CHAPTER 4 - THE FUTURE OF THE PORTFOLIO BUDGET STATEMENTS
A reassessment of the purpose of the PBS
It is important to re-emphasise that the primary role of the PBS is to
serve as explanatory memoranda to the Appropriation Bills. The Appropriation
Bills are complex and so, to expedite their consideration, portions are
referred to subject-related committees. What senators are ostensibly doing
in the legislation committees considering the estimates is 'informing
themselves, to a level at which they are satisfied, that the expenditure
proposals should be legislated for'.[1]
The reality is that the opportunity presented by the estimates process
for senators to question ministers and their senior officials about any
aspect of a portfolio sometimes obscures this primary purpose. Perhaps,
too, the Senate's inability to amend Appropriation Bills may divert senators'
attention from the bills themselves.
In the view of Cleaver Elliott, who has supervised estimates committee
operations in the Senate for many years, the kernel of the problem with
the PBS is that following the introduction of program budgeting,
[t]he document was asked to do two tasks - explaining the bill and describing
the programs. These, to me, and from the reflections I have got from senators,
appear to be entirely different tasks. Both are worth while and senators
are interested in both, but they are different tasks. As a result, the
document appears to do neither task well ... it is an explanation of the
bill which should be the priority. After all, it is a legislative process,
not an administrative exercise in program budgeting.[2]
When this committee's predecessor supported the move to program budgeting
in 1985, it is probable that it failed to appreciate the extent to which
the appropriations would be lost sight of, or the very real difficulties
of attributing certain generic costs to programs. It is important to recall,
however, that senators had problems with the explanatory notes before
program budgeting, when they were strictly explanations of the items of
expenditure in the Appropriation Bills. The essence of the problem is
that senators may also use the estimates process - and hence attempt to
use the PBS, which serve inter alia as an agenda for estimates proceedings
- for general information gathering and for party-political purposes,
for which the PBS can be entirely unsuited.
It would be fair to assume that, in the view of the Department of Finance
- a view formed after extensive consultation over many years with the
Department of the Senate and individual senators - the information senators
require to inform themselves sufficiently to pass the Appropriation Bills
is that which is currently contained in the PBS, namely:
- an overview of the portfolio, its role, program structure, major developments
which have led to variations affecting programs;
- Appropriation Bills disaggregated by sub-program;
- reconciliations of program outlays and appropriations;
- a summary of outlays for the portfolio for the current year, the budget
year and three outyears, then portfolio outlays and staffing by program
and sub-program;
- a summary of budget measures affecting the portfolio for the current
year and three outyears;
- program information, including a statement of objectives, summary
tables of resources, variations to outlays from the current year to
the budget year, budget measures affecting outlays, and performance
information.
In an attempt to link the PBS more prominently to the Appropriation Bills,
the DoF guidelines recommended in 1997-98 that the disaggregation of the
Appropriation Bills be placed prominently at the front of the document.
A glance at the Appropriation Bills shows why DoF advocated program budgeting
in the first place: the Bills emphasise inputs only - how much money was
expected to be spent in the current year and how much is proposed to be
spent in the budget year. It was in an attempt to direct senators' attention
to the results of that expenditure that program budgeting was devised.
Senators have occasionally responded 'appropriately' but en masse, they
have not taken up the opportunity to examine rigorously the outputs of
expenditure and determine whether or not value for money was achieved.
There are, inevitably, a number of reasons for this. There is no political
mileage to be gained by questioning an apparently successful or an innocuous
program. There is no way of knowing, from the PBS, if successful results
were achieved by dubious or improper means and hence are worth examining.
The programs and sub-programs are often too aggregated to identify particular
areas of interest or concern. This does not mean that program budgeting
was a failure: it may merely mean that the PBS do not tell the whole story,
or tell it clearly enough or at a sufficiently disaggregated level. And
of course, they do not address the 70 per cent of expenditure covered
by special appropriations.
Certainly the PBS in their current format offer a wealth of information,
but it is not necessarily the only sort of information senators want.
The kind of information senators have indicated they want from the PBS
include the following: explanations of apparent discrepancies; clarification
of expenditure and staffing for particular projects, particularly ones
initially funded by a previous government; details of discretionary expenditure
such as grants funding, ex gratia payments, consultancies, membership
of boards, et cetera, where the possibility of political patronage exists;
like-with-like comparisons of expenditure over time, and particularly
following a change of government. If the PBS are to have an agreed focus
on the forthcoming financial year budget, much of this information would
not and should not be included.
This is not to say that such issues are inappropriate for Senate committee
examination, as they may go to the heart of accountability. Whether legislation
committees examining the estimates are the appropriate venue for that
examination is a moot point; they are currently, however, the principal
venue at which a minister and supporting high-level officials are present
to be questioned, and hence will be used.
Ted Evans, Secretary to the Treasury, described the reality of the estimates
process as he saw it in his submission to the inquiry:
It is evident from Committee hearings, however, that the PBS ... do not
make a significant contribution to these [estimates] processes (accepting
that it is difficult to judge what contribution they might make outside
of the Committee's hearings, per se). The bulk of the questioning
in the hearings is directed at policy issues in general or at information
that would not normally be covered by the PBS. This reality ... does not,
in my view, detract from the worth of the hearings - in that some highly
useful information is exchanged - but it is relevant to assessing the
role of the PBS and hence their format.[3]
Similar views on the relative lack of use of the PBS were expressed by
others, in evidence to the committee. One witness suggested that this
was because senators did not understand the financial information they
contained.[4] While this is undoubtedly correct,
Senator Bishop pointed out that other sources of information were available
to senators and that they tended to keep files on programs and issues
of particular interest to them and used the estimates process to pursue
those issues, if there was a political dimension to the issue and if it
was still current.[5]
The committee agrees that the PBS do not always play an important part
in the estimates hearings - but there are a number of variables at work
here: the individual senators involved in a given year and their level
of experience and subject knowledge; committee and hearing dynamics; the
inherent complexity of the portfolio and its programs; the quality and
extent of other sources of information; and matters of current political
moment unrelated to the appropriations. The fact that a portfolio's PBS
is relatively neglected one year does not imply that the following year
model will be equally neglected. Nor does it follow that a senator who
uses a given portfolio's PBS closely on one occasion will continue to
do so in succeeding years. Non-use of a PBS may, on the one hand, be an
indication that the explanations of expenditure it contains are perfectly
adequate; on the other hand, it may merely indicate that other sources
of information are better or easier to use.
Mention was made in evidence to the committee of the role of the PBS
in driving organisational change within portfolios.[6]
Senator Bishop commented, and the committee agrees,
the fact that you use [the PBS] to drive internal change, to implement
internal accountability and to make middle-level officers more responsive
and responsible for outlays of Commonwealth moneys is entirely praiseworthy
and I would not discourage that.[7]
But this must be a useful spin-off from the primary purpose of the documentation,
and not an end in itself.
It is important to recall that the PBS is the minister's statement to
the Parliament, and through it, to the public, as part of his or her accountability
obligations. It is understandable that ministers wish to present a positive
view of their portfolios in their PBS, and not what Senator Knowles described
as 'loaded guns'.[8]
Suggestions for the immediate future
At present, we have a situation where the PBS and the process for which
they are intended are basically mismatched and neither, it must be said,
contributes particularly well to the ostensible purpose of assisting in
the passage of the Appropriation Bills. But with the last year of program
budgeting approaching, now is not the time to attempt change, when the
parameters within which we will be operating within the very near future
will themselves bring about major change in the structure of the PBS.
In the view of the committee, the PBS should continue, pre- and post-accrual
budgeting, as relatively concise documents which do not attempt to second
guess individual senators' interests but which adhere broadly to standardised
guidelines, though allowing reasonable scope for presentational needs
of individual portfolios. The time has long since passed when the PBS
could be a stand-alone accountability document. They should, however,
continue to note references to related public documents such as annual
reports, evaluation reports, audit reports, corporate plans, et cetera.
Rather than recommending change to the PBS in a probably vain effort
to oblige them to cater more adequately for estimates hearings, the committee
advocates the more extensive use of pre-hearing briefings, possibly even
by way of inviting the relevant portfolios' Assistant Secretary, Budgets
(or equivalent) to a scheduled legislation committee meeting. In doing
so, it is mindful of the arguments against this process - that it is not
on the public record, and therefore of little use in formal accountability
terms. The committee points out that there are positive advantages to
private briefings: they can encourage a less adversarial approach to the
estimates; they limit grandstanding; they can accommodate the particular
private interests of individuals senators without wasting time in formal
hearings; the vagaries of the budgeting process can be explained; they
can be a forum in which broad lines of questioning to be undertaken at
the public hearing can, where appropriate, be raised to ensure that the
appropriate officers attend and are well briefed.
The committee is under no illusions that such an approach will 'solve'
the problems with either the PBS or the estimates process. It notes the
resignation with which several portfolio representatives recounted rejected
offers of briefings[9] but it is
also aware of other cases in which all sides have benefitted from the
process. It advocates that, rather than the informal canvassing of legislation
committee views from the secretaries of the committees now suggested in
the DoF guidelines, the somewhat more formal approach of pre-hearing briefings
be routinely attempted. At the very least, the process should be of assistance
to the committee secretariats.
In submissions and evidence to the committee, a number of portfolio representatives
expressed a wish to receive feedback on their efforts with the PBS. In
the 1997-98 budget estimates round reports, four of the eight legislation
committees[10] commented on some
aspects of some portfolios' PBS but most portfolios were left in the situation
of receiving no formal feedback. As Len Marsden of the Department of Communications
and the Arts pointed out, his portfolio made the assumption that after
the criticism of the previous year, the lack of committee or senatorial
comment on the most recent budget round indicated 'we must have got [the
PBS] fairly right'.[11] In the view of the committee, no
department or agency should be left in any doubt about a matter of such
importance. In an attempt, therefore, to formalise the process of feedback
on the PBS which the committee believes is integral to their refinement
and improvement, the committee recommends that all legislation
committees in their report on the examination of the budget estimates
be required to comment on the format and content of the PBS.
The impact of accrual budgeting
On 7 May 1997 the Minister for Finance issued a press release,[12]
announcing the Government's intention to implement a fully integrated
accrual financial management framework, a decision consistent with recommendations
of the National Commission of Audit, with recommendations of the Joint
Committee of Public Accounts, and with the practice of the majority of
the States. The essential difference of accrual accounting is that, unlike
cash accounting, it records when the actual economic transaction takes
place, independent of whether the related cash payment is made at the
time, and hence registers assets and liabilities.
As Grant Hehir of the Department of Finance indicated to the committee,
a major element in the Government's decision is 'to move away from the
current framework which is loosely based on programs to one which has
a more explicit focus on outputs and outcomes'.[13]
He went on to explain 'we currently appropriate on a mixed basis of various
different things. We tend to report on a program basis with respect to
the performance of agencies and we report financial information on an
accrual basis' but that with the move to accrual budgeting, reporting
would be more consistent. Budget documentation, PBS and annual reports
would all include the standard accrual-type reports such as operating
statements, balance sheets, cash flow statements and capital budgets.
The PBS would set out performance indicators, including the outputs and
outcomes which agencies wished to produce, while the annual reports would
report on what was achieved.[14]
Representatives from the Department of Defence were supportive of the
move to accrual budgeting, pointing out that in the 1997-98 PBS, they
spent 250 pages explaining a $400 million variation in a budget base of
$10.4 billion; that, as an example, the air force cash base reflected
in the PBS for 1997-98 was about $778 million but that the $11 billion
in assets was not reflected in the document at all.[15]
The Department of Finance emphasised that, with the output/outcome focus
of an accrual budget, there will be better financial information on the
costs involved in meeting objectives and hopefully, a resultant improvement
in decision-making.
The committee is fully supportive of the move to accrual budgeting, despite
the magnitude of the systems costs involved in the transfer (approximately
$50 million[16]) and the associated staff training
costs. There are, however, many issues to be clarified before draft accrual
budgeting PBS can be produced. The Government has committed itself to
a trial of accrual budgeting for selected agencies in 1998-99 with a full
accruals budget in 1999-2000. The most pressing issue for all agencies
is one of timing. It appears that the Government wishes to proceed with
option 3A as outlined in the COBRA scoping study[17],
namely outcome and output based accrual budgets and estimates with accrual
appropriation subject to agreed cash limits. But there remains doubt as
to which of the 28 steps to achieve this will be proceeded with. Agencies
need this information as a matter of urgency to set up the requisite processes
in good time to collect the necessary information.
Other issues which have been raised with the committee and which to date
remain unanswered include:
- the extent to which longer term trend analysis will be exposed in
the PBS;
- the extent of the additional estimates process;
- depreciation rules for discretionary and non-discretionary assets;
- comparability of treatment of assets across portfolios; and
- clarification of input from the Appropriation Bills, annotated and
special appropriations
A major stumbling block in the path of program budgeting has always been
the cumbersome linkage of the Appropriation Bills to the program framework.
It seems to the committee that if accrual budgeting is to succeed, it
must be on the basis of accrual appropriations. Accrual appropriations,
however, could also be fairly cumbersome if the vital distinction between
matters which the Senate cannot amend (appropriations for the 'ordinary
annual services of the government' as outlined in section 53 of the Constitution
and encompassed in the present Appropriation Bills Nos. 1 and 3) and matters
about which it can request amendments (capital works, items of plant and
equipment, grants to the States, and new policies, as encompassed in Appropriation
Bills Nos. 2 and 4) is maintained as it must be. The committee notes that
what is encompassed in the latter bills has become increasingly blurred
in recent years over items such as computing equipment and welcomes the
opportunity offered by the move to accrual budgeting to reestablish clear
distinctions and precise and clearly understood capital thresholds.
DoF has not as yet presented the committee with a model of the proposed
PBS under accrual budgeting. The committee has, therefore, sampled the
budget estimates in accrual form of the State and Territory governments
which have moved to accrual budgeting (see Appendix B for an example
from the ACT). On that basis, with allowances for the portfolio structure
which the committee expects to see retained, it surmises that the PBS
will take roughly the following shape:
- an overview of the portfolio - its component parts and any changes
thereto, and their contribution to the objectives of the portfolio;
- budgeted statements (in the same format as financial statements, for
easy reconciliation with the audited financial statements at a later
stage) for each agency of the portfolio, including an operating statement,
a statement of assets and liabilities, a statement of cash flows and
a capital budget statement where applicable;
- a narrative explanation of the budgeted statements, concentrating
on the variations (this should assist senators to follow movements in
employee and administrative expenses); and
- a description of each agency's role, intended outputs, new budget
measures and the outcomes they are intended to achieve. For each output
class, a brief description, objectives and an operating statement showing
revenue, expenses and an operating result for the current year, the
budget year and a percentage variation, with a narrative explanation
for major variations. Performance information for the output in tabular
form, covering quantifiable targets, quality targets, and measures of
cost and timeliness where applicable for the current year and the budget
year, with an explanation for dramatic variations.
The important features which the committee wishes to see emerge from
accrual budgeting PBS are comparable agency performance information over
time, and comparable inter-agency performance information. This means
that very careful thought needs to be given to the nature and size of
the output classes and the measures of performance.
The committee expects that, following the initial accrual budgeting year
when the PBS will in all probability not contain comparable performance
information from the previous year, senators will work their way through
the PBS in the order information is presented, picking up on obvious discrepancies
or outputs of interest to them and possibly using a generic questioning
period at the commencement of each agency's hearing to explore issues
of a general nature.
From the experience of estimates committees in other jurisdictions, and
particularly from New Zealand which has had considerably longer exposure
to accrual budgeting than any Australian State or Territory, the committee
cautions against unrealistic expectations of the improvements accrual
budgeting may bring. Allen Schick, in his recent review of the New Zealand
reforms, noted amongst other things the following:
- almost 500 output classes were described, resulting in difficulties
in developing performance indicators and describing them succinctly
without overloading the estimates;
- a 'truly extraordinary' disproportion between the largest and smallest
output classes, despite materiality tests;
- several changes to the format of the estimates; and
- complications in the allocation of overheads and other indirect costs
amongst the various output classes.
He particularly commented on the number of estimates supplementary questions
on functions and services to be introduced or curtailed during the year
and on input information on matters such as travel, consultancies, personnel
expenses, which to him indicated that despite the reforms, Parliament
had not lost interest in that type of information.[18]
For the reasons advanced earlier in this report, the committee predicts
that the response of the Senate will be similar. This is not a criticism
of accrual budgeting, merely a recognition of senators' perfectly proper
interests in other aspects of accountability.
In his submission to the committee Mr Evans, Secretary to the Treasury,
stressed:
The potential impact of this change [to accrual budgeting] should not
be underestimated and I think it important, given the lessons we have
learnt with the current format of the PBS, that the Department of Finance
ensure that sufficient consultation and advice takes place at an early
stage to ensure that there is consistency of interpretation of accounting
policies and hence the documentation ultimately presented to the Parliament.[19]
The committee agrees. The level of concern expressed to it in submissions
and evidence regarding the tight timeframes under which the PBS are produced,
and the evidence of the errors in the current documentation, lead the
committee to encourage DoF to produce its draft guidelines, to conduct
its consultations and workshops promptly, and to finalise and promulgate
its final guidelines so as to provide portfolios with the maximum time
possible to complete the PBS.
The committee notes but does not at this stage support the idea of dividing
the PBS into core documentation to be provided for urgent tabling after
the budget and a supplementary document to be produced at a later stage.
The committee further notes the concern expressed by Cleaver Elliott
of the Department of the Senate, that 'if we are constantly revising the
documentation, we do make it difficult for senators to follow'.[20] With this in mind, the committee exhorts all
parties to do their utmost to get the structure of the PBS under accrual
budgeting as correct as possible from the outset. Some degree of refinement
is inevitable but wholesale change for the sake of it is to be avoided
at all cost.
Conclusions and recommendations
The committee's general conclusions about the format and the content
of the PBS are that the documents should be relatively concise; they should
adhere broadly to a recommended (not mandated) standardised format which
nevertheless allows reasonable scope for individual presentational needs;
they should refer to, but not repeat, information in ancillary documentation;
and they should provide concise explanations of material variations. The
Department of Finance should, by way of formal workshops or a telephone
hotline, stand ready to explain budgeting conventions to interested senators;
portfolios should routinely offer pre-hearing briefings on factual matters
related to their PBS.
In the short term, the committee has decided against making any recommendations
for change to the PBS in the final year prior to accrual budgeting. Following
the public hearing held by the committee in the context of this inquiry,
the Department of Finance issued draft guidelines for the 1998-99 PBS
which move some way to addressing some ongoing problems. They recommend,
for example, the inclusion of cross-portfolio information; they reflect
the changes to nomenclature recommended to the committee by the Department
of Primary Industries and Energy; they simplify and reduce the number
of tables; they allow for the aggregation of minor variations to outlays;
and they highlight new budget measures. The 1997-98 change which permitted
a considerable degree of presentational flexibility in the PBS was warmly
welcomed by portfolios and the committee and went some way to addressing
some of the problems encountered in the past. Further change for one year
only and at a time when massive change can be expected for budget 1999-2000
with the advent of full accrual budgeting seems unwarranted.
The committee hopes that the above comments may serve as some general
guidance to the DoF in its development of accrual budget documentation.
In the absence of draft accrual PBS, the committee is unable to comment
further at this stage. It wishes to retain its rights of input to the
process, however, and therefore makes the following recommendations.
The committee recommends that the Department of Finance circulate
its proposed format for the PBS under accrual budgeting, when it is available,
to the committee for comment so that the committee, and through it the
Senate, can have input to the final form of the documentation. The committee
further recommends that the Department of Finance circulate to
the committee the comments of departments and agencies on the proposed
format for the PBS, so that the committee can be aware of the attitude
of those departments and agencies directly.
The committee will consider from the parliamentary perspective the outcomes
of the trial accrual budget, from July to September 1998, of self-nominating
agencies. If warranted, it may consider tabling a second report on the
format of the PBS at that time. It proposes to report on the format of
the PBS following the first round of accrual budgeting estimates in mid-1999.
And, as detailed in Chapter 3, the committee recommends that all
legislation committees in their report on the examination of the estimates
be required to comment on the format and content of the PBS.
Senator Brian Gibson
Chairman
[Return to Table of Contents]
Footnotes:
[1] Mr Cleaver Elliott, Senate
Finance and Public Administration Legislation Committee, Hansard,
20 June 1997, p. F&PA 10.
[2] ibid., p. F&PA 11.
[3] Treasury, Submission,[p.
1].
[4] Mr Pat Watson, Senate Finance
and Public Administration Legislation Committee, Hansard, 20 June
1997, p. F&PA 20.
[5] Senator Mark Bishop, Senate
Finance and Public Administration Legislation Committee, Hansard,
20 June 1997, p. F&PA 20.
[6] See, for example, Ms Helen
Evans, Senate Finance and Public Administration Legislation Committee,
Hansard, 20 June 1997, p. F&PA 22.
[7] Senator Mark Bishop, Senate
Finance and Public Administration Legislation Committee, Hansard,
20 June 1997, p. F&PA 23.
[8] Senator Sue Knowles, Senate
Finance and Public Administration Legislation Committee Hansard,
20 June 1997, p. 6.
[9] See, for example, Mr Marsden,
Senate Finance and Public Administration Legislation Committee, Hansard,
20 June 1997, p. F&PA 35.
[10] They were Community Affairs,
Foreign Affairs Defence and Trade, Rural and Regional Affairs and Transport,
and this committee.
[11] Mr Len Marsden, Senate Finance
and Public Administration Legislation Committee, Hansard, 20 June
1997, p. F&PA 35.
[12] The Hon John Fahey, MP,
Government adopts accrual financial management framework, 7 May
1997.
[13] Senate Finance and Public
Administration Legislation Committee, Hansard, 20 June 1997, 20
June 1997,
p. F&PA 40.
[14] ibid., p. F&PA 41-2.
[15] ibid., p. F&PA
43.
[16] ibid., p. F&PA 45.
[17] Commonwealth Budgeting,
Reporting and Accounting (COBRA) Scoping Study, Canberra, June 1997
ed., pp. 49-50.
[18] Allen Schick, The Spirit
of Reform: Managing the New Zealand State Sector in a Time of Change,
NZ Treasury, 1996, p. 78.
[19] Mr Ted Evans, Submission,
[p. 2].
[20] Senate Finance and Public
Administration Legislation Committee, Hansard, 20 June 1997, p.
38.
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