CHAPTER 2 – ACCRUAL BUDGETING AND THE ROLE OF THE PORTFOLIO BUDGET
STATEMENTS
Introduction
The first estimates committees were set up in June 1970 in a `first systematic
attempt to supplement the consideration of any legislation in the plenary
chamber by preliminary inquiry by small committees of parliamentarians'.
[1] To assist senators in their understanding
of the appropriation bills, some ministers adopted the policy of distributing
`explanatory notes' to senators considering the appropriations. The practice
caught on quickly and the explanatory documents evolved, through a process
outlined in the committee's previous reports on this topic, [2]
into today's Portfolio Budget Statements (PBS).
Most PBS outline their purpose in the user guide at the beginning of
the document. The following example, drawn from the 1999-2000 PBS, is
fairly typical:
The purpose of the Portfolio Budget Statements is to inform Senators
and Members of the proposed allocation of resources to Government outcomes
by agencies within the portfolio. A particular emphasis is facilitating
Senators' and Members' understanding of the appropriations proposed
in Appropriation Bills (1 and 2) 1999-2000. [3]
Some portfolios go further, specifying, for example, that part of the
purpose of the PBS is to `set out the links between relevant outcomes
sought by the Government and the outputs to be provided by the Portfolio
agencies'. [4]
DOFA, the custodian of the PBS guidelines, states in its own PBS, `The
major role of the PBS is to explain requests for funds through the Budget
Appropriation Bills', then goes on to assert:
The PBS provides sufficient information, explanation and justification
to enable Parliament to understand the purpose of each item in the Bill(s)
and the accrual budgets of the Portfolio. [5]
This ambitious 1999-2000 version is in contrast to its more modestly
worded 1998-99 predecessor, whose purpose was `to inform Senators and
Members of the proposed allocation of resources ... an integral part of
this purpose is the facilitation of Senators' and Members' understanding
of the proposed appropriations...'. [6]
In essence, the PBS take the place of the explanatory memoranda that
accompany and support other pieces of legislation in their passage through
the Parliament. Whatever other functions the PBS may serve, Parliament
is the intended audience for the PBS. The Appropriation Bills are, however,
rather different pieces of legislation to the normal run of proposed legislation.
Without their passage, government would come to a standstill and hence
their preliminary examination in the estimates process and their debate
in the chambers is often accompanied by more party political posturing
than genuine consideration of the expenditure proposed therein. The information
required for an impartial understanding of the Appropriation Bills and
that required for an adversarial examination of them may not be identical.
Nevertheless, as a senior officer of DOFA outlined at the committee's
public hearing, the PBS must endeavour to meet Parliament's diverse needs:
The portfolio budget statement is one of the central budget documents
that enables effective public scrutiny of Commonwealth expenditures.
As such, it needs to be in a format that is tailored to the information
needs of senators and members to ensure that it is able to be used as
a document that can enhance accountability and ensure disclosure. [7]
The enhancement of accountability and the ensuring of disclosure are
indeed worthy goals. Whether they can be achieved by documents which report
at an often fairly aggregated level on outputs and outcomes depends to
a large extent on how one choses to define `accountability' and `disclosure'.
In the committee's view the PBS, being ministerially endorsed documents,
have always tended to highlight the good news stories and to draw a discreet
veil over the bad and, as such, have always been criticised by those seeking
to question less than optimum performances.
Experience of accrual budgeting in other jurisdictions
At an international level many jurisdictions have moved or are moving
towards accrual accounting. Only New Zealand and Iceland have a total
accrual based budgeting, management and reporting (including whole of
government reporting) framework. The United Kingdom will implement full
accrual budgeting in the year 2001-2002. Most Australian state and territory
jurisdictions have either implemented or are in the process of implementing
accrual based reporting.
New Zealand's experience has shown an increased focus on longer-term
issues. Highways and other infrastructure are included as assets in the
balance sheet, drawing attention to their management and maintenance.
Iceland has drawn attention to the implications of civil service pension
obligations by including them as liabilities in their balance sheet. [8]
The committee sought evidence from representatives of the Australian
Capital Territory (ACT) and Victorian treasuries on their respective experiences
of four and two accrual budgets. Salient points from their evidence included
the following:
- the ACT has moved from a comprehensive outcomes statement to a more
summary, strategic outcomes statement, reflecting the difficulty of
actually being able to measure achievement towards outcomes; [9]
- the level of detail initially budgeted for in the ACT was too low;
[10]
- comparability of outputs year on year took four years to achieve in
the ACT, while in Victoria outputs were adjusted between the two budgets
but not so significantly as to reduce the effectiveness of the overall
output framework;
- comparability between budgeted figures and what was reported on in
the financial statements at the end of the year was a concern in the
ACT, as accounting definitions and the framework were refined;
- detailed reconciliations were introduced in the ACT to show the policy
impacts on the financial statements as a result of government decision
making processes as opposed to impacts on the financial statements relating
to accounting changes, program changes or transfers between departments;
- Victoria had not, at the time of the hearing, seen the closure of
the accountability loop via performance reporting in 1989-99 annual
reports, but concern was voiced that as the Victorian budget was based
on a portfolio aggregation of entities, some manipulation would be required
to ensure that what was reported on in annual reports was the same as
what was opened up in the budget papers;
- linkages needed to be strengthened between strategic plans, corporate
plans, the budget, the performance monitoring regime and reporting in
annual reports; and
- benchmarking was favoured but impeded by a lack of benchmark data
and partners; in the ACT where the benchmarked cost of the TAFE system
was shown to be higher than in other jurisdictions, coupled with a low
satisfaction rate, it had led to significant budgetary cuts.
The first federal accrual budgeting PBS
With the experience of other Australian and overseas jurisdictions in
mind, the committee turns to an examination of the federal 1999-2000 PBS.
The 1999-2000 budget was the first federal accruals-based budget using
an outcomes/outputs reporting framework. The change had been recommended
by both the National Commission of Audit in 1996 [11]
and the Joint Committee of Public Accounts, [12]
the former observing:
to better meet its accountability obligations to the electorate and
its constitutional responsibilities for the appropriation of Commonwealth
moneys – ultimately funded by taxpayers – the Parliament is
seeking greater transparency in the Government's financial activities
at the agency, aggregate budget and whole of government levels. This
includes greater consistency between the accounting bases used for presenting
government budgets, for managing resources under their control, and
for financial reporting on performance against budgeted outcomes ...
taxpayers and other users require a financial reporting and accountability
framework which better discloses the revenues, expenses, assets, liabilities
and contingent liabilities of the Commonwealth Government.
Transparency of the Government's overall financial position would also
be improved through the regular and timely publication of consolidated
whole of government financial statements prepared on an accrual basis.
This committee, whose predecessor had advocated a change to accrual accounting
as early as 1982, and which welcomed the move to audited financial statements
prepared on an accruals basis in 1994-95, supported the accrual budgeting
change as the next logical step. Accrual budgeting provides the detail
of the full cost of providing services within a given year, including
depreciation of assets and superannuation liabilities. Full disclosure
of the financial statements for Commonwealth agencies is for the first
time provided. Also the alignment of Appropriation Bills with the PBS
and the annual reports on an outcomes basis has the capacity to provide
the promised `clear read' from the performance promised to the performance
reported on.
The dual change from cash accounting and from a programs-based structure,
simultaneously, was neither simple to achieve nor easy to represent in
the PBS. The change was compounded for agencies with the contemporaneous
challenges of devolved banking and Y2K compliance activities.
The committee recognises that some of the difficulties experienced by
senators with the 1999-2000 PBS were of a transitional nature but others
were inherent in the changed arrangements. Agency-wide expenses across
several outcomes are no longer separately identifiable in the PBS. Nor
is it possible to identify separately the activities of particular offices
or organisations such as the Office of the Status of Women or the Australian
Geological Survey Organisation, which do not have separate appropriations
and which are subsumed in the larger framework. And totals only are shown
for administered expenses, which in the case of some portfolios account
for the major part of their activities and spending.
But this is only part of the problem.
The PBS and the estimates process
If one accepts that the purpose of the PBS is to explain the Appropriation
Bills, then the move to appropriate moneys on the basis of outcomes does
facilitate the `clear read' advanced by DOFA as one of the merits of the
change. There are other purposes claimed for the PBS: to provide portfolio-specific
detail not appropriate for the main budget papers; to help the minister
understand the portfolio's budget and expenditure plans; and to assist
the agency with its internal planning. One agency, the Department of Communications,
Information Technology and the Arts, believes that the purpose of the
PBS has been `diluted' with the inclusion of budget measures, appropriation
variations and performance information. [13]
Many would agree with Peter O'Keeffe of the Department of the Senate
who suggested to the committee that the PBS had become a hybrid document
and,
that hybrid nature has constantly and consistently been the source
of disputation and dissatisfaction for senators, particularly when accountancy
methodologies and formats change ... that hybrid character in itself
is a function ... of the hybrid nature of estimates hearing processes
and procedures. The theory is that the estimates committees examine
the government's proposed estimates for a particular financial year.
But by tradition and practice, the questioning has always gone well
beyond that ... [14]
From the evidence of estimates hearings, senators have their own views
as to what constitutes the information they require to satisfy themselves
about the expenditure proposed in the Appropriation Bills and that information
is frequently not to be found in the PBS, either in their present or previous
formats. This is not to say that the PBS are necessarily inadequate. At
a macro level, they are most useful documents and may serve a host of
parliamentary information purposes largely unrelated to the passage of
the Appropriation Bills. Nor is it a reflection on the type of information
sought by senators in estimates hearings. The rules governing the estimates
hearings allow for questioning so long as it relates to items of `proposed
expenditure', [15] but as Mr O'Keeffe suggested,
that is generally liberally defined and questioning has traditionally
ranged far and wide.
The reality is that senators use estimates hearings, and the PBS, at
least in part for purposes other than to examine what has been achieved
from the expenditure of taxpayers' money and at what cost. With documents
which focus an attention on outcomes, the balance may change. But the
committee recalls that the same claims were made of the move to program
budgeting in the mid-1980s, with little appreciable change in the tenor
of estimates questioning. In defence of the estimates process, however,
it is an unrivalled opportunity to question government accountability
and, in the view of this committee, that can and will be explored through
input and process questioning of expenditure on contracts and consultancies,
ministerial travel, political appointments to high office, et cetera.
As Mr O'Keeffe stated,
These are not the outcome/output issues which DOFA wants senators to
focus on, but questions of this kind are asked in every round of estimates.
In every single round since 1970 they have been asked – regardless
of the format of the PBS. Why is that? The reason, I think, is very
simple. These are the matters which represent any federal government's
greatest exposure to corruption and abuse of power or office. [16]
So the end result is that, in the new PBS, we have detailed, informative
documents relating to the Appropriation Bills which are criticised because
they do not meet purposes which are incidental to their main purpose.
In the following chapters, the committee will consider three major changes
in the 1999-2000 PBS, namely the outcomes/outputs reporting framework,
the financial statements and tables, and the performance indicators, and
will examine their reception by senators in estimates hearings. In Chapter
6, the committee will present its conclusions and recommendations.
Footnotes
[1] Reid GS and Forrest M, Australia's Commonwealth
Parliament 1901-1988, Melbourne University Press, 1989, p. 360.
[2] Senate Finance and Public Administration
Committee, Estimates Committee Documentation and Procedures, 1991;
Senate Finance and Public Administration Legislation Committee, The
format of the Portfolio Budget Statements, 1997.
[3] Foreign Affairs and Trade portfolio, Portfolio
Budget Statements 1999-2000, p. 3.
[4] Transport and Regional Services portfolio,
Portfolio Budget Statements 1999-2000, p. 3.
[5] Finance and Administration portfolio, Portfolio
Budget Statements 1999-2000, p. 6.
[6] Finance and Administration portfolio, Portfolio
Budget Statements 1998-99, p. 3.
[7] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 2.
[8] Parliamentary Library Information and Research
Service, Budget features 1999-2000, p. 3.
[9] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 4.
[10] ibid., p. 11.
[11] National Commission of Audit, Report
to the Commonwealth Government, AGPS, Canberra, 1996, p. 232.
[12] Joint Committee of Public Accounts, Report
338 - Accrual Accounting: a Cultural Change, AGPS, Canberra, 1995;
Report 341 - Financial Reporting for the Commonwealth, AGPS, Canberra,
1995.
[13] DOCITA, in Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p.135.
[14] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, pp. 35-36.
[15] The Senate, Standing Orders and Other
Orders of the Senate, February 1999, SO 26(5).
[16] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 36.
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