1. This paper seeks views on the Scottish Executive’s proposals for a financial framework for the Scottish Parliament.
2. Effective financial management is critical to the future success of the Scottish Parliament. It will need to be able to ensure that its budget is spent in the way that best meets the needs of Scotland and its people. The Executive believes that the Scottish Parliament needs a financial framework that will:
2.1 Give the people of Scotland a say in how their money is spent;
2.2 Provide the financial information needed for effective decision making;
2.3 Ensure that the Scottish Executive is accountable to the Parliament and to the people of Scotland;
2.4 Provide an independent and vigorous audit system and value for money regime;
3. The shape of this framework has been considered by the Financial Issues Advisory Group (FIAG), a body consisting of leading figures from the financial world together with individuals representing a cross-section of wider public and private sector interests. The Scottish Executive has considered FIAG's recommendations and has concluded they would give the Scottish Parliament a modern system, which balances the need for public and Parliamentary accountability with the efficient management of public services. The Scottish Executive is minded to develop a financial framework based on FIAG's recommendations.
4. The Scottish Parliament already has a set of interim Standing Orders. Their financial provisions are based on the relevant recommendations from the FIAG report. The Parliament is required, under the terms of the Scotland Act 1998, to legislate on a financial framework. It is vital that legislation is passed in time for funding allocations for the financial year 2000-01 to be made since the transitional arrangements operating at present run out then. The Executive's target is to have a Bill setting up a financial framework in place by the end of 1999. In order to achieve this objective, we intend to introduce to the Scottish Parliament an Accountability, Budgeting and Audit Bill in September 1999.
5. Not all of FIAG's recommendations can be dealt with in Standing Orders or legislation. For example, some of the Group’s proposals cover the internal financial procedures of the Scottish Executive whilst others can best be dealt with through non-statutory agreements between the Scottish Parliament and the Executive.
6. In view of the need to introduce a draft Bill in the early autumn, deadlines are tight. In the course of developing its recommendations, FIAG has already sought the views of interested parties and a number of organisations have already commented on the proposals that the Scottish Executive is now considering. None-the-less, the Scottish Executive is determined that its intention to set up a financial framework that follows on from the FIAG report is opened up for public scrutiny and comment. We are therefore circulating this consultation paper over the course of the summer. We seek views on:
6.1 our intention to set up a financial framework based on FIAG's recommendations;
6.2 the following FIAG recommendations where we wish to consider FIAG's proposals in more detail before moving forward:
6.3 The budget approval process;
6.4 The structure of Audit Scotland;
7. Views on these issues should be sent by Friday 20 August 1999 to:
Gregor Lindsay
Scottish Executive Finance
3-C31
Victoria Quay
Edinburgh
EH6 6QQ
(Telephone: 0131 244 7505, FAX: 0131 244 7524)Comments may also be e-mailed to gregor.lindsay@scotland.gov.uk.
8. In order to help informed debate on the issues raised by this consultation paper, the Scottish Executive would, as usual, like to make copies of the responses available to the public on request. The Executive will, therefore, assume that responses may be made available in this way. If, however, respondents indicate that they wish all or part of their reply to be excluded from this arrangement, confidentiality will of course be respected, although the response may be included in any numerical summary of the responses received.
9. A copy of the executive summary to the FIAG report, which summarises the Group’s main conclusions, is at Annex A to this paper. Full copies of the Report can be found on the Internet at www.scottish-devolution.org.uk. Copies may also be purchased from the Stationery Office Bookshop, 71 Lothian Road, Edinburgh, EH3 9AZ, telephone: 0131 228 4181, FAX 0131 622 7017.
10. Annex B to this paper sets out the Scottish Executive’s response to the FIAG report. It lists each of FIAG's recommendations and explains how we intend to respond. The Annex shows which proposals are covered by Standing Orders, which ones require legislation and explains how the Executive proposes to deal with the remaining recommendations.
11. For the most part, the Scottish Executive is minded to implement FIAG's recommendations without modification. There are some areas however where further thought is needed before the Group’s proposals can be taken forward. These are listed below.
12. The Scottish Executive intends to accept FIAG's recommendation that there should be a radically different process of Parliamentary approval for the allocation of resources to spending programmes. It would be based on three stages and would give the Scottish Parliament a greater degree of detailed financial control than is practised by the UK Parliament. FIAG envisaged the main Parliamentary involvement at the first two stages:
12.1 before the summer recess when Parliament would consider spending strategy and broad priorities ; and
12.2 in the late autumn when Parliament would examine the Executive’s draft budget in some detail, at the level below main programme (main programmes are Health, Transport, etc) with the Finance Committee drawing together alternative proposals, if appropriate.
13. FIAG recommends, however, that the final stage, ie the Parliament’s consideration of the Executive’s firm budget proposals should be largely formal with the Parliament able to reject or approve the package but not to amend it. There are important practical considerations involved. Local authorities, health service bodies and others providing public services have to have reasonable certainty on the level of funding available to them well before the start of the year, if they are to plan sensibly. Uncertainty will jeopardise the provision of public services.
14. The budgetary process recommended by FIAG would give the Parliament a framework around which to consider expenditure options. The Group also intended that this would promote a culture of on-going dialogue between the Parliament and Executive on financial issues. We think this is consistent with our own desire for regular, constructive liaison between the Parliament and Executive on how funds should be spent.
15. FIAG recommended that Parliament should seek the views of the public during the first stage of the process (ie in the Spring). The Executive proposes, separately, to seek the views of the public on the firm proposals they put to Parliament in the autumn.
16. FIAG recommended that approval of the Executive’s main annual spending proposals (and those of other bodies granted money directly from the Scottish Consolidated Fund) should be by primary legislation, albeit with only the Executive able to either introduce Bills for this purpose or to propose amendments to them. The interim Standing Orders provide that in respect of such Bills.
17. If primary legislation is used for revisions the Executive would have to bring to the Parliament, in addition to the main Budget Bill, two, three or exceptionally more, Budget Revision Bills during the course of a year. This will be necessary to seek Parliamentary approval for changes to funding allocations necessary in the light of unfolding events, and for Parliament to approve the additions to Departmental budgets arising from previous year’s underspends.
18. The advantages of using primary legislation are:
18.1 it emphasises the importance of the Budget scrutiny and approval process;
18.2 it cannot be overturned except by further primary legislation;
18.3 it is possible to make amendments to a Bill when it is being considered by the Parliament. (When the Parliament is considering secondary legislation, neither the Parliament not the Executive may table amendments); and
18.4 there is a clear precedent for the use of primary legislation by other parliaments including Westminster.
19. There are some drawbacks with the use of primary legislation for Budget purposes. The main one is that there could be a four-week delay before the Bills receive Royal Assent. The four week delay is because the Scotland Act 1998 (section 33) provides that the Advocate General for Scotland, the Lord Advocate or the Attorney General has that time to decide whether to refer to the Judicial Committee of the Privy Council, a question as to whether a provision of the Bill is within the competence of the Parliament. It is possible that these persons might indicate prior to the passage of a Bill, that they do not intend to make such a referral, in which case, the potential delay could be shortened or avoided altogether. However, each Bill would have to be considered on its merits – there could be no blanket exemption for a particular category of Bills (eg Budget Bills).
20. This is not an insurmountable problem, especially for the main Budget which will follow an agreed annual timetable that can make allowances for this delay. However, some Budget Revision Bills may require urgent implementation (for example to meet a sudden, unforeseen demand). Bills would also have to go through each of the three stages laid down in the Scotland Act.
21. A simpler procedure would be possible if the Accountability, Budgeting and Audit Bill conferred on the Scottish Ministers a power to approve Budgets or Budget Revisions by secondary legislation. Under such a system, Budget Proposals would be approved through the use of Orders. These would require approval by the Parliament and Standing Orders could be developed that would require them to be considered by the Parliament's Finance Committee and in plenary.
22. Standing Orders could also be used to specify a revised timescale for the Parliamentary consideration of Budget Revisions. Therefore, if an urgent response was required, it would be possible for the Parliament to scrutinise a Budget Order more quickly than is the normal case for secondary legislation.
23. The disadvantages with the use of secondary legislation are that it would not be possible to amend an Order in the course of its passage through the Parliament. It is also possible that the use of secondary legislation for approving the main Budget would send the wrong message about the importance of this process. This latter problem is less of an issue where Budget Revisions are concerned as these would merely be adjusting allocations that have been agreed previously. Here, scrutiny of proposed revisions by the Finance Committee may be a more practical solution, enabling the Parliament to concentrate on the main Budget itself and on the overall spending strategy.
24. There are three options for budgetary approval:
24.1 both the main Budget and Budget Revisions could be dealt with in primary legislation;
24.2 they could all be dealt with in secondary legislation; or
24.3 the main Budget could be in primary legislation, with subsequent revisions to that Budget in secondary.
25. The Executive agrees that the main Budget each year should be put before Parliament in primary legislation, but are minded to consider favourably the use of secodary legislation procedures for budget revisions. We would welcome views on these conclusions.
26. The FIAG report recommends that there should be an audit body, Audit Scotland, comprising the auditing staff of the Accounts Commission and the National Audit Office (NAO) staff in Scotland which would carry out audit work for both AGS and the Commission. Both would also be able to procure audit work elsewhere.
27. FIAG was concerned to ensure sufficient "critical mass" in the public audit service to ensure a high quality product. There is considerable doubt as to whether keeping the auditing capability of the Accounts Commission, and the staff of AGS carrying out audits entirely separate (in analogy with the current position) would achieve this.
28. At the same time, FIAG was also concerned about the possible bureaucracy involved in having three separate audit bodies (two commissioners and a public audit provider), and therefore recommended that the AGS should also be the Chief Executive of Audit Scotland.
29. The Executive endorses these recommendations in principle. However we are encountering some practical difficulties in putting together detailed proposals for implementation which would both reduce the bureaucracy to a minimum and preserve the independence of both the AGS and the Accounts Commission. We have therefore set out at Annex C, possible options and would welcome views.
30. FIAG recommended that audit arrangements for bodies receiving grants from the Scottish Ministers should be made more consistent where this was within the competence of the Scottish Parliament. In particular, the Group recommended:
30.1 making the Auditor General rather than the Accounts Commission responsible for the audit of all health bodies; and
30.2 making the Auditor General responsible for the audit arrangements of all NDPBs which are also statutory corporations and of further education colleges.
31. The Executive proposes to accept the recommendation to transfer audit responsibility for health service bodies to the Auditor General.
32. Since the FIAG report was published, the funding arrangements for FE colleges have changed. They no longer receive a grant direct from the Scottish Ministers. Instead, funding allocations are made through the newly-established Scottish Further Education Funding Council. None-the-less, the Executive thinks that, as the colleges rely to a considerable extent on the Scottish Consolidated Fund, that their financial management is a legitimate interest of the Scottish Parliament and the public. Consequently, we have concluded that, in common with the auditors of other public bodies, the auditors of colleges should be independent of college management. Therefore, the Scottish Executive is minded to accept FIAG's recommendation on this issue.
33. FIAG also considered the audit arrangements for "local spending bodies" such as the local enterprise companies. These organisations receive funding from the Scottish Consolidated Fund via funding bodies. It is not within the competence of the Scottish Parliament simply to change the audit arrangements of bodies constituted as companies (as many such bodies are). Meantime, we intend to implement FIAG's recommendation that the Auditor General be granted a statutory right of access to all local spending bodies, subject to any body being significantly dependent for its income on public funds or statutory levies.
34. FIAG did not discuss the possibility of specifying the qualifications to be required of public service auditors. One proposal would be that those signing audit certificates should either be:
34.1 the Auditor General for Scotland;
34.2 a person eligible under the terms of section 25 of the Companies Act 1989; or
34.3 a member of the staff of Audit Scotland who holds a professional accountancy qualification and that any person signing the audit certificates for the accounts of the Auditor General should be eligible under the terms of section 25 of the Companies Act 1989.
35. We would welcome views on these conclusions.
36. The FIAG process has already exposed many ideas on the Parliament's financial framework to public scrutiny, but both the Parliament and the Executive are firmly committed to the principle of public consultation. Therefore the Executive would welcome further views on the proposals set out above which we will then consider before presenting the draft Accountability, Budgeting and Audit Bill to the Scottish Parliament in September.
July 1999
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