Chapter 5 - Improving transparency and specificity of budget documents
5.1
In this chapter the Committee discusses how the nature of the
system of Commonwealth funding and expenditure is revealed in the presentation
of the Budget and the Budget documents.
Previous parliamentary reports
5.2
Parliamentary committees in the past have reported on the adequacy of
the explanatory material provided with the Budget.
Reports on the Portfolio Budget
Statements
5.3
One of the Committee's predecessor committees, the Finance and Public
Administration Legislation Committee, published three reports on The Format
of the Portfolio Budget Statements in 1997, 1999 and 2000. In its third
report, tabled in November 2000, that committee concluded, inter alia,
that:
... the PBS are ... well-crafted documents which contain a wealth of
useful information, once the reader has grasped the underlying concepts of
accrual budgeting, budgeting processes, the reporting framework and reporting
requirements. The PBS are not for the uninitiated.
They are evolving, however, and may eventually reach a point
where they can more closely merge the government's aspirations for them as
budgeting statements and senators' hopes for a simple, straightforward,
user-friendly, yet detailed guide to the estimates.[1]
5.4
The question regarding the adequacy of budget reporting was raised with
the Auditor-General in this inquiry. He responded as follows:
I think the short answer is that this whole area is a journey
rather than a destination. The system continues to evolve. We need to learn
from the experience as we go. I think there are some areas that are worthy of
attention. Our submission points out some of those areas, including, for
instance, the description of the outcomes and the consistency of the use of
outcomes across agencies and whether greater use of program information would
assist senators in their work. There is the perennial issue of performance
information. There is also the issue of the understanding of the financial
management framework itself. I came into the room as Ms Campbell was speaking
about Finance’s plans, where appropriate, to try to simplify the financial
framework, because in some areas it is complex and does require a level of
detailed knowledge.[2]
Report on the accrual budget
documents
5.5
In June 2002 the Joint Committee of Public Accounts and Audit (JCPAA)
reported on a review of the accrual budget documents. Among its several other
recommendations the JCPAA recommended that:
Agency outcome statements should:
Completely and clearly define their
key objectives to reflect the impacts Government expects from their work;
Completely and clearly define the
impacts Government expects from agency administered items; and
Accurately articulate the purpose of
the relevant appropriations under the Appropriation Acts of the Commonwealth
Budget.[3]
5.6
The Government agreed in principle with these recommendations and in its
response to the committee's report on 13 May 2003 stated that Finance was
developing Outcomes Principles that would require the development of more
specific, less aspirational outcomes statements where appropriate.[4]
Reporting on forward estimates in
the PBS
5.7
In the second report on the format of the PBS, the Senate Finance and
Public Administration Legislation Committee recommended that forward estimates
for outcomes and outputs should be included in the PBS.[5]
In its third report the committee again recommended that forward estimates be
provided in the PBS, but only for administered items.[6]
5.8
The Government did not accept those recommendations because:
... there is already extensive reporting of forward estimates
provided in the budget documentation. Forward estimates information is provided
at an aggregate level (cash and actual) as well as for agency expenses,
measures and on a functional basis. This information is published at both
Budget and Mid Year Economic and Fiscal Outlook update.
The purpose of the Portfolio Budget Statements (PBS) is to
explain the annual Appropriation Bills before the Parliament. As such, forward
estimates information by output and for each administered item (or by program
prior to the introduction of outcome-output budgeting) have never previously
been included in the PBS, nor in the Explanatory Notes.[7]
5.9
The Committee agrees that one important purpose of the PBS is to explain
the annual appropriations. This is manifested by the inclusion of specific
reference to the documents in the Appropriation Acts, and particularly to the
provision that declares that the PBS are relevant documents for the purposes of
section 15AB of the Acts Interpretation Act 1901.[8]
However, the PBS also have other purposes, which should include informing the
Parliament of the expected future levels of expenditure on particular budget
measures. The Committee's predecessor committee stated:
Mr Murphy [a Finance official] responded that the focus of the
PBS was the budget year. From a strictly budgeting viewpoint, this is correct.
But as the committee has repeatedly pointed out, in approving the Appropriation
Bills, senators have to satisfy themselves that previous expenditure has been
wise. Were detailed forward estimates available in the PBS, they might disclose
that, in two years’ time, a given output required a huge injection of money,
one explanation for which might be wastage or inefficiency in the past. At the
very least, the proposed changing expenditure pattern would be worthy of
examination.[9]
Committee's conclusions
5.10
The Committee is aware that much detailed information is provided in
connection with the Budget, including some financial information for forward
years, and it appreciates that much effort and many resources are needed to
produce that information. The Committee also accepts that government provides
that information in good faith in part to assist the Senate to perform its role
in scrutinising government funding and expenditure. Nevertheless, this
Committee, like the Senate Finance and Public Administration Legislation
Committee, also considers that the provision of program level forward
estimates for outcomes, outputs and administered items in the PBS would enhance
the transparency and accountability of government for its funding and
expenditure,[10]
especially in view of the carry over of funds and programs to future years. (
See Chapter 3, paragraphs 3.63 to 3.74.)
5.11
The Committee also notes that there is insufficient mapping of spending
by agencies on particular programs between the Budget Papers and the PBS.
Expenses are classified on two different bases. The PBS classify expenses by
outcome. Budget Paper No. 1 classifies by function or purpose. The two are not
reconciled. Transparency is further reduced where responsibilities sit across
portfolios. For example, spending on the Housing and Community Amenities
function and the three sub-functions[11]
traverses programs in the portfolios of Defence, Transport and Regional Services
and Family and Community Services. There are no program descriptions. Instead, users
have to try their luck hunting programs through at least three different sets
of PBS.
Recommendation 11
5.12
The Committee recommends that a common approach be taken for the
Portfolio Budget Statements and that estimates for three forward years be
included for departmental and administered items at the program level. This
should be able to be referenced back to functional and sub-functional splits in
the other Budget papers.
Formulation of statement of outcomes
5.13
It seems to have been widely accepted by most observers, including by
Parliamentarians, ever since the Government decided to adopt the accrual-based
outcomes/outputs framework from the 1999-2000 Budget that appropriating moneys
according to outcomes, with departmental outputs and administered items
contributing to the achievement of those outcomes, would emphasise performance
rather than process in the public sector and would increase
accountability.[12]
5.14
Professor Bartos submitted that:
The transition to outcomes/outputs accrual budgeting in
1999-2000 was accompanied by further significant changes in budget reporting.
Some of these added to transparency and accountability: in particular,
information is now available on assets and liabilities, changes in the net
worth of government can be monitored, and there is now consistency between the
reporting structure in the budget papers and departments'/agencies'
Annual Reports.[13]
5.15
But as pointed out in a Research Paper published by the Commonwealth
Parliamentary Library in 2002:
... there is an apparent paradox. The adoption of an
accruals-based system of accounting makes the Executive's financial activities
more transparent to the Parliament in its role of holding the Executive more
accountable for those activities after the event. Yet the supposedly
necessary complementary changes to the appropriation structures, wherein the
Parliament's authority is given before the event for the Executive's
financial activities, may actually have diminished Parliament's capacity to
control the Executive in the way the Constitution envisaged.[14]
5.16
The current situation contrasts with that in earlier times:
Although Parliament was presented with a detailed list of intended
budgetary spending, in practice there was little or no management information
on what or how resources were expended. The system was strong on ex ante
controls but weak on expenditure management...[15]
5.17
To the extent that Parliament's capacity to control the spending of the
executive has been diminished, this appears to have resulted from the current
structure of the annual Appropriation Acts and in particular the
outcomes/outputs presentation of proposed expenditure.
5.18
The JCPAA has registered concern about the broad formulation of
outcomes. In its 2002 report the committee stated that:
The Committee highlighted several examples of poor output and
outcome definitions during the public hearing. There was concern that the
outcome statements were too broad and far reaching, whilst some output
statements were difficult to comprehend.[16]
5.19
Professor Geoff Lindell submitted that '... the statement of outcomes can
frequently be so open ended as to cease to be a meaningful description of the
purpose of any expenditure'.[17]
5.20
Professor Lindell observed that a need for greater specificity
of purposes is not inconsistent with the need for flexibility. He suggested
that a category of departmental expenditure could be drafted that would
describe running and regular expenditure for items of expenditure that are not
thought to require detailed itemization. These items could include the
acquisition of office furniture and stationery and the payment of salaries. Professor
Lindell submitted that this category of expenditure should not include
departmental expenditure which is capable of being identified by reference to
the nature of the policies promoted and implemented by an agency.[18]
5.21
ANAO pointed out that broad statements of outcomes allow budget-funded
agencies to attribute particular activities or programs to more than one
outcome and that this reduces the information value of nominated outcomes to
Parliament. This was highlighted in ANAO's recent audit of the Roads to
Recovery Programme administered by the Department of Transport and Regional
Services.[19]
In that case, payments that related to the transport outcome were subsequently
reported against the regional services outcome so as to prevent the department
being reported for breaching Section 83 of the Constitution.
5.22
In its supplementary submission, ANAO suggested that if there were
greater specification of the purposes of appropriations in Appropriation Acts
(for example through greater specification and/or the number of outcomes) the
potential for this type of cross-outcome program attribution might be reduced.[20]
5.23
Broad formulation of outcomes may lead to further obfuscation of the
government's accountability to the Parliament even with regard to administered
expenses. In this context, Maurice Kennedy wrote:
Under the terms of an annual appropriation, an entity is allowed
to switch its operating capacity resources (Departmental Outputs) between
Outcomes, but not its 'deliveries' (Administered Expenses): those appropriated
amounts can only go to the recipients covered by that particular Outcome.
However ... the Outcomes for Administered Expenses are often expressed so broadly
that they do not impose particularly strict legal limits on the purposes for
which the appropriated amounts may be applied.[21]
5.24
ANAO submitted that:
The experience to date suggests that there would be merit in
further reviewing the breadth and presentation of outcome descriptions; and
examining whether the greater use of programme-level information would assist
Parliament in its work, and improve the transparency and accountability or
Commonwealth public funding and expenditure'.[22]
5.25
In its recent report on the application of the outcomes and outputs
framework ANAO recommended that agencies incorporate periodic reviews of
outcomes into their business or budget planning processes with the aim of
ensuring that outcome statements are sufficiently specific and enable the
identification and measurement of an agency's contribution to the achievement
of outcomes.[23]
5.26
Professor Bartos submitted that the Committee should:
Recommend to the executive that the Minister for Finance and
Administration be delegated a power to require outcomes descriptions to be
expressed in clear, simple and measurable terms. In practice, this power would
be exercised by his department in negotiations with other departments, and
could be expected to result in considerable improvement in budget transparency...
[24]
5.27
With regard to the specificity of outcomes Finance informed the
Committee that it was:
In a process of continuing improvement in assessing outcomes to
determine whether or not they provide the parliament and the people with an
appropriate level of detail and [was] working with agencies to refine their
outcome descriptions as well as performance indicators that go with those
outcomes.[25]
Committee's conclusions
5.28
The Committee has concluded that the broad formulation of outcomes has
accompanied a loss of program detail and specificity in the appropriations
processes of the Parliament. This poses challenges for parliamentary scrutiny. Outcomes
must be more precisely and meaningfully specified in the appropriations bills
and in all other budget documentation. There is also a need for
cross-agency consistency of performance with measures of cost, quality and
timeliness. Systematic evaluation of results against targets also needs to be
built into budgeting processes, including through active involvement of
Finance.
Recommendation 12
5.29
The Committee recommends that outcomes be expressed in clear,
simple and measurable terms and that the Department of Finance and
Administration play an active role in improving and evaluating the quality of
outcomes.
Program-level expenditure information
5.30
Witnesses suggested that one way of ensuring that the Parliament is
presented with a greater level of detail in the Appropriation bills and the
supporting documentation is by the use of program-level information.
5.31
ANAO, for example, suggested that the greater use of program-level
expenditure information might assist parliament in its work. Reference has also
been made earlier in this report to suggestions that financial reporting in the
budget documents should be according to programs, and that the current
outcomes/outputs reporting should be at a level that the public and ministers
commonly understand as programs.[26]
5.32
The Committee was informed that the government already collects
expenditure information at this level for its own internal purposes. ANAO informed
the Committee that:
There have been recent moves to increase the use within
government of programme-level information and controls. For example, additional
internal reporting requirements, particularly in relation to programme
information, have been established to provide better information for
decision-making. Similarly, programme level controls also exist for funding of
long-term commitments by some Departments (in accordance with Regulation 10 of
the Financial Management and Accountability Regulations 1997).[27]
5.33
Also in relation to programs, Finance informed the Committee that:
The need for a greater range of information below outcome level
was recognised in the Budget Estimates and Framework Review (BEFR) in 2002,
with the decision being made by Government at that time that agencies would be
required to develop and submit programme information.
The introduction of the Central Budget Management System (CBMS)
has assisted agencies to submit this information in a more comprehensive form,
and Finance is still evaluating the quality of the data. The decision to
publish programme information is one for the Government to make. However, once
quality issues are addressed Finance will be in a position to advise the
Government on options for greater use, including publication, of programme
information.[28]
5.34
Professor Bartos made the following suggestions for change:
Either a) seek reporting on the program information currently
used for budget decision making or b) a preferable option, break the current
outcomes/ outputs structure down to a level that corresponds to what the public
and ministers commonly understand as programs.[29]
5.35
As the Committee has reported earlier, in Chapter 2, ANAO recommended in
its recent report on the application of the outcomes and outputs framework that
Finance consider opportunities for improvement that relate to better
integration of programs into the outcomes and outputs framework, including
developing criteria to guide agencies' decision-making on the inclusion of
program information.[30]
5.36
Bearing in mind that program level information is capable of being
reported from the CBMS[31]
the Committee suggests that the budget documents might be presented as shown in
Appendix 3 at outcomes, outputs and program levels. Presentation of the
government's finances in this or a similar form would assist senators and
others in their scrutiny of the annual budget and would thus enchance
transparency.
5.37
ANAO submitted that a key issue in any move to greater use of
program-level information and controls would be a sound approach to identifying
individual programs:
A reasonable principle to adopt would be to identify distinguishable
components (an approach that is advocated by the accounting standard on segment
reporting) so as to focus on major and significant programmes. Another useful
guide ... would be the breakdown that the agency uses for its own executive
decision-making.[32]
5.38
The Auditor-General suggested that care should be taken not to require
universal presentation of program information:
It needs to be appropriately targeted so that it assists the
parliament. You will remember that in the old program budgeting days we used to
have programs for corporate services.[33]
5.39
Although it might be asserted that program budgeting had been tried and
had failed, Wanna et al were of the view that:
During the 1980s the quest to adopt program budgeting took on
something of a 'holy grail' with officials treating the term as an incantation
– a miraculous salvation for the ills of public finance. The 'implementation'
of program budgeting remains one of the great myths of the recent era of
Australian public sector management. It cannot be said that it was ever
discontinued, because despite the rhetoric it was never implemented in the
first place.[34]
Committee's conclusions
5.40
The Committee has concluded that the presentation of program-level
information in the Appropriation Acts and in the other budget documentation
should lead to greater specification of the objectives of proposed expenditure
and hence greater transparency and should be implemented. The evidence and in
particular redevelopment of Finance's budgeting systems indicate that
presentation of expected and actual expenditure as well as forward estimates on
this basis is feasible, and a system of program reporting could be implemented
relatively quickly and easily. The Committee considers that presentation of
information on this basis should also improve accountability because it should
be more focussed and therefore more comprehensible.
Recommendation 13
5.41
The Committee recommends that expenditure should be reported at
the levels of programs in the budget documents, including in the schedules to
the Appropriation Acts.
Departmental outputs and administered expenses
5.42
The terms 'departmental' and 'administered' are not defined in the Appropriation
Acts.[35]
5.43
The Committee was informed that 'departmental' and 'administered' are
defined in Finance Minister's Orders and those definitions have been refined
over time, but ANAO indicated that it might be beneficial if the expenditure
that is 'departmental' and expenditure that is 'administered' were explicitly
addressed in the Appropriation Acts.[36]
ANAO also informed the Committee that the Australian Accounting Standards Board
(AASB) is undertaking work that relates to the distinction between
'administered' and 'controlled' items and how they should be accounted for.[37]
5.44
ANAO submitted examples of difficulties that agencies have encountered
as a result of the apparent confusion surrounding the interpretation of these
items. One department in 2002-2003 had reclassified expenditure appropriated as
a departmental output as an administered expense; others had drawn
(erroneously) on administered items to meet the departmental costs of
administering those same items; and appropriations for similar activities
undertaken by different agencies have been allocated differently, either as departmental
outputs or administered expenses.[38]
Committee's conclusions
5.45
Obviously there is an element of confusion surrounding the allocation of
expenses as departmental or administered, and that confusion must necessarily
be reflected in the documentation provided to the Parliament. This in turn will
adversely affect the transparency of government funding and expenditure. The
Committee considers therefore that this issue should be resolved swiftly and
trusts that the work of the AASB will assist in this regard. However, given the
progress made by that body on the harmonisation of accounting standards, the
Committee questions whether the government should necessarily await the AASB
findings before moving to alleviate the confusion that apparently exists.
5.46
The Committee considers that when a reasonable consensus is reached on
the definitions of 'administered' and 'departmental' that those definitions
should be explicitly addressed in the Appropriation Acts.
Recommendation 14
5.47
The Committee recommends that the terms 'administered' and
'departmental' be defined in the appropriation bills or other appropriate
documents.
Accounting standards
5.48
The Committee was informed that the use of two different accounting
standards and inadequate cash reporting lead to confusion and a waste of
resources.
5.49
Professor Bartos submitted that the adoption of accruals led to the
unnecessary duplication of reporting in the budget papers against two
accounting standards: Government Financial Statistics (GFS) and Australian
Accounting Standards (AAS). In his submission Professor Bartos touched on the
strengths and weaknesses of both standards but concluded that:
There can be unproductive debates over the details contained
within reporting standards that make not the slightest differences to decision
making, accountability or transparency.[39]
5.50
Professor Bartos concluded that the standard itself is not important;
what is important is that one standard be adopted and applied consistently so
that reliable estimates of trends can be reported. He submitted that there is
currently an attempt being made to harmonise the AAS and GFS standards and that
harmonisation would be a highly desirable outcome. In the meantime in his view
the best approach would be to adopt just one of the two.[40]
5.51
Mr Harris submitted that having two accounting standards leads to
confusion. He asserted that the Parliament is entitled to impose its own choice
on what standard the executive should use to report to Parliament:
If Parliament insisted, as it can, that GFS be used by Commonwealth
departments and other government reporting entities, the cost of duplicated
reporting would be eliminated and the clarity of government reporting would be
enhanced.[41]
5.52
Professor Barton has written that:
The present system of accounting in the Australian Government is
untenable with the presentation of two sets of accrual budget statements and
outcome financial statements which show very different results for all
components; and secondly, the absence of CABS [Cash Accounting and Budgeting
System] which is needed for fiscal policy purposes, appropriation bills and
good cash management. In principle, the solutions are obvious ones, i.e. –
a) the reintroduction of CABS as a subset of AABS [Accrual
Accounting and Budgeting Systems] for the direct recording and timely reporting
of cash transactions as occurred prior to 1999; and
b) harmonisation of the sound features of AAS [Australian
Accounting Standards System] and GFS [Government Finance Statistics System]
into one combined, robust accrual accounting FMIRS [Financial Measurement
Information and Reporting System] system which is based on the GFS model and is
relevant for the public sector.[42]
5.53
Professor Barton submitted that if agreement is not reached shortly by
the AASB the GFS system, as modified according to the recommendations of the HoTARAC
[Heads of Treasury Accounting and Reporting Advisory Committee] Committee, be
adopted. He noted that the implementation of that system would require an
amendment to the Charter of Budget Honesty Act 1998.[43]
5.54
Professor Barton also submitted that budgeting and financial reporting
of administered items would be simplified if they were reported on a cash
basis, and commented that, 'They are normally cash transfers and they would be
more easily understood as such'.[44]
5.55
Professor Barton informed the Committee that it 'would be easy for
Parliament to follow each set of budget statements if the full cash budget
statements are presented, and are then adjusted for below-the-line non-cash
accrual items'.[45]
Committee's conclusions
5.56
Witnesses acknowledged that the current use of two different accounting
standards for the budget documents is at least potentially confusing and
supported the harmonisation exercise that is underway. They also acknowledged
that the harmonisation exercise has taken some time. The Committee considers
that the sooner this matter is finalised the better because any confusion must
inevitably lead to less transparency than would otherwise be the case. There
were suggestions that if a standard were not agreed upon within twelve months,
that the Parliament should unilaterally declare that the budget documents
brought before must conform to one standard, and that this standard should be
based on the GFS system.
5.57
The Committee shares the frustration of those who have advocated this
course and will revisit the issue if significant progress towards a single
agreed standard has not been reported within twelve months from the time of the
tabling of this report.
Recommendation 15
5.58
The Committee recommends that the ongoing process being
undertaken to harmonise the accounting standards should continue and should be
expedited by the Government setting a deadline for its completion.
Other suggestions for improved transparency
5.59
Professor Bartos made a number of other suggestions for changes to the
Budget documentation that he considered would result in greater transparency.
These included the provision of better functional information in Budget Paper
No. 1; the provision of more functional information in the estimates
reconciliation table in Budget Paper No. 1; and publication of time series and
graphs on trends in net worth, together with an explanation for those trends.[46]
5.60
ANAO commented on the above suggestions as follows:
Some of the other additional information being advocated ... may
provide additional information for some users but may not be of information
value to many Parliamentarians. The Budget Papers are already voluminous, and
ANAO is unaware of the extent to which Parliamentarians require the additional
information suggested.[47]
Committee's conclusions
5.61
The Committee considers that these matters of detail are probably best
left for the consideration of the different Legislative and General Purpose
Committees when they are examining the estimates. The committees may wish to
note the suggestions and determine in the light of their experience whether their
adoption would assist them in their work.
Reporting on budget, financial and public sector reform
5.62
Professor Bartos submitted that there is virtually no information in the
public domain on what (if any) financial management improvement projects are
underway within government.[48]
5.63
ANAO agreed that there is value in the early signalling of proposed
changes to the financial framework but suggested that the amount and rate of
change has reduced in recent years as the framework has stabilised and that there
is no need for such disclosure.[49]
Committee's conclusions
5.64
The Committee accepts that it is possible that as the accruals based
outcomes/outputs framework has matured that there has been a perception within
government that there is little need for review and reform. If senators were
concerned that insufficient work has been undertaken (or published) they could
raise the issue in the context of the estimates processes.
5.65
There is an ongoing need to ensure that accountability deficits do not
arise from the implementation of the current framework.
Treatment of depreciation
5.66
Professors Barton and Bartos and Mr Harris commented adversely on the
current treatment of depreciation expenses in the Commonwealth Budget.
5.67
Mr Harris submitted that the Parliament's loss of control over the
appropriations can be seen in many areas, including in the provision of
appropriations for depreciation. He noted that the appropriations made for
depreciation seem to have neglected that at the outset of the new financial
arrangements, the Parliament had already provided the funds to acquire the
assets being depreciated. Appropriating for depreciation reimburses the
government for appropriations it has already received.[50]
5.68
Professor Bartos suggested that there has been double dipping – agencies
may be being funded for depreciation while still receiving additional funds for
new assets. He submitted that it now appears that many agencies are not making
provision for replacement of assets, and are still seeking supplementation when
they need to replace assets or make system replacements or upgrades. He cited
the Customs replacement IT system as an example.[51]
5.69
Professor Bartos concluded as follows:
It would be desirable for the Auditor-General to be asked to
report on whether agencies have misused depreciation funding, and if there is
supporting evidence that they have, for this component of departmental funding
to be withdrawn.[52]
5.70
Professor Barton submitted that depreciation charges should not be
directly funded in the budget because:
While they are necessary accounting charges for the use of
physical assets in the outcome statements, funding them directly creates
confusion and complications with respect to the accountability for the expenditure
of budget appropriations. Rather, gross capital expenditure should be
separately reported and budgeted for as required, with a subdivision of
expenditures between asset replacement (i.e., the depreciation component), and
asset expansion. This methodology has the effect of funding depreciation
charges each year only as required for replacement purposes in that year. This
is useful information for Parliament and management. As well, it would avoid
the questionable practice of departments building up internal cash balances for
future asset replacement or whatever other purpose they may use to spend the
funds on. Also in practice, the lifespans over which costs are allocated
for long life assets may bear little relationship to reality, and the annual
depreciation charges can be, ‘soft’ figures. Lifespans are greatly affected by
obsolescence, repair and maintenance, and general management of the asset.
These matters are not given much consideration in determining asset lifespans
for depreciation purposes.[53]
(Committee's emphasis)
5.71
Professor Barton informed the Committee that:
I make a point in my paper with respect to some of the
allocations to departments for depreciation purposes. I can give you probably
two very good examples. The National Museum of Australia depreciates some of
its collection items over 5,000 years. They happen to be rocks. I assume
Geoscience Australia does the same—Geoscience has a very large collection of
rocks. Is it appropriate to fund those depreciation charges? I would say not.[54]
5.72
ANAO commented on the evidence given by other witnesses as follows:
Budget Paper 4 2006-2007 states (page 4) that expenses typically
included in Departmental Outputs appropriations include operational expenses
including depreciation. Accordingly, as depreciation funding is not separately
identified, or funded, the use of such amounts is not restricted to asset
replacement. Because depreciation funding for asset depreciation can be
significant and asset replacement expenditure often occurs in large amounts at
irregular intervals, it would be open to Finance and the Government to consider
approaches such as that outlined by Professor Barton.[55]
5.73
Finance submitted that it continues to review the framework and its
different aspects and will examine the issues raised by Professor Barton.[56]
5.74
ANAO has also noted that the funding of depreciation is an issue in any
consideration of the Compact of 1965, especially in relation to the matters
that should be included in appropriations bill No. 2.[57]
The Compact of 1965 has been discussed elsewhere in this report.
Committee's conclusions
5.75
The evidence suggests that there are problems with funding for
depreciation in the current framework. Funding for depreciation, particularly
for replacement purposes, is opaque. The Committee has recommended earlier in
this report that the Government should consider whether funds should continue
to be appropriated for depreciation. In that context, the Government should also
consider new approaches that would result in greater transparency and, in
particular, should consider the approach suggested by Professor Barton.
Recommendation 16
5.76
The Committee recommends that the Government should give consideration
to a system for funding depreciation whereby gross capital expenditure would be
separately reported and budgeted for as required, with a subdivision of
expenditures between asset replacement (i.e. the depreciation component) and
asset expansion.
Portfolio Budget Statements
5.77
The extensive and detailed explanatory documents that are tabled with
the Budget documents and are now known as Portfolio Budget Statements (PBS)
have evolved from the explanatory material first provided by some ministers to
the early estimates committees. The PBS in their various guises, eg Explanatory
Notes, Program Performance Statements or Portfolio Budget Measures Statements,
have often been commented upon not only by committees considering the estimates
but also by other committees, including one of this Committee's predecessor
committees.
5.78
Those committees generally have been interested in the format of the PBS
or in their adequacy as explanatory documents.
5.79
The legal status of the documents is significant. In 2002, when he was
considering the legal implications of the sections in the Appropriation Acts
that declare that the PBS are relevant documents for the purposes of section
15AB of the Acts Interpretation Act 1901, Maurice Kennedy made the
following observations:
The important point is that the PBSs, when read with the
relevant provisions of the Appropriation Act, do not impose any additional
legal restriction on the purposes to which an entity may apply amounts
appropriated to it under an annual Appropriation Act so long as such a purpose
is not inconsistent with the terms that describe the entity's outcome(s).
Consequently, there seems to be no legal impediment to the Executive's
undertaking, during the course of a financial year, totally new or expanded
activities which had not been foreshadowed to Parliament in the PBSs.
Provided that the new or expanded activities were, in some way, related to the
achievement of a described outcome, and their costs could be accommodated
within the total appropriation provision for that outcome, Parliament may not
be formally aware of the matter until details were later revealed in the
entity's annual report and financial statements.[58]
5.80
The PBS provide a wealth of information but their value as documents for
informing the Parliament as to how funds will be spent is problematic. ANAO
informed the Committee that:
- Whilst the PBS provide considerable additional material in
respect of departmental outputs, the amounts are not required to be spent in
the manner identified in the PBS (as outlined in Combet v Commonwealth of
Australia);
- For administered expenses, generally less detail is provided in
the PBS than for departmental items. Further, whilst an administered
appropriation may be used for any or all of the activities mentioned for that
item in the PBS, its use is not restricted to those activities mentioned in the
PBS; and
- Notwithstanding the additional detail provided, the final
appropriation sources may not be certain, especially where outcomes are
specified so as to overlap with the purposes of other funding sources, such as
special appropriations.[59]
5.81
ANAO accepts that the PBS have value as accountability documents, in
that they set out performance measures and statements of expected performance,
with the results of that performance being reported later in annual reports.
However, ANAO has found through its audit activities that in certain cases the
PBS have not provided a good indication of how some appropriated funds will
actually be used by entities. ANAO referred in particular to its audits of the Management
of Net Appropriation Agreements and the Financial Management of Special
Appropriations, which have been discussed earlier in this report.[60]
ANAO also referred to a finding in its report on the Post Sale Management of
Privatised Rail Business Contractual Rights and Obligations that:
... the PBS reporting of FACS [Department of Family and Community
Services] had consistently over-estimated the amount of funding required to pay
the purchaser of the passenger rail business for concessional rail travel.[61]
Committee's conclusions
5.82
As mentioned earlier, one of the Committee's predecessor committees considered
in depth the content and format of the PBS. Apart from making the above
observations the Committee does not propose to comment further in this inquiry,
but suggests that the Senate Legislative and General Purpose Committees in
their consideration of the estimates should report on the format and content of
the PBS of the portfolios that are referred to them. The committees might, for
example, comment of the specificity of the definition of outcomes. They might also
attempt to determine expenditure on outcomes (or programs) and compare that
expenditure with the estimates set out in the PBSs. While this would be
accounting for expenditure after the event, such an exercise would enable
committees to gauge the accuracy of previous PBS estimates and provide a
measure by which new PBS estimates could be tested and assessed.
Contingency reserve
The contingency reserve is a global reserve which is supposed
to allow for: amounts not yet allocated to individual programs; the tendency to
underestimate costs of existing programs in future years; and the tendency to
overestimate administered item expenses in the early years as the programs get
up to speed. The Committee considers that the transparency of the contingency
fund could be improved by production of a reconciliation table by sub-function
for changes across the forward estimates. This would be produced in the Budget
and in the Mid Year Economic and Fiscal Outlook.
Navigation: Previous Page | Contents | Next Page