Official Report (Hansard)
Date: Wednesday, 08 February 2012
Committee for Finance and Personnel
Spring Supplementary Estimates and the Budget Bill
The Deputy Chairperson: I welcome our witnesses, Michael Brennan, the head of central expenditure division; and Jeff McGuinness also from central expenditure division.
Mr Michael Brennan (Department of Finance and Personnel): As I mentioned at last week's session, this is the end of the 2011-12 financial process. The Minister is now seeking your permission for accelerated passage for the spring Supplementary Estimates and the Vote on Account. I understand that the Committee received a background paper setting out the detail of the request.
This is, as I say, the end of the 2011-12 financial process. The Committee has already had significant engagement throughout the year, kicking off with the Main Estimates in June of last year, and three subsequent monitoring rounds when revisions to the Main Estimates are presented to the Committee and then to the Assembly. The spring Supplementary Estimates are the climax of the adjustments made in the monitoring rounds since the Main Estimates last June.
I have been before this Committee and the previous Committee many, many times, and I know that a constant criticism is that the Estimates volume is incredibly complex and lacks transparency. I know that members are concerned that there is an inability to read across from the Estimates volume to the Budget document that the Executive approved in March of last year. Therefore we replicated the reconciliation table. That is presented at annex A and shows the adjustments that can be made in going from the Budget allocations to Departments through to the spring Supplementary Estimates decisions for each Department.
The Estimates before the Committee include what we call "headroom" for three specific cases. That is where we write the spring Supplementary Estimates to a slightly higher position than signed off by Departments at January monitoring. That is because, in those three cases, there is an anticipated additional spend coming in, and that is to give Departments legislative authority to incur that spend. The most important of the three cases relates to the Department of Agriculture and Rural Development, where we have built in just over £15 million of headroom in anticipation that the European Commission will rule on CAP disallowance. Two relatively minor headrooms are constructed for the Department of Enterprise, Trade and Investment in relation to possible additional expenditure in promoting the Irish Open and the possibility that Invest NI may make some additional capital grants to client companies.
The only other thing is the Vote on Account, which is payment in advance to Departments to get them through to the Main Estimates.
The Deputy Chairperson: It is 45%.
Mr Brennan: It is 45% of this year's financial allocation to Departments, and that is just to see Departments through,
The Deputy Chairperson: It is like a bridging loan.
Mr Brennan: Yes; it is to get them through to the Main Estimates in June.
The Deputy Chairperson: Thank you very much. Have you anything to add, Jeff?
Mr Jeff McGuinness (Department of Finance and Personnel): The 45% is an approximation. For some areas, it is a bit more than that, depending on the needs of the Department. For instance, the Utility Regulator gets 75% because they are highly dependent on receipts from other areas. There is a bit of flexibility for them.
Mr D Bradley: Annex A shows that there is a huge amount in easements. Casting my eye over the figures for resource easements alone, I see that it seems to be about £150 million, and there is even more if you add the capital side. That is a huge variation, and you have to wonder how, in a time of economic difficulties, Departments got things so wrong.
Mr Brennan: We were completely surprised as well. As our Minister said at January monitoring time on the Floor of the House, the expectation was that, when the Budget was constructed last March, it was a tight settlement for Departments. Yet, the reduced requirements on both the resource and capital sides are much higher than we had anticipated. You will be aware of some of the reasons for those reduced requirements, for example, the economic downturn and the impact on Invest NI.
Other, encouraging, factors have come to light. For example, Departments' administration budget — pens, photocopiers, salaries — has fallen by 3·8% in year. When you factor in inflation, that is a significant reduction in admin spend by Departments in the year to date. There are some positive reasons why the easements have materialised. The level of easements is a major reason why the Minister announced that he will do a review of the budget allocations for 2013-14 and 2014-15.
Mr J McGuinness: Some of those easements are in ring-fenced areas such as depreciation, where resources cannot be reallocated because the Treasury controls us on that.
The Deputy Chairperson: I am sorry; I missed that point.
Mr J McGuinness: Some of the resources that have been given up are in ring-fenced areas, such as depreciation. For instance, approximately £43 million of DRD's reduced requirement is depreciation, and we cannot reallocate that. That is ring-fenced to Treasury-controlled totals.
The Deputy Chairperson: There are variations under the column entitled "Technicals". Can you explain those to the Committee?
Mr J McGuinness: I will run through the major ones. There is £74 million additional for DEL, approximately £70 million of which is student loan subsidies. That is a claim on the Treasury reserve for student loan-related issues. The Treasury will provide that for us.
The Deputy Chairperson: Was that because of an increased number of students?
Mr J McGuinness: I am not aware of the specific circumstances, but it is the same in England, so there must have been some particular change to the treatment.
You will see that DETI has a significant reduction in resource of £53 million and an increase of £35 million; most of that relates to the Presbyterian Mutual Society's reclassification of resources. The Executive allocated £50 million in resource to the society, and when it looked at the accounting treatment it saw that that should have been capital, so the switch had to be made. It is not quite £50 million, because DETI then had to pay £11 million to the Department of Business, Innovation and Skills for the C Series launch investment. Apparently, that Department was the only one that had the legislation to do that, and so we had to pay it. That is the reason for the slight mismatch.
DFP received a significant amount of capital, most of which came from the Department of Justice (DOJ) in relation to Account NI set-up and shared service set-up.
The Deputy Chairperson: What is that figure of £6 million in capital?
Mr J McGuinness: That is in relation to getting Account NI into the system and making sure that it had the shared services in line with us. DSD provided £4 million to the Department of Health for welfare reform issues. The DOE capital of £1·8 million is a transfer from DETI that relates to the Thompson Dock in the Titanic Quarter. The DOJ amounts are reserve claims and include PSNI additional security funding and the hearing claim. That will be provided by the Treasury.
The Deputy Chairperson: What is that figure of £1 billion —
Mr J McGuinness: That figure of £106 million is reserve claims from the Treasury. The other significant one is the DSD transfer to the Department of Health. There is also a transfer from DSD to DRD in relation to the City of Culture. I think that it is for the improvement of footpaths, street lighting and so on.
The Deputy Chairperson: Can you say anything about the OFMDFM figures?
Mr J McGuinness: They will be technical adjustments between Departments; things going in and out. I do not have anything specific on them.
Mr Cree: I know that you guys have the answers to these things, but it illustrates how ridiculous it is. I am looking at a set of figures that I find impossible to relate back to the original budget.
Mr Brennan: Up until two years ago, it was effectively impossible, and it was an issue that was always raised —
The Deputy Chairperson: It is just almost impossible now. [Laughter.]
Mr Brennan: At least you can draw comfort from the fact that the two sets of numbers reconcile. Yes, there is a lot of smoke and mirrors in that middle column that required an explanation, but —
The Deputy Chairperson: There were a few that Jeff was not quite sure about himself.
Mr Brennan: We have highlighted the major ones; for example, when we talked about the minus £1 million figure in OFDMDFM, you will probably find that it is many very small de minimis issues rather than one big one. It is not like the £100 million figure in the Department of Justice, which is the PSNI's drawing down of its reserve claims under the devolution settlement.
Mr McLaughlin: Jeff referred to the C Series. Is that the second exceptional payment in that respect?
Mr J McGuinness: I believe so, but I cannot confirm that for definite.
Mr Brennan: We will get back to you on that, if it helps.
The Deputy Chairperson: What steps have been taken to ensure that there has been an appropriate degree of consultation, as required under Standing Order 42 (3), by which the Committee decides whether to grant accelerated passage?
Mr Brennan: This is the culmination of this year's financial process, so the Committee has been engaged in all the significant milestones to date from the Main Estimates through monitoring to here. Departments have engaged with their relevant Committees in each of those stages to ensure that they are advised and aware of what is going on. There is significant engagement of Departments, for example, through the finance director network, so that when Departments and Ministers have issues such as the common agricultural policy (CAP) disallowance or the Irish Open, for example, those are raised. Therefore when the spring Supplementary Estimates are before you, they are constructed on the basis that all Ministers, Departments and Committees are aware of what is going on and are content with it.
Mr Cree: In the document, the capital for DFP is technical. That £6 million does not mean a thing to me. What is it?
Mr J McGuinness: Most of it is a transfer from the Department of Justice in relation to Account NI set-up costs and capital costs in relation to the Department of Justice coming on-line with shared services.
Mr Cree: Would that not have been budgeted?
Mr J McGuinness: No, that would have gone through each monitoring round as a technical adjustment between Departments. Each Department will agree that individually. The Department of Justice had the budget for it, but it is now transferring a budget to DFP to —
Mr Cree: Therefore the overall budget figure itself has not changed.
Mr J McGuinness: It will have changed in relation to Treasury increases, but the technical adjustments between Departments will balance.
The Deputy Chairperson: If members are content, we will end this part of our evidence session and will shortly move into the next part of your evidence.
Question put and agreed to.
That the Committee for Finance and Personnel is satisfied that there has been appropriate consultation with it on the public expenditure proposals contained in the Budget Bill (Northern Ireland) 2012 and is content to grant accelerated passage to the Bill in accordance with Standing Order 42(3).
The Deputy Chairperson: Can I confirm members' agreement to confirming our decision in a letter to the Speaker?
Members indicated assent.
The Deputy Chairperson: We now move to the second part of the evidence session with DFP officials: the process that will be used and the proposals that the Department will be putting to the Executive to ensure appropriate consultation with the Assembly on the review of Budget allocations for 2013-14 and 2014-15. That is important, given that the Committee will be required to make decisions once again on accelerated passage for Budget Bills in 2013 and 2014, which provide for any resulting reallocations. I ask Michael and Jeff to make a statement.
Mr Brennan: All I can do is outline the broad framework that we constructed to take the review forward. As we said earlier, there was surprise all round at the level of reduced requirements that materialised in this financial year. Given that many Ministers had expressed concerns to the Finance Minister during the year about how tight their financial settlements were — yet money was coming back to the centre from most Departments for reallocation — the Minister thought it prudent to have a review of the 2013-14 and 2014-15 allocations.
We are now starting to scrutinise the reduced requirements that materialised this year on the resource and capital sides to see what their key drivers were. The key questions are: were they one-off surrenders; or were they surrenders that are likely to re-occur in the following years? In the latter case, you could construct a very strong argument for taking the money off those Departments now.
Another issue that we want to look at over the coming weeks is the bids that were submitted by Departments for additional resources and whether they were for one-off items or recurrent bids that are likely to be pressures on Departments in the years ahead. That is what we are doing now with our supply colleagues and the Departments: we are scrutinising what actually happened in Departments over this year.
We will benchmark it against the provisional out-turn stage, which is in May of each year when Departments sign off on what their actual spend was. In May, we will be able to see where Departments finally are with regard to the money that they needed, where they spent it, and how that benchmarked against where we were when we left January monitoring.
The Minister then intends to present a paper to the Executive, probably at the end of the summer, setting out his initial conclusions and what the implications might be for the 2013-14 and 2014-15 financial years. As the Minister said in his response to the Committee, he is perfectly content for us to engage with you as necessary to keep you apprised of where we are as the review progresses. The reason that only the 2013-14 and 2014-15 years are included and not the 2012-13 year is that the Minister will probably bring a paper to the Executive in late summer or after the summer recess, by which time half the 2012-13 financial year will have already progressed, so it would be pretty redundant to seek to take money out of Departments at that stage.
The Deputy Chairperson: The Department suggested that reallocations in years three and four of the Budget will probably be at the margins. How does it determine whether the proposed budgetary adjustments are sufficient to warrant a full and proper budget process, including appropriate consultation with the Assembly?
Mr Brennan: As the Minister said, the adjustments are likely to be only at the margins of the block allocations to Departments because the big surrenders that come to mind immediately from this year are Invest NI/DETI. However, the key driver for those surrenders was where we are in the economic cycle. For example, it would probably be short-sighted to cut significant chunks of money out of the Invest NI budget now only to find that in 2013-14 or 2014-15 Invest NI did not have adequate resources if the economy picked up. Therefore we will look at the degree to which each Department surrenders a proportion of its total departmental allocation at the start of the year to see whether or not it is recurrent. That will happen at the margins; it will not look at the source of every pound spent by a Department, because that does not seem to be where the problem lies.
The Deputy Chairperson: Legal requirements exist in section 64 of the Northern Ireland Act 1998 and in the Good Friday Agreement to say that budgets require scrutiny in Committees before the Assembly approves them. How will the DFP ensure compliance with that?
Mr Brennan: The Executive and the Assembly have set out and endorsed a four-year Budget; therefore it has the imprimatur of the Executive and the Assembly. We are not seeking to bin those Budget allocations to Departments; all we are doing is revising them in the context of what is likely to emerge in the year ahead. The fundamentals of Budget 2011-15 still stand; it is not a fundamental re-opening of the Budget position. The requirements of the consultation are fully complied with.
The Deputy Chairperson: Yet there is enough variance for you to decide that there is a need to review departmental allocations after one year.
Mr Brennan: There is always variance, even within years; that is why we have the monitoring rounds.
The Deputy Chairperson: Not to the extent that there is this year.
Mr Brennan: Yes, but the Minister told the Assembly that he is surprised at the extent of the reduced requirements; he is looking to see whether that is likely to materialise in future. At the end of the review, the Minister may conclude that the initial budget allocations stand and that there is no need to readjust between Departments.
Mr McQuillan: In the last Assembly, one of the SDLP's criticisms of the Finance Minister was that he would not revise the Budget; now that he is going to do it, you criticise him. It is a prudent and responsible step.
The Deputy Chairperson: I am not criticising the Minister for revising the Budget.
Mr McQuillan: It is coming across that way.
The Deputy Chairperson: I am just asking on behalf of the Committee — not on behalf of myself or the SDLP — how proper scrutiny measures will be implemented.
Mr Humphrey: You are not doing it on our behalf.
The Deputy Chairperson: I am acting on behalf of the Committee — I am not acting on behalf of my party — in the role of Deputy Chair. I want to make that very clear.
Mr Humphrey: We are making it clear that you are not doing it on our behalf.
The Deputy Chairperson: It is a pretty serious allegation to make that I am acting in a party-political role. I am not; I am acting on behalf of the Committee and solely on behalf of the Committee. I make that clear once again.
Mr Humphrey: Chair, with respect — you can check the Hansard report — I did not make any reference to your party in what I said.
The Deputy Chairperson: Your colleague did.
Mr Humphrey: Yes, and he will stand by that.
The Deputy Chairperson: I have refuted the allegations that he has made. We will move on.
Mr Cree: I will try to look at this logically, although I know that that is an awful word to bring in at this stage. At the end of January, we completed 10 months of the year. Does the Department have an accurate forecast for the year end?
Mr Brennan: It is very difficult to know what Departments will spend down to the nearest pound; we will not know that until May when we get to the provisional out-turn. Through monthly forecast out-turn exercises, where we ask Departments what they think they will spend in each month, we can construct what we think is a realistic scenario of where we will be when we get to the end of the financial year. That is why, when the Executive got to the end of January monitoring, they were left with £11 million of resource DEL that they did not allocate. They did not allocate that because, first, there were no substantive, worthwhile bids to meet; and, secondly, the Executive agreed that they wanted to carry £50 million of resource DEL and £11 million of capital DEL into next year. By looking at the forecast out-turn for the remainder of this financial year, we can see that sufficient resources will be coming out of Departments to get us to that target to carry into next year, just by looking at cash management and the allocations of Departments.
Mr Cree: My main concern is that I think that the Minister said £60 million. Is there any risk of money other than that being available and returned to the centre?
Mr Brennan: No, not really. The advice to Ministers is that we have erred on the side of caution. Last year, out of a block of about £10 billion, only £1 million on the side of capital was surrendered to the Treasury.
Mr Cree: At this point, you do not expect a surrender.
Mr Brennan: Certainly not.
Mr McLaughlin: The logic for the review stands. I am interested to know whether the review will look at any proposals for reallocations as well as surrenders. At this point, before the review, is there any evidence that front-line service delivery has been affected? Have any programmes been set aside, and is that, in any way, an explanation for some of the surrender?
Mr Brennan: From the information relayed to us, it does not seem as if front-line services have been hit at all. In fact, as I said earlier, the encouraging factor is that behind-the-scenes and admin expenditure in Departments is reducing. That suggests that Departments are stopping doing things that they should not have been doing anyway. There was a certain capacity in Departments to cut back, and, when the message got through to Departments in March of last year that this was going to be a tight settlement, they were readily able to slam on the brakes to slow down spending internally that did not impact on front-line services. For example, you got to the position of meeting every bid from Departments in January monitoring, including from big Departments such as health and education, which are critical in their front-line service interface with the people of Northern Ireland. There were no bids from the Health Department, for example, and the Department of Education handed back some of its schools' end-year flexibility.
There did not seem to be significant unmet demand for resources in key Departments. Obviously, that will not continue, and we want to get Departments' assessments of what the pressures are likely to be in 2013-14 and 2014-15, particularly given that big policy agenda items are coming down the road, such as welfare reform. We need to factor those issues into where Ministers and the Executive are likely to be in two years' time and whether they have appropriate resources or whether there needs to be a reallocation.
Mr McLaughlin: My final point is related to that, and I expect that the review will deal with it anyway. I suppose that staff costs and salaries are the major item in resource spend. Does it look as if that issue has distorted the projections?
Mr Brennan: I do not really know the detail. As I said, admin expenditure has fallen dramatically, and the pay cap that is applied in the Civil Service and the wider public sector has probably created a ceiling for resource departmental expenditure limit. However, I cannot say the extent to which it has exerted the overall pressure in driving out reduced requirements in Departments.
Mr McLaughlin: Was that cap projected into the staff cost estimations at the start of the financial year?
Mr Brennan: Yes. When the Budget was constructed, each Minister was given certain rules to abide by on uplifts in areas such as salary costs.
Mr Girvan: Thank you. Leslie touched on a point that I wanted to get clarification on: we are allowed to carry over £60 million so long as we do not exceed that and have to hand some back to the Treasury. We would come in for some flak if that happened. Thank you for the clarification on that.
We ran into difficulty last year whereby we had an issue with the Department of Agriculture and the Department of Education, and two Excess Vote debates had to take place. I am looking at the underspend in Departments. Having been involved in local government, I come to this process somewhat sceptically. Have some of those Departments made bids on the basis, because I appreciate that they build in what they call their slush fund —
Mr McLaughlin: Contingency fund. [Laughter.]
Mr Girvan: Contingency fund may be the right term. Some Departments include projects that they believe should be done but which never will be. Those projects are put on the bid list to make sure that the Department has some fall-back to cover its contingency position. Has a full body of work been carried out to ensure that that is not being covered up with figures that show drastic underspends from budgets across the board rather than from just one Department? That would indicate to me that the problem is not just the economic downturn, because there are some areas where you cannot use that argument. DETI may be one of the key areas where that argument could be used, but you cannot say the same for other Departments.
Other Departments have ongoing costs that would not necessarily be affected by a downturn in the economy. I wonder whether those Departments have been scrutinised to ensure that they have made a bid for the money on the proper basis and are not just creating a contingency fund or a fall-back position. I have seen that happening, where you end up having money held in reserve to pass across and to help budget out a few years ahead. I know that that is not easy to answer, Michael, because you do not have direct input into every Department.
Mr Brennan: In one way, it is quite easy to give you some comfort on that. There has been a strong drive from DFP out to Departments about improving financial management over the past couple of years. To be frank, three or four years ago, the levels of underspend were unacceptable, and that was in an environment where we had an end-year flexibility scheme where we could carry it across into next year. It may be fair to say that the eye was not really on the ball then, because the money was not lost in Northern Ireland.
However, in the past year in particular, there has been a big focus from the central finance group in DFP about what is happening in Departments to make sure that the level of underspends declared at the end of the year is as low as possible. As I said, we got the entire block down to just £1 million on the capital side, which is phenomenal going,, but we look at it at an individual departmental level as well.
Departments seem to be playing ball. I am not aware of any slush funds or contingency funds being built up. What gives me comfort is that were Departments doing that they would get caught out at provisional out-turn stage because they would be left with a massive underspend. That would have to be declared, because it would be picked up in their accounts, but we are not seeing that coming through. We certainly did not see it in last year's provisional out-turn. The only other way a Department could try to play that game would be if it was awash with cash that had been stashed away for a rainy day. In that case, it would have to surrender it in the January monitoring round or in the last monitoring round of the year to go back to the centre so that it would not be on its books as it progressed to provisional out-turn.
The papers that we supplied on January monitoring show that no Department made massive surrenders other than DETI. Northern Ireland Water did as well, but that was mostly ring-fenced in depreciation, which we could do nothing about. DETI was the only Department making big surrenders in a monitoring round to reduce its underspend capacity as much as possible for its provisional out-turn. You should take comfort from the fact that Departments do not have the capacity to build up a contingency or slush fund because they would be caught out in the end at provisional out-turn stage. The Executive's imperative now is to manage the underspend provision at a macro level to bring Northern Ireland in under the Budget exchange system at the £50 million and £10 million. If we go over that by 1p, however, that goes to the Treasury. Departments know that now and are playing by the rules of the game.
Mr J McGuinness: In addition, DFP supply teams will scrutinise each bid that Departments submit to DFP through the monitoring rounds to make sure that they are content with them before they go forward.
Mr Girvan: With regard to the Excess Votes, we will not encounter the same issue this year as we did last year in relation to Departments coming forward at the 11th hour with an excess bid issue.
Mr Brennan: We would not have presented the excess issue if we had thought that there was any possibility of that. At this stage, however, we take Departments at their word about what they say is happening in Departments. If anything happens after that, they are yours. [Laughter.]
Mr Cree: It is very difficult to vote against any of the stuff that we have here because there is an answer for it. Would we not have to get into the detail of every Department to conduct a meaningful debate?
Mr Brennan: Yes. That takes us back to the earlier discussion about the complete lack of transparency in the Estimates volume and the fact that we have to construct a separate table to give you a reconciliation back to the budgets. When you stood up in the Assembly last March and were given the Budget paper, you can see exactly where the money is going to each Department, where it is being spent in each Department and, to be blunt, who the winners and losers are.
You cannot do that when you have the Estimates before you. It takes you to the heart and fundamental importance of this review of the financial process because, in two years' time, we want to have an Estimates volume before you that you can open up and see exactly what is going on with Department X with regard to where money is going, and, at the same time, read it directly across to the Budget.
Mr Humphrey: Thank you both very much for the presentation. I welcome your comments on efficiencies, right down to stationery. The return to the Treasury of £1 million in capital spend out of a £10 billion block grant indicates that the systems that were put in place in the past few years are working.
I agree with my colleague about Ministers asking for budgets because budgets are, after all, aspirational. If Ministers were not being aspirational, one would have concerns. However, the revision of budgets in the monitoring round shows a prudent way of dealing with the issue. The figures that you presented to us of the £1 million returning to the Treasury out of that £10 billion shows that it works.
Leslie's point is very valid. Where would you start with this stuff? I am content that what we heard today shows that the Department is being very prudent. I guess that it is not necessarily the job of other Departments to be prudent, which is why it is important that Finance and Personnel is there to check. When I say that it is not their job to be prudent, what I mean is with regard to asking for budgets.
You mentioned Northern Ireland Water and the Housing Executive in relation to the Department for Social Development. The example of 8,000 homes to get PVC windows is a laudable goal set by the Minister. If that is not delivered, that is not the Minister's fault. It comes down to whether contractors can do it within the specified time. How much of the knock-on effect of money having to be surrendered to the centre by the Department of Finance and Personnel is to do with arm's-length or semi-governmental bodies and not directly Departments?
Mr Brennan: When we talk about the £1 million surrendered to the Treasury and the £10 billion block, that embraces all public expenditure and not just expenditure by Departments; it also embraces expenditure by the Housing Executive, the education trusts and health boards. That brings the entire public sector in Northern Ireland into just a £1 million surrender to the Treasury.
Controls over what is going on in arm's-length bodies are administered by individual Departments. For example, the finance division in DSD will have stringent controls over exactly what goes on in the Housing Executive. There will have to have been a business case for the thermal insulation of 8,000 houses, and it will have to have been approved by DSD and signed off by DFP supply. The money goes where it is supposed to go, and there is then a post-project evaluation to ensure that it was spent where it was supposed to have been spent.
Mr Humphrey: I mean this in the best possible sense: I am really pleased to hear that the Minister has a policy of "No Surrender" as far as money going back to the Treasury is concerned.
The Deputy Chairperson: Very good, William. Thank you, gentlemen. You could not possibly comment on that, of course. You will provide us with further information if the need arises. Thank you very much for your contribution.