COMMITTEE FOR FINANCE AND PERSONNEL

Budget (No 2) Bill

23 May 2007

Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Mervyn Storey (Deputy Chairperson)
Mr Roy Beggs
Dr Stephen Farry
Mr Simon Hamilton
Mr Fra McCann
Ms Jennifer McCann
Mr Adrian McQuillan
Mr Declan O’Loan
Ms Dawn Purvis
Mr Peter Weir

Witnesses:
Mr Gary Fair
Mr Leo O’Reilly Department of Finance & Personnel
Mr Richard Pengelly

The Chairperson (Mr Mitchel McLaughlin):

Hello, Leo, it is good to see you again. I welcome you and your colleagues to the Committee.

Mr Leo O’Reilly (Department of Finance and Personnel):

Good morning, Mr Chairman. Richard Pengelly will explain the consultation process that took place in autumn 2005, based on the draft Budget that was published by the Secretary of State.

If the Committee is agreeable, I will then say a few words about the subjects that were raised, and how they influenced the final Budget allocations that were announced by the Secretary of State in December 2005.

The Chairperson:

Yes, of course.

I wish to remind everyone that Hansard is recording this session.

Mr Richard Pengelly (Department of Finance and Personnel):

The initial or pre-consultation stage happened during late spring and early summer of 2005. Officials engaged informally with various groups, such as the Northern Ireland Council for Voluntary Action (NICVA), trades unions’ representatives, and the Confederation of British Industry (CBI), to give them a sense of the process and to allow them an early opportunity to make known their points, which were then relayed to Ministers.

The starting point for consultation was the publication of the draft Budget in early October 2005. That kicked off the formal public consultation, which lasted until late November. The Committee has chapter 6 of the final Budget document, which outlines that consultation. In summary, seven public consultation events were held across the Province. I do not have a note of the exact venues, but meetings took place in Belfast, Lisburn, Omagh and across Northern Ireland.

Leo O’Reilly and I attended those events and chaired them. We made opening comments to set the context and scene, but the form of the meeting depended on the number of people who attended. For example, if there was a large group we broke it up into smaller groups — to allow for discussions and questions — which came back together for a plenary session. On several occasions we had quite a small turnout, so we stayed in open forum throughout the event and had question-and-answer sessions in which we tried to address any concerns that were raised. We noted the points that were made by those who attended and relayed them to Ministers.

There was also a session of the Northern Ireland Grand Committee in the Commons, which Angela Smyth attended on behalf of the Secretary of State. The Secretary of State and Lord Rooker had a briefing session for all the MLAs in the Long Gallery of Parliament Buildings, and, in addition, Lord Rooker met the main political parties separately.

All the points that were made during the consultation were put to the Secretary of State to allow the ministerial team to take decisions on allocations.

There was also a dedicated consultation website at www.pfgbudgetni.gov.uk which stayed open throughout the year. There were 900 written responses, the key points from which were summarised and included in the submission to Ministers.

Mr O’Reilly:

I want to highlight briefly the concerns and key issues that were raised during the consultation. The consultation raised strategic issues — generic concerns about funding for the Health Service and education, for example — and specific concerns on matters that might account for a small amount of public expenditure but which are of special concern to a group, community or locality. As we went round Northern Ireland during the consultation, points specific to those areas were raised.

In general, the broad issues raised during the consultation were written up and summarised in chapter 6 of the Budget document, which we drew to the Committee’s attention at the last meeting.

The issues raised focused first on the intended funding packages for children and young people, which the Secretary of State had announced in his draft Budget; energy and the environment; and skills and science.

The generic concerns inevitably related to significant areas of spending such as health and education, where concerns were raised about employee costs and about managing declining pupil numbers while retaining schools’ integrity and role in the community. Specific issues were raised on the youth service and the library service. A particular issue, due to the significance of the planned growth in infrastructure spending at that time, was how the money would be spent on regional disparities and access to infrastructure and investment in different parts of the Province. Questions were also asked about the role of public-private partnerships.

Concerns were raised about the amount of support available for housing associations, although at that time the increase in house prices and the impact that had on access to affordable housing was considerably less significant than now. Planning was brought up, as was the Government’s proposal to introduce water charging. There was concern about the form of the rating system, which was still being considered at the time, and more generally about the review of public administration. There was also a debate between the Government and local community representatives about the number of councils.

The Government’s response is set out in the documents, although I do not intend going through each of them. The Secretary of State’s final Budget plans, which were announced in December 2005, are largely the plans that are still in effect for this financial year.

There were three or four key themes. First was the Secretary of State’s wish to divert funding into priority funding packages. The total sums involved were not significant in the totality of public spending, but he saw the funding packages as a way of diverting some resources into key areas and activities that needed to be addressed, particularly targeted action. Later publications gave further details after the Budget was published.

The second key strand was the growing investment in capital infrastructure that was just beginning to take off about that time. Total planned investment was increased by more than 50% between 2002-03 and 2007-08, and that is reflected in this year’s Budget, in which there is a planned capital investment of about £1·3 billion.

The third and fourth key strands were the continuing investment in health and education. The Budget at that time included continuing significant growth in planned allocations to the Health Service and education. Those key themes of the Secretary of State’s Budget — infrastructure, special funding packages, and continuing investment in health and education — have since been reflected in the Budget allocations that were made for last year and for the present financial year.

Mr Weir:

There has clearly been consultation, as each concern that was raised has been commented on. That is interesting, in the light of one of the debates that we had this week: in ‘Priorities and Budget 2006-08’, at paragraph 152 of the report on the consultation responses, it says that:

“[t]he reduction in planning provision will have no real impact on the agency’s capacity to deliver current services”.

In the light of the events of the past year or two, that may have a certain irony.

You said that the Secretary of State had outlined his priorities. What adjustments were made to the Budget as a result of the consultation? If the consultation was simply to garner the public’s comments and pat people on the head, people have wasted their time in responding. It is a waste of Government resources to consult unless it leads to real change and to subsequent announcements concerning the Budget.

Mr O’Reilly:

Richard will give you specific figures. When the then Secretary of State announced his draft Budget, he allocated all the available resources across the programmes. Changes to the allocations can come from two sources: first, resources can be withdrawn from some areas and reallocated to others; and, secondly, advantage can be taken of any new resources that become available between the publication of the draft Budget and the final Budget. One new resource became available during that period: in his pre-Budget report of November 2005, the Chancellor announced the allocation of new money to Northern Ireland. The Secretary of State used that money to allocate extra resources to specific areas.

Mr Pengelly:

The Budget covered two years — 2006-07 and 2007-08. In the three priority funding packages, there was an additional £8 million for 2006-07 and an additional £12·5 million for 2007-08. An additional £5 million was allocated for health in 2006-07 and £10 million in 2007-08. Those figures were all in addition to the original draft Budget figures.

As Leo said, when the draft Budget was produced, all the available money was allocated, meaning that further allocations to one area could be made only at the expense of others. Among the 900 written responses to the public consultation, I do not recall any that suggested a reduction in funding.

Mr Weir:

I suspect that some of us could make a few suggestions to the Chairperson about reductions in funding.

It is fine to talk about how the additional money was spent, but if the consultation did not really examine whether we were doing things right or whether the emphasis should be shifted, and if it did not appear to lead to changes, its value is called into question.

The Chairperson:

That may just be the qualitative difference between a devolved and a direct-rule arrangement. I am certain that the Assembly will want to pursue certain issues in its own time.

Mr O’Reilly:

Mr Weir made a point about resources for the Planning Service; it concerned the offsetting of receipts against planned spend. In previous years, we allocated additional resources to the Planning Service to enable it to continue to improve its functions —

Mr Weir:

Hence its very healthy state.

Mr O’Reilly:

Sometimes problems other than resourcing difficulties can affect the quality of a public service.

The Chairperson:

Do members have any other questions?

Mr O’Loan:

I have a broad question. We are being asked to accelerate the passage of a Bill, and that has to be done for this year. Given that the devolved Assembly has started up and that we are well into the year, I take it that most allocations are already fixed and that the Budget is a ship that does not turn around very fast. Will there be any Budget flexibility for issues in which the Assembly has already expressed an interest? I am thinking, for example, of social housing. I accept that houses cannot be built overnight and that any changes will require time. However, what sort of flexibility will there be to allow the Budget to reflect the Assembly’s concerns?

The Chairperson:

Dawn Purvis has a related question.

Ms Purvis:

My question follows on from Declan’s. In order to allow flexibility with other funding packages, will the Executive have access to any projected underspend for 2006-07?

The Chairperson:

The monitoring round report gives us the opportunity to interface with the projected programme and to consider any issues that might have been reprioritised.

Mr O’Reilly:

In answer to both questions, as the Chairperson said, the in-year monitoring process is used to approve the initial allocation. At regular stages throughout the year, the Department of Finance and Personnel asks all Departments to identify any reduced requirements in their allocations and other issues for which they want to bid for additional in-year resources.

That process will happen this year, as in previous years, and, indeed, during the Assembly’s first mandate. It provides an opportunity for all Departments to identify issues on which they consider that they could spend more money in the current financial year. Their requests are set against what the Department of Finance and Personnel refers to as the “RTM” — room to manoeuvre — to make reallocations in the current financial year.

As was reported at last week’s Committee meeting, the Department is still compiling and finalising figures on departmental underspend in the last financial year. Related to that is access to underspend, or what the Department refers to as end-year flexibility.

Excluding whatever additional money becomes available through any underspend at the end of the last financial year, the present stock of end-year flexibility available to Northern Ireland — the total available on the resource or current spend side — is £140 million. The Chancellor announced that, as was reported at last week’s meeting, access to that money will be over a two-year period: £75 million this year and £65 million next year.

The total stock on the capital side was £180 million, and the Chancellor said that £100 million could be accessed this year and £80 million next year. I should stress, however, that the position of my Minister and the Executive is that the matter is not closed, and they are continuing to pursue it with the Chancellor.

The Chairperson:

We wish them luck.

Mr Beggs:

Has the Chancellor’s package been incorporated into the recent Estimates or is it being dealt with separately? Are there any significant costs and liabilities, particularly in the review of public administration, that have not been built into the Estimates or are they part of a black hole that has yet to emerge?

Mr O’Reilly:

Richard Pengelly will comment on any additional costs and liabilities.

The answer to the first part of your question is no. The Department of Finance and Personnel has not incorporated any aspects of the Chancellor’s package into this set of Budget proposals. The rationale is that the Executive and the Assembly inherited the current position on 8 May 2007. That position influences the Main Estimates and the Budget Bill.

Subsequent changes will incorporate the additional resource of £100 million allocated by the Chancellor for this financial year. The Executive and the Assembly will determine the allocations. At their last meeting, the Executive confirmed their decision to allocate £75 million to the Department for Regional Development for the deferment, or review, of water charges. Such changes will be incorporated into the monitoring process during this financial year and will eventually be reflected in the spring Supplementary Estimates of 2008.

As for additional costs and liabilities, new pressures and, indeed, reduced requirements emerge constantly. The position changes daily.

Mr Pengelly:

Mr Beggs used the term “black hole”. On the basis of everything that the Department of Finance and Personnel knows, there are no black holes in the financial position that the Executive inherited. As Leo said, those who plan expenditure in December 2005 for the 2007–08 financial year are aware that new issues will emerge. However, given that the planning is done 18 months ahead of the expenditure, those issues cannot possibly be quantified with any certainty.

There are certainly costs related to the review of public administration and some other areas.

However, flexibility is available through the in-year modelling process and access to in-year adjustments. The Department’s clear assessment is that that is capable of dealing with all issues that emerge. Those issues will re-emerge in subsequent years when the Executive and Assembly set spending plans. There will always be residual issues that cannot be quantified with any degree of certainty.

Ms J McCann:

The voluntary and community sector has expressed its desire to contribute to consultation on the young people’s funding package. Will it be given the opportunity to make a contribution on where it believes the money should be directed?

Mr Pengelly:

Colleagues in the Department of Education are taking the lead on the children and young people’s funding package. It has engaged with the voluntary and community sector on the issue since the publication of the Budget. I cannot remember the date; however, I can provide it for the Committee later. Additional funding was made available for the voluntary and community sector in response to the implications of the cessation of the previous Executive’s Children’s programme fund. That additional funding was made available for the financial years 2006-07 and 2007-08.

Ms J McCann:

Can the voluntary and community sector suggest where the funding should be allocated?

Mr F McCann:

The priorities that were set by direct-rule Ministers may not be the Assembly’s priorities. Can issues be reprioritised in the middle of the present Budget cycle, before new Budget proposals are presented to the Assembly?

Mr O’Reilly:

As I explained to the member’s colleague, there is an in-year process. However, adjustments are usually marginal in the context of the total spend, given the nature of the spending programme for the current financial year. Obviously, the major opportunity to review priorities and allocations fundamentally is the Budget, which will be developed by the Assembly and its Committees in the coming months and which will lead to the publication of draft Budget proposals in early autumn, with the final confirmation of the Budget in December 2007. That will be the major opportunity for a fundamental examination of spending plans for the next three financial years.

Dr Farry:

According to the headline figures, it seems that there is movement from provision in 2006-07 of just under £17 billion to just under £14 billion. The biggest drop appears to be in resources for the Department for Regional Development, which drops from £5·2 billion to £1·7 billion. Why is that? The cash requirement is still rising. However —

Mr Pengelly:

May I ask what page the member is looking at?

Dr Farry:

Page 7 of the ‘ Northern Ireland Estimates 2007-2008’.

Mr Pengelly:

I am not sure. I will certainly examine that and provide the Committee with an explanation.

Dr Farry:

There seems to be a huge fluctuation.

Mr Fair (Department of Finance and Personnel):

There was a large write-down in the Department for Regional Development. I do not remember the details, although it was substantial.

Mr Pengelly:

It was a consequence of the transition of the Water Service from an executive agency to Northern Ireland Water. Its assets, such as pipes and sewers — the infrastructure that is required to provide water and sewerage services — were valued in accounting terms at “replacement cost”. That is, the total cost of reinstating those assets. When the Water Service became a Go-co structure, a commercial revaluation of the company was carried out. The consequence of that revaluation was that the carrying value went from more than £6 billion to just under £1 billion. The difference had to appear as a resource cost in the Department for Regional Development.

Dr Farry:

That explains it.

The Chairperson:

Are there any other questions? The focus has been on underspend. You can understand why the Committee would be interested in examining that periodically. Mr Storey asked about priority funding packages and projected expenditure. One can see underspend emerging there.

Will you provide the Committee with a printout of the figures for 2006-07? I expect that that will take some time to prepare, but members would be interested in seeing it.

Mr O’Reilly:

We can provide it as part of the out-turn information, by which I mean the actual spend last year.

Mr Pengelly:

We are analysing the information that is coming to us from Departments. We hope to have the information for the Committee in the next few weeks, and we should be able to provide a fair degree of detail.

Mr O’Reilly:

Spending on the funding packages is ring-fenced and can therefore be monitored separately.

The Chairperson:

We briefly discussed underspend — the end-year flexibility. Do we have 70% or 100% access to that amount?

Mr Pengelly:

The underspend for the 2006-07 financial year is still being finalised. Before taking account of that, there is, in expenditure terms, a “stock” of £140 million, which is the amount that the Treasury “owes” Northern Ireland. In his latest discussions with the Executive, the Chancellor agreed that £75 million of this could be drawn down this year and the balance, £65 million, next year. Consequently, we will have 100% access, but over two years rather than one.

The Chairperson:

Thank you again for your help and information, which has been useful. That brings our evidence session to a close.