Appendix 1 - Updated paper on ordinary annual services of the government
hl.pap.15777
8 February 2008
ORDINARY
ANNUAL SERVICES OF THE GOVERNMENT
Since 2005 the Appropriations and
Staffing Committee has had before it a question relating to the ordinary annual
services of the government, arising from the system of outcome budgeting
adopted after 1999. This question arose in relation to the classification of
expenditure authorised by the annual appropriations bills.
Origin of the question
In May 2005 the Australian National
Audit Office (ANAO) raised a question about the interpretation to be placed
upon the Thirtieth Report of the Appropriations and Staffing Committee,
presented and adopted by the Senate in 1999, in relation to items of
expenditure which may be regarded as ordinary annual services of the government.
ANAO considered that there was a misunderstanding about what the committee and
the Senate had agreed to on that occasion. Members of the committee
subsequently indicated that they agreed with the interpretation of the report
which had been provided to ANAO in subsequent correspondence.
The question of interpretation
arose from the appropriation bills presented early in 2005 to authorise
expenditure on relief for the victims of the 2004 tsunami. Part of that
expenditure was contained in a bill designated for ordinary annual services of
the government. As expenditure on tsunami relief could not possibly be
expenditure for the ordinary annual services of the government, the bill was
treated in the Senate as a non-ordinary annual services bill, and, on the
question being raised by ANAO, this was communicated to ANAO.
Subsequently, ANAO questioned other
expenditure made from appropriations for the ordinary annual services, and
raised the question again. Following further correspondence, which was referred
to in Audit Report No. 25 of 2005, it appeared that the Department of Finance
and Administration (DoFA) had not accepted the interpretation of the Thirtieth
Report of the committee endorsed by the Senate, and adhered to a view that any
expenditure on existing outcomes of departments is expenditure for the ordinary
annual services of the government. This is contrary to the agreement between
the Senate and the Government known as the Compact of 1965 and with subsequent
determinations by the Senate, including the determination made on the Thirtieth
Report of the committee.
It is necessary to set out briefly
the history of this matter.
Classification of the ordinary annual
services
Section 53 of the Constitution
provides that the Senate may not amend a bill appropriating money for the
ordinary annual services of the government, but may request amendments of such
a bill. An appropriation bill not for the ordinary annual services of the government
may be directly amended by the Senate. Section 54 of the Constitution provides
that an appropriation bill for the ordinary annual services of the government
must contain only those appropriations.
The classification of appropriation
bills on the basis of whether they are for the ordinary annual services of the government
determines how the Senate deals with a bill procedurally. This classification
of appropriation bills, however, is also a useful adjunct to parliamentary
accountability for expenditure, because it enables the Parliament to see at
once which expenditure is for normal ongoing activities of the government and
which expenditure is for other purposes.
The classification of
appropriations was the subject of an agreement between the Senate and the Government
in 1965, known as the Compact of 1965. It was then agreed that appropriations
for the following matters would be regarded as not part of the ordinary annual
services of the government:
- the
construction of public works and buildings;
- the
acquisition of sites and buildings;
- items
of plant and equipment which are clearly definable as capital expenditure;
- grants
to the States under section 96 of the Constitution; and
- new
policies not authorised by special legislation, subsequent appropriations for
such items to be included in the appropriation bill not subject to amendment by
the Senate.
The agreement was subsequently
confirmed by the Senate, including by a resolution of 1977, which provides that
appropriations for expenditure on:
- the construction of public works and buildings;
- the acquisition of sites and buildings;
- items of plant and equipment which are clearly
definable as capital expenditure;
- grants to the States under section 96 of the
Constitution; and
- new policies not previously authorised by special
legislation,
are not appropriations
for the ordinary annual services of the government, and that proposed laws for
the appropriation of revenue or moneys for expenditure on the said matters
shall be presented to the Senate in a separate Appropriation Bill subject to
amendment by the Senate.
The application of the Compact of
1965 was the subject of correspondence between the committee and the government,
tabled in the Senate on 3 November 1988 and 4 April 1989. It was agreed that expenditure on computers, which, due to changes in technology, are no longer
major items of capital equipment, and expenditure on the fitting out of
buildings, should be regarded as part of the ordinary annual services subject
to certain limits.
Under the terms of these
determinations by the Senate, clearly expenditure for new policies could not be
part of the ordinary annual services of the government.
The current question relates to
correspondence between the committee and the Minister for Finance and
Administration and the Thirtieth Report of the committee in 1999.
The modifications of 1999
In February 1999 the then Minister
for Finance and Administration wrote to the President of the Senate suggesting
that there should be some “modest changes”, consequent upon the impending
introduction of accrual budgeting, to the Compact of 1965 between the Senate
and the government on what constitutes the ordinary annual services of the
government under section 53 of the Constitution.
The proposal submitted by the
minister was:
- all
equity injections and loans, including for defence purposes, in Bill 2;
- new
administered expenses that fall within an existing outcome included in Bill 1;
- asset
replacement will be typically funded from depreciation provisions appropriated
in Bill 1 as part of the price of outputs. [Bill 1 is the ordinary annual
services bill and Bill 2 the other bill.]
It should be noted that only administered
expenses (ie., expenses, such as statutory entitlements, over which
departments have no control, as distinct from departmental expenses) falling
within “existing outcomes” would be ordinary annual services. What was meant by
“existing outcomes” in any event? The minister's proposal also stated that
appropriations for new capital acquisitions would be contained in the
appropriation bill not for the ordinary annual services “so that Parliament can
clearly distinguish between Government resourcing for ongoing activities
and its investment in agencies” (emphasis added). So “ongoing activities” were
ordinary annual services.
The minister's proposal was
referred to the committee by the President.
The committee, and the Senate by
endorsing the committee's report, agreed that:
the
classification of appropriation items according to whether they fall within the
category of ordinary annual services of the government ... remain unchanged
except that:
- items
regarded as equity injections and loans be regarded as not part of ordinary
annual services
- all
appropriation items for continuing activities for which appropriations have
been made in the past be regarded as part of ordinary annual services
- all
appropriations for existing asset replacement be regarded as provision for
depreciation and part of ordinary annual services. (Thirtieth Report of the
committee, adopted by the Senate on 22 April 1999.)
In considering the general effect
of accrual budgeting, the committee observed:
Given
that all expenditure on achieving an existing outcome, including maintaining
and replacing existing assets involved in achieving that outcome, is to be regarded
as part of expenditure on that outcome, it is logical that such expenditure
should be classified as part of ordinary annual services.
The equation of “continuing
activities” with “existing outcomes” clearly arose from the language in the
minister's proposal. At that time the meaning and content of the expression “outcomes”
was not clear.
In effect, the committee took up
the minister’s expression “ongoing activities” (slightly altering it to “continuing
activities” and adding the definitional phrase “for which appropriations have
been made in the past”), and this was what was adopted by the committee and the
Senate. This expression was adopted because it avoided the lack of clarity
about what would be involved in “outcomes”.
In that context, there was still an
expectation that new policy proposals, which cannot by definition be “continuing
activities”, would not be included in the ordinary annual services bill. The
adoption of the alternative formulation was an attempt at an explanation or an
interpretation of the concept of “new policy” which, it was presumed, would be
of assistance in classifying appropriations in the context of accrual
budgeting.
The classification criteria adopted
in the committee’s Thirtieth Report were not intended to replace the
classification criteria previously established under the Compact of 1965. The
report clearly stated that the original criteria “remain unchanged” except as
modified by the new criteria. All of the criteria must be read together. When
that is done, it clearly emerges that paragraph (ii) of the new criteria,
referring to “continuing activities” of government as part of the ordinary
annual services, is a clarification of the concept of “new policies” in the
accrual setting.
On this basis, proposed expenditure,
both departmental and administered, for new policies should continue to be in
appropriation bills not for the ordinary annual services.
The concept of “new policy”, and
indeed the concept of “continuing activities” of government, involve problems of
interpretation. Those problems, however, have always been present. They are to
be solved by consideration of particular cases.
As noted above, this interpretation
of the effect of the 1999 agreement was put before committee in May 2005 and
endorsed by the members of the committee.
Later cases
The question was again raised in
2005-06 by ANAO following its examination of the operations of the Australian
Securities and Investment Commission (ASIC). The attention of ANAO was drawn
to the fact that $90.7 million for ASIC to implement new policies announced by
the government had been included in the appropriation bill for the ordinary
annual services.
Initially, ANAO suggested that an
apparent difference in interpretation between the Senate and DoFA should be the
subject of further discussion. DoFA, however, rejected this approach and
asserted that its interpretation of the 1999 modification of the Compact of
1965 should stand. The ANAO then recommended, in its report No. 25 of 2005-06,
“that the Department of the Senate and Finance should take steps to develop a shared
understanding of the appropriate location between the Annual Appropriation Acts
of departmental amounts for new policy” (paragraph 2.14).
There have been further cases of
expenditure included in the ordinary annual services bill which are clearly new
policies and therefore not part of ordinary annual services.
The Northern Territory Emergency
package of bills in 2007 included an appropriation bill purportedly for the
ordinary annual services. Clearly the response to the emergency was a new
policy and not part of the ongoing activities of departments and agencies.
The examination of the Portfolio Budget
Statements of various agencies produced a list of items which were clearly not
ordinary annual services but which were included in the ordinary annual
services bill. That list is attached to this paper.
In its report on 2006-07 annual
reports, the Finance and Public Administration Committee also drew attention to
items inappropriately included in the ordinary annual services appropriation
bill. That committee reiterated a recommendation in its report of March 2007
on Transparency and accountability of commonwealth public funding and
expenditure, that expenditure should be reported at the levels of
programs. That recommendation refers to the fact that the budget documentation
does not allow definite identification of programs and projects which are
included in outcomes. It is therefore not possible to identify all of the
expenditure inappropriately included in the ordinary annual services
appropriation bill.
The issue
The assertion by DoFA that money for
new policies may be included in the ordinary annual services bill is based on a
claim that, in the 1999 modification of the Compact, the Senate agreed that any
expenditure falling within existing outcomes could be included in the ordinary
annual services bill. This is clearly a misreading of the 1999 modification.
DoFA appears to be construing part, and only part, of the language put by the
minister to the committee, rather than the terms adopted by the committee and
the Senate.
Given that outcomes are now so
nebulous (and the vagueness of their content was not known in 1999), under the
interpretation adopted by DoFA virtually any expenditure could be included in ordinary
annual services. If that interpretation is allowed to stand, the distinction
between ordinary annual services and other expenditure could virtually
disappear.
It would also be much more
difficult for the Parliament generally, and Senate estimates hearings in
particular, to distinguish between expenditure for normal ongoing government
activities and other expenditure. Anomalies such as “ordinary annual tsunamis”
would multiply. The way in which the Senate deals with appropriations would be
unnecessarily complicated.
The 2006-07 correspondence
On 17 February 2006 the then President, on behalf of the Appropriations and Staffing Committee, drew this matter
to the attention of the then Minister for Finance and Administration, and
forwarded to the minister examples of expenditure inappropriately included in
the ordinary annual services bill. Further letters of the President drew
attention to subsequent cases.
The March 2007 report of the
Finance and Public Administration Committee also recommended that the
Appropriations and Staffing Committee and the Finance Minister arrive at a
solution to the problem of ordinary annual services.
The then minister responded by
letter dated 21 May 2007, not dealing with the issue or the examples, but
suggesting an alternative scheme for distinguishing ordinary annual services
from other items of expenditure. Under this proposed scheme, all expenditure
under existing outcomes would be regarded as part of ordinary annual services,
and the only items included in the other appropriation bill would be new administered
items, major capital funding and financial assistance to the states,
territories and local government, items which were never regarded as ordinary
annual services.
This proposed scheme does not meet
any feasible interpretation of the simple language of the Constitution,
“ordinary annual services of the government”. It would allow completely new
policies, programs and projects to be funded through the ordinary annual
services appropriation bill, and not necessarily identified in the budget
documentation, on the basis that they fall within the vaguely worded outcomes.
The minister’s letter simply
confirmed the position put by DOFA to ANAO in 2005. That position has not
changed. A memorandum sent by the Department of Finance and Deregulation (as
it now is) to all departments and agencies in January 2008 instructs them to
follow this interpretation in composing their 2008-09 estimates.
Conclusion
The only solution to the problem,
consistent with both the Constitution and parliamentary control over
expenditure, would be to return to the Senate's original determination, that
there should be no new policies included in appropriations for the ordinary
annual services, with the objective test for new policies, namely, whether
money has been appropriated for them previously.
This solution would be consistent
with the spirit of the recommendation of the Finance and Public Administration
Committee that programs and projects be identified in the budget documentation.
hl.misc.15445
24 May 2007
Expenditure on
New Policy Proposals included in Appropriations
for the Ordinary Annual
Services of the Government
- New policies to be implemented by ASIC: $19.4M in 2002-2003,
total $90.7M*
- Aid to the victims of the 2004 Asian tsunami: $131.4M in
2004-2005*
- Establishment of central project management of proposed Access
Card: $36.7M in 2006
- Establishment of National Training Centre for Aerial Skiing:
$2.5M one-off in 2006-2007
- Establishment of Alfred Deakin Institute: $4M one-off in
2006-2007
- Establishment of National School Chaplaincy Programme: $14.1M in
2006-2007, total $107.5M
- Establishment of Beaconsfield Community Fund: $7.2M in 2006-2007,
total $8.3M
- Establishment of ethanol distribution scheme: $6.3M in 2006-2007,
total $17.2M
- Establishment of liquefied petroleum gas vehicle conversion
scheme: $74.7 in 2006-2007, total $835.9M
- Assistance to General Motors Holden: $2M in 2006-2007, total
$6.7M
- Establishment of Port Kembla Industry Facilitation Fund: $2.6M in
2006-2007, total $5.2M
- Establishment of scheme to identify potential onshore energy
sources: $7.4M in 2006-2007, total $58.9M
- Establishment of Office of Water Resources: $2M in 2006-2007,
total $4.5M
- Establishment of Uranium Mining Processing and Nuclear Energy
Review Taskforce: $3.9M one-off
- Establishment of national system for registration of personal
property securities: $22.3M in 2007-2008, total $113.3M
- Establishment of Australian Government Summer School for
Teachers, cash rewards for schools: $32.3M in 2007-2008, total $154.9M
- Establishment of Australian Centre for Climate Change Adaptation:
$17.1M in 2007-2008, total $126M
* These were the cases drawn
to attention by the Australian National Audit Office.
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