Finance Committee, 20 Sep 2005

Meeting date: Tuesday, September 20, 2005

Official Report 178KB pdf

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Efficient Government

Agenda item 3 is consideration of a paper from Arthur Midwinter and the Scottish Parliament information centre on efficient government, specifically the allocation of efficiency savings. For our meeting on 28 June this year, Arthur Midwinter produced a paper detailing the efficiency savings that appeared to have been already allocated under the previous spending review. At the committee's away day, he and SPICe were asked to produce a chronology paper, which we now have. I invite Arthur to speak briefly to the paper. Once he has outlined the main points in it, I will invite comments from members.

The paper attempts to pull together a number of developments in the efficient government programme. I will highlight the main points. First, the paper separates out the two types of savings that we have heard about. There are savings of £319 million in budget baselines and savings of nearly £412 million that are not in baselines but have been left in the appropriate departmental portfolio.

When the savings were first proposed, they were described as targets the meeting of which would free up resources for investment in front-line services. Initially, I was of the view that only the local government settlement had been built into the first type of savings—the savings in budget baselines. Indeed, an Executive official advised me that that was the case. It was only later in the year that it emerged that slightly more had been built into those savings, including the health efficiency savings, and that £319 million had been reallocated at the time of the spending review, so we were labouring under a false impression. I am not suggesting that there was any attempt to deceive us; we simply received the best information that was available at the time.

The sum of £319.3 million has been reallocated between portfolios, but the Executive is unable to tell us where. It was treated as part of a bag of money that included the Barnett consequentials and the results of other reprioritisation. Almost £412 million has been left in departmental portfolios. I understand that that money relates to programmes in relation to which departments' proposals for the efficient government initiative were received after the spending review process had been completed. The departments that submitted their proposals late were rather fortunate in being allowed to keep that money.

There is a lack of information about where the £319 million has gone. Furthermore, we have no information on how the money in the second category of savings has been used. I thought that it could be spent only once the targets had been met and the savings had materialised. I would expect information on that to appear in the annual report on such matters and—given that the Executive is transferring money within portfolios—to form part of the budget revisions. I hope that that will come later. The view was expressed to us that the savings were left with the departments concerned because there had been a tight settlement. I confess that I find it difficult to understand how real-terms growth of 3.5 per cent could be described as a tight settlement. That does not match the experience of most of my working life, but never mind.

We have since had correspondence that confirms that, in relation to the efficient government data, there are no service baselines or output measures in place to allow us to measure what we would properly regard as efficiency improvements. The draft budget states that efficiency is about the relationship between inputs and outputs, but at the moment we simply have financial data; we do not yet have output measures that can be used as a proper baseline for measuring progress and we do not know where money has been reallocated.

I have a final comment, which is not in the paper. I am aware that events move on as our work progresses. A new document has been produced that the committee will discuss next week. Both the committee and Audit Scotland have raised major concerns about the quality of information and financial data. There is a lack of output data and we need clear baselines and more transparency on how the savings are delivered.

The second set of efficiency technical notes, which the committee will discuss next week—I cannot be here then—makes no major revisions. It makes a number of minor revisions, but does not address any of the big issues that the committee and Audit Scotland have raised. That is a matter for concern. Unless we get output data and baselines, the present programme cannot be described as an efficiency programme; it will simply be an exercise in reallocating money.

As Arthur Midwinter has indicated, next week we will quiz the minister on efficiency technical savings. I suggest that members stay behind at the end of today's meeting to get a briefing from Arthur on some of the issues. We can address the issues relating to the ETNs with the minister next week.

Before opening the floor to members, Arthur, I seek clarification on a couple of points. I am conscious that three members of the committee were not committee members in June, when we discussed our approach to the budget process. In paragraph 3 of the briefing note, you state:

"My initial impression was that only the Local Government savings of £326m had been built into the baseline".

Why has it turned out that the amount was only £201 million? I suspect that that may be a little impenetrable to members.

The issue is fairly straightforward. Total local government savings were £326 million. The £201 million is composed of a reduction in the revenue support grant element—the block grant to local authorities—and police elements of the specific grant of, I think, about £30 million. For information, I will circulate to the new members of the committee a note that spells that out in detail.

The information that we received at the time was that local government had been treated differently. When we pursued the matter later, there was an exchange of e-mails between us and a number of Executive officials in which we sought to get the correct picture. Basically, the £201 million has gone from the local government budget; it was taken off and reallocated. It will be open to local authorities to use the remaining £125 million—which includes savings on procurement, one of the grey areas—if they make the savings.

There are three figures here: the £326 million and the £201 million to which we have referred, and the £168.3 million for assumed local government efficiency savings that appears in table 1 of paper FI/S2/05/20/3.

The figure of £168.3 million is the total that came out of the RSG. The other figures are £27 million for efficiencies in the supporting people programme, which has been taken out of local government, and £5.5 million for common police services. Those three figures tally up to about £201 million. The table spells out the position. The second, third and fourth savings that it lists are the combined local government package of the £201 million that has gone.

That explanation is helpful.

I am concerned by the fact—which you have flagged up to us on a number of occasions—that the efficient government delivery group does not seem to have been tasked with measuring efficiency. Efficiency should be measured either relative to a theoretical maximum, which is difficult to do in public sector finance, or at least in respect of whether efficiency is being improved, but the group does not seem to have been asked to work that out. Many concerns have been expressed in the committee about whether the Executive is as ambitious as, or more ambitious than, the Treasury. Do you know whether the United Kingdom Government has a mechanism for measuring whether it is increasing the efficiency of its projects?

I confess that it takes me enough time to keep up to date with what is happening in Scotland, without worrying about the rest of the UK. However, I am aware that the Treasury is treating the delivery of savings as a matter for departments. It appears not to have a central co-ordinating mechanism. Once it has set targets, it leaves it to individual departments to deliver them. There is a slight difference from the situation in Scotland, because all ministers at Whitehall have had to sign up to the programme and are accountable to Parliament for delivering it. That has not happened up here.

I am questioning whether the UK exercise is simply a saving exercise or whether it is an efficiency exercise. We are making the argument that, if we are not able to measure whether outputs have increased relative to inputs, we cannot say that we are more efficient. Will the UK Government be able to say that? Have ministers down south signed up to doing it, or have they signed up only to making savings?

I do not know the answer to that. In theory, the UK Government has signed up to an efficiency programme, but without going through the hundreds and hundreds of projects in the same way as we have done here, I could not possibly comment, as the saying goes. The Treasury has always stressed the need for output measures in its work, but I do not know whether those measures are different from ours, so it would be unfair of me to comment.

It is probably fair to say that the process that the committee is going through is the most rigorous searchlight on the matter since devolution.

Absolutely. Under the old regime, the Select Committee on Scottish Affairs probably would not even have considered the matter. Without doubt, the Executive is under far greater scrutiny over the delivery of the savings than its counterpart in Whitehall, just because of the sheer time that it would take to scrutinise delivery in Whitehall.

I am surprised that the departments that did not identify efficiency savings until later in the process somehow managed to do better in the settlement than those that did what they were intended to do and considered the matter earlier. You said that the justification was that the spending review had been tighter—although you were somewhat sceptical about that—but is there any evidence at all that the review was tighter for departments that identified the efficiency savings later? I think that I may know the answer to that.

The review was tighter in that the growth was 1 per cent less than it had been in previous years—we moved from 4.5 per cent growth to 3.5 per cent growth. However, in most of my working life studying such matters, the changes have been of the order of 1 or 2 per cent either way—there could be a reduction—so the increases in the past four or five years have been exceptional. I think that there is a table that would provide the answer to your question. It was certainly recognised that the bulk of the savings fell on one or two departments, while others had savings targets of less than 1 per cent. The savings are roughly split 50:50 in terms of the portfolio holders, but we should be clear that the bulk of the savings are in health and local government.

Elaine Murray touched on the issue of measuring efficiency. Is the inability to capture output data a problem? If the Executive was to put in place measures to capture output data to allow us to measure efficiency, is it the case that we would not know whether anything had been delivered more efficiently for another two years or so?

There are always areas where it is problematic to measure output, particularly in administrative and support services. However, for the big mainstream services such as roads, housing, education and health, measuring the output of the services is not difficult, although measuring outcomes is much more difficult. For comparison, local authorities are required to produce that kind of baseline for the best-value audit. There is no reason why the exercise could not have been done. One can only guess that the problem was caused through pressure of time and the sudden announcement of the review, but there are no technical reasons why output measures could not be produced for the bulk of the programme, which I think is what you are asking.

So there is no reason why that could not be done now.

The Executive could do it now, if it so wished.

I take the convener's point, which was backed up by Arthur Midwinter, that thanks to devolution we put the Government here under more financial scrutiny than is the case south of the border. However, I am worried about the fact that we cannot identify where £320 million has been allocated. We still have some way to go before we get into the financial innards of Government. Surely we cannot leave it there. To the proverbial man in the street, £320 million is a great deal of money. Can we go back to the Executive and ask about that? We must find out where the money has been allocated. It is not satisfactory for the Executive to say that it will be spent on education, health or whatever. If the Executive is moving money from department to department, the Finance Committee should know about it.

Whether you go back to the Executive is more a matter for you than for me. All I can say is that you have a letter from the Minister for Finance and Public Service Reform, which states:

"it will not always be possible to say specifically where a particular saving has been directed to."

It is for the committee to decide whether it wants to write back and ask for clarification, but the Executive has not been able to provide the information either in my informal discussions with officials or in formal correspondence with the committee.

Perhaps we can pick up the issue with the permanent secretary when he comes before us next week.

Is the matter something that we will return to next week?

There will be opportunities to return to the matter, particularly as the permanent secretary will be here. You might want to pursue the question then.

The correspondence is quoted in paragraph 9 of the briefing note on the reallocation of efficient government savings. The minister says that it will not be possible to say where a particular saving has been directed, but I would say that that is true of most of the savings.

We have some way to go yet.

I will pursue the point that Andrew Arbuckle has just left. I am struck by the contrast between the statement that Arthur Midwinter read out from the minister's letter, which says that it will be difficult to identify where the savings have gone, and comments that the minister put on the record in October 2004 in response to a question from Elaine Murray. He said:

"we will be able to demonstrate clearly where savings have been made and applied. After all, we must ensure that there are identifiable benefits at the front line."—[Official Report, Finance Committee, 5 October 2004; c 1758.]

The minister's letter says, "Come on. How do you expect us to be able to work out where the money has come from and gone?" However, he stated to the committee that the Executive would be able to give that information. We must get to the bottom of the point about the £320 million.

My question is about a point that Arthur Midwinter made a moment ago. He said that it may have been pressure of time that prevented a methodology from being put in place to ensure that the information is captured. I do not think that any of the work that should be done would pose a difficulty to any organisation that wanted to measure its inputs and outputs and to determine whether it had increased efficiency. I am struck by Arthur's comparison with local government and the best-value regime, because my local authority colleagues tell me that they do such work every day of the week. If local government can find what Arthur correctly identified as genuine efficiency savings—local government is getting less money but it has to provide more services, so anecdotally it seems that it is becoming more efficient—what is the impediment for the Scottish Executive?

I am not sure that I can answer on behalf of the Executive but, personally, I do not see an impediment. I agree with the sentiments that you express. A desire to do the necessary work rigorously would lead to the generation of the appropriate output data. We have not had an explanation of why that has not been done. Will you run your first point past me again?

I quoted from the Official Report of the Finance Committee meeting of 5 October 2004. The minister said:

"we will be able to demonstrate clearly where savings have been made and applied. After all, we must ensure that there are identifiable benefits at the front line."

In the committee's previous discussions on the matter, I raised concerns about whether both parts of that statement are true. On the first part, there are uncertainties about the information that we will get about the delivery of local government savings—they represent a big chunk—and the delivery of health and procurement savings. In those areas, the information that we were given was not adequate for us to judge whether the sums that the Executive highlighted as targets were achievable. The jury is still out on that. I understand that the Executive is reaching an agreement with the Convention of Scottish Local Authorities on how the information about the delivery of those services will be presented—that is still to come.

We are nowhere near resolving the second point. The Executive's view has been that the additional benefits arising from the release of the savings were reflected in the targets that were set at the time of the spending review. I immediately said to the committee that that was not adequate and that those targets, some of which are outcome based, were not the same as measuring output increases as a result of efficiency gains.

We then had a reply from the Executive that suggested that it would use the national accounts model to show that it had increased output by 5 per cent. I advised the committee that that model is entirely inappropriate for such an exercise. The national accounts model treats the public sector input the same as the output—if one increases spending by 5 per cent, one increases output by 5 per cent. In this case, however, if we stick to the national accounts model, we add nothing because we would just redistribute the 5 per cent.

The committee has already said to the minister that we do not think that either of those explanations or ways of measuring the delivery is adequate. For each service, we need a measure of increased output—more teachers, more policemen and so on. The minister used that language in what he originally said—he talked about teachers, policemen, doctors and nurses—but we have no quantitative information about how those numbers are changing as a result of the exercise. Part of the problem is that the Executive has treated the block of money as part of the overall growth pot.

I would have thought that it was perfectly practical for the Government to identify a range of different savings, put them into a pot and say, "This is the efficient government pot and we will now have a bidding process"—that is the way in which the challenge fund bidding process worked in previous years. There would be an identifiable pot of money from which it would be possible to draw down. I take it from your paper that no such approach has been taken.

The process involved the moneys that were made available being redistributed according to ministerial priorities—that was the phrase that was used. The process that you describe would have been perfectly possible to operate.

In the Scottish Parliament information centre paper there is an efficient government timeline. Next to 29 November 2004, it states:

"Publication of the Efficient Government Plan by the Scottish Executive reveals a target of £745m recurring savings".

Although it was claimed at the time that those savings were recurring, that was disproved shortly thereafter. Therefore, the word "recurring" is superfluous.

I am quite happy with it. In a sense, savings recur once they are made. We were unhappy about the Executive counting them three times, but if one saves £90 million, it is saved forever.

I would love to see that explained to genuine captains of industry, let alone people in the public sector. However, I will pass glibly over it, which treatment is about as good as it deserves.

The key point that comes out of the paper is that you have proved that even auditing the movement of money is difficult and embarrassingly incomplete. Anything less than a total reconciliation and a full audit trail is an affront to the committee and the Parliament.

I presume that that is an observation.

I am looking for verification of that reasonable statement.

There is a need to deal properly with the exercise in the way in which you suggest, otherwise it will continue to be treated as it is in the media. Devolution is supposed to be about bringing in more transparent and rigorous government. Let us pursue that.

On the assumption that we can park that reconciliation and audit trail back where it belongs, is there value in our turning the focus on the baseline of outputs and saying, "Given that you're making these claims for savings, let's see the baseline outputs as they were at 24 June 2004; let's see the movement that is forthcoming on that", and use that as an additional reconciliation?

We should be asking for that information; it is a gap in the document. Audit Scotland gave the Executive the same advice: without baselines and output measures, the exercise will not be complete.

That is nice and crisp. This should go back to the Executive: we want a reconciliation of the money and of the outputs, and anything less is not enough.

The issue is the timescale within which that can be achieved.

Some of the matters that I wished to explore were discussed in response to previous questions. However, there are two or three things that I wish to ask Arthur Midwinter.

If I may quote the classic line, "You wouldn't start from here."

The road to Dublin.

I do not want to make any comparisons with Ireland because Jim Mather would come in if that was an Irish joke.

The convener mentioned the timescale, and we are probably a year down the road from the commitments and pledges on how savings would be targeted. We have discussed critical elements such as baseline budgeting and drawing down outputs, but are there any additional useful measures that the Executive could take within the timescale to allow us more clarity than we have been given in our past two or three meetings?

I cannot think of anything further. All my thoughts on the gaps and on what needs to be done are in the various papers. I am just looking for more rigour and more transparency in general. If you were to ask, "Where should we start from?" I would answer, "What is a reasonable target? How can we share the work equitably among the portfolios? What will be the benefits in the outputs?"

The efficient government initiative does not appear to have been set out in an overall rational way. We have a set of savings that are made early on and built into local government settlements; for another five portfolios, things are determined after the spending review is over. I certainly would not want to see the situation handled in such a way again; I would like to see it handled within a strategic framework.

Given the knowledge, experience and erudition on financial matters that you regularly demonstrate to the committee, can you tell us why things did not happen in that way? When you are having a nice wee glass of wine and speculating with friends and colleagues on these issues, do you wonder why they were handled as they were?

You are leading Arthur Midwinter into territory for which he is not responsible.

I have not been able to drink wine for five years, Frank; you are making me envious talking about it.

Does it interfere with the whisky?

Given the skills and expertise in the Executive, why were matters not better organised?

We know that the Treasury was working on the issue for nine months before an announcement was made. We do not know what was going on in the Executive because there has never been an announcement about that.

The Executive appointed its efficient government team after the first statement on savings of about £500 million was made. One official was in charge at that time, and then there was a trawl for others. My guess is that the Executive was slow off the mark. However, like you, I gather that from the information that comes before me. I have no knowledge about whether anything was going on before the announcement in June 2004 by the then Minister for Finance and Public Services.

As a new member of the committee and as one who has no background in local government, I am interested in your remarks about the best-value audit of local authorities. Where can I find information about that so that I can identify the relationship between the £168.3 million of assumed local government efficiency savings and the existing auditing and baseline work done at local authority level? Is it possible to assess some of the efficiencies?

I have two points to make on that. The best-value audit looks at an authority's management of its resources over the previous few years. About six have been done so far, and all predate this particular process. They will have considered what happened between 2000 and 2004 or 2005.

On the impact of best-value audit, before you joined the committee, we decided to write to local authorities to ask them how they were handling the issue. We visited two local authorities, and it was clear that they were not simply making efficiency savings but were reaching their targets in whatever way they could. Part of the committee's subsequent concern was that although the initiative was supposed to have the objective of allocating resources to service development, because of how it had been handled—cutting the grant to local authorities—there was a prospect of services being reduced and/or council tax being increased.

We are seeking information from councils and have received a number of replies, which we will report to the committee. I understand that we also now have a letter from COSLA about the matter. We have not looked at that yet, so I can give the committee no information about it.

The basic situation is that £168 million was taken from local authorities' block grant on the assumption that that sum could be saved without there being an impact on services. However, my experience of local government is that reducing or increasing grants never has the kind of simple impact that central Government thinks it will have. I expect that we will find that efficiency savings and other savings have been made, some of which might trickle into council tax increases by year 3 of the cycle. I have expressed that view to the committee before and, given what has happened over the past 25 years, that is still what I expect to happen.

I have two points to make on that. First, COSLA wants to meet Arthur Midwinter and me to discuss how local authorities take forward their targets. Secondly, I think that it is reasonable for the Finance Committee to look at all the budget areas, but that perhaps brings up a point of parliamentary protocol. For example, we must be conscious of the Local Government and Transport Committee's remit in relation to detailed analysis of what happens in local government. Committees might have to observe certain proprieties when pursuing local government issues, because one committee might go too far and encroach on another's remit.

I want to return to the business of the £319 million from the early losers. Paragraph 9 of the briefing paper quotes a statement from the minister. I might just be stupid—I am sure you will tell me whether I am—but I would have thought that the statement would also have referred to the possibility of having a bidding mechanism for the savings in the pot. However, that is not how ministers have approached the realignment. It is not possible to say, for example, that £1 million was taken from the health budget and put into the communities budget as a specific little parcel of money. Surely there must be consideration in the budget process to giving above-average settlements for particular projects.

It would have been better if you had used "ought" there, rather than "must". There ought to have been reallocations of the kind that you suggest, but we have no evidence that there have been. Nothing that has been reported to us suggests that that has happened. There has been no application of a framework in relation to using the release of funds to develop priorities, although we would have expected that to happen. Such an approach would have been consistent with the overall strategic approach that the committee has been trying to encourage ministers to adopt. However, we have nothing to suggest that that happened and the results suggest that it did not—for example, some local authorities got 3 per cent and others got less than 1 per cent.

But we should be able to explain how that accorded with ministerial priorities. I have difficulty in understanding why such information is not available.

From what Arthur Midwinter has told us, it strikes me that there is no reason why a more rigorous process could not have been put in place. There is no evidence of technology, processes or mechanisms being an impediment to such an approach—it just has not been taken.

I agree.

In the context of Elaine Murray's point, I want to flag up the issue of which budgets we might want to consider. It strikes me that we might want to highlight three. One is the transport budget, which seems to have made few efficiency savings. The second is the lifelong learning side of the Enterprise and Lifelong Learning Department, which also seems to have made no reduction. The third is the rural development budget. Those three areas do not seem to have delivered any significant efficiency savings.

From memory, I think that that is right; I think that that is what the table that we produced indicated. Those areas are what Wendy Alexander has previously described as an "interesting triumvirate".

Arguably, the thrust of the savings have come in the local government and health budgets.

I have a final question. One of the points that we started from was a comparison between projected savings south of the border and projected savings up here. The savings have been creeping up in Scotland. My estimates get us to about 0.7 per cent of the initial figure in England. Is that roughly in line with your estimates? The figure was £812 million.

I have not gone back to consider the comparison, because I am of the view that we should get away from it. As we cannot do much about it now, we should concentrate on ensuring that what is happening is appropriate for Scotland. Certainly, additional savings have been identified in each exercise. Next week's paper will identify further additional savings. The savings have been creeping upwards—from memory, the figure is now more than £900 million in cash-releasing savings. Those figures will be in next week's paper, because the additional savings came in after this paper was drafted.

There is a creeping improvement.

As there are no more questions for Arthur Midwinter, I thank him for the paper.

I remind members that John Elvidge will give evidence next week, predominantly on performance monitoring. During its away day, the committee signalled that we wanted to speak to him about resource allocations in the previous spending review, so there will also be the opportunity to raise one or two issues about that next week.