Parliament’s scrutiny of the Scottish budget needs a transformational change
By Caroline Gardner, Auditor General for Scotland
Presentation to DHI seminar: May 11 2017
Effective parliamentary scrutiny is obviously critical to ensuring the decisions taken by government are fully understood, thoroughly tested and properly challenged. This leads to better decisions, and contributes to public trust and confidence in government. And, of course, the processes surrounding the Scottish budget are a central element of good scrutiny.
We’ve heard from Graeme about the scale of change that’s underway. As you’d expect, it’s been a major focus of our audit work over the last few years, and will continue to be so for the foreseeable future.
Our reporting on financial devolution has covered two fronts – the progress being made to implement and manage the new powers coming out of the 2012 and 2016 Scotland Acts, and the need to develop the Scottish Government’s financial reporting to reflect the changes that are underway.
Our latest report, published in March 2017, found that the Scottish Government is well organised to deliver the new tax and spending powers, but more work is needed to build a clearer picture of what the changes will cost, and how the Government will address the significant staffing challenges it faces as the next stage of work begins.
We also emphasised again that Parliament’s role in scrutinising the Government’s policies, budgets and performance has never been more important.
Parliament’s existing budget process needs transformational change to ensure that Parliament is able to scrutinise whether the new tax and spending powers are being used in a way that’s sustainable, and makes the best use of resources in achieving the government’s policy goals.
As Auditor General, I support parliamentary scrutiny by providing the Public Audit Committee and others in Holyrood with robust, evidence-based and objective information on public spending and performance. I’m also a member of the Budget Process Review Group, set up by the Finance and Constitution Committee late last year, to fundamentally review the budget process in light of the new powers.
The group published an interim report in March, setting out five key themes linked by the central question: ‘How effective is the existing budget process?’
The Group has consulted external organisations and individuals to hear their views, which will contribute to the review’s next phase, and help influence the shape of the future budget process. And I hope that the consultation, with its focus on the purpose and extent of public engagement, is just the starting point for wider engagement as the budget process is transformed.
I’m going to focus on what I see as some of the key developments that are needed.
First of all, we need to move towards a whole cycle approach to the Scottish budget, extending the thrust of Parliamentary scrutiny from an annual set-piece event focused around the draft budget, towards sustained Parliamentary engagement at each stage of the budget cycle.
Audit Scotland provided the Review Group with an illustration of how this might work, which you can see here.
A whole cycle approach – sustained parliament engagement
The new powers bring both opportunities and challenges. The Scottish Government and Parliament have more choice over tax and spending, and new decisions to make about how and when to use the borrowing and reserve powers. The performance of the Scottish economy relative to the rest of the UK will have a direct influence on our public finances for the first time.
A more strategic approach means joined-up thinking across the different components of the budget – revenues, spending, borrowing and reserves – and understanding how they interact with each other and with economic performance. This requires longer-term thinking and planning, to create an overall framework for financial decision-making and sustainability.
Finally, a critical aspect of this approach will be balancing the need for short-term flexibility with longer-term direction and resilience. This will require the Scottish Government to set out its financial analysis and policies, and Parliament to scrutinise them effectively.
Introducing a medium-term financial strategy
A medium-term financial strategy is a central measure for parliamentary and wider public scrutiny. This will be critical to successfully introducing a rolling approach to budget scrutiny that’s not tied to Parliamentary cycles. The strategy would not necessarily have to be reviewed each year, but it would need to be refreshed periodically to reflect changes in the underlying conditions or in financial policies.
The strategy should set out the expectations and broad financial plans for the next five years, linking anticipated economic performance with the consequences for devolved and assigned revenues and spending, and for the block grant. The strategy should be underpinned by clear policies and principles for using, managing and controlling the available powers, especially the borrowing and reserve powers.
There’s obviously a great deal of uncertainty inherent in any medium-term financial plan – the last few years prove that beyond doubt – but scenario planning, based on transparent economic forecasts and financial information, offers the best way to assess the prospects for the Scottish budget and, in turn, support financial planning and decision making.
The Budget Process Review Group is considering what role a medium-term financial strategy might play, and what it might include. For me, the strategy should set out things like projected levels of revenues and funding, indicative spending and investment levels, and anticipated borrowing and reserves.
Finally, a good financial strategy would provide context and an overall framework for multi-year and annual budgeting, and for the development of more detailed spending plans over the period. These spending plans would need to be firm enough to act as a credible basis for financial decisions, while recognising that the inherent uncertainty and volatility of the public finances mean that frequent reviews will be needed to test whether the plans are still realistic. That again suggests a new role for Parliament and its committees in carrying out robust scrutiny of the spending plans, drawing on a range of sources of evidence, and drilling down according to their own interests and priorities.
Not only are Scotland’s public finances changing fundamentally with new tax and spending powers, but the Scottish budget is also becoming increasingly complex. Financial sustainability, transparency and accountability take on a new importance in this context, and should drive the revised budget process. Parliament has a clear locus, through the Finance and Constitution Committee, in scrutinising not just each year’s budget, but also the sustainability of the devolved public finances as a whole.
Scotland’s public finances are complex…
There’s no doubt that this is going to be a challenge. This exhibit sets out the funding and spending streams associated with the Scottish Government’s overall budget, including new elements arising from the new powers and the fiscal framework. Given this complexity, it will be vitally important for Parliament to have a clear picture and a shared understanding of the overall financial position, in order to be able to understand the risks and opportunities, and hold Government to account.
The measures I’ve described so far would help with this. Publishing the Government’s medium-term financial strategy, and its related policies and principles, will enhance financial transparency. Supporting this with medium-term and longer-term models, projections and plans will provide the Parliament, public sector bodies and the wider public with the information they need to understand the overall financial position. More clarity about overall financial expectations and plans would, in turn, encourage better medium-term financial planning by public bodies, something we in Audit Scotland have been recommending for a while now.
But there’s room to go further.
The Review Group has recognised the value of separating the factual content of budget proposals from their political interpretation. The introduction of objective standards for information would support this, and I have a few suggestions for what these standards could cover.
Ensuring budget numbers are transparent & objective
First, greater clarity over the budget aggregates and how they relate to each other. That means showing how anticipated spending will be funded from anticipated revenues, and how borrowing and reserve powers will be used to fill any gaps. This applies not just to the draft budget document, but also to any amendments. This year, for example, we saw the government make revisions to its draft budget following agreement with the Green Party to include an extra £220 million of spending. It is important that the Parliament and the public can clearly see where such money is coming from, how it affects the spending and revenue totals, and what the associated risks are.
This should be underpinned by prompt, transparent reporting of significant in-year changes, which Parliament has the opportunity to scrutinise. This includes both formal budget amendments and significant changes to the use of fiscal measures, such as unanticipated use of the resource borrowing powers.
Parliament also needs to be able to drill into the detail for each element of the fiscal framework, which sets out the rules and limits within which the Scottish Government manages its finances, including block grant adjustments, reconciliations and borrowing limits. Fiscal policy decisions need to be based on a good understanding of the consequences for future years, and how they sit alongside existing commitments.
It’s important that the numbers, forecasts and projections sitting behind these decisions are set out clearly to enable effective Parliamentary scrutiny. For example, revenue and spending classifications need to be presented in a consistent way. Consistency in the use of RDEL, CDEL and AME across budget documents would enable the reader to compare information on a like-for-like basis. Presenting information in a consistent format, such as standardised tables, would also help to make budget documents easier to navigate.
And financial information should be presented in a consistent time series in all documents – I’d suggest looking at least two years back, and three to five years ahead. At the very least, the information should cover the period of any spending reviews and medium-term financial strategies.
Finally, the Government’s budget documents need to meet its commitments to open government, which aim to foster openness, transparency and citizen participation. In its Open Government Action Plan, the Government has committed to financial transparency, and to clearly explaining how the public finances work. One way to do this is through a citizen’s budget that provides an easily accessible version, giving people the information they need to participate as informed citizens and stakeholders, and to hold the government to account for how it manages public money.
Finally, much of the focus of budget scrutiny is on the Scottish Government’s plans for public spending and revenue-raising, but just as important is what has actually been spent and raised, and what has been achieved.
Increased volatility and uncertainty mean that a clear understanding of annual outturns and the overall financial position has never been more important. This helps Parliament to hold government to account, and helps inform future budgets and plans. And, of course, it’s a key aspect of a whole cycle approach to budget scrutiny.
We already have a well-established approach to outturn reporting, through the published accounts of individual public bodies and devolved tax accounts. This reflects the individual accountabilities of all the organisations that spend and raise public money. What we now need is to see how all these individual accounts fit together to create an overall picture of the Scottish public finances.
At the moment, the Scottish Government’s consolidated accounts are perhaps the main vehicle for accountability to Parliament, but they cover just one element of this much wider picture, and they don’t include important elements such as local government borrowing and public sector pension liabilities. The challenge is to develop a way of pulling together the overall picture, showing the key movements and interactions without swamping the reader.
We need to see the overall picture at both budget and outturn stages, and it will be important that provisional outturn numbers are presented in a consistent way, with prior year actuals, rather than just budget figures, in order to tell the whole story.
Taking this one stage further means bringing financial and performance information together, so that the impact of spending decisions on performance and outcomes can be better understood.
This will require more effective performance planning and reporting, to improve clarity over what spending is aiming to achieve and what progress is being made.
The Government has a great starting point with its National Performance Framework, which sets out its over-arching purpose, strategic objectives and targets, but more work is needed to link the Framework with the Budget, the key mechanism for any government to achieve its goals. Together with more explicit performance planning and reporting, that will enable Parliament and others to develop an outcome-based approach to scrutiny over time.
For example, since 2008 New Zealand has used its budget process to focus on what it’s achieving from current and new public sector spending, by bringing together its budget and performance processes to enable a continuous focus on outcomes. The system is based around constantly asking ‘What outcomes does this achieve?’ based on four-year plans setting out the strategy, outputs and resources involved.
More focus on outcomes, outputs & performance
For me, a stronger approach to performance planning and reporting should include:
• Linking spending programmes to outcomes. Outcomes are, by their nature, often longer term, and it’s time to put more rigour into the process by being explicit about how planned activity is expected to contribute to outcomes over the medium term. This would entail more systematic use of output measures, set out the milestones by which progress will be measured, and establish the basis for budgets and longer-term financial plans
• At the same time, there’s scope to articulate much more clearly the expected impact of significant changes to spending programmes
• That would sit along annual reporting of the performance of spending programmes by public bodies, including Government portfolios, and an overall performance report for the Scottish Government
• Maintaining a clear parliamentary focus on financial sustainability, with broader year-round Parliamentary scrutiny of budget value for money, and developing parliamentary scrutiny to make more use of the independent and authoritative evidence that public audit can provide. The Public Audit Committee plays a key role, but there’s scope for us to engage more with the subject committees, for example making greater use of the annual audit reports that we produce on each public body, with the Public Audit Committee acting as air traffic control on our performance audit work. This is something we have been developing as part of our engagement with Parliament since last year’s election, and it’s obviously very relevant to both the Budget Process Review Group and the Commission on Parliamentary Reform.
Decisions on tax-raising and spending need to be informed by an understanding of what’s working, what’s planned and what this is expected to achieve in terms of outputs and the effect on outcomes. Some of this is already happening, but there’s an opportunity to build on these foundations, focusing first on new policies and on significant changes to spending plans.
To finish, all of these issues are on the agenda of the Budget Process Review Group, and set out in our interim report and the research we commissioned on international good practice. Now that the consultation has come to a close, a final report is due around the end of June.
In the meantime, helping to shape Parliament’s approach to budget scrutiny, and supporting it in practice, will continue to be a priority for me and for Audit Scotland. Our five-year rolling work programme, which we refreshed and published last month, sets out a commitment to report on the implementation of the new financial powers each year, and we also produce an annual audit report on the Scottish Government’s consolidated accounts.
I hope this evening has shown that there is a lot of work ahead, and there will be undoubtedly be plenty of debate about the best way forward, and some tough decisions to take. But we should also recognise that we have an opportunity here to create financial scrutiny processes that are world class, reflecting international best practice in a way that suits Scotland.
That will mean balancing aspirations for where we want to get to with the practicalities of implementation. We need both ambition and realism to make the most of these historic changes in Scotland’s budget.