§ 4.36 p.m.
§ Second Reading debate resumed.
§ Lord Lipsey
My Lords, not many weeks ago the House was full to the rafters for the debate on Section 28; an enactment of Parliament which, as I recall noble Lords on both sides of the argument said, had never resulted in a single prosecution. One cannot help but contrast that with this afternoon's debate. We are a happy few, a band of brothers, but we are not present or speaking in vast numbers. One might say that perhaps the Treasury did not encourage us to be present in vast numbers as its own brief on the subject states that the Bill is "technical". I am sure that few noble Lords would quarrel with that description.
However, I do not think that we should for one second underestimate the importance of the measure before us. My noble friend the Minister referred to double-entry bookkeeping, although I think that some historians could charge him with taking a rather Eurocentric view in attributing that to this Continent in 1492. Some evidence dates it back to Ancient Egypt in the years before Christ. Nevertheless, without double-entry bookkeeping, it is hard to envisage the development of modern capitalism with all that that has brought.
In a way I think that the Bill may turn out to be the double-entry bookkeeping of modern government in that it will lead to important changes. I believe that even more strongly as a result of the various other changes, which are not often seen as a whole, which have arisen with it. I refer to the new emphasis on evidence-based policy; the end of strict annuality in the control of public expenditure; the increased use of performance indicators and of targets through public service agreements and—this may be about to arise, and it is certainly not a moment too soon—the possibility of cross-departmental budgeting to deal with cross-departmental problems. When you consider that array of modernising measures as a whole, of which this is one of the cornerstones, you see the true measure of the importance of the Bill that is before your Lordships' House this afternoon.
This is a non-partisan Bill. Work on it started in 1993 under the chancellorship of Kenneth Clarke. I should like to pay credit to Andrew Likierman, without whom it is hard to see how we would have had this Bill today. He is the head of the Government Accountancy Service and Chief Accountancy Adviser to Her Majesty's Government.
The concept of the Bill is perfectly easy to understand. No one goes out and buys a house out of this year's income. If we do so, we certainly do not then say that we shall not be able to spend anything on food this year because we have just bought a house. That would be a daft way to proceed; but, in principle, that is the way in which governments have proceeded in this country. The Bill heralds the end of that principle.
So, conceptually, the Bill is perfectly simple. But, as one goes into the fine detail, one sees the difficulty of convincing the whole of Whitehall to abandon the 37 tried and tested methods, as some might have seen them, of dealing with government accounts. Some might have seen them as methods which had been tried and tested unto failure, but never mind. To get out there and to convince Whitehall to make the wholesale changes required was an awesome task. The whole House is indebted not only to the Minister who saw it through but to the official team under Andrew Likierman and to the departments which have done the work.
I heard the wise words of the noble Lord, Lord Taverne, that we should be careful with all such systems which appear to be instant solutions to all our difficulties. He referred to PPBRs and PARs. There was also MINIS, the system brought forward under Michael Heseltine, which I think was the other system that the noble Lord, Lord Taverne, was seeking to remember. The system in the Bill has a quality which separates it from those other systems. They were imposed on departments from the centre in an attempt to get departments to behave differently. Because they were imposed in that way, they were not successful in modifying behaviour. Departments were asked to look at their whole budgets—it sounds a brilliant idea—but when they actually came to do so they found—surprise, surprise—that every item in their budgets was absolutely justified.
The difference with this scheme is that it does not attempt to do all the work from the centre, but tries to give t he departments the tools to do the work themselves and to see matters rationally. It tries to give them incentives to behave in a rational manner as a result of what they see That is why I am much more optimistic about the potential of this reform—as I say, it is not a partisan point—to achieve what the other reforms failed to achieve: a more rational and systematic allocation of scarce resources—scarce resources which, I hardly need remind your Lordships' House, are paid for ultimately from the pockets of the taxpayer.
I should like to raise a point slightly outwith this subject—I am sure that it will be debated in Committee—that is, my concern as to whether Parliament, taken as a whole, is moving with the same speed and flexibility in this matter as are the Government and the executive. Perhaps strikingly, the two Acts replaced by this Bill date respectively from 1866 and 1921: the Exchequer and Audit Departments Acts of those two years are the ones we are getting rid of. Even 1921 seems a long time ago in terms of a modern system of financial control.
I recognise that I am in the presence of a number of noble Lords who have deep experience of the way in which financial matters are handled in another place—I pay deference to them—nevertheless, I trespass as an outsider who has looked at these matters in much less detail but who perhaps has a perspective lent by distance. I do not believe that this Parliament is at its best in its scrutiny of expenditure.
38 I am not the only person who does not believe this. Perhaps the greatest recent book on British government, Aaron Wildaysky and Hugh Heclo's The Private Government of Public Money, made that its theme. I looked at its conclusions again the other day. It stated:Don't muck around with the Treasury…do muck around with Parliament.The analytic staff capabilities of Parliament cry out for improvement…Cosy clientelism can develop between…legislative committees, executive bureaux and outside interests…Parliament needs a budget committee cutting across departmental lines…The staff available to MPs should be increased…as should the institutional staff serving Parliament and its committees".Every word of that is absolutely true. Unfortunately, it was written in 1974. Although there has been much progress since, it would be hard to say that a word of what was written then would not apply equally today.
Perhaps I may very briefly identify one or two points. I am not sure that the apparatus of the Public Accounts Committee, of the Comptroller and Auditor General, and of the National Audit Office is of the most modern. As I watch those bodies, I compare them with the actions of the Audit Commission, responsible for local government and health authorities. It seems to me that the Audit Commission has a strong edge and that its practices should be adopted.
A second point, which was referred to by Heclo and Wildaysky, concerns the lack of overall scrutiny of public expenditure. Individual departmental committees look at individual departmental expenditure—and often at log-rolling on behalf of particular interests—but no one looks at public expenditure across the piece on behalf of Parliament and comments on priorities. There are bits and pieces—the Treasury Committee sometimes has little goes at it from time to time, but it has a lot of other work to do—but there is not one single parliamentary committee dedicated to doing that.
My third point—I know that I am now trespassing in a dangerous area—is that it seems strange that your Lordships' House has no role in public expenditure scrutiny. I know that there is a constitutional propriety that says that only elected representatives of the people should decide where their money goes—I have some sympathy with that—but, in practical terms, this House is at its best where it complements the work of another place. In this field, there are shortcomings in the work of another place and there is scope for considering, particularly on cross-cutting issues, whether this House could not perform a useful role in regard to public expenditure. It should not be a question of Lords against Commons but a question of Parliament and the executive, and of how best Parliament as a whole holds the executive to account for the enormous sums it spends on behalf of the public. How that is done in practice is not a matter of constitutional doctrine but of practicability. The goal must be better scrutiny of public expenditure in the interests of the nation as a whole.
§ 4.47 p.m.
§ Lord Freeman
My Lords, I declare an interest as a former partner with PricewaterhouseCoopers. I am now an adviser to that firm, which has provided advice on resource accounting to a number of government departments.
It is a pleasure to follow the noble Lord, Lord Lipsey, that scourge of imprecise economic and political thought. I disagree with his historical memory. It may well have been more than 2,000 years ago before the first elements of double entry bookkeeping were discovered but, in defence of the noble Lord, Lord McIntosh, the doge of the ministerial Benches, he was quite right to say that it was the Venetians who developed the system. In the preparation of the accounts with which they used to control their trade with the world, the merchants of Venice used, literally, a system which is now proposed for government in the 21st century in the United Kingdom.
All sides of the House welcome this move to resource or accrual accounting—that is to say, including not only the movement of cash but the movement of obligations, both for accrued liabilities and advance prepayments—as a sensible substitute for cash accounting. For those interested in the subject, I am sure noble Lords will appreciate that it is important to recognise liabilities that have not yet resulted in terms of a cash obligation; to depreciate one's assets, as does every other private enterprise in this country; to measure the consumption of stock; and to take account of the timing of revenue obligations and not simply the movement of cash.
I thought that the noble Lord, Lord Taverne, was a tad cautious—even slightly gloomy—in the second part of his speech in terms of showing concerns about the application of the principle of resource accounting. I believe very strongly that Peers on all sides of the House will welcome this initiative.
I should also like to pay a tribute to Andrew Likierman—and for the benefit of the noble Lord, Lord McIntosh, who is making a special study of acronyms, Andrew Likierman is known within government as "Hot Gas"—as the head of the Government Accountancy Service. I pay tribute to "Hot Gas", and indeed to some of his predecessors who have worked on the development of resource accounting. I should also like to pay a particular tribute to my former colleague in another place, Ken Clarke. In introducing this new initiative he may not have read every single word of the Bill or of the relevant papers but, by Jove, he understood the implications. It was he who, with the typical determination that we associate with him, pushed through departments the preparation of resource accounting.
The noble Lord, Lord Taverne, was struggling to remember the initiative introduced by my former colleague, Michael Heseltine. It was called MINIS, the Ministerial Information System. It had nothing to do with accrual accounting; it was concerned with who was doing what to whom within departments. I am 40 glad to say that he introduced it in the early 1980s in the Ministry of Defence and it was still going strong in the Cabinet Office when I served with him in the late 1990s—and long may it remain a tool for Ministers.
I have five brief points to make to the Minister and would much appreciate any comment he can make now, or perhaps later by way of writing to me. The first concerns the timing of this change. My noble friend Lord Higgins was quite right in reminding us of the concerns of the Public Accounts Committee, about making sure that resource accounting was actually working properly before we abandoned the traditional cash accounting method of control. However—and this is very important—dual running of this system in anything but the shortest period of time will only seek to sow confusion, expense and muddle: muddle in Parliament, let alone in the departments.
While I recognise that we cannot dash ahead too quickly with a system which at the moment operates with some ragged edges, I implore the Minister who will answer this debate not to have a dual system of control running for too long. My noble friend Lord Higgins made a most valuable suggestion, and perhaps I could put some specifics on it. He suggested that it might be possible to look at some specific examples. Well, with 30th November being the cut-off date for the submission of accounts for audit, perhaps we could look at the fiscal year 1998–99. The resource accounts and the cash accounts have been running together—certainly the resource accounts have been in draft—and I am sure that many of your Lordships would appreciate the chance to look at the historical accounts. The committees in the House of Commons have been looking at estimates in the former resource accounts, but looking at historical figures is sometimes easier.
My second point is scope. The Minister referred to the extension of the principle of resource accounts to the rest of the public sector—for example, the National Health Service, schools and so on. I have difficulty with the concept of exempting the National Health Service from the preparation of resource accounts on the ground that the department itself, the sponsoring Ministry, will have to prepare accounts.
I do not think that that is a valid enough reason. I am certainly anxious not to place greater burdens upon the management of the National Health Service, but I would have thought that it would help its administration to have full resource accounts for hospital trusts. Therefore, perhaps the Minister would be bold enough at least to make a declaration of intent that the principle of resource accounting could be extended to the whole of the public sector within, say, three years—by April 2004. That seems to be a realistic aim. We cannot have a hybrid system: we cannot have one part of the public sector operating cash accounts and another part operating proper accrual/resource accounts. Either we all do it or we do not do it, and I should have thought that a fairly short time period was both sensible and acceptable.
My third point relates to the basis of depreciation. This is not an arcane point, because, if we are to begin depreciating the assets in the public sector, it is crucial 41 to know the basis of depreciation. I believe that we are in danger of having too complicated a system. As I understand it, we are likely to be using a modified historic costs depreciation basis. It is important that all departments, as well as Parliament, understand the clear basis by which we are depreciating: that is to say, charging the annual resource accounts for the consumption and use of our assets.
In the past, investment in assets, once made, created a free good for departments to use. The public sector was not necessarily disinterested, but paid little account to the annual cost of consuming a building, an asset, a road, or whatever, over its useful economic life. Now, for the first time, we shall have that. We are not going to do away with annuality, as the noble Lord, Lord Lipsey, quite rightly reminded us. We are still saddled with that, although I much regret it. I believe that, beginning with the commitment to fund the rail franchises between 1995 and 1997, we began for the first time to break the vicious cycle of 12-month annuality rules which limited the commitment that the Treasury was prepared to make. So I regret that we have not made any move in that direction, but at least we will maintain investment appraisals for new investment and at least the accumulated depreciation of past assets which need replacing will be some form of protection for investment commitment.
My penultimate point is to emphasise once again the point that was made by my noble friend Lord Higgins and by the noble Lord, Lord Lipsey. We are moving the focus in controlling the public sector towards output—what a department achieves in terms of its goals—and we are measuring inputs in terms of resources committed, and not simply cash, which represents a much fairer measure to contrast with output. It is a little noted achievement of this Bill, which I very much welcome, that it requires departments to produce not only what we call a set of accounts but a statement, for the 'first time, which relates costs to the outputs of the department. I very much welcome that.
My question to the Minister is: does he foresee any possibility that Select Committees both in the other place and in your Lordships' House could not take additional responsibilities for not only examining the accounts but controlling them by voting upon them? We know that Select Committees effectively, in most cases, have a governmental majority control, certainly in terms of much of their procedure and also in terms of some of their deliberations. I do not mean to be disrespectful but merely to repeat the obvious. To give Select Committees power, as in the United States Congress, for instance, to approve almost line by line the resource accounts—the resource estimates in this case—seems to me to be sensible.
Finally, I come to what I think is the most important point: that is the independence of the authorities which will supervise the generally accepted accounting principles and also the form of accounts. No one doubts that in most cases GAAP—generally accepted accounting principles—for the United Kingdom will be employed by the public sector, but if one studies the small print one finds that Her Majesty's Treasury will 42 be determining the form of accounts, following GAAP principles, and that indeed the principles themselves will be,amended as necessary in the context of departmental accounts".So I believe that some degree of unease will be expressed from the Front Bench and from both sides on the Back Benches as to the independence of the monitoring of this new initiative.
Cash accounting is a science: cash is spent or it is not spent. Resource accounting is an art, and because it is an art there is always disagreement about interpretation. For that reason, it is very important to have a clear and independent body of experts and of principals outside government controlling the preparation of accounts. I urge the Minister to accept not only the spirit of my comments but also my specific suggestions. I very much welcome the Bill and would appreciate any comments the Minister is able to make.
§ 4.59 p.m.
§ Lord Desai
My Lords, I join other noble Lords in welcoming the Bill. I, too, remember that many Christmases ago at a party, despite several drinks, Andrew Likierman, was able to be enthusiastic about the forthcoming revolution in government budgeting. I have been waiting and waiting and now, after several years, we are seeing the fruits of it. At last, after 800 years, the Treasury is to have decent accounting. Thank God for that! So far it has been cheese-paring with cash—"pinching the penny and clipping the pound" is the right expression—but now we shall probably have better accounts.
For a long time I have not understood a lot of Treasury orthodoxy. It seemed to have no basis in economic theory. When cash is involved, anyone who says, "You cannot have extra money", always seems to be much wiser than some one who says, "No. I want to spend it on a good cause". Even with resource accounting, we shall be some distance from genuinely good economic accounting because, as far as I can see, we shall be considering only monetary resources. There are all kinds of other resources for which we may not be able to account. I have in mind the saving of time, the saving or lengthening of lives, and so on. Therefore, I give a cautious welcome to this revolutionary proposal.
There is an interesting parallel here between the way national income accounting has continuously improved itself by getting closer to the economic as opposed to the accounting basis of income definitions. We still do not use those broader definitions of national income in our macro-economic policy making. But, leaving that aside, there is still a lot further to go in writing accounts so that they will make economic sense.
I agree with the noble Lord, Lord Freeman, that cash accounting is a science. But "science" is too big a word for it. In cash accounting "arithmetic" is more appropriate. We add numbers and everyone agrees what the numbers are. As resource accounting will be something of an art, what is important is not whether or not there is transparency; but that there should be 43 the widest public debate. And not just debate in Parliament. Our arcane rules of depreciation are important in the taking of decisions from which the public may suffer. We ought to be able to tell the public what it is that is being adopted.
I agree with the noble Lord that those who lay down the rules should be independent. We do not want to have further suspicion that the Treasury is up to its old tricks and, in another language, once again hiding things, as it always does. I regret that the Red Book, which is now white and much more glossy, stopped publishing the cost of taxes not collected. Once upon a time there was a column in the Red Book which set out the cost of zero-rating VAT. That was the cause of my downfall many years ago. I took it rather seriously and thought, "Why can't we have all that money?". It was useful to have transparent accounts of sums that are not collected or sums that are put under expenditure rather than income. It would not matter if there were two separate tables—one for the way the Government want to treat it and an alternative way of looking at the matter. The proposals in the Bill ought to make it possible for us to do that.
Eventually we shall have to move to much broader social resource accounting. After all, we are not just about spending money; we are about well being. I remember the classic case of the cost benefit study of the Victoria Line by Christopher Foster and Michael Beasley. The whole basis of the financing of the Victoria Line was in terms of the value of time saved for the traveller. We had a good deal of debate about whether or not to finance the Underground. Underground. But no one costed the amount of time a decent Underground system would save commuters. That, by itself, would save a lot of the money that would have to be borrowed. But we have not yet moved to social resource accounting. Even if we do not do it for financial accounts, we should move towards a broader social resource accounting. I am sure that what we are doing now is just a step towards that kind of change. In the meantime, I welcome the Bill and wish it God speed.
§ 5.5 p.m.
§ Baroness Hogg
My Lords, I join the chorus of welcome for the Bill. Whether it is a 3,000-year milestone, an 800-year milestone, a 500-year milestone or, as the noble Lord, Lord Taverne, suggested, perhaps something more short-term, I leave to better historians. But I am convinced that it has its heart in the right place. As the Minister said, it is the legislative expression of work that began under the previous government with respect to RAB and PFI. I join the chorus of compliments to Andrew Likierman and his team, not merely for the work of the team, but also for the persistence with which he kept Ministers' attention focused on this matter. Perhaps I may tell my obligatory Andrew Likierman story for this debate. I remember an occasion of him coming to see me at my office in Downing Street in 1994 and, by sheer force 44 of personality, he persuaded me to agree that this was by far the most urgent issue on the Prime Minister's agenda.
There has been some complaint that the Bill is a rather unhappy marriage of two issues and that the legislative backing for PUK has been grafted on, as it were, to a totally different set of issues. However, there is some connection in that even enthusiasts for PFI (or PPP as I must now call it)—and as one involved in some of the initiation of PFI, I certainly count myself as an enthusiast—must acknowledge that through PFI the Government are building up a whole series of liabilities. As my noble friend Lord Higgins pointed out, it will be one of the benefits of a full balance sheet that we would see those fully represented.
Having expressed my support for the Bill, perhaps I may signal some initial concerns. The noble Lord, Lord Higgins, made the important point that this reform must be both comprehensive and comprehensible. The trouble with such complex changes is that, while one is bringing them through, one tends to congratulate oneself on how far one has got and forget that when they are revealed to an astonished world what has been omitted and is incomplete will seem rather more important. That leads to mystification, irritation, suspicion and the creation of a whole new set of barriers to entry to the understanding of government accounts. Therefore, I endorse what other noble Lords have said; that is, that it is important to try to introduce this in a way that is comprehensive and comprehensible. I endorse the comments of my noble friend Lord Freeman on the subject of depreciation.
In the same vein, I ask the Minister to take seriously the suggestion for oversight by an independent body. That is not just because of certain controversy over the presentation of public expenditure numbers recently; nor because of criticism of the manipulation of the Red Book. That document is clearly reaching a size and a level of complexity that is beginning to tax even the understanding of the noble Lord the Minister. It is more because all governments—all Treasury Ministers—like to change definitions and presentations for both good reasons and bad far too frequently. The trend to independent oversight of such developments has been seen in relation to, for example, national statistics. It is a trend that we should move towards for national accounts as well in the Government's own interests. I ask the Minister to take that point seriously. It is not just a Treasury tease. It is important for the successful launch of this reform.
My second set of concerns relate to Partnerships UK. Some of them may be a touch "Committee-ish", but perhaps I may signal them at this point. An important purpose of our debate on the Bill in this House must be to clarify the role of Partnerships UK. I share the concerns expressed in another place about the distinction between upstream and downstream activities of Partnerships UK. I endorse the decision to give PUK a wide remit with respect to upstream activities, to make it effectively a facilitator; indeed, I warmly support that development. The build-up of the PFI has been seriously hampered by the lack of the 45 kind of expertise which I hope Partnerships UK will provide within the public sector. However, a downstream role is much more questionable. If Partnerships UK is to act in effect as another private sector investor, there are conflicts of interest to be explored. I welcome the introduction in another place of the £400 million limit on outstanding expenditure by Partnerships UK, but it does not deal with the principle that causes me concern.
The Minister will have given much thought to these issues since the Bill emerged from another place. I look forward to having them illuminated in his response.
§ 5.11 p.m.
§ Baroness Sharp of Guildford
My Lords, we on these Benches broadly welcome the Bill. It is important in terms of updating the basis of public accounts— possibly dating back 800 or even 3,000 years, as we have heard—and of bringing them into line with best practice in the private sector. In future we shall see a balance sheet, an operating costs statement, a statement of gains and losses, and a cashflow statement.
Another important addition is that under the new system there will be a statement of how resources are used according to departmental aims. I have been fairly well used to that in terms of R&D statistics. As they are presently drawn up, there is a variation in their presentation. One of the ways in which they are presented is against the degree to which they are used to promote the discovery of knowledge: to promote strategic applied research technology transfer. It is useful to be able to see how resources are being used. I take it that such a practice will apply more widely across departments. In addition, the accounts are to be set side by side with performance indicators for departments. Here too, there are lessons to be learnt and I shall refer to that. So far as the general public are concerned we are to have better accounts: accounts that are more comprehensible, more transparent. Those in themselves will open the way to better scrutiny, so that both the public and Parliament are better able to hold the executive to account for what is happening.
Like the noble Lord, Lord Freeman, I welcome the degree to which we are linking inputs to outputs. An issue about which I have long been concerned—I am delighted that at long last we are catching up on it—is the treatment of capital expenditure within the public accounts. To the man and woman in the street it has been incomprehensible that there has made no differentiation whatsoever in the treatment of capital and current expenditure in the public accounts. As the noble Lord, Lord Lipsey, said, the matter is treated in exactly the same way whether one is buying a house or a tin of baked beans.
I was a young assistant principal in the Treasury in the early 1960s when the Plowden report was implemented. In those days, we were moving away from what used to be termed "below the line" expenditure and were introducing what was then termed "resource-based accounting". The argument 46 was that in regard to inflation whether it was a matter of a tin of baked beans for school dinners or bricks and mortar for schools, it was a call on resources, and any call on resources might have an inflationary impact and therefore we should treat all alike.
Over the course of time, we have treated all alike. A problem has arisen in that, if it is a question of money for a schoolteacher's salary or money for bricks and mortar for a school, one can put off building the new school but one cannot lay off teachers and increase class sizes. Therefore, over the course of time in the public accounts we have seen a bias against capital expenditure. The result in this country has been a great crisis in terms of building the social infrastructure. Whether we are looking at roads, schools, hospitals, the Tube or anything else, we have failed to put money into public sector infrastructure. If we examine the interesting historical tables that appear at the end of the Red Book, we find that in the 1970s we were spending 5 or 6 per cent of GDP on public sector net investment. We are now spending 0.6 per cent.
I know that back in the bad old days of the 1970s all the nationalised industries were added into the public sector accounts. We have got rid of all those industries, partly because of the problem they caused in terms of investment. When British Telecom needed £20 billion in order to invest for the digital revolution, it said, "We cannot possibly do this within the public sector because it would inflate the public sector borrowing requirement far too much". That problem has led to distortion in all kinds of decisions for a long time. We are now spending far too little in terms of net investment in the public sector. We should be spending far more than 0.6 per cent.
Perhaps I ought to pay tribute to what the Government are doing in terms of the extra expenditure on public sector investment. But the money is going through the private finance initiative. Why? Because essentially it is "off the books"; it is not included in the public sector borrowing requirement. So we have increasingly seen heavy capital expenditure on schools, hospitals, roads and railways, all now going into the public finance initiative. I understand why it is going there; however, I have long argued that it is illogical. Why borrow more expensively through the private sector when the public sector can borrow more cheaply?
I understand that there a risk factor: historically, the public sector has been extremely bad at managing large capital construction projects. Nevertheless, I still fail to understand why the PFI—or the PPP, and now Partnerships UK, as the facilitating organisation for developing the skills and manpower to run, from here forward, a cornerstone of 21st century management of public resources, to use the Minister's expression—is seen largely as the way forward. From these Benches, I continue to register a somewhat sceptical view of whether this really will be the cornerstone of the management of public resources in future. Nevertheless, I accept that this will go forward; I realise that there is now bipartisan support (on the part of both the Opposition and the Government) for the public/private partnerships initiative.
47 This illustrates one of the problems that is faced up to in the Bill; namely, the question of the limitations of parliamentary scrutiny. Clauses 9 and 10 of the Bill extend the powers of the National Audit Office to investigate non-departmental public bodies. But the Bill leaves out of account a number of new kinds of public sector organisations, such as the private finance initiative where a great deal of money is going, and it is not clear how they will be audited. I join other speakers in feeling that this aspect of the Bill needs further consideration.
We are also unhappy about Clause 5 and the whole question of who should define public sector accounting procedures and standards. As it stands, the Treasury still plays a considerable role in setting those definitions. We worry about that and believe that it is far more satisfactory to have an independent body to set standards and definitions.
I return finally to performance measures and monitoring procedures. My honourable friends in another place are extremely enthusiastic about performance indicators and would like to see even more established for the public services. I have always had reservations about them, in part because, coming as I do from the education sector, admittedly HE, I have seen the degree to which performance indicators have distorted the allocation of resources. Looking at it slightly more widely, as the governor of a school I also witness the degree to which the need constantly to fill out forms, and the bureaucracy associated with performance indicators, detracts from the delivery of mainline services. That should not be forgotten.
Over the years I have also taught the economics of the Soviet Union. I have read at length, as I am sure has the noble Lord, Lord Lipsey, the work of Professor Alex Nove on this matter. The Treasury has the whole of local government under its thumb and, in terms of expenditure, has it precisely where it wants it. It is a highly centralised system of control over expenditure. Stalin would have been proud of such a system had he been able to exercise such control in the Soviet Union. When one establishes a control system of that kind in the public sector and cannot measure outputs by profits, one establishes performance indicators. We all know what happened to performance indicators in the Soviet Union and the degree to which they distorted the delivery of real goods and services.
I have been delighted to read in the past week that the Treasury has decided that there are too many performance indicators for most departments. That certainly appears to be the case. We need perhaps a few, but we must give this very careful consideration. Just think how hospital waiting lists have distorted the whole delivery of health services. I have some reservations about the degree to which we want to go along the route of performance indicators.
We on these Benches broadly welcome the changes that the Bill brings into effect, particularly if it succeeds in bringing a little more sense to the management and use of capital assets in the public sector. We have some 48 scepticism as to how much will be achieved and fear that in some sense it may be another case of Plus Ça change, plus c'est la même chose.
§ 5.23 p.m.
§ Viscount Bridgeman
My Lords, I repeat the observations of my noble friend Lord Higgins. We on this side of the House broadly welcome the Bill. I associate the Front Bench with the tribute to Mr Andrew Likierman and his interesting acronym. I am also grateful to my noble friend Lord Freeman for reminding your Lordships that so much of the initial stages of this work was done by my right honourable friend Mr Kenneth Clarke.
The expertise which has been available in this debate comes as no surprise. In that connection, I am interested in the suggestion of my noble friend Lord Freeman and the noble Lord, Lord Lipsey, that this House should take a greater role in the scrutiny, not of the Budget or expenditure, but certainly of the accounting of it. The Bill still has some serious deficiencies, the remedies to which were not accepted by the Government in another place. We are concerned not so much by what the Bill covers but, as my right honourable friend Mr Francis Maude said in another place, what it fails to cover.
With a broad brush, perhaps I may summarise our three concerns. First, the Bill gives the Treasury enormous powers to determine what is or is not to be included in the accounts. Secondly, it establishes no clear principles for the accounting of income and expenditure. Thirdly, it continues to permit the Treasury to omit large public assets and liabilities from the national balance sheet, to which my noble friend Lord Higgins referred. In particular, the state pension liabilities are omitted from the accounts. There is nothing to prevent any government from re-classifying expenditure. One glaring example of that is the reclassification of the working families' tax credit, to which my noble friend referred. We continue to be concerned about the vagueness of the Bill in valuing the assets of the Ministry of Defence and the definition of private/public partnership, about which I shall say more.
One of the key objections to the Bill as currently drafted is that there is no independent body to set the accounting standards by which the government accounts will be presented. My noble friends Lady Hogg and Lord Freeman also referred to this matter. The problem is that the Treasury will determine the accounting standards and the form in which the accounts are presented. No fewer than six clauses of the Bill give the Treasury power to issue directions to departments about the preparation of accounts, to determine which items of income or expenditure are included and even as to how income, expenditure and liabilities should be defined.
In essence, this Bill trusts the Treasury at all times to adopt proper accounting standards. We are being asked to trust this Government, and all future governments, not to massage the figures in order to paint their stewardship of the economy in the most 49 favourable light. Time and again during the passage of this Bill in another place the Government were asked to explain why, if they were genuine in their desire to see proper accounting standards for the public sector enshrined in legislation, they would not establish a body independent of the Treasury to ensure that the published accounts represented a true and fair view of the public finances. In our view, no satisfactory answer has been provided by the Government.
When it was suggested that a new national accounts commission should he established to ensure fair play, the Government replied that there were already many accountancy bodies in existence and that the creation of a further one would be superfluous and cause confusion within the profession. If that is the case—although I have my doubts—there are no insurmountable barriers to empowering one of the existing bodies to perform that role. We on this side of the House do not seek to be prescriptive about how the rules are properly policed; we merely attempt to set out in legislation the principle that it is wrong for the Treasury both to prepare the accounts and to determine the manner in which they are created.
In the private sector no company can create its accounts in any way that it sees fit; each must conform to the accounting standards and have its accounts independently audited. The private sector analogy is that of a company which sets its own accounting standards and goal posts which it moves from year to year to suit its own requirements. I see no reason why the public finances should be treated any differently from the disciplines imposed on the private sector. The Government provided a perfect example of that in the treatment of working families' tax credit, which costs around £5 billion per annum. There is a consensus among experts that this credit, which replaced family credit, should be treated as an item of social security expenditure. It is, after all, a scheme designed to give some financial incentive to low income working families. Family credit was treated as social security expenditure. In that connection my noble friend referred to the OECD, and it may be worth reading its comment in full:We have clear guidelines on how we treat tax credits that were established in the early 1970s. If the tax credit is given to a family that have not to pay any tax because it is a low income family, we treat this tax credit as social expenditure".It is clear to those on this side of the House that the Treasury wishes to treat this matter as a tax credit because it shows that government spending, and therefore the tax burden, is lower than is the case. In our view, that is a blatantly political decision by the Government.
The problem is that under the provisions of the Bill the Treasury would be within its rights to make such decisions and have them cloaked in the respectability that resource accounting should give to the public accounts. Other public liabilities include state pensions and other benefits to which my noble friend Lord Higgins referred. Will the whole of the Government's accounts include full liabilities for those amounts? We simply do not know how the Treasury will account for 50 them. We believe that it is far more desirable to have an independent set of standards to which all governments must conform.
The Government have yet to come forward with a logical explanation as to why that should not be the case; and I give notice that we shall bring forward amendments in Committee to ensure that this vital independent safeguard is included.
I turn to supervision and monitoring. Here the Bill appears to fall between two stools. Not only does it fail to make provision to use the services of a number of suitable accountancy bodies in the private sector, but it also restricts the scope and, therefore, the effectiveness of the Comptroller and Auditor General's office.
We believe that it is wrong that the CAG does not have universal scope of access and audit across the public and quasi-public sector. This is a concern which was raised by the chairman of the Public Accounts Committee in another place, and amendments tabled by PAC members to rectify the deficiency were supported by both Conservative and Liberal Democrat Members in another place.
I acknowledge that the Government have made some concessions on the issue, including the announcement of a study of the issues to be conducted by the Chief Secretary to the Treasury. We welcome the Minister's appointment of the noble Lord, Lord Sharman, to chair the body to look into the issue. The speed of working of the noble Lord, Lord Sharman, is legendary in the profession; but even he cannot produce a report until the end of the year and we on these Benches are seriously concerned that such a report will not be enshrined in the primary legislation.
If it is the Government's genuine wish to put the public accounts on the same footing, why do they not accept that it is right for all financial accounts of the public and quasi-public sector to be subject to audit by the CAG and that the CAG has proper rights of access to appropriate persons and papers? At present, the audit arrangements for executive non-departmental bodies (quangos) are arbitrary and illogical. A substantial minority is audited by auditors other than the CAG. The decision as to who will audit each newly-established body is made by the individual sponsoring department when the body is established. As a result, there is a lack of consistency in the information provided to Parliament and an unnecessary waste and duplication of audit effort. Let us contrast that with what happens when the government of the day choose to reorganise or create a new department of state. The Exchequer and Audit Departments Act 1866 currently provides automatically for the CAG to audit the new department.
We believe that it is desirable to allow the CAG the right of access and audit across the whole of the public accounts. Not only would that provide a consistency of audit which would reinforce the accuracy and probity of the public accounts we wish to see, but we must also remember that audits by the CAG have the advantage over those made by other auditors in that 51 the CAG is genuinely independent and not employed by the body which is being audited. The CAG is indeed genuinely distanced from the executive.
The Government have not come forward with any satisfactory reason why the CAG should not have full rights of access and audit. I do not, of course, insinuate that the absence of such provision means that the Government are attempting to cover up any deficiencies in existing audit arrangements. However, it fuels suspicion that the Bill falls short of the high ideals of resource accounting which it purports to enact. By leaving out cast iron audit arrangements the Bill is not as good as it should be. It is a golden opportunity missed, and we shall be bringing forward amendments in Committee to rectify those deficiencies.
I refer briefly to the private initiative which the Government support in the tradition of the enterprise culture established by my noble friend Lady Thatcher in the early 1980s. I refer noble Lords to the recently published Treasury Committee's report on the private finance initiative. It makes many good points. It points to the value for money test, comparisons wherever possible and the subsequent evaluation and monitoring of projects. My noble friend Lady Hogg referred to the difference between upstream and downstream. I quote the last paragraph of the report which has a bearing on this issue. It states:There is a danger of conflict of interest if [Partnerships UK] provides financial assistance in PFI projects on which it has advised; and there is also the risk that financial support for some projects and not others would discriminate unfairly".It continues:We therefore recommend that [Partnerships UK] should not have power to provide financial assistance to PFI projects, whether by taking equity shares or otherwise".We are concerned that the definition of a public-private partnership is so wide as effectively to give the Treasury the power to give money to any project. As such it is a further dimension to the Treasury powers to set the format of the public accounts in whatever way it chooses.
Finally, I refer to the valuation of the Ministry of Defence assets. The resource accounting manual states:The normal basis of valuation may not be appropriate if a modern substitute is markedly different in its cost, life or output, or where technological advances have resulted in likely replacements having significantly improved quality or quantity of outputs. Under such circumstances, it will be necessary to undertake a 'modern equivalent asset' calculation to arrive at a replacement cost for the asset".My noble friend Lord Freeman referred to depreciation. While that is an acceptable accounting treatment, the problem with Ministry of Defence assets is that "modern substitutes" for many items of military equipment have the potential to vary enormously in nature and costs depending on the particular defence needs of the country at the time and the military capabilities of potential aggressors. It is not clear either from the Bill or the resource 52 accounting manual how such massive changes in the value of assets, which theoretically change the financial viability of the ministry, should be treated.
The wide powers which the Bill gives the Treasury to determine the form of accounts mean that the treatment of such items does not need to appear on the face of the Bill. However, the view of this side of the House is that the Government should be probed to explain how they intend to account for such items. The fact that it is a difficult issue does not mean that it should be swept under the carpet.
This is in essence a good Bill. We look forward to the points we have raised being addressed by the Government in the later stages of the Bill.
§ 5.38 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to all noble Lords who have taken part in the debate. As so often in this House, it has been an exceptionally well informed debate. I do not refer simply to two former Financial Secretaries to the Treasury, but also head of the Policy Unit at No. 10, a distinguished professor of economics, the author of the best book on the Treasury in the past 15 years, and the former chief financial officer of Conservative Central Office, 1984–86, the noble Lord, Lord Freeman. I have been doing my homework!
As I said to officials when I first met them to discuss the Bill, I have always understood that the way Treasury looked at money was that one took £1 of revenue and £1 of capital and made £2. They were not familiar with that formulation, but it has haunted me during my time in public life. I still believe that it is the way in which it has been treated. However, I am happy to refrain from making any party political point about the changes which are taking place and which were started under the previous government.
From the outside, I was inclined to say, "Well, the previous government made noises about all this. They were prepared to talk about it, but we have actually done it". I do not believe that that is true or fair. The more I have learnt about the subject, the more I realise that the continuing process was seriously begun in the early 1990s. Many of the changes which had to be made, in particular the preparation of a national asset register and the nurturing of expertise within the public sector, were inevitably long-term projects. The previous government pursued the matter with all due diligence and I say that we took it over with enthusiasm without criticism of what went before.
The welcome for the principles of the Bill is such that I have little to say from my prepared remarks. I shall try to answer the questions which were raised and shall not need to give a sermon about public expenditure and the improvements in it. Like Lord Whitelaw, I shall comment on what was said by each speaker in turn. He used to make a good joke about it, which I cannot do, but perhaps that course would be the most helpful.
I am grateful that the approach of the noble Lord, Lord Higgins, is to make the Bill more satisfactory. That view was echoed in all parts of the House. He 53 complained about the lack of consultation with the Public Accounts Committee and the National Audit Office. We have apologised to the Public Accounts Committee and to the Treasury Select Committee for the fact that the Bill was produced with a shorter interval than normal between publication and introduction in the House. I repeat that apology on behalf of the Government.
Even so, in March last year the Public Accounts Committee and the Treasury Select Committee received a memorandum on our legislative intentions. Continuous memoranda have been sent and those bodies have been continuously consulted. The National Audit Office saw and commented on instructions to parliamentary counsel, a privilege I have never had during my dealings with various Bills. Although I accept that there was too short a time, I believe that there has been a considerable amount of consultation.
The noble Lord then raised an important point which was echoed throughout the debate. It was in relation to what he described as "discretionary rights" for the Treasury over the powers of Parliament. That lead to discussion of the investigatory role of the National Audit Office and the Comptroller and Auditor General. Such criticisms dominated debate in another place and therefore the Chief Secretary to the Treasury, Andrew Smith, set up the review which I described in opening. Although it is legitimate and right for noble Lords to seek to tease out what we hope to do as a result of the review, I believe that it is a proper response to the properly expressed concerns. The group will report before the end of the year. Noble Lords have welcomed the role of the noble Lord, Lord Sharman, in the group. I shall be happy to discuss in Committee, or at any other stage, its terms of reference and methods of procedure.
§ Lord Higgins
My Lords, I am grateful to the Minister for giving way. We are concerned that if a such a study group were considered necessary, it should have been set up before the Bill came before the House. The problem is that it will not report until after the Bill has received Royal Assent. If precedents are anything to go by, it could be another half century before we have a chance to incorporate in primary legislation any recommendations that it may make. A timing problem exists and we must be clear about the terms of reference and how we can put into primary legislation whatever may be the group's views.
§ Lord McIntosh of Haringey
My Lords, it is not necessarily the case that they would have to be put into primary legislation. If we had wanted to agree with the comments made in another place and here today about the role of the National Audit Office, we would not have needed changes on the face of the Bill. We are doing what we believe to be right and are consulting on the issues in as open and independent a way as possible. However, it would not be fair to say that any conclusions which the review body reached must wait another century for primary legislation. It is virtually certain that such issues can be dealt with without primary legislation.
54 The issue of accounting definitions was raised by a number of speakers. The noble Lord, Lord Higgins, claimed that there is too much Treasury discretion over them. We must look at the process. We are told that an independent body should be responsible for them, but there is already such a body, the Accounting Standards Board. It is not, and never has been, a government body. It has been a body of the accountancy profession which has survived because it has gained the confidence of that profession, of its clients, and of business in this country. The commitment in the Bill is to the generally accepted accountancy practice and to the "true and lair" phrase which is used by the Accountancy Standards Board. That is our starting point and it is entirely independent of government.
However, we are not satisfied with that. We have not done what several other countries have done in introducing resource accountancy; that is, simply to take private sector accountancy standards and apply them wholesale to the public sector. We do not believe that that is the best way to proceed. We have explicitly, openly and transparently set out a resource accounts manual. That is a huge document, which is explicit about the changes necessary for the application of accountancy standards to the public sector.
That manual has been under the oversight of the Financial Reporting Advisory Board. The FRAB was not set up only by government with only government members, but with distinguished members of the business community and the accountancy profession, and with the active participation of the National Audit Office. Therefore, the charge that we do not accept independent oversight of accountancy standards cannot be sustained. The noble Lord, Lord Higgins, asked why there should not be pro forma accounts. There are pro forma accounts in the annexes to the resource accountancy manual. That is the basis on which we are proceeding.
The noble Lord, Lord Higgins, went on to ask—I am not sure that I understood the question—who takes what decisions on the basis of the new accounts. I hope that I am interpreting it correctly, but my understanding is that departments which seek resources for the activities that they wish to pursue in the public sector will have exactly the same role as they have had in the past. However, they will seek resources rather than cash. Again, Parliament will have not only no lesser a role but a greater role than it has had in the past.
In the past, when parliamentary committees looked at the annual report of a department of state, they had one annual report to examine. Now, they will have two annual reports to look at with an entirely different approach: one will cover the plans for the forthcoming year or period of budget—we have, after all, moved from annuality to three-year budgeting—and the second will be the report of what has happened in the past year. That represents an increase in parliamentary accountability and in no sense is there an3, decrease. Therefore, in so far as decisions are taken other than by the Treasury, they are taken by departments in the application that they make for funding, as they always 55 have done, and the scrutiny role is as strongly—indeed, more strongly—in the hands of Parliament. I believe that that point was raised by the noble Lord, Lord Taverne, and, if I may say so, I believe that that is the answer to his question.
I turn to a question from the noble Lord, Lord Higgins, regarding depreciation. When I was told by such a distinguished accountant as the noble Lord, Lord Freeman, that cash accounting is a science and that resource accounting is an art, I asked myself whether he meant that it was a creative art or whether it was perhaps some kind of more respectable art. Of course, there are different definitions of "depreciation". However, the definitions which we are using are those governed by generally accepted accounting practice and by the need to present a true and fair view; in other words, not only are the standards of presentation of calculation of depreciation the same as they are in the private sector, but they are also required to be more explicit than sometimes is the case in the private sector. Of course, they are provided in addition to the cash requirement because of the period of dual running. I shall return to that point in a moment.
The noble Lord, Lord Higgins, then asked why income tax was excluded from the accounts. Because we do not have hypothecated tax in this country, income tax is not included in departmental accounts. However, in due course it will be included in the whole of government accounts, and the whole of government accounts will include all the areas of the public sector to which he referred. They will include local government, schools and hospitals. I believe that in most cases hospitals currently work on resource accounts. In due course, there will be no question of excluding local government expenditure within the whole of government accounts. It is also intended that income from taxation, both central and local, will be included in the whole of government accounts. Therefore, all sources of income to the public sector will be taken into account.
I believe that I have already answered the specific points raised by the noble Lord, Lord Taverne. Therefore, perhaps I may move on to those raised by my noble friend Lord Lipsey. I echo the tribute paid to all who have taken part in the preparation for this change. They include not only Treasury officials but financial officials in all departments who have a very difficult role to perform. My noble friend said that there was a question as to whether Parliament moves at the same speed as government. I believe that he referred primarily to the House of Commons, although he suggested that this House might have a wider role. The rules which govern this House in respect of comity between the two Houses prohibit me from making comments about the adequacy of scrutiny of financial matters by the House of Commons.
The noble Lord, Lord Freeman, asked a number of most interesting questions. The first related to the timing of the change. I believe that he was moving in the opposite direction to the noble Lord, Lord 56 Higgins. The noble Lord, Lord Higgins, was keen that we should not give up cash too soon. I believe that the noble Lord, Lord Freeman, was keen that we should avoid dual running for too long a period. Of course, we have taken a great deal of care with the four triggers to ensure that we do not move on to stage 2 before we are satisfied that stage I works, and so on. The third trigger is in the middle of being achieved, and we believe that we reached a happy medium between those who want to carry on longer with cash and those who want to avoid excessive dual running.
I believe that I dealt with the scope issue because I made it clear that the whole of government accounts will include the entire public sector. I hope also that I dealt with the question raised by the noble Lord, Lord Freeman, with regard to the basis of depreciation coming from GAAP and from "true and fair". Of course, the issues are hugely difficult, as they have been in the private sector in moving from historic cost to modified historic cost to the ultimate dream of some people of current cost accounting. Those difficulties exist no less in the public sector and may, to some extent, be greater than in the private sector. However, I believe that the noble Lord's accusation that we are stuck with annuality is not fair because, with the Comprehensive Spending Review and now with SR 2000, we have, after all, moved to a three-year horizon. That has been widely welcomed by the public sector and by those who are affected by it.
The noble Lord's fourth point concerned the nature of the set of accounts to be produced. The Bill covers accounting requirements. Of course, the supply procedure is, and has always been, non-statutory. Changes to the procedures of voting supply and of scrutinising Estimates are a matter for Parliament rather than for legislation. I believe that that goes back to the point raised by my noble friend Lord Lipsey.
On the same matter, he suggested that the role of Select Committees in the Commons should be extended to a power to vote on resource Estimates. Again, that is a truly revolutionary proposal. It is one which raises the whole issue of the separation of powers between the legislature and the executive. Since it is primarily a matter for the other House, I hope that he will forgive me if I do not venture into what I see as very dangerous territory. His final point concerned the Treasury determining the form of the accounts. Again, I believe that I have dealt with that matter.
In reply to my noble friend Lord Desai, who asked for an eventual move to social resource accounting, I can say only that if that is where we want to go, this is the only way to get there. I am not saying that it achieves what he wants, but I do not see how we could take into account the social concerns that he very properly raises except by the route that we are adopting. I do not say that the route is being adopted for that purpose.
I was asked by the noble Baroness, Lady Hogg, about the link between Partnerships UK and resource and account budgeting. She made the point quite legitimately that inevitably public/private partnerships build up liabilities. Of course, those liabilities will have 57 to he reflected in the whole of government accounts; indeed, they may have to be reflected in departmental accounts if, strictly speaking, the projects are within departments. So she is quite right to say that that is a much larger issue than that about which she and I have crossed swords from time to time; namely, the size, complexity and opacity of the Red Book.
I was extremely interested in what the noble Baroness said about the upstream and downstream activities role of Partnerships UK. She was happier about the facilitation role of PUK than about its downstream role. But there is still a public sector skill deficit in that area. It is not just a matter of being another body of advisers. Advisers exist—at a price. But PUK could act as a co-sponsor of projects and sit alongside the public sector project team, taking decisions with it and, to some extent, sharing responsibility for it. That is why we have included in the Bill, which I understand the noble Baroness welcomes, the limit of £400 million at any one time in relation to PUK involvement.
I should love to engage in a long debate with the noble Baroness, Lady Sharp, about the PSBR. I have always agreed with what she said about, for example, the £20 billion needed by British Telecom for investment which had to be ruled out in the old days under the public sector borrowing requirement.
But I believe that the noble Baroness is being unfair about this Government's policies, for two reasons. First, the golden rule, which is set out in the fiscal strategy document, says that over the economic cycle, we would borrow only for revenue purposes. We have set up distinct investment funding and we have doubled our capital investment expenditure over that period, quite apart from PPP. That is additional to PPP. There is an additional £10 billion of public investment without any partnership involvement whatever.
It was suggested that there is no Public Accounts Committee/NAO scrutiny of Partnerships UK. Any money which goes from the Treasury to Partnerships UK comes out of voted money. It comes out of appropriation or resource accounts which have been audited by the NAO. Of course, it is always possible for the NAO to undertake value-for-money studies under the auspices of the National Audit Act 1983.
I have spoken for longer than I intended. I accept that the debate on the role of the National Audit Office and the Public Accounts Committee will be raised in Committee. I acknowledge that and am prepared for it. We believe that we have good answers to the questions which have been raised but we are grateful that they have been expressed in the terms in which they have. We are grateful for the general support for the Bill expressed by your Lordships. I look forward to further consideration at later stages of the Bill and I commend it to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.