Scottish Government

1 EXECUTIVE SUMMARY

Introduction

1.1 We were asked by the Minister for Finance and Public Service Reform to prepare this report as one of several initiatives geared to support the Spending Review 2007 ( SR 2007) process. As independent reviewers, we used our considerable public and private sector experience of managing budgets in large and complex organisations to discharge our remit. We reviewed all portfolio budgets, except for most of local authority spending, to determine whether SE spending is in line with its priorities and that programmes are performing well.

1.2 We reviewed available evidence and interviewed a wide range of Ministers, officials and stakeholders from November 2005 to March 2006. We analysed and wrote up our findings during April and May 2006. Our report reflects back the views and messages we heard, as well as our own conclusions.

1.3 Overall, we found the SE to be well-run, forward-looking and seeking to learn and progress. Our work has highlighted a number of areas for learning and improvement. Our comments and recommendations are aimed at continuing the progress the SE is making in coming to terms with devolution.

1.4 We are grateful to all Ministers, civil servants and other individuals, who contributed to our work so constructively.

Key Messages

1.5 A complex and dynamic array of priorities has compromised the ability of the SE management planning systems to set out clear outcomes and meaningful targets. PA/manifesto commitments for 2007 and beyond should be set out in a way in which outcomes can be more easily delivered by the individual departments and other bodies through a sound business planning process.

1.6 The SE presents itself as an organisation with much good practice and a willingness to learn and improve. It needs a more formal and rigorous process to assess how effectively it performs. Policies should be developed with an understanding of the financial implications and risks involved and the outcomes required by Ministers. The financial skills of individuals should fit their roles. A Best Value culture should be instilled across the whole organisation.

1.7 Good financial discipline is an essential element of any successful policy framework, particularly in a period of fiscal constraint. The SE's current approach is adequate in most respects, but it needs to develop a formal, comprehensive and corporate challenge function during SR 2007.

1.8 Every organisation needs sound processes to challenge the effectiveness of any new initiative. Initiatives need to be subject to clear evaluation methodologies within agreed timescales and with clear paths mapping out their future, especially relating to exit strategies or transfer to core funding.

1.9 Sound financial planning systems require comprehensive and clear budgetary analysis. There is a need for a more rigorous approach to the classification and detail of spending in published budgets. While it is important to highlight the costs and outcomes of new initiatives, it is equally important to ensure appropriate scrutiny and challenge is given to spending inherited from previous SR's. There also needs to be more challenge on the Government Accounting rules applied by Treasury, particularly about borrowing for capital spending.

1.10 Programme management is too much about spending the available budget, rather than defining clearly what needs to be provided. The SE should focus on strategy and policy and avoid detailed management in areas more suited to its delivery agents.

1.11 Scotland's public services are delivered through a complex and costly web of public bodies and agencies. This 'crowded landscape' should be reviewed as soon as possible to determine whether fewer organisational entities could be more effective at delivering outcomes and could do so at a reduced cost.

1.12 The Minister for Finance and Public Service Reform has 'a duty to ensure that every pound that is spent is spent wisely and where it can have the most impact' ¹. The limitations of the SE's financial planning and management systems mean the assessment of the effectiveness of budget performance needs to be treated with a degree of caution.

Conclusions

1.13 Devolution is a dynamic process and continues to evolve. Coalition government is still relatively new. The political 'contract' between the parties forming the Government is not a management tool but, expressed in the right way, it can form the cornerstone of the SE's management planning systems.

1.14 There needs to be a formal, comprehensive and corporate challenge function supported by a Best Value culture across the SE to ensure that every pound is spent wisely and to best effect.

1.15 It is time for a systematic re-assessment of the relationships between the SE, its Executive Agencies and NDPBs following devolution. It is important this 'crowded landscape' is reviewed as soon as possible in terms of efficiency and effectiveness.

1.16 A better understanding is needed of SE budgets if the potential for realignment is to be maximised. Nonetheless, this review of portfolio budgets suggests there is potential to realign about £1 billion - 4% of the relevant budgets. Other options are also detailed which provide the potential for more headroom. That is the scope available to Ministers to make 'Choices for a Purpose' in SR 2007.

Overall potential headroom

1.17 Table 1 summarises our findings on headroom, i.e. the areas where there is potential to realign budgets closer to Ministerial priorities. We show two types:

• Type 1: areas where we have identified potential headroom for SR 2007 with firm estimates using 2007-08 figures; and
• Type 2: areas for review that might yield potential headroom where we can also give an estimate or top limit.

1.18 Within the report, we identify other areas for review that might yield further headroom, but where we are unable to provide an estimate. In some cases, we have made a judgement based on our experience about how much might be created in percentage terms.

Table 1

* Excluding local government budget which was not reviewed.