Public Audit Committee

Meeting date: Wednesday, November 24, 2010

Official Report 576KB pdf

---

Section 22 Report

---

“The 2009/2010 audit of the Scottish Government consolidated accounts”

Before we turn to item 3, can we agree to take item 6 after item 3?

Members indicated agreement.

I invite the Auditor General for Scotland to give us his comments on his report “The 2009/10 audit of the Scottish Government consolidated accounts”.

Thank you, convener.

The Scottish Government consolidated accounts make a substantial document of well over 130 pages. I recall suggesting, perhaps rather rashly, that the information in the consolidated accounts might be used to help improve and inform Parliament’s budget scrutiny process. I suggested back in March that Audit Scotland might be able to assist that process by providing an analysis of variation between the outturn and the budget, and related matters.

The accounts are not qualified and, in general terms, the Scottish Government and associated bodies managed their budgets well, with the financial outturn being within 1 per cent of the budget as a whole. The Audit Scotland team prepare a final report on the accounts, which states that the Scottish Government has made significant improvements in both the timing and the quality of the accounts presented for audit. The audit was completed in early September this year, which is significantly earlier than in previous years. That was a great achievement for both the Scottish Government and the Audit Scotland team, particularly given that it was the first full year of the application of the international financial reporting standards, which are a bit of a challenge to everyone professionally.

I will comment briefly on some of the developments in reporting on the Scottish budget. As members are aware, the Scottish Government’s spending plans are usually published in the autumn, followed by a budget bill, which is usually presented to the Scottish Parliament the following January for the financial year that starts in April.

There are opportunities to change a budget during the year, with Parliament’s approval, and that is most commonly done through the autumn and spring budget review process. At each of those stages, supporting documents provide additional detailed spending information at what are generally known as level 2 and level 3. However, there is no statutory requirement for the Scottish Government to stay within these lower limits.

In recent years the Scottish Government has made a number of significant improvements to the way in which financial information is presented to the Scottish Parliament, but we believe that there is scope further to improve the clarity of reporting to Parliament, particularly on the reasons for proposed changes to the budget.

The Audit Scotland report provides an overview of how individual Scottish Government portfolio budgets changed at the autumn and spring budget review points. For example, the report says that nearly a third of the 65 level 2 budget lines showed significant changes between the original budget and the spring budget revision.

The supporting documents provide some explanation of why budget changes are proposed. Although in some cases changes to level 2 budget lines are the result of ministerial funding announcements, which are explained in the supporting documents, it is not always clear which level 3 budget lines are affected. For example, it is not immediately clear that the additional funding for modern apprenticeships, which is a significant policy initiative, resulted in an increase in Skills Development Scotland’s budget.

Most budget changes are the result of the transfer of resources within and between portfolios and, generally speaking, there is limited information about why such transfers were necessary. I suggest that the provision of more detailed information could allow Parliament to exercise more effective scrutiny by helping the committees to understand better the reasons for proposed budget changes.

I will touch briefly, if I may, on the variations between the 2009-10 outturn and the approved budget. A summary of the total outturn is on page 30 of the accounts. The accounts also contain, from page 32 onwards, individual portfolio outturn statements, and there is a single outturn statement that details each portfolio’s capital spend against budget.

There is no formal requirement for the Scottish Government’s consolidated accounts or any other document to report the outturn at the end of the financial year in comparison with the budget at level 3. I think that subject committees would find it useful to have information at that level to inform their consideration of the budgets for future years.

12:00

One purpose of the Audit Scotland report is to provide more detail on the variations between the outturn and the budget than one can find in the accounts. There are many reasons why outturn will not match budget—for example, some budget lines are demand-led, which will affect the outturn. In other cases, the implementation of policies and projects might be faster or slower than anticipated, which will result in expenditure that is greater or less than has been estimated.

The Audit Scotland report concentrates on the significant variances at level 2. There were 11 instances in which the net resource outturn varied from the budget by more than £10 million and 5 per cent of the budget. In three portfolios, capital outturn also varied from the budget by more than £10 million. One can derive a lot of things from the accounts, but they are not always explained as clearly as they might be.

I offer two thoughts in conclusion. First, given the financial constraints that the Scottish Government will face in future, it is more important than ever that high-quality and detailed financial information is made available so that Parliament can exercise adequate and well-informed scrutiny of the proposed budget. With that in mind, there is scope for further improvement in the clarity of reporting to Parliament; for explaining the reasons for proposed budget changes; and for providing more detailed financial information to Parliament on outturn against budget. Subject committees in particular may find it useful to receive more detailed reports on the outturn at portfolio level as part of their scrutiny of the subsequent year’s budget. It is important to understand what was spent in the previous year before determining the spending needs in the year to come.

In that context, I remind the committee that under the Budget (Scotland) Act 2010 a new arrangement will be introduced: for the first time, there will be only one overall statutory budget limit that will apply to the Scottish Government as a whole, which means that a breach of the legislation would be possible only if the overall total for all portfolios was to be exceeded. That will have the advantage of allowing the Scottish Government to move money more easily between portfolios without the need for approval by Parliament. There may be less emphasis on using the formal autumn and spring budget review process to secure Parliament’s approval for changes to the budget. As a result, at the end of the year there might be greater variances between budget and outturn than we have seen in the past. It will be important to ensure that the change to a single overall control total under the 2010 act, which will bring some advantages for the Scottish Government, does not result in less detailed information being available to support the parliamentary scrutiny process, especially in future years when budgets will be under severe pressure.

Secondly, I have an obvious comment that takes me back to the report that I produced last year on “Scotland’s public finances: preparing for the future”. The accounts relate primarily to the audited financial numbers, and say hardly anything at all about the activities, outputs and outcomes that are delivered from the spending. The Scotland performs part of the Scottish Government website provides useful information on progress with outcomes, but as I mentioned in “Scotland’s public finances”, the improvements in that regard need to build a link between the money that is spent and the delivery of outputs and outcomes. If we do not get that link, the ability to scrutinise the value for money of spending programmes will be somewhat limited. I encourage the Scottish Government to continue working towards filling in that missing link.

As ever, my colleagues and I will do our best to answer any questions.

I want to ask the Auditor General about one of the issues that he raised towards the end of his remarks. He suggested that it would be necessary for us to consider the reasons for proposed budget changes, but he went on to discuss the single overall control total.

My understanding from what has been said is that the Scottish Government can vire money between different budget headings without bringing such proposals back to Parliament for discussion or approval. By contrast, councils in Scotland set out their budgets and councillors make policy directions, and any major changes such as, say, making a substantial cut to the social work budget in order to invest in education would be subject to discussion and a degree of accountability. We are supposed to believe that the Scottish Government is accountable to the Scottish Parliament and that the Scottish Parliament is responsible for holding the Scottish Government to account, but we are actually moving to a situation in which the Scottish Government is less accountable to the Scottish Parliament than Scottish local authorities are to their members. Given the sums of money that we are considering and the stage that we have reached in the very difficult process to which the Auditor General has referred, surely it cannot be right or helpful for there to be less accountability for and less scrutiny of the Government than ever before.

As the form and content of budget acts are clearly policy matters for the Scottish Government and, in particular, the Finance Committee on behalf of the Parliament, I hesitate to say too much on the issue. However, the point that I was endeavouring to make was that until now the Scottish Government has been required to present in the autumn and spring budget revisions any significant adjustments at portfolio level. In other words, it has been required to obtain Parliament’s approval to move money within or between portfolios. There will be advantages for the Scottish Government in having single-budget-line approval but the word of caution that I offer is that it will be important to find a way of being very transparent about those movements to ensure that at the end of the financial year account can be taken of them in any scrutiny of the Government’s overall financial performance.

It is perhaps also worth making the point that the financial information accompanying the autumn budget revision, for example, has improved over the years and is useful for the Finance Committee and the subject committees in considering budget planning for the following year. We simply need to be vigilant about certain issues.

The report is very valuable and I agree with everything that Robert Black has had to say on these issues. I certainly think that this is the start of a process that will become increasingly valuable in years to come as we scrutinise outturn in greater detail. In many cases the information is complex and difficult to understand; indeed, one can see from the report that Mr Black has produced that underspends and overspends have to be read in the context of

“Variances as a result of technical accounting adjustments ... Variances as a result of budget classifications”

and

“Variances as a result of amendments to provisions”.

Only after taking all that into account does one get to other general underspends against budget, which can be those that we really want to drill down into. Audit Scotland’s assistance in understanding and drilling down into these matters and scrutinising what ministers and officials do will be key. I think that we will be able to do that more and more in future but at the moment things are, at times, as clear as mud.

Tricks get played—sometimes by officials as well as by ministers. For example, we have just heard about the funding for modern apprenticeships. A minister can make an announcement and refer to additional funding, but officials can then go to the body that is responsible and say that it is still expected to deliver everything within its current budget because they believe either that it was on track to underspend, or that it could make efficiency savings within the financial year. A minister can make an announcement that we think is mainstreamed into the future departmental budget, but officials, sometimes without the minister’s knowledge, will take the money out the following year, saying that the minister’s announcement was for that year only. It is particularly easy for officials to do that when there is a change of Government.

All of that goes on all the time in government. The process should be clearer and more transparent and open. At the moment it is, and will continue to be for some time, complex and opaque. The reporting process is very important.

I am looking for clarification more than anything else. Paragraph 12 of the Auditor General’s report, and exhibit 1 below that, show the changes to the budget between the original budget and the spring budget review. I was interested to see that the net budget increased by £440 million during that period. How did that come about? Where did that additional money come from?

As ever, these things are not straightforward. I will start the answer, and then I might invite Fiona Kordiak to continue. The committee has not had the pleasure of interacting with her before. She is the director of audit services and is in charge of all the local auditing, including the audit of the consolidated accounts. She might be able to help with the detail.

The net increase in the Scottish Government’s budget comes from a number of sources. Some involve additional funding from HM Treasury arising from the well-known Barnett consequentials that happen during the year.

By far the biggest reasons for the increase are technical adjustments resulting from the implementation of IFRS. Those were agreed by the Treasury but the spending power is neutral as the adjustments do not involve additional cash becoming available.

I turn to some of the specific increases in the health, education and local government portfolios. The main reason for the increase in the health budget was a technical adjustment under IFRS, and the education budget increased largely because an extra £116 million was provided to the Scottish Further and Higher Education Funding Council. Extra grant funding was also provided to local authorities, but the Scottish Government would be best placed to give the committee more information on that.

Meanwhile, there have been reductions in the finance, justice and environment portfolios. Again, we can analyse that at a high level, but detailed information will have to be supplied by the Scottish Government.

I do not think that I have much to add. Basically, there was an increase of £292 million because of the IFRS adjustments. It is not real money, in a way, so it does not mean that the Scottish Government has any additional resources; there was just a change in accounting rules. As Bob Black said, some of the rest came from Barnett consequentials and other sources, but the main increase was IFRS money.

That is helpful. I was just trying to understand why the budget had increased. It sounds as if most of it came through technicalities, but there is an element of what I presume were additional announcements by the UK Government, followed by unexpected Barnett consequentials. That is interesting. We are dealing with next year’s budget, for which a sum has been presented, but, on past trends, the amount of money that is available to spend might be higher than anticipated because the same sort of increases might apply in the coming year.

Yes.

Okay. Thank you.

12:15

I am slightly confused, because the convener seemed concerned that the powers that are available to the Scottish Government under the budget bill allow for less scrutiny. If I understood him correctly, he suggested that the Government could move funds between budget lines without parliamentary scrutiny. However, I think that the Auditor General said that that is not the case and that parliamentary approval is still required. Is that right?

Our understanding is that, for the new budget bill, the formal approval that is required of Parliament will be for one overall control total for all the spending that is controlled by the Scottish Government.

The budget bill is liable to approval, or otherwise, by the Scottish Parliament.

Yes, that is right. That is the intention at the moment. It will be a single sum.

Notwithstanding the concerns, it is still for the Parliament as a whole to scrutinise the bill and to decide whether to pass it.

Oh, yes: there is no doubt that Parliament may scrutinise in any way that it wishes. The point that I was endeavouring to make was that appropriate arrangements will need to be in place so that the Parliament receives, at the right time, sufficient information to enable it to understand well how the resources are being moved in year, both within and between portfolios.

Will you clarify that? As I understand it, you are saying that any substantial changes that are made during the year between portfolios do not have to come back to Parliament for discussion or approval. As long as the Government stays within the total sum and does not exceed it, there is no obligation to come back for parliamentary scrutiny.

My understanding is that, on a strict interpretation, that is what the budget bill means. However, I immediately say that, in recent years, the Scottish Government and, before that, the Scottish Executive have progressively improved and widened the amount of information that is available to the Parliament. I am sure that the Scottish Government has no intention of drawing back from that, but it needs to be aware of the implications of how information comes through to the Parliament at the right time and to which committee.

The bottom line is that power over the budget is retained by Parliament.

I have another question, but first I want to clarify that point. Does that—I assume that it does—include transfers between revenue and capital and vice versa?

Transfers between revenue and capital could occur in any case within a portfolio. The balance between revenue and capital within any particular portfolio is an administrative decision.

I am not sure that it has been clear to everyone that the budget bill allows for that. I thought that it was about approval of specifics and not just of the overall total. That is interesting and helpful.

I have another question. Until 2007, the accounts contained a figure of £50,000 paid every year to Her Majesty’s Revenue and Customs for updating the database for collection of tax changes of plus or minus 3p in the pound. In 2007, the Treasury asked for just over £1 million, rather than the annual payment. That would have enabled us to raise £1 billion through thruppence in the pound extra in tax. It is a small amount to raise a huge amount. Was it ever reported to the Auditor General that the money was no longer being paid?

No, that was not reported to us and, to be frank, I would not expect it to be, because the sum involved in payment to the Treasury was relatively small compared with the size of the budget and would be well below the threshold of what auditors of accounts call materiality.

So, it would not have been included in the accounts.

The amount that was being spent would be in there somewhere, but it is a relatively small sum compared with the multimillion pound figures that we are talking about in the report.

It is a relatively small sum compared with the multimillion pound figures; you are absolutely right.

One helpful comment at the tail-end of the Auditor General’s report suggests that more detailed financial information could be presented to the subject committees from time to time so that they can keep an eye on outturn against budget.

Am I right in saying that this is the 11th or 12th year of the consolidated accounts in the Scottish Parliament? Has the issue not arisen before of broadening and making available to subject committees regular reports on outturn against budget? It seems to be a particularly wise and sensible thing to share. Is this the first time we have thought about it?

As I mentioned earlier, both the previous Scottish Executive and the current Scottish Government have steadily improved the quality of financial information that is available. Perhaps the point that I am really trying to make here is that the section 22 report is a very complicated document, which is principally about the audited financial numbers and related matters. In that form, it is not very helpful to subject committees that are trying to come to terms with the financial performance and the spend profile within their areas of interest. It is not intended to do that.

However, I would certainly encourage the Parliament and the Scottish Government to think seriously about whether it would be possible to continue to improve the information that is available. For example, it might be possible for the Scottish Government to provide a separate document for subject committees that would provide a more detailed explanation of outturn against budget, with explanations of why variances have occurred. If we are to move to a situation where the Scottish Parliament is approving a single line, then it seems to me to be even more important that the subject committees get that kind of analysis presented to them in an easily digestible form.

That was really helpful. I have probably a more technical question on the main report—the consolidated accounts. I draw members’ attention to pages 106 and 107, which refer to contingent assets and contingent liabilities. My question is: is it real money? There are substantial amounts of money mentioned there. I draw members’ attention to the column on contingent assets headed “31 March 2010” and to the items there relating to, for example, Glasgow Housing Association and contingent liabilities for medical negligence. Under the same column heading for contingent liabilities, there is an item in the “Health and Wellbeing” category for a potential liability from the Glasgow stock transfer of £75 million. If we add up the figures, the total comes to about £400 million. Is that real money as Fiona Kordiak described earlier? Is it set-aside money? Is it a reasonable amount of money to be set aside? How do we know whether that is enough, not enough or too much? I presume that with budgets being very tight at the moment, we could do with deploying that, if it is real money, directly to front-line services.

Contingent liabilities are not moneys that are set aside. They differ from provisions, which are moneys that are set aside. Contingent assets and contingent liabilities are, by their very nature, uncertain. That is why they are not provisions. They are disclosures of something that may or may not happen in the future that may give rise to future economic benefit or cost. There are accounting rules that need to be followed as to when something moves from being a contingent asset or contingent liability to being a provision. It is all down to predictions about how certain the event is to occur. The crucial question is whether the amount involved can be estimated with reasonable reliability. Contingent assets and liabilities have not been set aside, but are merely disclosures in the accounts.

If they were required to be provided for and set aside, what would be the impact?

If a liability was required, that would be a cost in the year of account in which it was decided that provision had to be made.

Can you see what I am getting at, convener? I ask because £300 million or so is an incredible amount of money to find if some circumstance were to arise. That would put an enormous hole in any Government’s budget, at this time.

Some of the contingent assets and liabilities can be quite long term, so they may not involve issues that would ever crystallise in any one year.

So, we do not really have to worry too much about it, do we? [Laughter.]

The very fact that the amounts are disclosed means that they have to be considered and reviewed frequently.

Thank you very much for that.

The last time that question was asked was by an Irish finance minister.

I am looking at paragraph 19 of the summary report, which covers variations between the 2009-10 outturn and the budget. I am interested in the fact that the underspend was £253 million. The fair point is made that that is less than 1 per cent of the budget, but it is still more than £0.25 billion. Committee members who were in Parliament in the early years from 1999 will recall that major criticisms were made of the Government at that time for underspends of substantially less than £253 million. My first point is that that is a significant sum of money—the spending of an additional £253 million in Scotland could have made a substantial difference. Such sums of money will become even more important in future years, as the public spending situation becomes tighter and tighter.

What happens to that £253 million? What are the options for future spend of that money? Is it rolled forward? Is it still available to the Scottish Government? It is important to make the point that the sum of money that the Scottish Government required to fulfil its functions and responsibilities in 2009-10 was not the budget figure but the actual spend, which was £253 million less than the budget figure. Former councillors will be well aware of zero-based budgeting. Such an approach means that for the Government to get best value as regards future spend, it is important for it to take into account the fact that it required £253 million less to deliver services in that year, rather than just to parrot or repeat the 2009-10 budget figure.

As far as the underspend is concerned, the Scottish Government has to undertake a very fine balancing act as it comes towards the end of the financial year, because it never wants to overspend against the budgets that Parliament has approved, which would lead to automatic qualification of the Auditor General’s audit opinion on the accounts.

In itself, £253 million is quite a lot of money, but as a proportion of the Scottish Government’s budget, it is not. It is less than 1 per cent.

In the past, the underspend has been much lower than that. As I recall, it has been less than £100 million on many occasions.

In recent years, the level of underspend has been fairly consistent. In 2008-09, it was less than 1 per cent, so it has been fairly steady in recent memory.

As regards what happens to underspends, in general, any underspend in the existing comprehensive spending review period would be returned to Westminster, to HM Treasury, and would not be reconsidered until the next CSR period. I have not yet had time to analyse—

So, is the money lost to Scotland?

It would be lost to Scotland in that CSR period, unless the Scottish Government made an exceptional case to HM Treasury for retaining some of that money. It was part of the agreement that was struck between the Scottish Government and the Treasury that the funds that were sitting with the Treasury prior to the present CSR period could be released, and those have since been drawn down and released to Scotland.

Some of that money could have been used for updating the HMRC’s revenue database, could it not?

It would therefore have had no cost.

Is not it the case that £7 million of that £253 million could have been used for updating the HMRC database?

I think that that is probably a policy matter, so your question would be best directed to the Government.

Very wise. There is a job for you in the diplomatic service.

I will just put it on the record that that is a policy matter over which we have no control, given that we have no control over HMRC.

That aside—

It would be good to get that clarified on the record. I think that Jamie Hepburn is suggesting that we would have no control over paying the money to HMRC.

12:30

No. My point is that we had no influence over HMRC’s decision on whether to renew the computer system.

I do not think that that was the question that George Foulkes was asking; he was asking whether some of the underspend could have been used to pay the bill.

That was the point that I was making—although it was not the point that I wanted to ask about.

I am a little confused about the underspend. I understood that there was something called end-year flexibility and that money that has not been spent could be retained under the so-called end-year flexibility arrangements. Could you explain the situation?

In the fairly distant past, the levels of underspend were significantly greater than they are at the moment, and money was built up in the Treasury through the adding up of all the underspends. As part of the agreement between the Scottish Government and the Treasury, the end-year flexibility was set aside, Scotland could get access to the money that had built up in the Treasury, and any underspends in subsequent years would not be available until the next spending review period or unless Scotland could make a specific case to argue for the release of the underspend.

The situation is just as Fiona Kordiak described.

Yes.

It is interesting to hear that underspends were much higher in the past.

Could I make a point?

I will bring you back in shortly, Nicol.

On contingent asset liabilities, I want to double-check that I am reading the information correctly and, maybe, set Willie Coffey’s mind at ease. The figure of £293.3 million is not actually a liability, is it? It is an asset—money that could be accrued—and if you add the assets all up, the total is greater than the liabilities. Is that correct?

Yes. Some of them are assets and some are liabilities.

But none of them is real. [Laughter.]

Could I simply ask that the committee be given a note of the underspends since 1999?

Yes.

On the question of the underspend, Nicol Stephen mentioned the figure of £253 million, but the chart shows a greater underspend of £314 million. That is balanced against an overspend in capital of £61 million. What has actually been returned to HM Treasury—£314 million or £253 million?

It is £253 million.

In that case, if a capital project—I cannot think of one, but perhaps a capital project in Edinburgh or somewhere else—

Or Kilmarnock.

Yes, or Kilmarnock.

If a capital project overspent by £314 million in one particular year, could the underspend be set against that to balance it?

Yes. Money can be transferred from revenue to capital for that purpose, under how the money is accounted for.

If a big capital project that is currently under way has overspent significantly—I cannot think of any such project off the top of my head—an underspend could be set against that.

Yes.

Great. Thank you.

In conclusion, I have a couple of questions related to what the Auditor General said. Will financial performance information be sustained at a significant level of detail, or is that something that we need to ask for?

A considerable volume of information supports both the accounts and, during the course of the financial year, the budget and the autumn and spring budget revisions. There is an opportunity to work with the Scottish Government to ensure that the financial information that is provided to assist budget planning is improved, particularly in the way that information is supplied to the subject committees to assist them in their work.

That would be useful. The last question is this: will we be able to see progress linking Scotland performs to the money that is actually spent?

That question is probably best addressed to the Government. I am not sure whether the team has any information about on-going work, but that link certainly cannot be made easily at the moment.

We can follow that up. Thank you for your contribution.