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I welcome to the committee three witnesses who will give evidence as part of our examination of the Scottish Executive budget for 2004-05: Ian Doig, the director of the Chartered Institute of Public Finance and Accountancy in Scotland; David Dorward, former chair of CIPFA in Scotland and director of finance at Dundee City Council; and David Sawers, director of finance at Angus Council.
Thank you, convener. I will keep my remarks brief.
We are going to ask some general questions to start with.
I will begin by asking about revenue funding or aggregate external finance. There will be an increase in AEF from £7,378 million in 2003-04 to £8,125 million in 2005-06. Is that increase sufficient to take on board the inflationary pressures and the identifiable new burdens?
CIPFA does not have an official view on that. It is for the Executive, subject to Parliamentary approval, to set public spending levels. Perhaps my two colleagues will give you their points of view.
As Ian Doig said, it is for the Executive to determine the amount of the local government budget. The committee will be aware that COSLA has a view on it, which is that local government has been underfunded under the 2004-05 settlement. That question would be better addressed to COSLA than ourselves.
You will remember that one of the issues that came up in previous budget discussions was the linking of a proposed settlement with output or outcome agreements for local services and the importance of doing that. What progress has been made on that? Have you been able to identify any best practice that we could follow?
Again, the official CIPFA view is that we are not involved at that level as an institute, although my colleagues might have something to say about the process and the progress that has been made.
A fair amount of liaison and consultation has taken place between COSLA and the Scottish Executive and significant progress has been made. It is too early to point out areas where there has been good practice, but local authorities are making good progress in dealing with outcome agreements. COSLA and the Scottish Executive plan to take that further in 2004-05. The budget probably does not take on board outcome agreements, as it is far too early for it to do that. The budgets for 2005-06 and 2006-07 will have a greater opportunity to take into account outcome agreements as they become better developed.
So, you do not know of any best practice anywhere.
COSLA will probably have a much better indication of that than we have, through the directors of finance. Outcome agreements are not simply finance based; COSLA would be better placed to answer that question.
Let us move on to local government capital issues. In the next financial year, the prudential scheme will be introduced. How has that been reflected in the Executive's budget and do you think that that will enable local authorities to take advantage of the new regime?
Our official view is that it is for the Executive to set spending limits. You will have a more detailed session this afternoon on the prudential code and some of the scenarios that might emerge from that. I invite my colleagues to comment on the practicalities.
The spending document seems to indicate a reduction in capital expenditure in real terms. However, within the revenue settlement, £916 million is provided in 2004-05 through the spending review, which is enough money to service existing local authority debt and provide for new investment of the order of £500 million. That £500 million is obviously related to the prudential framework, given that the loan charges support is there to support local government capital expenditure.
I agree with that. You do not need to point out to those of us who have been on the committee for some time the fact that the budget is not clear—that is the clearest statement that there is.
The Executive is certainly making more allowance than it has in the past. I say that as a matter of judgment. It is apparent to everyone that the infrastructure in Scotland needs renewed. Things such as roads, and so on, need renewed. It is for the Executive to decide what is affordable. We would not comment on the amount in the budget; all that we would say is that there is a need for increased capital expenditure to renew our assets.
You commented on the £500 million of new investment in the revenue budget. Is that additional to the specific capital allocations?
That is correct. It is in addition to the figure of around £400 million, which relates specifically to capital grants rather than to capital allocations.
What period does the £500 million figure relate to?
The £500 million figure relates to 2004-05. The figure should be repeated in 2005-06.
It is worth pointing out that, although the Scottish Executive budget talks about £413 million for capital, that does not reflect the whole situation, as it does not reflect capital receipts. The level of spend in local authorities is more like £1 billion. It is important that the committee understands the whole situation that it is scrutinising. Improvements could be made to the transparency of the process.
It is strange that, prima facie, the document seems to underestimate the amount of capital investment that could be incurred in 2004-05. Local authorities are making plans to use the prudential framework as effectively as they can. I believe that the local authorities are expected to make their returns today on their projected planned capital expenditure for the next three years under the prudential framework. It will be interesting to see how that adds up. The prudential framework gives local authorities an opportunity to enhance quite significantly their capital expenditure.
We have jumped ahead to address capital a bit earlier than I had expected. Three or four members are indicating that they want to come in on various points. First, I will call Sylvia Jackson and Bruce McFee, who want to come in on prudential borrowing and capital.
My question links with revenue as well, for obvious reasons.
I hope that it is not a cheeky question. You are to give a talk later this afternoon on the prudential framework. Are there any other significant points that you have not covered as yet in your answers to Iain Smith?
What we would like to do in the session later on today is to talk through the principles and some of the possible scenarios. Members will be able to ask more detailed questions at that time.
The points that we have referred to relate to the 2004-05 settlement. The presentation to the committee will cover the longer term as well as the short term.
That is fine. Thank you.
At the moment, public-private partnerships are substantially supported by means of the money that is supplied to local authorities to create a level playing field. In future, instead of supplying local authorities with level-playing-field money for PPP projects, would it be prudent or feasible for that money to be redirected into a form of revenue support that would allow local authorities to take up more effectively the borrowing scheme that we have talked about?
The prudential framework will give far more flexibility than is the case with the previous system. We will cover all of that in the talk this afternoon.
I support what Ian Doig said. As part of the "best-value assessment" of capital projects, local authorities will want to investigate what provides best value. If PPP provides best value, local authorities will obviously want to continue with it. However, if PPP is not regarded as providing best value, we would want to lobby the Executive to adopt what is regarded as the best-value approach. It is too early to say which approach provides best value for money.
I do not want for one moment to take you into the sphere of politics. However, if it were proven, or if there was evidence to suggest, that a method other than PPP would be better for the funding of a schools rebuilding and refurbishment programme, would it not be more effective to provide the local authorities with the level-playing-field money so that they could use it to finance their prudential borrowing?
CIPFA's view is that there is no right answer. It is horses for courses. We do not say that PPP/PFI is the right answer in all cases; we do not say that it is the wrong answer in all cases. PPP/PFI is one of a range of tools that directors of finance in local authorities should consider. We will talk through the prudential code with you later on this afternoon.
I want to clarify the response to a question that Dr Jackson asked. You said that good progress has been made in output or outcome agreements for local services. What exactly does that mean? How many agreements exist?
I could not give you an answer to that question. The only organisation that could give an answer is COSLA. I am sorry if that sounds as though I am passing the buck.
You said that CIPFA does not have a view on which methodology should be used to finance projects. The new best-value regime has been in operation for a short time now. How is that developing? What approaches are being taken to monitor how the new regime is starting to take effect?
Are you asking specifically about the financial issues?
Yes.
Assessments are being done of proposed capital expenditure schemes. As part of those assessments, some analysis will be done on what solutions are available to the council. As you will be aware, PPP is a central part of the school rebuilding programme in the meantime. Taking forward a project outwith the PPP scheme would need to be done in conjunction with the Executive. At present, the PPP schemes are an integral part of rebuilding the schools.
I want to take that a little bit further. Community planning partnerships are another new development. Because those are new, there may not be a lot of evidence so far, but given the fact that those bring together funding sources from different bodies, does local government have any difficulty in tracking its spending through the CPPs? Are any issues arising around that?
I am not aware of any problems with that. One thing that heartens me about the prudential framework is that it includes project appraisal. Part of that project appraisal is identifying the most appropriate way of funding the project. That can include a wide variety of methods, including the prudential framework and PPP. Some of those projects will be joint funded with our community planning partners. That is happening on the ground, right at this minute.
A problem in all budgeting is comparing like with like and trying to understand exactly what is going on. How do we establish local government's base budget?
At present, the Executive and COSLA are having some discussions on that. To date, there is no transparency as to what local government's base budget is. I think that COSLA is pursuing that with the Executive. The Executive has, I think, indicated that it will support the provision of that figure for local government as part of the 2004-05 budget settlement. Work on that is going on at present, but we take the point that there needs to be a starting point for a local government budget.
COSLA brought together what it perceived to be its base budget for the 2002 spending review, and negotiation and consultation continue to be undertaken with the Scottish Executive. The local government base budget is difficult to identify, given all the new funding that is coming through and all the new initiatives that are added on a yearly basis.
Are you saying that it is not possible to get a base budget, because the situation is one of shifting sands? There must be a line that could be drawn, which would allow you to make some comparison.
If local government and the Scottish Executive could agree which playing field we are all on, then the goalposts would not keep shifting.
There is a baseline for the amount of grant that councils get, but there are a number of initiative-based pots of money that are allocated to local government over and above that. Before drawing up a local government budget, the funds that are allocated to local authorities in addition to the mainstream AEF budget need to be identified. To be fair to the Executive, it is important to realise that we have made significant progress over the past two or three years, notably with three-year budgeting. We have also made significant progress with partnership agreements with the Executive, working on several issues that have been unclear for a number of years. The Executive is committed to aiding transparency, and I think that that is partly due to the work of the Local Government Committee in identifying those issues.
Can you reassure us that there is a main stream of funding that can be identified, and that the real doubts are at the margins?
Within spending plans, there is the AEF settlement, in addition to which there is the capital allocation settlement. There are a number of Executive budgets where local government plays a part. From time to time, money is mainstreamed from those budgets into the local government budget. On a strategic basis, it is important that that money is identified earlier than has been the case to date. It is important not to understate the fact that the Executive and COSLA are developing that.
We wish you well in your search for clarity.
Greater transparency is required in the Executive's budget, so that you can judge how it compares with a local authority's spending need. There are some good examples—one being concessionary travel—of the Executive's coming back to us, wanting to identify the actual cost of such new initiatives and offering to fund any shortfall. That is a good example of identifying the financial effect and impact of a policy and making good any shortfall in the original estimate.
The cost of new burdens is included in budget calculations, but how accurately can that cost be measured?
That is the $1 million question. The Executive makes assumptions regarding the cost of new burdens. In some instances they are demand led, and it is difficult to ascertain whether the funding is too much or too little. Some calculations are based on estimates. When the cost of the initiatives is identified, it is important to go back to the Executive and explain why the estimates were too much or too little.
Individual local authorities will have to make detailed estimates of what they expect new burdens will cost—and I realise that we are not yet at the end of the period that local authorities have to arrive at their assumptions for next year. Does CIPFA have any indication from local authorities on precisely how much new burdens are expected to come to?
I should emphasise that we are not here representing local government; we are independent. The arrangements work best when local authorities are working with the Scottish Executive in a true partnership. When new legislation comes along, there is a need to gear up to accommodate its provisions. That might involve staff or premises, and it is important that local authorities are brought into such preparations. Otherwise, the outcomes might not be achieved in the appropriate time scale and with the realism that the Scottish Executive might have intended. Again, that is about transparency and partnership.
I realise that you are not here to represent local government, but do you have any feel for the size of the new burdens that local government is likely to bear from next year's budget?
COSLA has identified a figure but the Executive disputes it. You will recognise the figure of £440 million, which COSLA says is the amount by which local government has been underfunded over the years. The Executive does not share that view, but the feeling in local government is that various services have been underfunded.
It is wrong to try to consider new burdens as a totality; it is far easier to break things down into specific new burdens. COSLA and the Scottish Executive are considering individual new burdens and assessing whether assumptions made by the Executive could be improved on. I go back to the principle: as long as the Executive goes back and reviews the actual costs of new burdens and then says that it will make good those costs in the following year's local government settlement, that is the best that can be done.
How accurately can you estimate inflation, which is obviously an important part of the revenue budget?
As you are aware, the Government estimates inflation regularly. The accuracy has to be reviewed from time to time. You can estimate inflation in public service requirements and you can estimate price inflation, but at the end of the day they are only estimates, albeit informed estimates.
Local authorities' basket of purchases is not the same as the national average. We are better at identifying the problem than we are at offering a solution.
I want to ask about the modernising government fund. As you will know, that has been fixed at £15 million for the next three-year period, with an additional £1 million available for small-scale projects in 2004-05 and 2005-06. Is the level of funding sufficient to deal with the Executive's aims in the draft budget?
It is always difficult to say that a level of funding is sufficient. The work that has been done through the modernising government fund has been crucial for the future delivery of public services. Pilot projects have taken place in a number of local authorities and good practice has been passed on; that has been the correct way of doing things. One could always spend more money, but I believe that the sums are adequate at the moment.
The main point is that the modernising government fund should deliver the Executive's aims. When we take evidence from Andy Kerr, the Minister for Finance and Public Services, can we advise him that you are more than satisfied that you will be able to deliver those aims with the modernising government fund over the three-year period?
I really could not say whether £15 million is sufficient to meet the Executive's objectives for that fund.
Why might the fund not be sufficient? I appreciate what you say, but we are trying to find out whether the level of funding that the Executive has set is sufficient and, if not, why not.
When you set a budget, you have to consider what you want to achieve and how much that will cost. The level of funding has to build up from a base level.
I have a question that follows on from that point. I have gleaned from what you have said that you think that the process must be improved in certain respects, such as transparency. I am trying to get the important information that you have come to give us. Will you crystallise how we can make the budget process better?
As David Sawers said, a local government budget is required that draws together the various elements that are in the budget at present. Under each present budget head, an element is deliverable by local government. The finance and public services part of the budget runs to only two and a half pages, so the detail is insufficient to allow proper evaluation of a budget of such size. One problem is that local government issues are spread throughout various heads and the elements are not brought into one local government budget. The other problem is that the detail is insufficient.
The finance and public services budget line is forecast to grow more slowly than the Executive budget as a whole. Do you have any comments on the overall allocation to the finance and public services heading?
To recap, CIPFA's view is that it is for the Executive, subject to parliamentary approval, to set public spending limits. Local government expenditure is forecast to increase in actual and real terms, but to decline as a proportion of the total Executive spend. In other words, other programmes might receive higher priority. That is probably okay in a time of growth, although it would be more problematic if there were a squeeze and the size of the cake reduced.
My question might be more relevant to the spending review process. However, has CIPFA done any work on the likely implications of the feared potential pensions shortfalls, in relation both to funded superannuation schemes and to unfunded schemes in which local government is involved?
CIPFA has not done any such work. Until recently, most local authorities thought that the situation was a blip that would probably pass. However, some authorities down south are starting to consider the issue more seriously and to address it because huge amounts of money are involved.
To give some comfort, the situation in Scotland is far better than that in England and Wales. Historically, local government in England and Wales was allowed to have a ratio of 75:25 assets to liabilities, but that never happened in Scotland—we did not take up that option. Therefore, the local government pension scheme here is far better funded than that in England and Wales.
In the quinquennial reviews of funded schemes, is there a general trend of actuaries recommending increased employer contributions? If so, what implications does that have for the overall local government budget?
The last actuarial valuation was in March 2002. The new employer contributions became effective from 1 April 2003 for the following three years. All nine local government schemes saw an increase in their employer contributions, but the increase was fairly staged—it was not dramatic—and will be built into local authorities' three-year budgets for 2003-04, 2004-05 and 2005-06. The increases were not as dramatic as what might have been expected from reading about them in the press—that is the point. Actuaries take a long-term view, whereas what was perceived through the press was a snapshot on one day of the prospective values of the pension schemes.
I want clarification for myself, but perhaps this will help the rest of the committee as well. In response to Paul Martin's question on the modernising government fund, mention was made of the lack of transparency of the indicators in showing where moneys could be effectively used. How widespread is that difficulty?
The point about the lack of transparency related to inputs to the budget rather than to outcomes. As members will know, the GAE system is a can of worms. There are various views about what measures are reasonable; for example, under the previous system, GAE indicators were refined regularly and grant distributions were changed after studies, but that led to a very minimal shift in overall grant distribution. Where we stand at present is that we say that the GAE system should be used for grant distribution. If a better system comes along, we will consider it but, to date, no proposal has gained consensus that suggests that we should not, in the meantime, stick with the tried and trusted method.
Do you have any input to give about that? Collectively or individually, do you have any ideas about what would be a better system?
The only point that I would make is that any amendment to the present system should be properly road tested to ensure that we know what its implications will be. We should not change the system just for the sake of it because it is important that we are aware of the implications of any change before it is adopted.
How would a change be road tested? Would the indicators for one selected local authority be changed to see whether the change was appropriate?
I presume that all the indicators would be examined to see what the impact of the change would be across the board.
Road testing would be very much a desktop exercise. One need only look at England and Wales, where there was a change in the method of grant distribution for the 2003-04 council tax, to see the turbulence that such changes can cause.
So, we can look for examples of problems elsewhere, but we do not necessarily know what the solutions are.
The point is that we are talking about reslicing the cake. If extra money is being allocated elsewhere, that must happen at the expense of something else and the implications of that must be understood. That is the point that we are making about the need for research and road testing.
One area that we have not covered is the joint budgeting that is now more common in public services. For example, in community health partnerships, there is greater overlap between local authority budgets and health service budgets. There are other areas in which local government expenditure is not as transparent as it could be, such as when trusts are set up to look after leisure services. There is ever-greater reliance on partnerships and other forms of delivery, so how can we ensure that we can still track local authority budgets, and that there is transparency in the budgets that have been allocated and the delivery of services?
What are we looking for from the resources that are being allocated? The Executive and local authority politicians have separate objectives so there is a mix of objectives as far as local government budgets are concerned.
The matter is not just about this committee's role; it is about the role of the Parliament generally. For example, the health budget is massive and it can be difficult to see where the extra resources that are being put into health are reflected by improvements in services. If we are moving towards overlap between the local government budget—which is a large part of the Executive's expenditure—and other budgets such as the health budget, I would be concerned if we were not able to track whether those resources were delivering the benefits and services that we want. It is not important to me whether the Local Government and Transport Committee or other subject committees of the Parliament scrutinise that. I am asking how we can ensure that it is possible to track the finance.
In terms of the joint future agenda, we operate a system of aligned budgeting whereby the health service is responsible for its budgetary inputs and local government is responsible for its inputs. However, we are trying to measure joint outcomes. We have agreed outcomes that are being measured by the partnerships, but the inputs are being controlled by the body to which Parliament has allocated responsibility.
Some local authorities suggest that we have to re-examine the way in which such partnerships are made accountable. For example, the health service is not a local democratically elected organisation, whereas a local authority is. Therefore, there are different pressures on each. Does CIPFA believe that there should be any changes in legislation on the way such joint partnerships are managed that would ensure that allocation of resources is scrutinised sufficiently?
The requirement for public performance reporting for local authorities is an important part of the Local Government in Scotland Act 2003. The requirement to produce outcome-based reports could be extended to other joint-funded bodies. That would be an important change because reporting on inputs in public performance is not necessarily as important as the outcomes.
Budgets have tangible effects, so it is important to separate the real from the hoped-for. In setting local government budgets, is it reasonable to assume productivity or efficiency improvement?
In any organisation, it is reasonable to assume that managers will examine how they are delivering a service to make sure that it is being delivered efficiently and effectively. Are you asking whether it is reasonable to assume that savings can be built into Government budget assumptions? That is a different argument.
Would it be reasonable to build in such savings? After many years of efficiency savings, how much cash would be left over and available to be brought to the rescue?
As you are aware, local government has been examining itself and improving its efficiency for several years. There have certainly been considerable efficiency savings during the past six or seven years since the unitary authorities were formed.
The question is about the extent to which one believes efficiency savings should be set by central Government. If they are set too high, there is no incentive for local government to find its own efficiency savings. If they are set at a reasonable level, it would not change the way in which local government went about making efficiency savings, but there would certainly be a better feeling among local authorities about retaining some of those efficiency savings for investment.
Retention for investment—we are almost into the art and politics of budgeting.
We have covered most of the areas that we wanted to ask about. I draw this evidence session to an end and thank the three members of CIPFA for attending and giving evidence.
Meeting continued in private until 15:48.
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