Committee Reports::Interim Report No. 02 - Appropriation Accounts 1993::12 December, 1994::Appendix


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APPENDIX 1

12 December 1994

Deputy Jim Mitchell T.D.

Chairman

Public Accounts Committee

Dáil Eireann

Dublin 2

Dear Chairman

Please find attached a note as requested by you on the question of a role for the PMG’s Office in relation to excess Votes. We are always available should you or your staff wish to discuss or clarify any points. I am following up on the other issues which you raised, and will be sending further papers to you.

Yours sincerely

P. H. Mullarkey

Secretary

Role of the Paymaster General’s Office in relation to excess votes.

Summary

The responsibility for ensuring that the necessity for an excess Vote does not arise resides primarily with the relevant spending Department. The primary information generated by the PMG system relates to encashments, and not to Vote expenditure which is defined as the issue of Payable Orders by the spending Departments themselves and on which they report each month to the Department of Finance. To the extent that these monthly returns fail to highlight or signal potential excesses, the problem needs to be addressed within the management structures of the spending Department. There is a possible informational role for the PMG in buttressing the existing monthly returns system, and this is being examined: his compilation of total issues (and receipts) could provide Departments with a cross-check against their own.

Requiring the PMG to intervene to ‘stop’ cheques would be difficult to reconcile with his responsibility for maintaining the integrity of the State payment system. Vote expenditure occurs when the payable order is issued by a Department; the order is then readily cashed by a commercial bank, which is subsequently reimbursed by the PMG. Changing the system to allow the PMG to refuse to honour payable orders when the Department’s expenditure exceeded the Vote would lead to the banks withdrawing the present facility of cashing payable orders over the counter. This would lead to considerable disruption of the payment system, particularly for people without bank accounts. Furthermore, approved financial procedures for Government accounting oblige Departments to discharge matured liabilities as they arise even if this may result in the necessity for an excess Vote.

PMG’s banking operations

For all practical purposes, the PMG’ Office is, with some exceptions, the bank of Government Departments. Payments by Departments are usually made by means of payable orders drawn on the PMG. In practice, those payable orders are virtually equivalent to cash, with value being given on the spot by the bank to the payee in most instances.

When Departments issue payable orders, they must also transmit to the PMG authorisation to meet those orders. When the payable orders have been cashed by the Banks - which may be up to six months after issue - they are then presented by the banks to the PMG through the banks’ cheque clearing system, and are then matched against the Department’s authorisation. The PMG pays the banks the requisite amounts on sight (two days are allowed for validation purposes under the clearing rules) from an account known as the Paymaster General’s Supply Account. This Account is funded by Exchequer issues, by the Appropriations-in-aid realised by Departments, and by sums in respect of various Funds under the control of the different Departments. The various Votes and Funds are distinguished as separate accounts in the books of the PMG. The PMG holds all cash, voted and non-voted, as one general cash balance out of which he meets the payable orders presented to him.

Exchequer Issues

Exchequer issues are not made directly to each Vote Account, but to the Supply Suspense Account¹. In effect, the Exchequer makes a global issue to Supply Suspense of whatever is required to meet incoming payable orders, subject to an absolute limit of the aggregate amount voted by the Dáil for all Votes. The final issue of each quarter is calculated to ensure that the total issued for the quarter corresponds exactly to the requirements specified by Departments, i.e. the total they notify to the Department of Finance in respect of the payable orders they expect to issue in the quarter. At the end of each quarter also the accumulation of Exchequer credits in supply Suspense is transferred to the various Vote Accounts. This means that the Exchequer issue credited to a Vote Account at the end of a quarter is identical to the estimate of their Supply requirement given a few days previously by the relevant Department.

Because of the delays in the presentation of payable orders and notwithstanding lagged encashments, the combined expenditure of all the Votes can be significantly greater than the amount of cash needed immediately by the PMG. Because of this, at the end of a year, it is technically possible for a number of Departments to issue payable orders in excess of their Vote without breaching the total cash pool available to the PMG. This is how it can happen that the PMG can honour issues from a particular vote over and above the amount voted even though the global amount issued from the Exchequer is restricted.

Graphical representation

Appendix 1 gives a graphical representation of the operation of the PMG’s Office showing separately the movement of payable orders and the movement of cash.

Difference between cash and Vote positions

The essential point to be taken from the above description of the PMG’s banking operation is that it is conducted on a cash basis. On the other hand, Vote control is based on the issue of payable orders. For the purposes of the Appropriation Accounts, expenditure occurs when a Department issues a payable order, not on the date of encashment. This means that Departments know precisely at any time the total amount of expenditure incurred by them. It also means that the expenditure position of a Vote can differ considerably from the cash position of its account with the PMG. Departments report each month to the Department of Finance on projected spending against the budget. These reports call on Departments to highlight and explain emerging budget variances.

Information emanating from the PMG

At the end of each month the PMG’s Office gives each Department a comprehensive report of transactions on its Vote Account detailing encashments, cancellations etc., as well as the payments authorised and receipts lodged by the Department. It also compiles weekly information about total issues and receipts for each Vote². This is based on the authorisation schedules sent to the PMG by Departments and their receipts transmitted via the Central Bank. Accordingly, it is information that is already available to the Departments themselves and would be included in the more detailed monthly reports which the Departments are required to make to the Department of Finance.

Could excess votes be controlled via the PMG?

In view of the difference between the cash-based PMG operation and the issue-based Vote expenditure, the PMG would not be in a position to exercise an active role in policing excess votes, although there could be scope for an enhanced informational role.

It would not be feasible to have the PMG put a ‘stop’ to the encashment of Departmental payable orders in the way that a commercial bank would return a cheque if there were insufficient funds to meet it. When the PMG gives value against a payable order it has already been cashed by a commercial bank for the payee. If the PMG were empowered to ‘bounce’ an otherwise valid payable order because a Department did not have sufficient cash in its Vote account, the banks would insist on not giving value to the payee until the order had been cleared, implying a delay of at least two days. This would seriously alter the nature of a PMG payable order as it would end its practical equivalence to cash. Even greater difficulties would ensue for people who do not have a bank account. The encashment service provided by the banks is a vital part of the payment system, and any disruption of it would be resisted by the general public.

A PMG ‘stop’ on the issuing of payable orders, e.g. by having the PMG refuse in certain circumstances to accept any further authorisations for payment from a Vote, would be not operate effectively in practice. The PMG would not become aware that the Vote had been exceeded until he received the authorisation schedule from the Department, and, by then, the damage would already have been done, in that the payable orders would be already issued. A refusal by the PMG to honour those POs would lead to the disruption of the clearing system described in the paragraph above.

The threat of such a refusal might, of course, bring additional pressure to bear on a Department to remain within budget. But it is doubtful that this would prove to be a stronger deterrent than that which exists at present, i.e. the prospect of severe criticism by the Public Accounts Committee.

Such a change would also run counter to the instructions relating to payments in Public Financial Procedures:

“All matured liabilities must be paid before the end of the year. Such payments should not be postponed even at the risk of an Excess Vote” (Section 3.15).

The purpose of this instruction, apart from avoiding legal challenge from those suffering from delays in payment, is to ensure that Departments show the true position at end-year and do not try to ‘massage’ their accounts. This is a matter that has been taken very seriously by the C&AG who has scrutinised closely possible breaches of this instruction.

The Department has also considered if the PMG could play a more effective role in preventing Excess Votes if the operation of the global Supply Suspense Account were terminated and all transactions were effected directly on the individual Vote Accounts. However, this change would seriously complicate the operation of the PMG’s Office and would not address the difficulties discussed in the preceding three paragraphs; at the same time, the aggregate total of Exchequer issues to individual Vote Accounts would inevitably have to be larger than what would be required for a global Supply Suspense Account.

There could, however, be an enhanced role for the PMG in providing fuller information about the total issues from and receipts into each Vote as a cross-check against that from the Departments themselves. There is some scope for improving the quality of the data, and this will be explored. Also the compilation, weekly at present, could be provided more frequently, but that would entail a cost and could be an overkill.

In conclusion, it is inescapable that the primary responsibility for avoiding excess votes will continue to rest with the individual Accounting Officers. There is, however, scope for improving the timeliness of the detailed monthly reports by Departments to the Department of Finance, and this is being examined in a separate review of that system on which a report is being prepared for the Chairman of the PAC.

_____________________

12 December 1994

Graphical representation of PMG operations.

Payable orders stream

Cash stream

Notes on the flows

A&B:	Occur at the same time, and it is at this point that expenditure from the Vote takes place.
C	May be delayed for up to 6 months - the period of validity of a payable order.
D	Payable orders are validated and debited to the Vote Accounts within the PMG Supply Account within 2 days of being presented by a bank.

In the cash stream, the arrows show the direction of movement of the cash, but the time sequence is generally from left to right.

E	Usually takes place immediately, in that banks give value on the spot; this is a vital element of the payment process and changes that would damage it would undermine the credibility of Government payable orders.
F	Immediate, subject to validation within 2 days.
G	Dependent on PMG requirements, but subject to the limit of the Vote.
H	Departments lodge Appropriation-in-Aid, via the Central Bank to the PMG Supply Account where they are credited to the Vote accounts; the cash is moved to the Supply Suspense Account and utilised to meet incoming payable orders.

¹ This is done to simplify day-to-day operations; the division of each Exchequer issue across all Votes could only be done approximately, with considerable effort, and to no purpose or benefit.

² A factor limiting the value of this information is that it cannot be extracted at subhead level. Moreover, a number of Departments have difficulty in maintaining a clear distinction between Voted and non-Voted expenditure in the authorisations they send to the PMG - mainly due to a software problem that is currently being addressed.