THE FORMAT OF THE PORTFOLIO BUDGET STATEMENTS - SECOND REPORT
TABLE OF CONTENTS

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.

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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.