Official Report: Minutes of Evidence

The Chairperson (Mr McKay): Do you want to make an opening statement on this matter, Joanne?

Ms Joanne McBurney (Department of Finance and Personnel): Yes, if you want me to. Probably none of what I will say in the opening statement will come as a surprise to anybody, but I will go over it again anyway.

I think that the most important message from the Minister's statement on Monday is that the pressures facing the Executive in 2015-16 are not going to be limited to 2015-16. With the Office of Budget Responsibility (OBR) forecasting that, at a UK level, the resource departmental expenditure limit (DEL) will decrease by a further 13% in real terms by 2018-19, the Executive will continue to face downward pressures on their resource DEL, and it is important that the decisions that we make now will enable us to live within those constrained budgets going forward.

The total resource DEL is £10·2 billion in the overall Budget position for 2015-16. Of that, some £550 million relates to ring-fenced resource DEL that is used to fund non-cash costs such as depreciation and impairments. That leaves £9·7 billion of non-ring-fenced resource DEL to be used to fund ongoing public services. That is a 1·6% real-terms reduction on the 2014-15 position.

The total capital DEL budget is £1·1 billion. That is up £41·2 million since 2014-15, which, in real terms, is a 2·2% increase. However, that includes an increasing level of financial transactions capital from £128 million, which may be used only for loans to or equity investment in private sector entities.

Where key Executive decisions taken in the draft Budget are concerned, £100 million of capital DEL will be held centrally to repay the 2014-15 reserve claim, and Treasury has been approached to ask for the flexibility to pay that from capital as opposed to resource DEL. Treasury has also been asked to approve the use of £100 million in reinvestment and reform initiative (RRI) borrowing in 2015-16 to capitalise the costs of a voluntary exit scheme. Funding is being held centrally in anticipation of that.

Some £133·2 million in resource DEL is being held centrally to help to alleviate departmental pressures arising from the revaluation of public sector pension schemes, and £70 million in resource DEL has been set aside to fund a package of measures designed to mitigate the impact of welfare reform changes.

A feasibility study is being commissioned to inform the creation of a Northern Ireland investment fund. That will inform the scope, scale, design and investment strategy of the fund. Some £12·5 million of financial transactions capital (FTC) has been set aside to provide an initial balance, but that will not be the limit of the funding going into that fund. A £30 million change fund has been established to fund cross-cutting reform initiatives and preventative measures that are expected to generate savings in the longer term. The regional rate will be increased only by the rate of inflation, and there is an anticipated £50 million of capital receipts to be generated by the asset management unit.

On central funds, £14 million resource DEL and £15 million capital DEL for the Executive's Delivering Social Change agenda are being provided under the social investment fund and childcare strategy. EU match funding is being maintained at previous levels of £10·7 million resource DEL and £8 million capital DEL.

On departmental ring-fencing, the DOJ ring fence has been removed. Protection for the Department of Health was limited this time to front line health and social care elements, and the reductions that applied to other Departments were applied to those elements of the Health Department that were not considered to be front line health or social care. No reductions have been applied to the Northern Ireland Assembly Commission, the Northern Ireland Audit Office and the Assembly Ombudsman and Commissioner for Complaints, but they are expected to manage their pressures internally and to strive to achieve similar levels of savings, which they could then surrender.

Departmental resource DEL budgets were developed using an incremental approach, so, basically, there was a roll forward of the 2014-15 opening position, which was then adjusted to remove time-bound Executive allocations and EU funding that is yet to be allocated. The level of reductions was then agreed, and that will provide funding for central strategic pressures, along with an amount to be allocated in support of key public services. The reductions totalled £872 million, or 15·1%, of departmental baselines. Of that, £659 million was allocated back to Departments, and, of that, £534·5 million was allocated back for specific pressures. Those allocations were detailed in the Minister's statement, so I will not list them all here. The remaining £124·5 million that was allocated back to Departments was allocated on a pro rata basis to the Departments that were facing reductions to help to alleviate some of the pressure.

A different approach was adopted for capital DEL budgets. That was a zero-based approach and was based on an assessment of contractual and Executive commitments alongside a consideration of PFG targets and departmental priorities. As Ministers will have their own priorities, the capital position, while founded on specific projects and programmes, is provided as a capital envelope for Ministers to allocate as they see fit.

The public consultation period is to end on 29 December, and we are hoping that an Executive paper will be tabled on 8 January for consideration of the final Budget position.

I am happy to take any questions.

The Chairperson (Mr McKay): The Executive have agreed to hold £133 million centrally to alleviate pressures arising from pension scheme revaluations due to significant additional employer contribution costs. Was that unexpected?

Ms McBurney: It was not entirely unexpected. It is part of the ongoing pension reforms and revaluation that will happen at a UK-wide level. Work is being done on this, and the pensions side of DFP is in very close consultation with Treasury colleagues and the Government Actuary's Department to try to manage that cost downwards as much as possible. It will have the biggest impact on the health and education sectors, and that is why I think that it is important that we hold some funding aside. We are hoping that we will have final figures around the time of the final Budget to be able to factor that in and to allocate the funding to Departments.

The Chairperson (Mr McKay): Will the £133 million be enough to cover this, given that the revaluations have not concluded?

Ms McBurney: The figures have varied over the preceding few months and weeks. At one point, I think that it was £223 million, and the latest information that I have is that £133 million will be enough to cover it.

The Chairperson (Mr McKay): Will this be recurrent?

Ms McBurney: It will be recurrent, because the employer's contributions will increase going forward.

The Chairperson (Mr McKay): Can you give us some more detail on where this all came from?

Ms McBurney: Pensions is not my area of expertise, but, although each pension fund is paid out of annually managed expenditure (AME), there is a notional fund in the same way that a private entity has a fund to cover its pension costs, which it invests. Jeff will correct me if I get this badly wrong. A notional fund is set aside that covers the pension costs arising for your current employees. Every so often, that is revalued to see whether it is sufficient to cover the ongoing pension liabilities that you have built up from your current employees. That valuation has determined that the fund is not big enough, and the way that that is addressed, which is the same as it is in the private sector, is that you increase the employer's contributions to top up that fund to the required level. So, this is purely a result of revaluing that fund and saying that the funding that has been set aside is not enough and that, therefore, we need to increase our employer's contributions.

The Chairperson (Mr McKay): Paragraph 5.2 of the draft Budget states:

Has the Department received any assurance about when that information will be published and available to Committees so that they can undertake the necessary scrutiny, given the time pressures?

Ms McBurney: We have not made a specific requirement on Departments. It is just our hope that Ministers will do that and that Departments will want to do that and engage. We do not have a specific timescale, but I imagine that each Department's scrutiny Committee will want to address that issue with it.

The Chairperson (Mr McKay): Given the potential for delays in engagement between Departments and their scrutiny Committees, what absolute deadline is being suggested for this Committee's coordinated report?

Ms McBurney: As I mentioned in my overview, the plan is to get a paper to the Executive for their meeting on 8 January. That would mean that we would prefer to have this Committee's report as far in advance of that as possible, because we want to give it the proper consideration that it needs. Ideally, it would be at around the time that the public consultation ends, so, around 29 December. However, we will try to be as flexible as possible on that and to work with you, but, obviously, we need to get it in advance of that Executive meeting.

The Chairperson (Mr McKay): Pardon my ignorance, but why is there that pressure? We are looking at the previous Budget paper for 2011-15, and that process was almost a month behind where we are now. Why is there the additional pressure here?

Ms McBurney: I think that there are a number of factors, the first being that the timescales in the previous Budget process were not ideal. It meant that Departments did not have a final Budget agreed until March, which is very late considering that you are planning for the financial year starting on 1 April. In addition, this time around, the financial position is much more constrained. Last time, the resource DEL position was very benign; I think that there was a 0·1% increase. This time, Departments are facing 10% or 11% reductions. It will take more time for Departments to have certainty over what their Budget is to allow them to plan. So, to allow them to do that effectively, we really need to have a final Budget in place in January, which is why it is being constrained to an eight-week consultation.

Mr D Bradley: Good morning. To go back to the pension reform and revaluation, is that £133 million an estimated figure?

Ms McBurney: At this moment, it is an estimate, but it is based on the work that our pensions department is doing.

Mr D Bradley: No pun intended, but is that a conservative or a liberal estimate?

Ms McBurney: I think that it is a realistic estimate, based on all the information that we have to date.

Mr Girvan: There are no parties involved in it at all.

Ms McBurney: I do not think that it gives much scope either way. I am hopeful at the moment that there will not be another pressure emerging out of that, but, at the same time, I do not think that it is overambitious, and I do not think that there will be a lot of funding to spare. Of course, I may, hopefully, be proved wrong in one way if not the other.

Mr D Bradley: There might not be much to spare, but, hopefully, it is not a conservative estimate and we will not have to pay more.

Ms McBurney: No, hopefully not. I think that, based on the recent information that we received from our pensions side of the house, it should be enough to cover the pressures.

Mr D Bradley: The Minister says that he is going to use capital receipts to repay the £100 million loan. Has permission been secured from the Treasury to do that?

Ms McBurney: Our Minister has been engaging with the Chief Secretary to the Treasury and has written to him formally. We have not yet received a response, but we are hopeful that we will. Obviously, until we have something definitive —

Mr D Bradley: So, there is a question mark over that at the moment?

Ms McBurney: I would not go so far as to say that there is a question mark. He has not been engaging, and I do not think that we would have built that in if there was an extreme level of uncertainty. However, of course, until you get something in black and white, you cannot say definitively that it has been approved.

Mr D Bradley: I will go back to that word "conservative". The Minister seems to think that £100 million in capital receipts is a conservative estimate. What is the maximum that we could hope to generate through capital receipts?

Ms McBurney: I am afraid that I do not have a figure with me for what we have generated in previous years. The £100 million is already built into departmental baselines. There is £108·8 million already in departmental baselines, so that level of receipts is definite — those will be generated. On top of that, we have anticipated £50 million from the asset management unit. Obviously, those are slightly less certain, but we are hopeful that that is also a reasonably conservative estimate, and it should be.

Mr D Bradley: So, that is a total of around —

Ms McBurney: It is just over £160 million in total.

Mr D Bradley: It is £150 million, plus —

Ms McBurney: Plus £109 million that is already there. The £109 million is pretty certain; that is in departmental baselines and has been identified.

Mr D Bradley: You are saying that there is a further £50 million.

Ms McBurney: A further £50 million is being anticipated through the work of the asset management unit. We have not built in any receipts based on the work that the asset management unit has been doing with Departments into departmental baselines. We have set £50 million aside in anticipation that they will generate that amount.

Mr McQuillan: Can I just ask about the small business rate relief? In the draft Budget there is £20 million set aside for that, but there was to be a review of it. Where is that now? Does this mean that we are continuing with it?

Mr Jeff McGuinness (Department of Finance and Personnel): It means that we are continuing on with it for a further year.

Mr McQuillan: Just one year.

Mr McGuinness: Just one year, and then decisions beyond 2015-16 will be taken at a later stage.

Mr McQuillan: And where is the review at?

Mr McGuinness: I am not aware of that.

Mr McQuillan: Have any schemes been brought forward for the change scheme? What are the criteria for bringing a scheme forward for that?

Ms McBurney: There have been no schemes brought forward yet. We will commission returns from Departments on that. We are looking at things that will be cross-cutting, that will be preventative spending and that will generate savings going forward, so it will not be called invest to save, but it will be invest-to-save-type projects that we will be looking for. We hope to have those commissioned and exercised with the Departments and then factor those in to the final Budget with details on specific schemes.

Mr McQuillan: Is DFP thinking of bringing anything forward to that?

Ms McBurney: Not that I am aware of, but that does not mean that the other side of DFP is not considering that. I am sure it is. There is ongoing work in all Departments on ways to generate savings.

Mr Girvan: I go back to the £133 million set aside in relation to pensions. I just want to get it clear in my own head. Contributions by employers could increase, which comes out of our revenue again.

Ms McBurney: No, that £133 million is to cover those increased employer contributions.

Mr Girvan: OK; that is out of our revenue, then.

Ms McBurney: It is, yes.

Mr Girvan: Our total pension block is paid from an AME fund, I take it, and, as a consequence of the shortfall within that AME fund — which does not affect our block grant — we are then going to be knocking money out of our block grant to actually subsidise the pension scheme. Is there any mechanism in place to ensure that we do not have that hit? I appreciate that the size of the pension pot is at the point where it is not meeting the requirements of those who are drawing down the pension. That is not our fault, but we are going to be made to pay for it.

Ms McBurney: In case I have someone else in DFP shouting at me for getting it badly wrong, I will say first that pensions are not my area of expertise. What happens is that, just as within a private sector organisation you would have to put the money into an actual fund —

Mr Girvan: That is fine.

Ms McBurney: Yes, but to ensure that Departments account for basically all of the resources that they use, and that includes the cost of having employees, we build up a notional fund. An element of our salary cost goes to fund pensions in the future, and it is that. What they are basically saying is that the employer costs that we have been paying up to now have not been great enough to fund the pensions liabilities that we are building up. So although the actual pensions themselves are paid out of AME, what they are saying is that we as an Executive — and every other Department in the UK — should be meeting the ongoing costs of building up pensions for our employees. They are saying that that cost has been understated. We have not been contributing enough over the past five or 10 years or whatever, and it is that shortfall that we now have to address. Had we had an increased level of employer contributions over the past five years, that fund would not have been valued with that deficit. It would have been levelled out over that.

Mr Girvan: I appreciate that, if it was in the private sector, the pension pot would depend on the growth and the investment that that pot was put into. As a consequence, we are at the mercy of whatever Treasury is doing — putting it on red or putting it on black, hoping that it comes up. I just wonder if there is an issue there that we should look at, because it is going to be a recurring cost. If not, it might well increase, going by the reliance on the public sector within the Northern Ireland economy. Are we paying proportionately percentage-wise? Is it done in proportion to the number of civil servants who contribute into that pension pot?

Ms McBurney: It is directly related to the employee. Our share is directly related to the cost of our employees' pensions, so it is Northern Ireland civil servants and public sector health workers. It is definitely based on that.

Mr Girvan: I was just wondering how that figure had worked from over £200 million down to £133 million and where that negotiation came in.

Ms McBurney: It is all through how the Government Actuary's Department values it and in what term we make up the shortfall. That is too technical for me.

Mr Girvan: Nobody seems to know how government actuaries ever work, because we can never seem to get the information out of them.

Ms McBurney: No comment.

Mr McCartney: What do you expect to see coming from the public consultation process? A lot of people sometimes think that a public consultation is to pretend that we are giving the public a say and, at the end, we still do the same thing that we set out to do. What would you like to see in the public consultation process to try to alter this process?

Ms McBurney: We want to know from the public where they want the resources to be directed to and what they see as the priorities. It is also important that, if they are saying, "Give more funding to health or education", they also say which areas they think should get less funding, because we have a constrained amount of money available and if we are giving to one, we will have to take off another. It would be very useful if they could do that.

Mr McCartney: In terms of the wider process, a lot of people will say that there is an overuse of professional consultancy services. If that becomes part of the public consultation process, are you able to say that to other Departments or is that a departmental choice?

Mr J McGuinness: When we get the responses from the consultation, we will compile them and put them under key headings, and we will then provide that to the Executive for their consideration as part of the final Budget. Last time round, a number of changes happened as a direct result of consultation, including additional funding for the arts, because there was a big consultation response in that area. The changes as a direct result of the consultation were published as part of the final Budget the last time round, and I expect the same to happen this time.

Mr McCartney: The Minister referred to this in October, and possibly more in the Budget. Is a special monitoring process going to be put in so that, when people get additional money, it is spent in the way that the Executive intend?

Mr J McGuinness: Certainly if the Executive allocate money for specific things, we will make sure that Departments spend it on those specific areas.

Mr McCartney: Has any other mechanism been put in to say that now money is so scarce, we need an extra observation that money is being spent in a particular way? What is in my head is that there is a lot of speculation at present about the college at Desertcreat. They have presented to the Justice Committee, which I am a member of. Massive mistakes were made and a lot of money has been lost to the public purse, and people will asking be what, if we take other projects forward, we will put in place to make sure that that is not repeated, particularly when £20 million — that might not be the amount — is being lost at a time when people are seeing front line services being attacked or undermined and £1 million could make a difference here and there. How do we guarantee that that will not be the case in the future?

Ms McBurney: I am not aware of any plans to put any additional layers of screening in at the moment. There are already very good controls in place that are obviously sometimes not working as well as they should, but stepping up the existing ways of monitoring it maybe needs to be considered. I am not aware of any plans at the moment.

Mr McCartney: Overall, when the consultation process is finished, will an equality impact assessment be carried out on the proposals?

Mr J McGuinness: We are doing a high-level screening document in line with the Equality Commission's guidance. We have been liaising with it closely on how we go about that, and that will be published on top of the draft Budget in a number of weeks' time when we get the information back from Departments. In addition, we expect Departments to adhere to their own equality schemes and publish equality impact assessments on detailed policies and proposals that they come up with.

Mr McCartney: So it will be a combination of both.

Mr J McGuinness: A combination of both, yes.

Mr Cree: Did the £872 million shortfall come as a surprise to the Department? When did you first become aware of the £872 million shortfall for the 2015-16 Budget?

Ms McBurney: We have been aware, and have been making Departments aware for some time, that considerable pressures are emerging in 2015-16 and that Departments will need to face considerable reductions. The £872 million was not a shortfall as such, because the vast majority of that was allocated back to Departments. What it did was it allowed the Executive to provide funding to priority areas. We have been warning Departments for some time that there are significant reductions.

Mr Cree: I do not recall us being advised prior to June of this big change coming down the track.

Ms McBurney: I am afraid that I am probably not best placed to comment on what was before June, but I think certainly —

Mr J McGuinness: Certainly, the Executive have crystallised a number of issues in recent months that would develop that £872 million. We would never have been in a position back in June to be able to tell you what the total extent of pressures would be at that stage. That has crystallised in the last number of months.

Mr Cree: It certainly comes as a surprise to us and, I think, to most other people.

The baseline that the Minister refers to has yet to be distributed. How big was that baseline for the start of the year?

Ms McBurney: In which way? The starting point of the Budget?

Mr Cree: Yes — which was the end of the current year.

Ms McBurney: To construct the baseline, we basically rolled the 2014-15 opening monitoring position into Departments, and we removed certain time-bound allocations, including things like the jobs and economy initiative and other things that were allocated for a specific purpose in a specific year. That formed the Department's starting point. It was then to that that the reductions were applied. At that point, further allocations —

Mr Cree: Are there any EU outstanding moneys or Barnett consequentials still pending?

Ms McBurney: All the Barnett consequentials we have at the moment have been factored into that position. Obviously the Chancellor has his autumn statement coming up at the beginning of December. Something may emerge from that, although I do not imagine that it would be anything large. That will be factored into the final Budget position. The EU match funding that we hold centrally at the moment will be allocated out for the final Budget, but that has still to be factored into departmental positions.

Mr Cree: So the figure at the beginning of December will be finite. That will be it, will it?

Ms McBurney: It will be, unless there are any changes in the next period.

Mr Cree: Quickly flying back to the pensions one, I know that you said that you are not too happy with being in that area, but because it is a revenue stream, was a minimum funding requirement ever established for the scheme, as there was in private sector schemes?

Ms McBurney: I am not sure when the last revaluation of the scheme occurred, but my understanding is that, when the revaluation of the scheme occurs on a periodic basis, that determines what the level of contributions will be over the incoming period.

Mr Cree: Is it possible to find out whether there was a minimum funding requirement?

Ms McBurney: Certainly.

Mr Cree: That would be helpful.

My last question is about the sale of assets. We have a new department being set up that will cost in the region of £50 million, from what I can read. What sort of asset sales have we had over the last year?

Ms McBurney: I am afraid that I do not have the figures with me. We can certainly get them. Asset sales generate on a year-on-year basis; there are capital receipts coming in. I can certainly get you figures over the past few years if you would like to see those.

Mr Cree: That would be a little bit of a bonus, wouldn't it?

Ms McBurney: Yes, anything additional that we can generate in terms of capital receipts will obviously be a bonus. As I said, we have factored in —

Mr Cree: It is not in here at the moment.

Ms McBurney: We have factored in £50 million for anticipated asset sales.

Mr Cree: But the costs of the new department —

Ms McBurney: Sorry, it is not a new department. The asset management unit exists.

Mr Cree: It is a new-look department.

Ms McBurney: It has existed since, I think, the time of the previous Budget. It has been working with Departments on an ongoing basis. It is part of the Strategic Investment Board.

Mr Cree: We had some people here recently talking about the new system operating, but I will not labour that point at this stage.

One last point: next year, 11·7% of the overall capital spend will come from FTC.

Ms McBurney: Yes.

Mr Cree: I am looking at the Minister's comments about the investment fund: he said that he "may" utilise moneys from that. Can we know definitively? I certainly need to know, without any more time being wasted on it, what other system or process we can put in to maximise this. At the moment, there is no scheme or proper process so that we can harness all the financial transactions capital. If the investment fund is not able to cope with all that — it seems to be a bit utopian; it may not happen — we need some other way of utilising the money that is coming outside the Barnett formula.

Ms McBurney: You are right. There is no overarching scheme, but every Department has been tasked with identifying ways in which to use that funding. The investment fund will, hopefully, be an overarching scheme. We will not know with any certainty, until the feasibility study on it is completed, what levels of funding it will require and how we will utilise it. Hopefully, that work will be completed over the coming months.

Mr Cree: We actually had money returned by DETI; did it not return some £5 million?

Ms McBurney: It did.

Mr Cree: So that shows that, obviously, it is not working yet.

Ms McBurney: Well, obviously, there have been delays in that scheme, or it was not working as it should have been. It is a new funding stream and, yes, there are teething issues with it. We need to get Departments on board to identify projects that are suitable for it.

Mr J McGuinness: We are hopeful that we can spend the funding that is available and has still not been allocated in 2014-15. There are a number of schemes out there that may be able to utilise that. We are in negotiation with Departments on that. So we are hopeful that we will not lose money to Treasury this year.

Mr Cree: Yes, but we are really up against it now. We have £35 million unallocated.

Ms McBurney: Yes.

The Chairperson (Mr McKay): I want to ask about the workforce restructuring plan, which will:

Will that include reducing the contracted hours of public servants, and even pay cuts, as alternatives to redundancies?

Ms McBurney: Corporate HR is working through that scheme with Departments at the moment. I do not have any details of that, but I imagine that every possibility will be considered.

The Chairperson (Mr McKay): And are there any indications of what options they are looking at? You must have a broad idea.

Ms McBurney: My broad idea is that are working on a paper at the minute, to go to the Executive within the next two weeks, which will detail what they are doing on that.

The Chairperson (Mr McKay): For the Department of Finance and Personnel itself, obviously there is a 10·9% reduction. What options are being looked at within the Department specifically?

Ms McBurney: I am going to refer to my lines because, obviously, this is not our area as such. It is going to be challenging for the Department. What officials have told me is that it is a major cut to current expenditure, totalling £17 million. Further reductions of £8 million will also be required to enable them to fund inflationary pressures in pay and prices and new priorities arising since the previous Budget period. Part of the early planning work was that the Department identified a long list of savings, and the departmental board agreed in March to put plans in motion to deliver a reduction of 4%. There were also contingency plans identified, should a reduction of 8% be required.

Obviously the 10·9% cut is significantly in excess of what they were planning for, and it is going to be challenging for the Department to deliver, so it has set up an internal project team, representing all directorates, to conduct an internal review of DFP's budget. The aim of that is to identify opportunities for savings and generating additional revenue, not only within individual business areas, but also those that cut across DFP. It is also hoping to find opportunities to reduce costs at NICS-wide level during the process. Basically, work is ongoing to identify where to make savings within the Department.

The Chairperson (Mr McKay): You said that there is a plan in place — a savings plan to make 4% and a contingency plan to make 8%. What were you looking at for those plans?

Ms McBurney: It is not my area so I do not know, in detail, what they were actually looking at.

The Chairperson (Mr McKay): You may not know in detail, but have you a rough idea?

Ms McBurney: I will be honest: no.

The Chairperson (Mr McKay): What about you, Jeff?

Mr J McGuinness: No, I am not aware of the specifics. I imagine that the Department will have to look at measures around cutting costs in the delivery of services through use of shared services and that sort of thing. It is one of our key areas of spend, so therefore we have to try to make savings in it.

The Chairperson (Mr McKay): OK. Are there any other questions from members? Happy enough. I am concerned that the timeline is tight. I know that other Committees will be and have been making noises that it is quite tight. Is there a possibility that it could be delayed by a week or two to ensure that we get a proper and full response?

Ms McBurney: I do not think that it is within our remit to delay it by a week or two.

The Chairperson (Mr McKay): Yes.

Ms McBurney: It would be for the Executive to decide whether they wanted to push it back.

The Chairperson (Mr McKay): That is fair enough. OK, thank you.