those risks.

It might be useful and helpful for the committee to have what you are saying in writing, as members are anxious to get on with questioning.

You are, in a sense, setting out a theoretical model. If I were to pick a particular policy area—say, for John Swinburne's sake, care for older people and, as well as the introduction of free personal care, care standards—how far would the model that you have just described correspond with the reality of how policy has been implemented?

The model that I am describing is not theoretical in that sense; I am describing the way in which we operate across the Executive. The table that members have in front of them identifies the particular responsibilities of the key units. Several of the units that are mentioned have an interest in that area and each has its individual area of expertise. It is important to bring them together into a coherent framework that operates in such a way that, in any particular area, there is a continuous process of reporting by the department on its work as the year progresses. It is important that that is monitored by us centrally and that we draw information from all the departments in order to inform a summary overview of how successfully the Executive's commitments across the board are being progressed and to dig out where difficulties are emerging in the process. The process is very much an active one.

Let us say that a set of care standards is established for the provision of accommodation. There can be an aspirational standard and there can be a process of monitoring what is achievable. The costs of moving towards different kinds of scenarios for what is achievable can then be identified and a legislative and administrative framework can be set in place to take forward the policy. Is what you are describing actually what happens in the process?

There is an important distinction to make between the work that takes place in the OPS at the centre and the work that takes place in departments. The work that takes place in the OPS is very much concerned with the high-level commitments—the aspirational targets and the more operational, specific targets that are set out in the partnership agreement. Once we get into the more specific detail of any policy area, responsibility clearly remains with the minister, within his portfolio. The minister will have responsibility for identifying and monitoring the more detailed specific targets and ensuring their cost effectiveness. I make that distinction because the OPS is not concerned with the very detailed implementation of policy and the detailed targets that individual portfolio ministers have adopted.

Recently, the committee has been concerned with water expenditure. I am interested to know to what extent the policy development and implementation process resides with the monitoring division in the civil service and to what extent the structure that you have described comes into play. How do the two elements interrelate? Who is responsible if something goes wrong or is not considered properly?

Although primary policy responsibility undoubtedly lies within the portfolio, the process that I have described—which takes place throughout the year—will bring to light areas in which partnership targets and commitments do not seem to be being met in the way that we would like or areas in which progress seems to be at risk, for various reasons. On the basis of that kind of information, we produce a regular report for ministers.

There are three routes by which that information is taken back into policy thinking and the policy process. The first is the Cabinet's collective discussion of the issues. The second is bilateral discussions between the Minister for Finance and Public Services and the portfolio minister. The management group has now set up a sub-group to deal with delivery, which will also consider such issues and try to identify ways in which policy implementation could be improved. There are three central bodies that take the knowledge that is collected through the process that I have described and interact with the department where responsibility lies. That sort of analysis flushes out questions such as whether better-designed policy, better implementation or more resources are needed.

So you would be involved in making decisions about how quickly different thresholds of care standards, for example, should be rolled out and you would monitor information leading up to the decision-making process. Similarly, you would have been involved in considering the lack of investment committed to water infrastructure over the past three or four years.

The OPS is involved at a far less detailed level than you are suggesting.

I am trying to clarify the position.

Fundamentally, the OPS is involved at the level of the commitments that are set out in the partnership agreement. We were not involved in the design and preparation of the much more detailed strategies and targets within portfolios, responsibility for which rests with portfolio ministers. The link between the two is that, if concerns about a partnership agreement commitment are identified through the monitoring process, the Cabinet collectively—and the Minister for Finance and Public Services on its behalf—will engage in more detailed discussions with the portfolio minister and seek to understand what strategies that should contribute to meeting that commitment are not going as well as expected and what more might be done at that level.

Thank you for your explanation of how the system operates, which can be confusing to outsiders. Clearly, it would be inappropriate for me to ask you how objectives or targets are chosen, because those are ministerial decisions. Although civil servants advise, the responsibility for such decisions rests with ministers and questions about them should be directed at ministers. You are involved in monitoring, analysing and reporting on progress. From the available budget documentation, we find it difficult to see how the targets and so on tie into the strategic objectives and how the money that is invested reflects the Executive's priorities. Do you have more of a handle on that? Are you able to indicate to us how targets are monitored to ensure that the overall objectives are met? How are you monitoring the objectives of growing the economy and ensuring that services become more efficient and effective? We have difficulty making connections of that sort.

Your example of the economy is a good one. We have to be careful not to look too mechanistically at where the expenditures sit in any table. If we take the example of growing the economy, it is easy to fall into the trap of assuming that the Enterprise, Transport and Lifelong Learning Department is the area of the Executive that contributes to growing the economy. Indeed, the annual expenditure reports and so on encourage us to take that view.

The important thing is to go back to the basic strategic work of the Executive and examine what the Executive views as being the fundamental drivers of whatever the area of policy is that is being considered. For example, elements relating to the economy are well laid out in the earlier versions of the framework for economic development and, in the case of the enterprise network, in "A Smart, Successful Scotland". Those documents lay out what the basic strategy is and what the key drivers of the policy objective are.

The way in which to consider the issue is to go back from the strategy to the spending documents and examine how spending is allocated in the spending document towards those drivers of economic development. The First Minister has made it quite clear that, as well as the expenditure that takes place on the enterprise and lifelong learning side, he sees the transport infrastructure and the education system as being fundamental contributors toward the development of the economy. I agree that the documents do not set out the information in quite the way that I have described, of course.

The same sort of approach is required in relation to an examination of the targets. The targets that relate to that much broader strategy need to be considered rather than the targets for a narrow area of the work of the Executive.

You mentioned that the PIU is involved in some work on public services productivity. Could you say something about the nature of that work?

As you know, the unit is headed by Nick Parker, who has come in from the private sector and is working with us on a part-time basis. He is working with small teams of civil servants and bringing in private sector expertise from outside as appropriate. We have asked him to help us with the kind of work that Mr Kerr was speaking to you about last week, such as backroom efficiencies, sharing backroom services, and e-procurement. He is using his private sector expertise to suggest ways in which we can better approach those areas and bring a private sector element into them.

When the Minister for Finance and Public Services was with us last week, he strongly emphasised the procurement side of things. That is obviously one dimension of public services' productivity. However, at that time, we highlighted an interest in the measurement of productivity, which might more appropriately lie with the analytical services group. Clearly, if all of us are to pursue the agenda that we were talking about earlier on, the measurement of public services' productivity and comparability in measurement with the rest of the UK are important. Obviously, a lot of work is being done elsewhere in the UK and it would be useful to get an idea of the Executive's thinking about public services' productivity.

We agree that that area is important. There is no question about that. It is also an extremely difficult area in terms of measurement and the conceptual framework for understanding what exactly to measure in relation to both inputs and outputs. I do not say that by way of an excuse; it is simply a statement of the reality of trying to come to grips with a difficult question of measurement.

At the moment, the Scottish Executive's understanding of public sector productivity is poor. We are not alone in that, unfortunately; we share the problem with the UK and most other developed countries. The work that is being done in London as part of the Atkinson review is extraordinarily important in terms of trying to get a better understanding of how to go about doing that sort of work. We are in close touch with the review team, which visited us in February. We talked to the team and the team talked to various people across the departments, because much of the work revolves around defining public sector output in various sectors.

The sensible approach that we have adopted is to wait and see what Tony Atkinson comes up with. He is due to produce a provisional report in July and his final report will be published in January. It is difficult to predict what he will say in July, but we will consider what we can take from it. I have two approaches in mind. One is to see whether we can piggyback on the work of the review if it develops indicators that we can use readily. We would not do so mechanically, but there might be indicators that could quite easily read across. If we cannot use the specific output indicators that Tony Atkinson generates, the second possibility is that we may be able to use the basic principles that underlie his work and try to build on them in our work.

Everyone would readily agree that more work on the matter is needed, although we are conscious that the work is extremely difficult and probably quite resource intensive. Nonetheless, there are a bunch of reasons why people are deeply interested in it. People are interested partly because they want to know about the public sector's performance and partly because the work will guide the development of policy in the public sector. More broadly, people want to know about the performance of the national economy and GDP and so on. We have no difficulty in agreeing that the work is important.

That is enormously helpful. The committee will continue to show an interest in the matter because evidence-based policy must start with common agreement about the matrix.

I am aware of how resource intensive that work is and agree that piggybacking is the right way in which to proceed. However, as a precursor to the Atkinson review, the Office for National Statistics produced experimental productivity measures for England and Wales. Is it possible to ask the ONS, which has a UK-wide remit, to consider doing comparable work for Scotland, which might not be such a draw on the Executive's resources but would allow us to stay in step?

That is a possibility, although the Atkinson review was established because of serious questions about what is going on at the UK level. The ONS is deeply concerned not only about the productivity measure but about its components, particularly the output side, which is a fundamental part of GDP. We could ask the ONS to do that work, but it has sufficient worries. It is probably worth waiting to see how the ONS works through those worries before we try to do further work.

In the bilateral ministerial discussions that have taken place since the new structure was put in place, have there been any examples of policy or budgetary changes?

Obviously, I cannot report on the detail of bilateral meetings—you would not expect me to do so. However, the nature of bilateral meetings is that the Minister for Finance and Public Services, on behalf of the First Minister and the Deputy First Minister, undertakes a friendly challenge of the work that is being done in the portfolios. Policy changes have been discussed in the sense that, where specific partnership agreements have been seen to be at risk or to be moving more slowly than we might wish, the question has arisen of why that is the case. The policy is not always the reason why things are not moving fast enough—the implementation of policy can be just as important—but it is absolutely right that the nature of the policy is discussed.

You will be aware of the adding-it-up approach that the Cabinet Office strategy unit has taken in the past few years, one aspect of which is transparency. My constituents want to know why they are still waiting eight or nine months for an operation, but we get the answer that discussions between ministers are friendly chats. During our meeting in Motherwell, we questioned Richard Dennis about whether the discussions that take place are simply fireside chats. We remind you that you have a commitment to provide better public services for taxpayers' money. Where are the teeth within the structure that you have outlined? Is it the delivery unit that says, "Look, it's not working and you're not getting any more money until it works"? Alternatively, do people say, "Give us another six months and another £200 million and I'm sure that it will work after that"?

That question should probably be directed to ministers as much as to me. The primary approach is in the first instance to identify through monitoring whether something is on or off track and then to find out why that might be the case. A strong emphasis is placed on taking a collaborative approach to understand why initiatives are not working as expected. The role of reducing funding and other steps is further down the line.

When early discussions take place, the emphasis is much more on understanding how matters can be made to work better through what you characterised as a friendly chat—some such chats are from being friendly. The purpose is to find a solution rather than a sanction at that time. Ultimately, it is for ministers to expose such conversations as they wish to when they report to Parliament or at other opportunities.

How do we communicate that to a wider audience than the minister and officials? We, the public and relevant professionals learn about that only if it results in a budget revision or a slight policy change. The approach is different from my understanding of the Westminster strategy unit's adding-it-up strategy, which is more evidence based. The adding-it-up implementation group has said:

“Main areas for further improvement identified by the AIU Implementation Group include: continued promotion of greater openness (transparency being a powerful lever for evidence based policymaking)".

The structures that you just outlined do not have that transparency.

Ministers decide how they make matters transparent. Various opportunities for doing that are available. One is through the functional committee structures in which such matters are discussed. Another is through the main parliamentary debates that take place. Ministers can make such announcements in other ways, too.

The process that I described is a forerunner by which ministers try to understand how they may improve how things are done before making decisions. Of course they will make those decisions at some point, but I am describing a process by which knowledge is gathered through and analysed in the system. Various groupings in the system advise ministers about the possibilities for improvement and ministers hold conversations bilaterally or collectively. At that point, ministers determine how they transmit that to the wider community.

I will return to that point.

Does the structure that you have outlined link with local authorities? Is it purely linked with Executive spend and Executive departments? I presume that it is linked with the health service, although that has its own internal structure. That leads on from questioning of previous witnesses. Many deliverers of public services are not within the Executive's direct remit. An element of local accountability is involved, which means that local decisions are made to fit local circumstances. How does your structure accommodate that?

You are right to say that a significant proportion of the partnership agreement is in the hands of third-party deliverers. We are capturing the assessment of people in the Executive who have responsibility for different areas of government, wherever implementation takes place. For example, when the implementation of key partnership agreement targets sits in local government, responsible officials in the Executive monitor or sponsor those parts of local government. They report on progress towards meeting those targets.

I am keen to return to a more macro level. Growing the economy is the top priority. Recently, the new chain-linking method of calculating Scottish GDP was adopted. That made little difference to the data from 1971 to 2001—the average rise in GDP over that period has moved up from 1.6 per cent to 1.62 per cent. However, the method produced an apparent initial improvement to Scottish GDP data in the short term, although that petered out in the fourth quarter of 2003.

The fundamental point is that that cries out for comment when considered through a business analogy. If a business sold, disposed of or de-emphasised a damaged division or subsidiary, it would face a loss on disposal of assets, redundancy payments and reorganisation costs. Its cost of borrowing would probably go up. Its share price would probably come under threat. The competition would be aiming for its jugular, and others might even be moving in to try to take over what would be seen as a failing operation.

There is a second business analogy on which I want you to comment, and that is that no business would be allowed to rebase its performance comparison on a date as recent as 2000. That would show the corner shop and Tesco converging on the index of 100 from wherever they have come, which would be an amazing coincidence, then not diverging much from it in such a relatively short period of time. Why, when that would not be acceptable in the corporate arena, is it acceptable for Government to do that and to display data in such a way?

The analogy is not particularly helpful, given that when we measure GDP we estimate rates of growth in a huge number of different sectors of the economy. The key question is how we take those rates of growth from 300-plus different sectors and weight them together into a single measure. If we go back to pre-chain-linking days, the weights that were used, which reflected the shares of the different sectors in the economy, were at best three or four years out of date, and at worst seven or eight years out of date. At that time, those were the only resources that were available to us in those areas.

The key issue, on which most people agree, is that the weights that should be used are the most recent ones that are available, because they reflect the current structure of the economy in the most acceptable way. The move to chain linking is fundamentally a way of trying to make those weights as current as possible. In practice, there are lags in producing data. We still have a lag of something like three years, but we hope to maintain that and, if possible, reduce it to two years. The reason for doing that is that fundamentally we believe that we will get a much more accurate reflection of the rate of growth in the economy by balancing the different weights of the different sectors.

On your point about companies, the key issue is that we are not trying to diminish in any emotional sense the effect of one part of the economy being in decline or reducing its output. We are simply trying to reflect its contribution to the economy. If over a period of years one sector declines very rapidly for whatever reason—you probably have in mind the electronics sector over the past few years, but we could take many other sectors—we want to capture that as accurately and as quickly as we can. It is not a question of trying to minimise and devalue the change in the economy; it is simply a question of trying to capture the relative importance of sectors.

I hear exactly what you are saying, but if I were running a conglomerate and were able to have that same flexibility, I would never fear an annual general meeting, because I would always be able to emphasise the positive and de-emphasise the areas that were in decline and damaged.

To look at it from a different angle, GDP is clearly the only measure we have at present to monitor economic performance yet, in the recent Allander series of lectures, Nicholas Crafts told us that if Scotland could just achieve the same, relatively low, level of life expectancy that the rest of the UK has, we would enjoy a 21.3 per cent uplift in our GDP. What does that say for our current GDP figures and the confidence that we can have in them?

In my mind it does not affect the degree of confidence that we have in the GDP figures. The point that Nicholas Crafts was trying to make was that were Scotland more successful in improving the health of the people, such that life expectancy in the country improved, the proportion of people who operate in the work force increased and their productivity increased, the total production and consumption of the country would increase, which is true. That does not necessarily have any bearing on the methodology that we use for measuring GDP.

The thing that worries me about that is that a 21.3 per cent uplift would put Scotland well ahead of the UK average on published data. That sits particularly uncomfortably with real data on the movement in population, life expectancy, average incomes, new car registration, the value of houses and so on. It does not compute.

I have no doubt that most of the things that you mention would have an impact on GDP per se because most of them will generate incomes in different ways; personal income is a key component of GDP so that will be picked up in our estimates. I am sorry, but I do not see how that relates to the methodology that we adopt—that is simply saying that if we had a different set of policies or there were different outcomes in terms of how people participated in the work force we would count more people, more production and more expenditure in the classic GDP manner. The methodology is independent of those particular policy successes.

I have one final question.

This is becoming a bit of an academic debate.

Okay. Let me make it less academic.

Coming from the prosaic world of accounting, we are always interested in the cross-adds to verify data. When cross-adds do not cross-add the balloon goes up. When Nicholas Crafts states that we could expect a 21.3 per cent uplift in GDP, does the balloon not go up within the Scottish Executive?

No, I do not think so. I am not sure about the precise point that Nicholas Crafts was making, but I understood that it related to more people being in the work force and producing more if their health was better and they did not die younger. The Executive would accept the obvious nature of that comment and agree with it. That is the sort of analysis—although I admit that we do not usually come to it from that direction—that underpins the comment that was made earlier about why the Executive has strong targets on smoking, coronary health care and so on.

People accept that if we increase the health of the population, that has value in its own right and it also makes an important contribution to economic development, because more people are able to work and fewer people have to care for people who are sick and so on. The Executive is well aware of that linkage with economic development—a balloon does not go up, because we are aware of the issue, which is embedded in many of the partnership agreement commitments.

The witnesses will be relieved to hear that I offer no prospect of any academic debate.

I read the document entitled "The Framework for Monitoring Delivery" and it left me with a sense of incipient bafflement. I listened to Andrew Goudie's introduction, which—truncated though it was—increased that bafflement because he described a series of committees and bodies: the delivery unit; the analytical services group; the finance group; the management group; the performance innovation unit; the ministerial support group; and last, but presumably not least, the Office of the Permanent Secretary.

Without being facetious about all that, if we want to try to achieve efficiency—to me, as a fairly simple person, that means making savings somewhere along the line—are there not too many committees? Should there not be one committee, headed up by the Minister for Finance and Public Services, who reports to the Cabinet—or have I lost all contact with the reality of the situation within which we all operate?

One of the important things that we try to do is to integrate the various people in the Executive who have different skills in this area. One key aspect is the monitoring process, which in one sense is a fairly technical part of the system. The analysis is obviously about much more than the numbers and the sheer technical side of the process; it is much more complicated. The reporting side is also crucial—whether that is reporting internally to ministers or to the external world.

The picture is complicated, as delivery of policy is partly to do with policy and partly to do with the availability of resources, determining the best means for delivering policy and having the evidence that allows us to move towards the most appropriate means of implementing policy. Those are different sorts of skills. What we have done in the process that is outlined in the table entitled "The Framework for Monitoring Delivery" is to tie those quite tightly into one framework. There are several committees, but the process has several stages, which in practice it is worth identifying as separate parts. I hope that the table shows some of the key stages that we go through in trying to bring all the knowledge to bear. Ultimately, the most important part of the process is the final discussion in which ministers decide how to respond to that knowledge and how to use it within their departments to make policy more effective in the future.

When will that ministerial discussion take place?

The next discussion—Liz Lewis will correct me if I am wrong—will be on 12 May.

Surely the process must come to an end at some point—at least I hope that it does. When is it anticipated that that process will come to an end? Or have I misconceived the process?

We do not conceive that that process will come to an end. I presume that delivery will always be high up the agenda, so it will always have to be continually monitored and responded to.

Let me ask a simple question. Does the Executive write to quangos to ask them for their assessments of how savings in the expenditure that is planned within their remits can be effected? For example—if I may pluck one example at random—does it ask that of SNH?

I do not know about SNH in particular, but such assessments are an integral part of the spending review process in which the office is involved. The Executive has a set of commitments and targets that it hopes to meet. As part of the spending review, the Minister for Finance and Public Services talks with all parts of the Executive, including the NDPBs, and challenges them on how they are delivering those targets and the cost effectiveness of what they are doing.

What savings has that achieved over the past five years? Can you share that with us?

No. Perhaps Richard Dennis can say more about that, but I am not sure that we capture that saving in a single number.

I want to pick up on a couple things before we close. First, I would like the full text of Andrew Goudie's opening statement, only a portion of which we heard earlier. Secondly, picking up on Fergus Ewing's last comment, I think that it would be helpful to get a sense of how the arrangements that have been described to us today work in the context of the spending review. For example, who makes decisions and how are decisions made between different competing priorities? We would certainly welcome a submission on how that process links into the arrangements that you have described.

As Wendy Alexander pointed out, I think that the committee will return to this subject. We have had a consistent interest in performance review and I anticipate that we will want to consider the issues in detail once the Atkinson and Gershon reviews have been concluded. There might be an issue about the timing of when that information becomes available, so we would certainly welcome any input from the Executive that could help us to decide about the timing of any inquiry that we might hold on that.

I thank the witnesses for attending today.