Budget Process 2005-06
I welcome Professor Arthur Midwinter, who is going to advise us on the mainstreaming budget.
Professor Arthur Midwinter (Adviser to the Finance Committee):
Thank you. I apologise for my late arrival; I have been refereeing at the Finance Committee, where the meeting ran on a little longer than we expected.
You should not have to referee here.
Thank goodness.
I will set out the background to the changes in the budget process this year—I think that members have two papers on that—to try to assist you in thinking about which issues you want to tackle in the budget process. The fiscal context is tightening, in comparison with the most recent spending round. When I first drafted the budget briefing paper, I expected that the Scottish increase might be as low as 2 to 2.5 per cent in real terms. Having heard the budget announcement last week, I am slightly more optimistic than I was prior to it. However, the increase will certainly still be less than the 4.5 per cent growth that is set in the spending plans. The situation is tightening but we are still talking about growth—albeit at a lower rate.
From decisions that have already been announced, we know that the long-standing commitment to increase the health budget south of the border will bring Barnett consequentials. Other priorities that the UK Government has mentioned, albeit without precise figures, are education, housing and transport. All those issues are devolved, so we might do better than my original pessimism suggested. That pessimism was based on Gordon Brown leaks of six months ago.
If the Scottish Executive wishes to make serious progress on its priorities, it will have to address the redistribution of resources between and within portfolios. I cannot see the Parliament remaining in the position that we were in during the previous period. There has been roughly £1 billion of new money for the past three years. Those have been the biggest increases during the time that I have spent analysing such matters.
The Treasury has said that there will be no reopening of the baseline. That means that the 2005-06 budget—the one that we are about to consider—is regarded as the baseline for the new spending review period. In all three of the previous spending reviews—1998, 2000 and 2002—Gordon Brown has produced additional money to add to the baseline. Each time, the baseline has been revised upwards and we have had additional moneys to spend that we had not planned for—for example, last time it was about £500 million, I think. However, the word is that there will be no reopening of the baseline.
Members will have noted the increase of £43 million for council tax. However, under Barnett, that £43 million comes to the Executive unattached to council tax. The Executive can, with Parliament's agreement, spend that £43 million in any way that it wishes. However, that money is for the current year's budget, not for the new financial year—it is for the 2004-05 budget. An announcement has still to be made as to how the Executive plans to use that £43 million.
Not reopening the baseline is a big change in the fiscal context. The second change is to the process. The document to be published shortly is still called the AER but it has a new name: it is now the annual evaluation report rather than the annual expenditure report. I will explain why the document has a new name but the same initials. The Finance Committee carried out a review of the budget process in 2003, which was the last year of the first session of the Parliament. At the end of the review, the committee made some recommendations to the Executive on the management of the process. We were particularly conscious of the fact that members of the subject committees felt that there was too much overlap between the old AER and the draft budget. Pages and pages of the two documents were identical. We argued that that was because the AER had never developed into the strategic planning document that it was intended to be. The AER was, in effect, a draft draft budget that was published before the draft budget was published. We then argued that we should streamline the process. If members are not happy with the outcome, you can blame the Finance Committee, because the change is a result of its recommendations.
The change has a number of implications. First, the AER will now be a strategy document. It will have broad statements on what the Executive sees as its key priorities and on what it is trying to achieve in its programme as a whole over the next three-year period. Secondly, a great deal of information will be given on performance. In the Finance Committee's report, we argued that there was a need for a performance-reporting stage in the process. We seemed always to be dealing with revised targets without ever having formally checked whether our original targets had been met. We felt that such checking should be built into the process. For each of the programmes in the subject committee portfolios, the Executive will assess progress against targets. That will be a significant part of the new document. The only money figures will be for the current plans. Those figures will be restated in a way that shows the planned changes for the year ahead—2005-06. There will be the usual introductory tables that show the position for Scotland as a whole, and then for each portfolio there will be a breakdown into the level 2 and level 3 plans. So strategy, performance and money will be in the new document.
The Finance Committee made its final recommendation because it felt that the Executive had too many priorities. We got to a stage at which there were seven, which was roughly one per portfolio. That might suggest that there was a degree of consensus seeking going on and that each minister had to have a priority. However, we thought that there were too many. If spending on priorities was totted up, it accounted for almost 85 per cent of the budget. That left only a small amount, which we felt was rather meaningless. We also felt that that there should be more emphasis on cross-cutting priorities or, as I would call them, strategic priorities—the big issues that cut across departmental boundaries. Professor John Stewart used to call them the "wicked issues".
The document will be very different to last year's and members will have to make use of the draft budget. The Equal Opportunities Committee does not have a specific adviser, so I am going to try to help, if members want me to. Other advisers might have considered trends over the past few years using last year's draft budget and I will do that on the committee's behalf.
So there will be less information, but we will have the spending plans and a note of any changes that have been agreed since last year, on which we will focus. The sections in the draft budget on what will be done with the money will not be in the new document. There will be no narrative; members will have to look back to the previous document, in which the headings have not changed. There is also usually a section about what the budget does and what the Executive is trying to achieve. None of that information will be in the new document; it will be in the draft budget only each year.
The Finance Committee will meet soon to draw up the guidance for subject committees. Although the Finance Committee has yet to agree this, my guess is that it will look for subject committees' views on priorities. I know that this is difficult, but it would be helpful if the committee indicated which of the programmes are priorities from an equalities perspective. The Finance Committee will also look for subject committees' views on targets, whether progress is adequate, whether the targets are relevant or need to be changed and whether there are any gaps. For example, is there anything that should be considered a target that is not in the list?
The process will then become very similar to the previous process, with one slight exception. The stage 1 report will make recommendations for expenditure priorities and what should be high or low priorities from the Parliament's point of view. That will be in the June report, which is stage 1 of the budget process.
The spending review year is the crucial year. Two years ago, committees made recommendations for spending and some got quick, direct replies from ministers who said, for example, "That will be dealt with in the spending review." As a result, we never knew whether a recommendation was taken up or not, and we had to chase up those recommendations in the autumn. It has been agreed that the Finance Committee will receive a corporate document on behalf of the Parliament and then each individual subject committee will receive a reply to their reports. That will be after the Cabinet has made its decision, not before, so no one will be able to tell a committee that an issue will be considered during the spending review. We will know what has happened.
The Cabinet will meet in July or August, agree its responses and plans, and the replies to the committees will come in the autumn. After that, we will be provided with the new spending plans document, which will be similar to the slim "Building a Better Scotland" document. The new BABS document, which will not formally be part of the budget process, will be published in September and will probably contain high-level figures.
In October, the draft budget will be published with the new spending plans for the next three years. At that stage, the Finance Committee will ask committees whether the Executive has paid attention to their recommendations and if not, why not.
Before I go on to consider equal opportunities, this would be a suitable break for members to ask any questions that they have about the budget process.
In the first couple of years of the first parliamentary session, the budget documents were not transparent about whether any work at all was being done on equalities. Last year's budget documents seemed to be much better because areas were identified under budget headings and so on. However, there is an issue about whether targets work and whether the money actually goes to the areas that are given in the budget plans. It will be interesting to examine how we scrutinise that. I know that people do not like monitoring targets. However, we can talk all we like about equalities, but we will not change anything unless the money goes where it is needed.
That is a fair observation, as there was probably very little progress until last year's draft budget. I suspect that the most useful part of that document was the small equalities issues box that specified all the things that the Executive would do. That box will appear in the October document rather than in the AER that will be published shortly.
I do not know what the new priorities will be, but if closing the opportunity gap and sustainable development survive as priorities, I think that they will be treated like the equalities section was last time. The Finance Committee certainly pushed for that. However, the equalities section was driven by the lady in the Finance and Central Services Department who handles equalities issues and who was a member of the advisory group. It is important to have someone pushing for those changes.
The monitoring of performance is difficult. I understand the pressures that ministers are under when they are asked why they are not meeting their priorities or hitting their targets, but we need to be serious about such monitoring if we are fully to develop the Parliament's role in the way that is desired. For example, when we argued previously that economic growth could not be the top priority if the budget that most promotes economic growth—the enterprise budget—was falling, we were given the answer that the Executive spends a lot of money on transport, which supports economic growth but is not central to it.
The difficulty with cross-cutting priorities is that they probably have links to every budget heading that is under consideration. To try to map out those links in a sensible way is quite hard. I hope that the new split will help to make the system more transparent by allowing us, at the start of the year, to examine how well the Executive has done and, in October, to look at what it plans to do. That will be instead of what happened in the past, when we were always looking at what the Executive planned to do.
You are right that people tend to get a bit turned off by budgets, but budgets are obviously fundamental to the Parliament's ability to deliver on everything, so they are hugely important. The more accessible and understandable the budget process can be made, the better we will be able to relate it to delivery.
I do not know whether this is the appropriate place to ask this question, but I will ask it anyway. Personally, I am a little confused about end-year flexibility. We are sometimes told during the year that the Executive cannot afford, or does not want to spend money on, a specific project or proposal. We hear later that money is left over because of end-year flexibility. What happens to that money? Will the new process mean that it will be less likely that lots of money will be left in end-year flexibility?
I am happy to answer that. First, the mere introduction of end-year flexibility was bound to lead to an increase in what is called underspending. That is because departments knew that instead of having to spend the money quickly before 5 April, they could hold on to it and spend it later. Until last year—when the situation changed because of the new partnership agreement—the arrangement was that departments could keep 75 per cent of the underspend while 25 per cent was up for grabs. That meant that they had a kind of mini-budget process in which they reallocated towards priorities. Unfortunately, the announcement comes towards the end of June and we do not receive the figures until September, which means that scrutiny has not been as good as it could be.
Last year, because of the new partnership agreement, all of the money was left with the departments, which were told that they must use the money to further the partnership agreement. Therefore, any slippage was used to fund part of the new partnership package. From memory, I think that that end-year flexibility added £500 million to the budget plans.
I think that the sums of money are reducing each year from a peak of around £700 million. A large chunk—perhaps a quarter—of that money related to the slippage in the investment in water, which is planned to total £2.3 billion over four years. I predict that the level of EYF will change and I have asked the Executive to make it as clear as possible. It says that it has already done so, but we will work on it with the Executive to try to make the situation better.
I am not a financial whiz kid, but it seems to me that having end-year flexibility to the degree that we are talking about must be the result of bad planning.
You must remember that the system that operates at the moment replaced a system of cash control. Previously, towards the end of the year, people would go and buy computers or anything else that could be bought quickly. The theory was that we should avoid quick spend—to use the jargon of the time—and move towards end-year flexibility so that, rather than having money spent on low-priority areas, the money would be retained in departments to be used the following year.
To be fair, there was a change towards growth. Most of the civil servants had developed their careers in tight-squeeze situations. People were not used to managing as much money as was suddenly available—£1 billion a year is a huge amount of money. Spending bodies that had been struggling every year to figure out how not to spend money in order to cut budgets now found themselves having to manage growth. The figure rose to £600 million or £700 million in the first couple of years but is now down below £500 million.
I would still expect there to be significant sums of money because the bulk of the money that we are talking about is capital and capital programmes such as those relating to roads and water are notorious for slippage because of the scale of the activities.
Mr Peacock used to use the phrase "planned underspend". That is much better than "bad planning".
Can I raise the issue of equality proofing?
I was just about to ask you to do that.
I have the equality proofing budget advisory group document—I get it in advance—but I have not read it yet. When I have done so, I will be happy to highlight some issues for you from an equality perspective.
Before I talk about this, I must point out that I am on a steep learning curve in this regard. I do not come to this subject with any background. I am on the equality proofing budget advisory group as an observer and someone who knows about finance.
I understand that the minister has set up two pilot studies. My concern about them is that they are on areas of spending that are below level 3 in the budget and I am not sure whether they will generate lessons that are helpful to us in equality proofing the budget. For example, only a small amount of money in the health budget is spent on the cessation of smoking project and it is below level 3.
In coming to the issue fresh, I know that one of the difficulties is that all the models that the Executive examined that were already in operation did not seem to fit. That was partly because they were driven mainly by research into taxation and benefits, for neither of which is this Parliament responsible; it is responsible mainly for spending programmes.
Last year, I was the one who pressed the Executive to define what it meant by equality proofing the budget. We now have a wonderfully vague definition of equality proofing as the way in which the mainstreaming of equality is reflected in the budget, which I think I knew before we asked for a definition. That does not tell us a thing about how to go about it. I wanted to find out how the Executive intended to do that.
I am still a little uneasy that the expectations that have been created are greater than those on which the Executive is capable of delivering, but I want to be constructive and work with the Executive. I would like it to carry out equality audits, which involves starting at the other end. Instead of saying that we will equality proof everything when we do not know what equality proofing means—which is roughly where we are at the moment—we should take areas that are much bigger than the projects that the Executive is using and ask all sorts of equality questions about the employment pattern that is resulting from the money that is being spent. I thought that it was strange that although we could get figures about the progress on employment levels in the Executive's departments in the budget documents, we could not get them for health and local government, which are the two biggest employers in the country.
I have three or four headings that I think an equality audit could examine, including discrimination in employment and in access to service. It could be asked whether there are differences between the different groups in getting access to services. The issue of results and how they vary as a result of those interventions is related to that. It is only by drilling down in some depth that we will get answers to those questions. In a conversation with the minister, I floated the idea that she should consider such an approach because, on the basis of what is being examined at the moment, I was not convinced that the Executive would be able to deliver to the committee anything that it would think was equality proofing.
I have obtained a copy of a London Assembly document that won an award for equalities in the budget. It carried out roughly what we are trying to do in the relevant little box in the budget and, for each service, it highlighted lots of information about the employment levels and so on of the different groups. Race as well as gender is important in London. However, even though the London Assembly document contained nothing that would fit the description of equality proofing, the Chartered Institute of Public Finance and Accountancy gave the document an award on the ground that it represented best practice.
We need to work together with the Executive to make progress on equality proofing. I am not sure that the pilot studies will deliver the answer, because of the level at which they are operating.
The issue is interesting. In your paper, you ask how the process would work in practice. If we consider in retrospect the introduction of compulsory competitive tendering, for example, we can see that it had an adverse effect on women in particular—it had a big gender impact. In operating equality proofing, we might want to consider examples of that kind and to ask questions about whether a given proposal would have an adverse or positive impact on any particular group.
Pilot schemes for free school meals in primary schools are an example that would bring in the cross-cutting issues that you mentioned. I know that, in the first session, the Parliament had a debate about universality—about free school meals in all state schools—but pilot schemes for free school meals in primary schools would draw in areas such as health, education and communities, and perhaps also enterprise. We want to encourage people back to work, but the fact that they are losing entitlements such as free school meals for their children because of working families tax credit has implications—we might end up with more working poor. We would need to consider whether such a proposal would affect people more positively from the perspectives of gender, race and disability. A pilot on free primary school meals would show how children's health and their behaviour in schools were affected. A whole lot of cross-cutting issues could be addressed through only a small outlay in the budget. I am not trying to get you to agree to this specifically, but would such pilot schemes represent the appropriate sort of model?
That model is the way in which I would see things working. The decision would be taken to carry out an audit and a multidisciplinary team would be set up, which could feed into the process. One person would be given responsibility for running with it—it is crucial that somebody is responsible for delivering the report. The report would have to make recommendations for change. It would have to be treated seriously by the Executive, and not as just another exercise. The example that Elaine Smith has just discussed probably illustrates the sort of model of how things could work.
It is a matter of examining what is done now and asking all the equalities questions about it, and then finding out how we can do better. At present, the budget is just a big document—it is all figures, and nobody has time to look at it in any depth. The Parliament has one of the lengthiest, most involved budget processes in western Europe. I still feel exhausted at the end of it, and feel that there are things that I have had to skim over because of the lack of time. If we took an audit or review approach—whatever phrase we use; "audit" is the buzzword at the moment—that would basically mean conducting a review of where expenditure programmes are now, of what they are doing for equalities and of what we know they are not doing, and then making recommendations to improve arrangements across departments.
Those of us who have struggled with the budget process over the past four or five years have a real sense of frustration—which comes across in your comments—that, although we spend a lot of time on the process, we do not get very much out of it in the sense of understanding what is going on.
The equal opportunities issue presents us with a double whammy. First, there is the difficulty of equality proofing, which you have already touched on, and which you have covered in your paper. Secondly, there is the cross-cutting nature of the issue. Whereas most subject committees are dealing with given areas, which they know about—although they deal with cross-cutting issues, too—we have to concern ourselves with an issue that is spread right across the Parliament.
Who should conduct equality audits? Should it be—and can it only be—the Executive that conducts equality audits? Is there a role for external research, commissioned by the Parliament? What would be involved in equality audits?
Paragraph 8 of your issues paper says:
"The Executive will have to commit resources to such analysis if real progress is to be made."
Could you give us an indication of the resources that might need to be applied? We could then deal with that as one of our budget suggestions.
I will happily think about that and come back to you on the matter when next we meet. All the models are perfectly valid. At the moment, whether resources are devoted in kind, or in the form of money for outside researchers, it would be quite appropriate for the committee to conduct an equalities audit if it decided to. The Executive would then be formally reporting to you and you would bring it in to give evidence. You would hire an adviser and researchers, and you would probably bid for money to carry out that research. However, I see no reason why the Executive cannot do that itself, too. It has best-value reviews, which follow a similar model, although an equalities audit would be more ambitious than a best-value review, as it would be dealing with a more complex problem. If there is a ministerial or political commitment to doing something, that approach is more likely to succeed in the end.
You will all have taken part in committee inquiries and will have felt that your recommendations have not got very far. Last year, the Finance Committee did a review of children in poverty, following which a lot of recommendations were made. The bulk of them were taken on board, but one or two issues were very sticky at the time, and discussions on them are still continuing. Our experience was that the process was very time consuming and that it was hard to get an expert who would fit all the fields. That is also a problem for the Equal Opportunities Committee—you cannot have a budget adviser because there are so many areas of expertise.
A six-figure sum would be required for a serious, in-depth review that is done properly, in which the committee funds research or staff time is provided from within the Executive—or however it is done.
Accessibility of information is a fundamental equality issue. I am thinking about language. Your reports have been easy to understand, but you have fallen into the trap of using acronyms such as AER. I know that you explained that acronym when you came here, but thinking about it and working it out took me quite a while. I was also thinking about level 3 spending, which I did not know about. A fundamental requirement for anybody who prepares reports is that they should try to imagine that the reader is a non-finance person or somebody who has no knowledge of the job and use simple and accessible language. That is quite hard to do because it is second nature—
It should not be for me, as I am a simple professor.
Just a little explanation—
Are you new to the Parliament?
Yes.
There was not an AER last year because of the elections. If there had been, you would probably have been handed the relevant document as soon as you came in the door.
Even so, you can imagine the different papers on a huge variety of issues that we read. I still have not worked out SCPO, which was in some other briefing paper. One has to sit down and work out what things stand for, although it would be simple for someone to put in brackets what an acronym stands for once at the beginning of a paper. I do not know whether that issue can be taken on board throughout the Parliament.
That is a perennial issue. People are always being asked to be simpler.
It is a fundamental issue.
I shall try to simplify things.
Are there any other questions?
Margaret Smith asked what I wanted to ask about.
We were obviously pleased to take up your offer of advice, Professor Midwinter. You have said that you are on a steep learning curve, but you can imagine how the committee feels. I am quite excited by the prospect of an audit because I have a real frustration that we seem to be doing and talking a lot without seeing how things work. Whether the Executive, the committee or another agency is involved, the suggestion is interesting and we would want to discuss it.
I thank you very much. We hope to see you again soon.
It has been a pleasure—no doubt you will do.
The committee will now move into private session to discuss a draft report.
Meeting continued in private until 11:48.