REPORTS OF COMMITTEES

REPORTS OF COMMITTEES

CASH LIMITS: THE REPORT OF THE PUBLIC ACCOUNTS COMMITTEE

BRITISH Constitutional Law is an elusive subject. Its importance is beyond doubt, but lacking any basic law that can act as a focus for consideration, it is hard to define, and often h a r d x still to explain. Occasionally this imprecision leads lawyers to seek refuge in a body of case law that can be analysed by means of the techniques familiar to them in other subjects, but there is no guarantee that by concentrating on the areas that come before the courts the urgent issues of the Constitution are discussed.’ This is particularly true in the case of the sovereignty of Parliament. Wilson has noted two distinct meanings of the term 2; first that of the legislative supremacy of Parliament, and secondly its pre-eminence in the constitutional structure, and suggests that lawyers have ignored the second meaning, concentrating instead on amassing a large body of knowledge-or minutiae-on the complex case law that considers the first meaning. To attempt to study Parliament as the central constitutional institution with even a cursory glance at history is to become convinced that, a t least since Stuart times, the control of government expenditure is crucial to understanding Parliament’s function. Within that context-and without any tendention-a short report by a Committee of the House of Commons on a technical aspect of financial management is an important benchmark.

The aggregate, distribution and control of public expenditure are major topics of public concern. Schools of academics dispute its role in the economy, and social theories are predicated upon its size and function. In each of the last two years the Government has suffered a revolt a t the time of the debate on the Public Expendi- ture White Paper, and the uprisings were not less interesting for their possible symbolism. The Public Accounts Committee (P.A.C.) report is concerned with an aspect of the control of public expenditure and raises a series of fundamental problems for the future development of the British Constitution, but before the report is analysed, it is as well to briefly explain the subject-matter.

in 1961 the planning and control of public expenditure has proceeded by means of an annual costing of public policies over a five-year span.5 The plans of spending departments are discussed in bilateral negotiations with the Treasury,

1 Here I follow Wilson, Cases and Materials in Constitutional and Administrative Law (2nd ed.), v-ix.

2 Ibid. 225-227. :I Cash Limits: The 3rd Report of the Public Accounts Committee for 1977-78,

4 Control of Public Expenditure, Cmnd. 1432. 5 By far the most informative account of the whole process is Heclo and

Since the Plowden Report

H.C. 274.

Wildavsky, The Private Government of Public Money.

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and in the Public Expenditure Survey Committee (P.E.S.C.) which produces an annual report to the Government. After consideration in Cabinet, the final decisions on expenditure are put in the form of the Public Expenditure White Paper, produced between November and February each year. At the time of the Budget, estimates of the expenditure needed to secure the policies in “ Year One ’’ of the White Paper are presented to Parliament in the form of the Supply Estimates. The figures in the two sets of documents are not identical as the P.E.S.C. exercise works on constant prices from a price base some 18 months before the Budget, while the Estimates themselves are based on prices obtaining six months before the Budget. The approval by Parliament of the Estimates is the reaffirmation of its control of Government policies. But in times of even moderate inflation this act is merely symbolic, because the prices on which the Estimates have been based are already out of date, and will be even more so by the end of the financial year. To make good the shortfall Supplementary Estimates are presented later in the financial year, and the political exigencies of the modern House of Commons ensures that approval of the Estimates and Supplemen- taries is virtually automatic. There is thus little possibility for early prediction and ongoing control of the amount of actual cash spent. Thus cash limits.6 Expenditure is broken down into “ cash blocks ” and the volume’ figures in the White Paper are then revalued to take account of forecast pay and price increases in the coming year. The figure that comes out is the cash limit, and in general terms that is the total amount that may be spent on policies within the cash block in the coming year. During the year, the expenditure of departments is monitored against the cash limit by means of a new financial information system, the central element of which is a monthly comparison of expenditure against “ profiles ” of a Department’s expenditure process set earlier.’

A short example might be in order. Let us suppose that a reader of this Review wished to undertake some research in (for sim- plicity’s sake) a developed country, and was interested to know government expenditure policy on the British Council. First he would look at the Public Expenditure White Paper which, if he was lucky, would be in one volume and white.g Programme 2, Sub- Programme Overseas Information, includes among other services the Foreign and Commonwealth Office’s contribution to the British Council. The global total for the sub-programme for 1977-78 was S63,000,000, calculated at late 1975 prices. From there he would

C See the White Paper Cash Limits. Cmnd. 6440 and Appendix I to H.C. 274

7 ‘( Volume” in the sense that it is calculated from policies to prices and not vice versa.

See the Treasury note “Monitoring Voted Expenditure,” in H C 718 of 1975-76, Expenditure Committee (General Sub-committee) Report on Planning and Control of Public Expenditure for a full description of the information system.

!I In 1977 it was in two volumes, and blue.

of 1977-78.

Sept. 19771 REPORTS OF COMhlITTEES 57 J

go to the Supply Estimates for 1977-78, and find under Class 11 3 (d), Foreign and Commonwealth Office Grant in Aid to the British Council, €20,518,000 (at late 1976 prices). Next to that figure is the cryptic cypher FC03, indicating a specific cash block, and if he then looked that up in the Cash Limits White Paper lo hc would discover the figure of €22,400,000, based on a projection of prices over the financial year 1977-78; the last figure is the cash limit. Not all pub!ic expenditure can be treated in this way. As the P.A.C. indicate,” demand-determined expenditure, such as social security payments or regional assistance, are not susceptible to this kind of control. Indeed, social security payments are linked to movements in prices and incomes l2 and as will become apparent below, the dominating characteristic of cash limits is that they do riot respond to short term fluctuations in the rate of inflation.

Whilst indicating that “ cash limits are not of course in any way a substitute for the basic decisions on expenditure programmes the Government has to take ” l3 the P.A.C. welcomed cash limits as a means of improving financial management and, especially, tauten- ing “ financial control throughout the spending departments.” Never- theless, the Committee appreciated that the innovation raises serious issues for parliamentary control and accountability. First, use of cash limits reduces the status and significance of the Estimates. To be sure, the automatic nature with which they have been approved suggests that the loss is not a great one, and yet as an indication of the limits of executive action the grant of supply demonstrates, albeit in a symbolic way, the constitutional supremacy of Parliament. The Committee noted that “ cash limits are a purely administrative system, designed and introduced by the Government, and do not have any specific Parliamentary sanction,” and suggested that cash limits should be “ developed in the direction of a full cash budgetary control.” l5 The next step would be to assimilate the system into a revised form of Estimates, but Treasury witnesses indicated difficulties with the scheme.16 If the inflation calculator in cash limits was-happy thought-over estimated, and that was incorporated into Estimates, then Parliament would have granted more supply than was necessary for departments to pursue their policies. In that case, new techniques like a negative Supplementary Estimate may be needed to claw money back. In any event, M.P.s would be expected to pass judgment on projected rates of inflation; a subject not without its expertise, and one offering happy opportunities for political differences. The Supply procedure might become awfully slow-and not necessarily accurate-but the P.A.C. are clearly right to encourage thought on the best methods for placing responsibility for cash allocation back in Parliament.

l o Cmnd. 6440. 1 2 Social Security Act 1075. $. 125. 1 1 Ihid. 3 10.

1 1 H.C. 274 of 1977-78. 0 4. 1:’ H.C. 274 of 1977-78.4 11;.

Illid. a 2 I , ’ 5

1 % ; Ibid. Q. 450 462.

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Related to this point, and demonstrated by the British Council example above, is the startling complexity that the planning and control of public expenditure now presents, with three different price bases in the ring at once. As a member of the P.A.C. forlornly remarked," Estimates are " the only money that Parliament can make sense of." One of the aims of the Plowden report was to build up an informed public opinion on public expenditure, and it was argued that " the best system and most up-to-date techniques will succeed only if public opinion is actively stimulated and enabled to take a balanced view of the alternative uses of national resources that are posed." We have now reached a position where even the representatives of the public are confused by the different price levels and arcane jargon that underpin the debate. The Public Expenditure White Paper, conceived as the most important vehicle for the stimulation of public discussion, is now two processes removed from the actual cash spent on its policies.l6 Successive British Governments have never shown themselves over keen to promote the public awareness and critical faculty without which policy can alienate rather than involve, but a start could surely be made on rationalising the expenditure process.

The Committee found that " it is apparent to us that taking into account the way in which prices have moved during 1976-77 in relation to the forecast on which the cash limits were based, there has been a squeeze on some elements of expenditure not only in cash but probably in some cases in real terms." lo This raises further important points of principle, for it will be appreciated that one man's " squeeze " is another man's " good financial management " and a third man's "cut"--but before developing the point it is necessary to explain exactly why the squeeze happens. The reason is to be found in the method of calculation of cash limits. The Treasury have made clear 2o that the revaluation of figures to take account of inflation is in terms concomitant with Government pay policy and target movement of retail prices. If Government's anti- inflation policy is optimistic then the underestimation of the inflation calculator in cash limits will produce a squeeze/cut, unless the limit is extended. The initial Government White Paper on the scheme made it clear that " the limits will not normally be revised during the course of the year " in the absence of policy changes, and that position was reaffirmed before the P.A.C. Treasury witnesses made clear 22 that departments were urged to absorb unexpected increases in a different part of the same block, or perhaps by offsetting the rises against other blocks for which they were responsible.23 Actual

17 Ihid. Mr. Hordern at Q. 433. I h Although thc 1977 Public Espcnditure Whitc Paper alluded lo the role of cash

1!1 H.C. 274 of 1977-78.9 18. limits: Cmnd. 6721-1. Ei 19-22 2') Scc e.g. Appendis 1 to H.C. 174 af 1977-78. " 1 Cmnd. 6440. (i 18. "3 As had thc public Elpcnditurc While I'apcr, Cmnd. 6721-1. 6 21 2: : H.C. 174 of 1077-78. Q. 491.

Sept. 19771 REPORTS OF COMMITTEES 573

increases have been few and small, being limited to policy changes, difficulties caused by the rapid decline in the value of sterling in autumn 1976 and small adjustments due to teething Quite explicitly, Treasury witnesses said “ we deliberately designed the system so that it would squeeze, rather than let things through,” and “ once the cash limits are announced, they take primacy over the volumes,” 2 5 but the P.A.C. do not develop the full significance of these remarks. In the Expenditure Committee (General Sub- Committee) more substantial disquiet was expressed at the possibility-in times of unallowed-for inflation-of “ making a real cut without specifically announcing the fact, or indeed, announcing where its impact is.” 2 6 The Chairman of the Sub-committee put the constitutional position succinctly: “ If you have a formalised cut . . . it is discussed in Parliament, sometimes to quite a con- siderable extent. If a relative change in the forecast rate of inflation is either causing a hidden increase in the real meaning of a cash limit, or a hidden reduction that is not so readily debatable or noticeable.” 27 The level of public expenditure is perceived to be of major importance not just by M.P.s, but by members of the public who consider themselves overburdened by taxation or who depend on public benefits for their well-being. I t is quite inappropriate that significant changes in that level should take place as if by a piece of magic, comprehensible only to a closed set of initiates.

The point is worth developing further. The efforts at financial management that a department is expected to go through before it can make a putative case for an increase have important conse- quences for parliamentary accountability. To put it shortly, departments will be encouraged to juggle programmes within a cash block so that the limit is not broken, with a consequent readjustment of programme priorities.28 Accountability devices must be developed to scrutinise such It is facile to expect a traditional con- cept of ministerial responsibility to Parliament to achieve this given the secrecy of much departmental decision making, a relative decline in the anonymity of the civil service,3o managerial delegation and the “ hiving-off ” of areas of government expenditure to “ independent ” bodies.31 On the other hand, expenditure policy has a longer tradi- tion of accountability to Parliamentary Committees than any other facet of the polity, and it is here that improvements must be sought. The P.A.C. received assurances from the Treasury that

24 Ibid. Q. 440443. 2 5 Ibid. Q. 454. 26 H.C. 718 of 1975-76, Q, 96. z7 Ibid. Q. 121. 2 8 See Bevan, Copeman and Elliott, The Public Expendifure White Paper: Does i f

Do its Job?, unpublished paper given to S.S.R.C. Public Sector Study Group, February 1977, 5 26.

2 9 Zbid. $8 22-27. 30 As, for instance, on the Vehicle and General Affair. See H.C. 133, H.L. 80 of

1971-72. 31 As, for instance, the Equal Opportunities Commission and the National

Enterprise Board: and see Hague, Mackenzie and Barker, Public Policy and Privare Interests: The Institutions of Compromise.

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“ there is 110 question of withholding information that Parliament needs and that this committee needs ” 32 and that “ there will be publication of monitoring information.” 33 Most importantly, when accounting officers 34 of departments are examined by the P.A.C. they will “ expect to answer questions about the way in which their general financial control and, in particular, the cash limit system is operating.” 35 All the same, the P.A.C. made a number of additional recommendations to ensure that they are able to keep pace with developments during the year. There is the possibility of an in-depth study of a particular case of management by the Comptroller and Auditor and the Committee also recommended dividing the cash blocks so as to increase the precision and effectiveness of the Such a policy would no doubt help to catch any juggling that had unfortunate effects. Even so, the Committee felt forced to recommend that the Treasury “ b e ready, by the use of appropriate adjustments, to maintain the effectiveness of cash limits if movements in wages and salaries , . . should become less closely predictable than they were during the first year of opera- tion.” 38 But this is a singularly cryptic remark. The “ effectiveness ” of cash limits is to do with controlling cash, not with ensuring that policies are carried out. I t could be, therefore, that the Committee intend that in times of accelerating inflation, policies and/or manpower are cut rather than that cash is increased. That is a political judgment which should be the subject of political debate, not of administrative fiat.

The Expenditure Committee also has an important role to play in ensuring accountability. In its report “ Policy Making in the Department of Education and Science ” 39 it was indicated that Sub- committees would examine the expenditure plans of their “ client ” departments after publication of the Public Expenditure White Paper. If this was married to a scrutiny of the management of programme volumes within a cash block then we would be on the way to shedding light on some significant recesses of government. As always, some will argue that detailed scrutiny of civil servants in Committee is no substitute for calling a Minister to account on the floor of the House. Without wishing to take the discussion on to much wider territory, it may be noted that there has been a recent tendency by Committees to regard their natural constituency as including the public outside Westminster as well as M.P.s. This raises the possibility of a public debate being created-outside Westminster if necessary-that Ministers at some point must respond to. Much is

32 H.C. 274 of 1977-78, Q. 480. 3 3 Ibid. 34 Normally Permanent Secretaries. 35 H.C. 274 of 1977-78 Q. 480. 36 Zbid. 5 16. 37 Ibid. 6 20 (a). At the moment there are about 125 cash blocks, one of which

38 Ibid. 5 20 (c). 39 H.C. 621 of 1975-76. covers the whole of the Ministry of Defence.


bound to depend on the willingness and ability of the media to make intelligent use of the material that Committees feed them.

The problems of accountability that are raised by a cash limit provoked squeeze are not limited to central government. Although it is not possible to cash limit local authority current expenditure, large proportions of capital expenditure are in cash blocks and, most significantly, the annual Rate Support Grant settlement is cash limited.40 The Government has said that because of their “ overall responsibility for economic management, they must be closely concerned with the aggregate of local authority expenditure,” 4 1 and although the proportion of centrally funded local expenditure is intended to decline marginally over the next few years,42 it may be that any consequent local autonomy on rating will be offset by cash limits with an underestimated inflation calculator. As a result, the responsibility of local authorities t o their electorates for services becomes problematical as the authorities may find themselves having responsibility without power. It would, however, be a mistake to stress this point, as the conventional wisdom on local authority expenditure is to view it, in all circumstances, as a responsibility shared between local and central g o ~ e r n m e n t . ~ ~ More interesting is that cash limits on Rate Support Grants raise possibilities for accountability through the courts. Local authorities are charged with a variety of public duties, and the pressure on their capacity to perform them that “ tough ” limits might bring could conceivably produce actions for breach of statutory duty or public law remedies.

The constitutional difficulties that cash limits present should not automatically indicate that the system does not have its virtues. One of the present Government’s major items of policy is to “ control ” public expenditure, and there can be little doubt that cash limits and the new financial information system are helping to achieve that aim.44 The Treasury indicated before the P.A.C. for example, that they are now able to watch more closely the extent to which spending authorities have a spree at the end of each financial year.45 All the same, witnesses indicated that cash limits needed to be compli- mented by tight manpower policies in the public And, as indicated above, the P.A.C. do not feel that the new system in any way absolves Government from taking decisions about either the total or allocation of public expenditure. One might have expected the report to add a further point; cash limits may prevent the waste of money, but they do nothing in themselves to establish value for money. Concentration on the input of cash may be valuable as an

~~ -

4 0 H.C. 274 of 1937-78, 8 5. 41 See Cmnd. 6721-1, 8 27. 42 Ibid. Table 4. 43 It is, at least, the Government’s wisdom. See the Green Paper, Local Govern-

44 H.C. 274 of 1977-78, 8 19, and see the White Paper Cash Limits 1976-77:

45 Ibid. Q. 504-5. 4 6 Ibid. Q. 467-473.

ment Finance, Cmnd. 6813.

Provisional Outturn. Cmnd. 6902.

576 THE MODERN LAW REVIEW [Vol. 40

exercise in holding the fort, but at some date in the near future one would wish to see the Government move towards providing the information from which policy output could be measured. This is not to raise up, once more, the false god of programme budgeting, but merely a plea for coherent statements of policy-especially in the Public Expenditure White Paper-against which eventual cost and achievements can be checked.47 Straws in the wind suggest that the Treasury is starting to think along these lines, but, predictably, no plan has yet been made public. More depressing is the recent history of Programme Analysis and Review (P.A.R.), the process by which policies are subjected to detailed appraisal and costing so as to provide guides to future action.48 In the Queen’s speech the Prime Minister said: “When the Government make major policy studies, it will be our policy in future to publish as much as possible of the factual and analytical material which is used as the background to these studies. This will indicate material used in the programme analysis review unless . . . there is some good reason . . . to the contrary.” 49 Less than six months later, in answer to a Parliamentary Question asking merely for a list, and completion dates, of reviews, the Chief Secretary of the Treasury replied that P.A.R. studies are “ internal to the Government, and the reports are part of the con- fidential advice given by officials to Ministers. For this reason it has been the policy of successive Governments not to disclose or identify such views publicly.”50 So much for the spirit of open government. In its continued absence, a heavy load of ensuring value for money falls on the P.A.C. and Expenditure

Cash limits are the best example yet of the extent to which the expenditure process has become located in administrative practices and institutions. P.E.S.C. itself is an example of that tendency, but at least the P.E.S.C. exercise leads to a report to Cabinet and, even- tually, to a White Paper and parliamentary debate. Cash limits and the financial information system are the products of fertile minds in the T r e a s ~ r y , ~ ’ and are largely untrammelled by legislative con- straints and the scrutiny of debate. Much the same could be said of the new Consultative Committee on Local Government Finance, where central government and the local authorities meet to discuss and co-operate on expenditure policy. There are more reasons than mere novelty for the suspicion with which some of these newcomers to constitutional arrangements have been greeted. In the case of cash limits the welcome has been particularly warm. They have been blamed for redundancies in local government and for poor services

4 7 See Bevan, Copeman and Elliott, op. cit. 8 36-61. 4 8 See Heclo and Wildavsky, op. cit., Chap. 6 for a description of P.A.R. 49 H.C.Deb., Vol. 921, col. 25, Nov. 24, 1976. 5 0 H.C.Deb., Vol. 930, col. 185, Apr. 22, 1977. 50a Announcements made by Government on August 4, 1977, indicate an intention

51 And, in the case of the information system, of the management consultants to meet the spirit of the Queen’s Speech.

Arthur Anderson & Co.


at both national and local levels. They are suspected as an under- hand method of enforcing a pay policy in the public sector, and of encouraging spending authorities to make false economies in the short term for which they will have to pay mightily later. On a constitutional level, it can be argued that they confirm the pre- eminence of the Treasury among government departments, and perhaps attack the basis of parliamentary sovereignty. The essential point to make on this is that, even if there is no hard evidence that cash limits have had anything but a salutary effect on financial management, they are capable of disquieting results. They present a challenge that must be met by old and new forms of public scrutiny and accountability, for, as Treasury witnesses said to the P.A.C.: " We have no doubt at all that in rolling the cash limit system for- ward, we are setting up what will be a permanent feature of control of public expenditure. We have no doubt about that." 5 2

MIKE ELLIOTT * ~

5 2 H.C. 214 of i911-n. Q. 454. * The author would like to thank his colleagues in the Public Expenditure Group

at the University of Wanvick, especially Gwyn Bevan, Harold Copeman and Rob Bryer, for many discussions and ideas on the subject of this article, while accepting responsibility for any errors that remain.

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REPORTS OF COMMITTEES