Written evidence submitted by the National Audit Office (EST 12)

Thank you for our helpful discussion on 11 July, where we covered the NAO’s role with respect to the Estimates that are presented to Parliament on an annual basis. I am very supportive of the intentions of your committee’s inquiry and the desire to improve Parliament’s ability to scrutinise the government’s financial plans.

In response to your request for a submission to support the inquiry, this letter sets out our views on government’s current approach to the management of public finances; the role of the Estimates within the accountability framework; the NAO’s work to support public accountability with regard to the Estimates; the UK’s system in an international context; and areas for potential future development.

In my view, the main considerations for Parliament in the context of government spending are the effectiveness of its scrutiny of the overall framework for the management of the government’s spending position; and how the spending process, as reflected in the Estimates and the annual reporting cycle, aligns with and supports the process of cross-government planning. Greater scrutiny of the Estimates, in their current form, will not provide this oversight, as the process is only designed to provide resources for government rather than a framework for evaluating the effectiveness of the use of these resources. Therefore, I would advise your Committee to focus on ensuring that Parliament, supported by the NAO, select committees and the Scrutiny Unit, is able to test the effectiveness of the government’s key planning frameworks; and execution of plans under these frameworks in the delivery of government policy. This would support the drive for improvements in the approach to managing government’s overall business that the Public Accounts Committee (PAC), supported by the NAO, has been pushing for in recent years. I have set out my detailed points under five sections.

1            The current system for the management of the public finances

In July of this year I published two reports on Single Departmental Plans[1] and the Spending Review[2]. Single Departmental Plans were first published by each department in February 2016. They set out the objectives, linked to the government’s manifesto commitments, each department is committed to achieving in the current Parliamentary session. The Spending Review, is the Treasury’s process for establishing departmental spending priorities, and is informed by the same manifesto commitments that support Single Departmental Plans - though the two processes are not explicitly linked. Together these processes form the government’s current approach to managing its medium term priorities. The outputs are not subject to Parliamentary approval and are managed separately to the Estimates process that is the subject of the Committee’s current inquiry.

The reports I published in July include a preface that sets out the current weaknesses in the government’s overall approach to managing the implementation of policy and the public finances. In summary, the preface concludes that, while some progress has been made, the current mechanisms amount to a collection of top-down, set-piece processes and guidance that fall short of an overarching integrated framework for strategic business planning and management.

The preface proposes an outline framework for strategic business planning and management to address these issues. This framework, based on established management practice, proposes a cyclical approach to understanding the operating environment for government; setting priorities; allocating resources; monitoring performance and making improvements. The adoption of this model, with enhanced reporting of outcomes, will help to ensure that the enduring business of government is managed transparently and effectively through the changes in political priorities that are an inevitable feature of public service delivery.

The preface and the accompanying reports were taken by the PAC on 17 October in a session that explored the Treasury and Cabinet Office’s approach to improving the coordination of public management through Single Departmental Plans and the Spending Review process. The transcript of the PAC session[3] shows the departments’ commitment to improving the government’s framework; and their desire to introduce a more integrated management process; including the alignment of the government’s objectives with the mechanisms for funding them.

Progress in the delivery of an integrated approach to planning and management is key to establishing a more robust framework for judging the performance of government and the value it is delivering. This aligned framework will also provide a mechanism for Parliament to understand and challenge the effectiveness of government’s financial control, over and above the Estimates process that is the subject of the Procedure Committee’s current inquiry.

2            The role of estimates within financial management framework

Estimates are the Treasury’s mechanism for controlling annual government spending. The Estimates process, as it stands, provides the Treasury with a method for managing annual departmental budget allocations; and ensuring that departments’ outturns against these allocations are reported to Parliament and are subject scrutiny via the NAO’s financial audit processes.

The Main Estimates, supported by the Supplementary Estimates and reported outturn against the Estimates, in the Statement of Parliamentary Supply in each department’s annual report and accounts; include the Treasury’s allocation of capital, resource and cash spending to departments. Each department is provided with capital and resource allocations under the headings of Departmental Expenditure Limits – the cost of managing and administering government spending; and Annually Managed Expenditure – demand led and uncertain expenditure which is more difficult to estimate and control; supported by an annual cash limit, termed the Net Cash Requirement. Each year Parliament votes limits against each of these headings, supported by a broad explanation of the activities that they will be spent on, termed the “Ambit”, to provide a legal framework to support the Treasury’s oversight and management of the fiscal framework.

The approval of Estimates by Parliament, Treasury monitoring of spend against the Estimate headings, and the reporting of outturn in departmental annual reports and accounts provide the key mechanisms for managing the resources that departments can deploy under the Ambit to fund their activities. Under current convention, this approval does not form a substantial ex-ante mechanism for evaluating the outputs that are delivered against these headings or the outcomes that are achieved. This is because the spending control totals are not currently linked to measures of departmental operational performance, which, as described above, are set out within Single Departmental Plans. As a result, further scrutiny of the Estimates process by Parliament, under their current guise, would not provide greater insight into the government spending plans or performance, only the appropriateness of the annual allocation of resources that the Treasury provides to departments.

3            The NAO’s activities with regard to Estimates

The NAO has two broad activities with regard to the Estimates process: the Comptroller function[4] which approves the broad legal basis for payments out of the government’s main bank accounts; and the annual audit of outturn against estimates as reporting in departmental Statements of Parliamentary Supply.

The Comptroller function provides a process for the approval of transactions from the government’s main bank accounts, the Consolidated Fund and National Loans Fund, under the Exchequer and Audit Funds Act 1866 and the National Loans Fund Act 1968. There are two elements to this approval. The first is the authorisation of cash limits that the Treasury allocates through the Estimate process and are approved by Parliament, once the Main Estimates and Supplementary Estimates receive Royal Ascent. This approval confirms the accuracy of the reflection of the Estimates in the Treasury’s system for managing the cash supply that departments are granted by Parliament. Following this approval departments can draw cash from the Consolidated Fund up to the allocated limits without seeking further funding provision from the Treasury and Parliament. The second is the daily approval of all other payments, outside of the Estimates process, out of the National Loans Fund and Consolidated Fund. Under the current legislative framework, this approval is “light touch” and confirms that the payments out of these bank accounts are supported by appropriate documentation and are within the scope of relevant legislation.

The annual audits of departmental financial statements and Statements of Parliamentary Supply assess departmental outturn against each of the spending limits allocated by the Treasury and voted by Parliament. This process provides assurance over the methods by which this outturn is derived from the annual expenditure that is presented in departments’ annual financial statements. This information is produced and audited under the best practice International Financial Reporting Standard framework. Annual departmental financial statements are audited to levels of accuracy, termed materiality, that I judge to be appropriate, but the derivation of the Statement of Parliamentary Supply is audited to the nearest £1,000, providing confidence that the outturn is accurately reported to a consistent level.

Any excess spending above the parliamentary limits at the end of the financial year automatically triggers a qualification of my audit opinion, through a technical breach, by departments, of the allocations of resources they are provided by Parliament – termed an “Excess Vote”.[5] Every year the Public Accounts Committee, produces a report summarising the Excess Votes that have occurred in year, which are then “regularised” via a subsequent vote in Parliament on the Treasury’s Statement of Excesses – providing visibility to Parliament of those bodies that have consumed more resources than they were allocated.[6]

Under this system, the major elements of the Parliamentary control framework are ex-post and follow the approval of the Estimates – approval of the limits for cash supply via the Comptroller function; Treasury’s monitoring of progress against the Estimates limits; and the requirement for departments to report audited outturn against the limits set by Parliament.

4            The international context for spending control

The UK system is broadly seen as comparable with international best practice for fiscal control and reflects the generally high levels of financial compliance exercised by the Treasury and departments through the systems and processes that are set out in the Treasury’s Managing Public Money.[7] The process of accountability for Estimates is supported by the annual programme of 60 Value for Money reports that are produced by the NAO. These reports evaluate the outputs and outcomes of government projects and programme and are used, predominantly, by the PAC to hold the executive to account on behalf of Parliament.

Other countries operate different systems for the approval of spend and operate greater ex-ante scrutiny of spending plans. These systems tend to form a judicial, rather than parliamentary, system for spending control and enforce, through legal sanctions, the requirement for departments and government bodies to comply with pre-approved spending limits and detailed plans for the delivery of projects and programmes.

Few countries operate a hybrid system of ex-ante and ex-post control. The obvious outlier is the system operated by the US Congress, through Government Accountability Office’s[8] scrutiny of spending proposals and audit of outcomes.

5            Future developments

The current accountability system has served Parliament and the taxpayers well. Despite high profile failures in departmental programmes at an output and outcome level, the controls over public spending at an aggregate level and though departmental allocations remain effective and there are few instances of fraud or inappropriate use of public funds.

It is clear, however, that the current system for the scrutiny of Estimates could be made more transparent and effective. The information in the Estimates as they stand is dense and difficult to interpret and Parliament should be provided with sufficient insight into budgetary allocations to support its vote on the Estimates. It is also not clear, under the current process, how the Estimates align with the Treasury’s Spending Review and the Single Departmental Plans.

The Treasury should play a significant role in developing improvements in the information that supports parliamentary scrutiny in this area. I am also, however, happy to explore, in coordination with the Scrutiny Unit, areas where we could help parliamentarians to exercise their role more effectively and provide greater insight into the co-ordination of the spending framework with the Government’s approach to managing the implementation of policy. This could include:

• training to help members understand and interpret the information presented in the Estimates, to support more effective scrutiny during debates and other mechanisms for parliamentary oversight;
• liaising with the Scrutiny Unit to establish what value the NAO can add to the support they already provide to Parliament;
• exploring mechanisms by which I could provide greater insight into departments’ performance against the Estimates, including tracking the allocation of resources the accuracy of department’s outturn against their budgets over time.

As I noted in my introduction to this letter, however, enhancements to the Estimates process need to be aligned with improvements in the ability of Parliament to apply scrutiny to the performance of government against its objectives. This should include, as set out above, alignment of Estimates with the Spending Review and Single Departmental Plans; and the reporting of progress against the agreed operation and financial objectives. This is the area where there is the potential to provide greatest insight into the overall performance of government and its constituent parts in terms of inputs, outputs and outcomes; and deliver better value for taxpayers through more effective management of public services.

AMYAS C E MORSE

November 2016