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APPENDIX G FINANCE COMMITTEE SUBMISSION

Finance Committee

Submission to the Independent Budget Review Group

1. The Finance Committee advanced the case for a rigorous and systematic baseline budget review and a reappraisal of programmes and priorities in a report which was sent to the Executive on 15 September 2005. The Committee believes this is necessary for a number of reasons, including the expectation of a tighter funding settlement and evidence of an increasing degree of committed expenditure in the Scottish Budget. Furthermore, it has also expressed concern over the scale of savings being pursued in the Efficient Government initiative relative to equivalent savings targets in Whitehall bearing in mind the ambitious social and economic targets set by the Executive in the Scottish Budget.

2. The Committee therefore welcomes the establishment of the Independent Budget Review Group and will support your activities wherever possible. However, we have considerable reservations over the timescale you have been given to carry out this important task. The Committee had hoped to make recommendations to you based on rigorous analysis over which programmes should be reassessed, given that your remit may result in some recommendations for savings. However, to do this the Committee would need to adopt an evidence-based approach, drawing on research and oral evidence. It would be extremely difficult for the Committee to do this within the tight timescale.

3. The Minister indicated at the Committee's meeting on 7 November 2005 that your group was likely to have an input from individuals from the private sector. We welcome this and we also believe that this additional input makes the need for extending the timescale even greater. If you were able to secure an extended timescale the Committee would be able to engage with the group's work to a greater degree and we would hope to make a more substantial submission. This initial submission outlines the ongoing issues raised by the committee and in particular, highlights the Committee's concerns that monitoring spending against portfolios is difficult because problems remain over transparency.

4. In its scrutiny of the Scottish Budget since Spending Review 2002, the Finance Committee has consistently argued for a strategic framework of priorities to guide the budget process. In each Spending Review period, the Executive has had a different set of strategic priorities, in addition to functional priorities in each portfolio.

5. In its budget reports, the Committee has sought to provide constructive criticism in its role of addressing overall priorities, and advising on the budget information provided. This submission draws together arguments, issues and evidence regarding priority setting from the annual budget reports, and also from the cross-cutting expenditure reviews.

6. The Executive inherited a budgetary format developed for the minimal approach to scrutiny at Westminster. The first Finance Committee budget report was heavily critical of the basic information provided. At that time, there had been a statement of four priorities in the Spending Review Report (Scottish Executive 2000), but these were not referred to in the Annual Expenditure Report ( AER) or the Draft Budget (Finance Committee 2001a), and the approach to prioritising spending was departmentally based.

7. The then Deputy Minister for Finance, Peter Peacock, gave evidence of the Executive's wish to move towards a system of priority based budgeting in which expenditure priorities are decided on the basis of the priorities that come from departments. Such a system would focus more on outcomes than inputs. This remains an aspiration not an actuality.

8. Particular concern was expressed over the lack of transparency in block allocations to health and local government, and the Minister agreed to try to provide more disaggregated information for those two programmes - which together account for nearly £17 billion of the £23.3 billion in the DEL (71%) - to set out spending plans for specific services. This remains a problem in health, although GAE service assessments are now included. Ministers stressed their wish to reach agreement on six outcome measures with COSLA, whilst developing a performance assessment framework ( PAF) in the NHS, to allow financial discretion at the local level in delivering the defined targets. It is difficult to tell whether health boards and local authorities deliver national spending priorities as effectively and efficiently as possible in the absence of such measures.

9. Finally, in the Stage 2 Report (Finance Committee 2001b) the Committee reported its concern over the lack of financial information regarding the targets and delivery of cross-cutting themes identified by the Executive, despite the emphasis on joined up government.

10. There has been significant progress in improving budget transparency since then, through a continuing dialogue between the Committee and the Finance Co-ordination Team. There is a now a standard budgetary format for each portfolio with objectives and targets, which sets out new resources since the previous budget, and which deals with cross-cutting targets. The subject committees comment on priorities within their portfolio, whilst the Finance Committee draws together issues and recommendations regarding spending priorities in its budget reports (see Appendix). The remainder of this paper sets out the Committee's continuing concerns over setting and monitoring priorities, to assist the Budget Review Group in its deliberations.

Defining Priorities

11. Although the Executive makes extensive use of the language of priorities, it has not stated what "priority" means in practice, making it difficult to assess the extent to which priorities are reflected in allocations. In the 2002 Spending Review, for example, we were advised that Ministers had set out their lists of priorities, for additional spending, and that whilst not all of the additional resources would be spent on these priorities, they would come first.

12. It is certainly understandable that additional costs on existing programmes are due to demand pressures, or the costs of pay settlements and other inflationary costs would have to be accommodated in budget making. Nevertheless, clear priorities are necessary to make the best available use of the available resources.

13. In 2002, then Finance Minister, Andy Kerr argued that the funding for the five priorities (health, jobs, transport, crime and education) adds up to about 70% of the total budget. However, when we examined the allocation of the increment of growth (including GAE provision) we found that only health and transport had received above average increases in the relevant budget lines. The Committee also took the view that this resulted from having over 70% of the existing programmes defined as priorities.

14. In practice, therefore, the Committee has focussed on whether the Executive's stated priorities receive above average increases in allocations over a Spending Review cycle. This is the approach used by HM Treasury in the UK Spending Review.

The Number of Priorities

15. Our view has been that the Executive has too many strategic and portfolio priorities. Whilst there is overlap between them, the framework of priorities has changed in each Spending Review. For the record, these were:

with two cross-cutting themes - Closing the Opportunity Gap and Sustainable Development

with the two cross-cutting themes mentioned above

16. The Committee has consistently questioned the merits of such generalised statements as strategic priorities against which proposals for programme spending can be evaluated. Expert witnesses have also expressed concerns over the number of priorities. Donald MacRae of Lloyds TSB Scotland, for example, advised us he could find little linkage in the budget between the expressed priorities and the planned expenditure totals, and recommended fewer, ranked priorities (Finance Committee 2003 para 24).

17. In the current context, it would be possible to support almost any spending proposal under the existing set of priorities derived from the Partnership Agreement. Strategic priorities should be overarching and cut across departmental boundaries. 'Closing the Opportunity Gap' is the best example of a priority which can be used to assess the wider impact of programme proposals on additional spending.

Problems of Transparency

18. There has been considerable progress in the provision of financial information, in terms of new resources, inflation and targets, over the past five years. There are two major problem areas - the aforementioned block allocations to health and local government, and the handling of cross-cutting themes.

19. The block allocations to health still do not set out the spending assumptions for the various programmes of health care, making it difficult to monitor allocations to priorities. In local government, the promised local outcome agreements, to be based on six measures, have still not been delivered, making performance monitoring difficult.

20. There are problems over how cross-cutting themes are dealt with in the Draft Budget. Current practice is to require departments to state how their budget proposals as a whole contribute to the three crosscutting themes (i.e. mainstreaming). The information is of mixed quality, some using specific projects with costings, others assuming that all their core programmes contribute to wider objectives, although in some cases the wider impact (e.g. of health spending to economic growth) is difficult to assess sensibly. To assist the Group to better understand these difficulties, we shall present evidence from two crosscutting reviews, on child poverty and economic development, which highlights our concerns.

Finance Committee Report on Children in Poverty (2003)

21. This review examined budgets and programmes across Scottish Executive Departments which provide funding specifically targeted at improving the position of children in poverty. The approach was to assess whether this had been treated as a spending priority, the realism of the financial assumptions within each programme, and the transparency of the budgetary information. The Committee commissioned three research papers, on health, housing and local government.

22. The report challenged the view put to it by some professionals that simply improving mainstream provision is the best way to tackle poverty, given the continuing inequalities in terms of educational access and attainment, or health access and status. It welcomes the priority given to programmes targeted directly on children in poverty, which consumed a growing share of the Scottish budget at that time.

23. The Committee also concluded that such targeted spending is transparent and easily monitored, in comparison with the core health and local government programmes, which the Committee felt were difficult to disaggregate in a way to allow it to monitor the extent to which additional resources are being used to benefit poor households. This was not true of the housing programme, which is clearly targeted on poverty and disadvantage.

24. The report concluded in favour of targeted spending over core spending because, "several departments and agencies - despite the rhetoric of joined-up government - see child poverty as peripheral to their concerns." (p.35)

Finance Committee Report on Economic Development Spending (2005)

25. This review was conducted in two stages - a research exercise to identify which budgets and monies support economic development, and a consideration of the appropriateness of the level of economic development spending in the light of:

• The identification of economic development as the top priority of the Scottish Executive.
• The challenges and opportunities facing the Scottish economy.
• The state of knowledge of factors influencing economic development and of the theory of economic development; and
• Evidence on the effectiveness of expenditure on economic development and on activities supportive of economic development.

26. The first stage raised doubts about whether the resources of the Scottish Executive were being allocated in a way that reflects growing the economy being the Executive's top priority, and moreover, whether specific spending decisions were systematically assessed or prioritised on the basis of their economic development impact. The Committee therefore recommended that the Executive improves the resource allocation process to target resources more effectively towards delivering its top priority.

27. In defence of its record, the Executive pointed to growth in the infrastructural and skills needs of the economy, particularly in education and transport spending, but also health spending. The Committee was not convinced by this argument, noting that transport spending has grown mainly in public transport programmes, whilst roads expenditure stood still, despite the problem of road capacity being identified by business as the priority, and appraisals of roads projects showing higher economic gains than other transport projects.

28. In the case of health, the Committee's concern is that individual consumption of health services is greatest in the last three years of their lives, making the link between NHS spending and growth (as opposed to health status) somewhat difficult to measure.

29. In conclusion, the Committee found it was not possible to assess how these increases fit into the stated strategy of growing the economy. The report showed that primary spending on economic development (spending which directly promotes economic activity) has not been a budget priority, and further that there is a lack of evidence that the overall pattern of public spending and investment has been strongly influenced by economic development priorities. There was a need for a stronger link between strategy and expenditure.

Primary Spending on Cross-cutting Issues

30. On the basis of these major reviews, the Committee finds it helpful to utilise the distinction drawn between primary and support spending on cross-cutting themes. Within budgets, departments undertaking economic appraisal of spending proposals will attempt to assess their economic, social and sustainability impact. This does not result in clear budget lines, particularly for sustainable development. This practice is described as 'mainstreaming' in Executive publications.

31. Primary spending, however, refers to programmes of expenditure whose main aim is to promote aspects of economic growth, equal opportunity or sustainable development. Most of the core spending programmes, such as health, transport or education, will support the development of these crosscutting themes, but in ways which make it difficult to quantify costs and benefits. As we have shown, departments highlight such added value in their portfolio chapters in the Draft Budget.

32. Evaluation of the wider impact of such spending is problematic, as it is easier to link budgets to outputs than outcomes. Outcomes are the result of the interaction of governmental action, socio-economic behaviour and multiple decisions. The Committee has argued for a strategic target for economic growth, on the grounds that if it is the top priority, it ought to have a strategic target within the budgetary framework. The Executive's reason for not having a target highlights the problem with outcome measures. They argue that economic growth depends on a range of factors therefore it would not be "credible to claim that specific changes in GDP were directly linked to specific Executive spending". This does not sit easily with the aspiration to budget for outcomes as it would also apply to the opportunity and sustainability objectives.

33. The Budget Review Group will face the same problems as the Committee, in trying to assess whether priorities are reflected in allocations, in terms of disaggregating block grants and external factors to allow resources to be linked to results. However, we have attached the programmes we consider to be primary spending on the crosscutting priorities in Tables 1 to 3.

Capital Spending

34. The importance of capital investment by the public sector in infrastructure is a key instrument for promoting growth. Whilst there was a growing proportion of the Scottish Budget committed to capital from 1999 to 2002, a modest decline then occurred. The Committee therefore recommended that capital spending be given greater priority in SR2004 and the Executive is now planning annual growth of 7% in real terms. By 2007-8 it will have grown from 10.7% of the DEL to 11.6%.

35. It is important to maintain this progress in the next Spending Review, as capital spending has been an easy target for cutbacks in past periods of retrenchment. Unfortunately, despite the Infrastructure Investment Plan reiterating Executive commitments "to take every opportunity to regenerate our communities, securing extra value from all our investment and infrastructure programmes in order to tackle poverty and close the opportunity gaps", the report does not provide the necessary financial data to show this is being implemented.

Budget Strategy and the remit of the Budget Review Group

36. The Committee would draw one final point to the attention of the Budget Review Group. It notes that your remit is to scrutinise the Executive's budget and ensure programmes are delivering against the priorities and commitments in the Partnership Agreement. In our view, the extensive list of nearly four hundred commitments in that Agreement are often matters of details and only a minority have budgetary implications. Moreover, as we have stated above, the four key challenges are not particularly helpful as a basis for budgetary strategy and require to be seen as broad goals rather than spending priorities.

37. There is a danger that in monitoring the delivery of the Partnership Agreement, the review could become a somewhat limited exercise in mechanistic box-ticking and, in our view, it would be more productive to examine whether the spending decisions of SR2004 translate into a coherent budget strategy for tackling the three crosscutting themes.

38. In theory, the budget should flow from the Partnership Agreement. In practice, the Partnership Agreement is not a comprehensive strategy for government, but a list of specific commitments within a very broad set of objectives. Budget strategy requires the setting of overall priorities which can be meaningfully used as evaluative criteria for spending decisions, and as a basis for monitoring performance in implementation.

Summary

1. The four key challenges set out in the Partnership Agreement are too broad to provide a useful, operational framework of strategic priorities for budgetary purposes.

2. The three cross-cutting themes of Growth, Opportunity and Sustainability are more useful, although the last of these tends to be applied as a general principle mainstreamed across portfolios rather than a wider evaluative criteria for resource allocation.

3. In terms of economic growth, the Committee's investigations show that primary spending on activities which directly promote economic growth amount to £1390m in 2006-7

4. Primary spending on services which directly target the 'Closing the Opportunity Gap' agenda amount to £1300m in 2006-7.

5. Spending on capital investment in infrastructure has grown in real terms and its share of the budget is planned to grow further.

6. Primary spending related to sustainable development amounts to around £596m in 2006-7.

7. It is difficult to assess whether the crosscutting priorities are being reflected in core budgets in health and local government because of the lack of disaggregated financial information and whether spending is delivering the desired results because of the problems in practice of integration priorities, budgets and targets.

8. In addition, there are weightings for poverty and deprivation in resource allocation formulae for health, local government, and further and higher education, which amount to over £400m in 2006-7. However, decisions on how to allocate these resources are made by the delivery bodies themselves.

9. Budget strategy requires the setting of overall priorities which can be meaningfully used as evaluative criteria for spending decisions, and as a basis for monitoring performance in implementation.

Appendix

Recommendations on Priority Setting in Finance Committee Budget Reports

3 ^rd Report 2002

1. The Committee recommends that when the Draft Scottish Budget is published in the autumn, the document systematically illustrates how the additional funding this year will be spent, what outputs it will provide, and contains an explanation of how these decisions advance the Executive's spending priorities. (para 26)

2. The Committee recommends that the Executive gives specific consideration to the positions of the Enterprise and Lifelong Learning budget; the Transport budget; the Education budget; and the Justice budget, to ensure they receive priority for additional funding, and they be demonstrated to us in the autumn. (para 47)

7 ^th Report 2002

3. We note the expression of concern by the Justice Committees over the fact that the Justice budget is set to decrease as a share of the Total Managed Expenditure, and draw it to the Executive's attention for future consideration (para 42)

4 ^th Report 2003

4. The Committee also recommends that the Executive reports on crosscutting themes as well as BABS targets, in the new Performance Report section proposed for the revised AER.

5. The revised documents at Stage 1 of the process should also include an assessment of progress with spending priorities, including Health and Local Government, in the proposed performance report on progress against targets (para 72)

5 ^th Report 2004

6. The low priority given to programmes such as the enterprise agencies and higher and further education appears to be inconsistent with the economic strategy and therefore the Committee recommends these programmes which contribute, both in the short and the long term, to economic development should be identified and assessed for priority in Spending Review 2004 (para 49)

7. The Committee recommends that the Executive makes capital spending a budget priority for Spending Review 2004, sets a target to increase the share of the Scottish Budget devoted to capital and considers whether End Year Flexibility arrangements can be redefined to ensure funding is not transferred to resource budgets in this process (para 53)

8. The Committee therefore recommends that the Housing and Regeneration expenditure in the Communities budget be treated as a priority for additional spending in Spending Review 2004, to advance both the social and economic strategies of the Scottish Executive (para 56)

8 ^th Report 2004

9. The Committee recommends that the Executive examines the impact of lower than average increases in grant support year by year for local government on council tax bills, especially as council tax increases bear disproportionately on low/fixed income households above the rebate threshold. The Committee is particularly concerned at the impact of the proposed grant support levels at the end of the Spending Review period which it believes are likely to cause very considerable problems for local government. (para 70)

Table 1: Primary Spending on Economic Growth 2006-7

Table 2: Primary Spending On Closing The Opportunity Gap 2006-7

Table 3: Primary Spending on Sustainable Development 2006-7

References

Scottish Executive (2000) Making A Difference For Scotland: Spending Plans For Scotland 2001-2 to 2003-4
Scottish Executive (2001) Annual Expenditure Report of the Scottish Executive
Scottish Executive (2002) Building a Better Scotland: Spending Proposals 2003-2006
Scottish Executive (2004) Building a Better Scotland: Spending Proposals 2005-2008
Finance Committee (2001a) 10 ^th Report, Stage 1 of the 2002/3 Budget Process
Finance Committee (2001b) 13 ^th Report, Stage 2 of the 2002/3 Budget Process
Finance Committee (2003) 4 ^th Report, Stage 2 of the 2004-5 Budget Process

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