The MoJ and Money

Understanding financial accounts has never been one of my strong points, but former finance director of the Prison Service Julian Le Vey certainly does and I notice he wrote in May regarding the MoJ's financial predicament. I've taken the liberty of removing references and a table.     

THE MINISTRY OF JUSTICE IS BANKRUPT. SO IS AUSTERITY

The Ministry of Justice has run out of money. If it were a business, it would have to declare itself insolvent. If it were a local authority, its members would be be liable to disqualification. But don't worry: it's only a Government Department, and you, dear reader, will keep the MoJ going, come what may!

The MoJ's increasing financial desperation is the story of austerity across the public sector. Can spending possibly be cut further? Has austerity simply run out of road?

Let's go back to the 2015 Spending Review. By 2015, the last Justice Secretary but 4 - or is it 5? - Greying or Failing, some such name - had already made unprecedented deep cuts, getting rid of 1 in 4 prison officers, closing 20 prisons (though without reducing the prison population), cutting prison officer starting pay, and cutting the probation service into many pieces and flogging off half it, closing over 100 courts.

Then, in SR 2015, the then Justice Secretary - some bloke called Glove or Rover, possibly? - promised still further heroic cuts, in return for massive spending upfront. Given £700m to 'modernise' courts, MoJ would save £200m a year by 2019-20; given £1,3bn to build 9 new prisons, it would save £80m a year by closing old ones, plus an unspecified amount from escorting contracts, as more court cases were dealt with by video links to prisons, instead of actual physical presence.

That has now all unravelled pretty much completely.

First, it was found that the earlier cuts had gone too far - prisons were spiralling out of control and it was impossible to recruit and retain staff. So the cuts were partly reversed, though the larger part remains in place.

Then it was found that the new probation service contracts weren't sustainable, and it became necessary to pay the operating companies more that the contracts specified.

So the SR 2015 figures had to be revised upwards for the 2017-18 budget.

Then the 9 prison building programme fell apart. Not one brick has been laid. The programme is now so delayed that no prisons will be fully operational by 2020, perhaps two fully operational in 2022. As a result, running costs can't be reduced. indeed for the next 5 years, running costs must increase, because of double running and transitional costs of closures. [Edit: looking back, I see that in my time, we managed to open eight new prisons in just four years. But that was using PFI, which we now realise, was entirely wicked, neo-liberal, useless - unless, that is, you really, really need prisons built quickly].

But the reality is that closures of any kind look increasingly problematic. On MoJ's own projections, there will be 1,700 more prisoners in 2021 than there were in 2017. And there is a 1 in 3 chance that that will actually be 2,600 more. Well, 2 new prisons should do it – if heavily overcrowded from day 1. But of course, MoJ won't have the money to run them, because you can no longer close the old ones. Meanwhile capital funding, unused because of the slippage, was diverted to meet MoJ's higher than budgeted running costs.

Then the court 'modernisation' programme turned out to cost more than expected, helping to cause an overspend in 2017-18. And according to the NAO, the planned savings from the programme are now looking.....dubious. So, more expense, but possibly less savings.

Moreover, there is growing evidence that obliging more defendants to accept court appearance via video links instead of being physically present - a vital element in MoJ's planned savings both in court escort contracts and court management - may in various ways disadvantage the defendant and result in serious, institutionalised injustice.

Then, pay: SR 2015 budgeted 1% for pay inflation but MoJ smashed the 1% ceiling with a 1.7% settlement for prison officers last year - and does anyone seriously think the POA can be shoved back within a 1% ceiling this year, or next? But where will the money for more than 1% come from? Hardly 'efficiencies' - those have all gone to pot.

Meanwhile, there were other pressures: delays in implementing new fees, demand for legal aid up. It's all very difficult, Minister!

Thus the original budget for 2017-18 had to be increased during the year by half a billion pounds. (I daresay many local authorities would like the opportunity be able to go back to Treasury in year with their bowl: “Please Sir, can I have some more?” But Government reserves that right to itself).

And MoJ is still unable to say just how much it will spending this year, 2018-19: it is still busy discussing things with Treasury. We'll let you know later what we need, MoJ's Permanent Secretary tells us – and Parliament. The Estimate says £6.9bn: my guess would be the final figure will be around £7.4bn.

The steady upward drift of MoJ spending plans since SR 2015 can be put thus: (see table)

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Thus, the MoJ is now plainly totally adrift from plans agreed in the last SR. What next?

Well, the real terms cut in MoJ spending since 2010-11 has been in the region of 20-25%. The cost of those cuts is that the reasonably decent prisons and probation services we had in 2010 have been devastated, violence in prisons has doubled, self-harm has doubled, maintenance contracts in prisons have collapsed, Inspectors report widespread, unacceptable failure of both prisons and probation services, 100 barristers chambers are boycotting legal aid work, 258 courts have closed. All informed people (outside of the MoJ, naturally) agree that the entire criminal justice system of this country has been very seriously damaged by years of cuts.

Surely austerity must now have run its course.

Except that the criminal justice system is very unlike the NHS, or schools, or social care in one crucial respect, when it comes to spending. Demand can in part be controlled – as it cannot, realistically, for hospitals or schools or social care.

Not only that, it should be controlled. Since the mid 1990s, the prison population has doubled: at just the point where crime has halved. (For an account of why we can be sure rising prison numbers did not cause crime to fall, see here). We have been building prisons almost without a break for a quarter of a century, opening 31 new prisons, and building around 25,000 places within existing prisons. Building has cost some £3bn, enough to build 25,000 new homes. Running costs have risen by over a £1bn a year, enough to recruit 40,000 extra teachers or nurses. And all this spending has precious little good: over-crowding is not reduced, re- offending rates have barely budged. Yet community punishments are much cheaper than imprisonment and in many cases, achieve just as much.

Government can reduce use of imprisonment. It has been done before - by Tory Home Secretaries. If then, why not now?

--oo00oo--

The follow up article can be found here:-

NOT ON THE MONEY

Anyone hoping that the Justice Committee's questioning of Rory Stewart, prisons minister, and MoJ officials on 26 June would give a clearer picture of the Department's finances was emphatically disappointed. The event illustrated the limitations of the Commons Committee system, in which each of a dozen or so MPs is in turn given the chance to ask 'their' list of questions. When the answer is unclear or evasive, the questioning often moves on without the issue being resolved. Particular so, when complex financial matters are discussed. The effect is like watching a confused battle at night, where the occasional flash briefly illuminates something - but you are not quite sure what – or how it connects to the rest of the battlefield.

In my analysis of 14 May, I described MoJ's finances as out of control, bursting the settlement agreed in SR 2015 in many directions simultaneously, by, I estimated, as much as a billion a year.

Here's what we learned from this hearing - or didn't [my comments in italics]:

1. MoJ got an additional £300m on top of the SR settlement for the 2,500 'extra' staff [i.e. 'only' about 15% fewer staff than in 2010. That is, £300m over 3 years or an average £100m a year. But it seems MoJ has simply to absorb the cost of breaching the 1% pay ceiling which was assumed in the SR, which I estimate as costing £116m a year more by 2020-21]
2. the CFO said that the reason the SR settlement is impossible for MoJ to manage within, is that 2 key assumptions were wrong: that demand would fall and that more could be raised through charging. [Does not make sense: the 2015 population projections were actually higher than the 2017 projections; and in any case, none of these figures would have allowed remotely net closure of prison capacity, which is the only way of saving significant money: marginal changes up or down in overcrowding rates have relatively small financial consequences]
3. MoJ say they are managing a £1.2bn hole over 2 years [unclear whether this is before or after the extra £300m, or the capex/revenue switch]
4. if no extra funding is forthcoming, the £1.2bn hole would require 20,000 places worth of prisons to be closed [but how did you come to have a £1.2bn hole?]
5. nevertheless the CFO is 'comfortable' with prison funding for 18-19 [ incomprehensible: implies that MoJ has filled the £1.2bn hole after all, without having to lose a single place or prisoner. Note also that the MoJ's Memorandum on the 18-19 Estimates stated that the budget was not yet set and was still in discussion with Treasury, so how could you be comfortable with a budget not yet set?]
6. fortunately (!) the hugely ambitious building programme funded in SR 15 failed almost completely – building hasn't even started now: so some £235m of unspent capital was switched to revenue in 17-18 and some, MoJ hope, rolled forward to 18-19. [It appears that there will be a capex underspend this year also of £292m. But it is unclear what the increase will be in the interim Estimate for this year, or in plans for next year in excess of the SR outcome and to what extent funding will come either from capital to revenue switches last year or this year or next year, and/or non capex underspend. If you think this is very confusing, you are right. Poor Marie Rimmer MP made a gallant effort to understand what the hell is going on but was sunk without trace, because the CFO could not explain the figures]
7. it is not yet clear that bailing out the CRCs (because the volume assumptions made in the contracts were badly wrong) can be accommodated within the revised, higher SR settlement 
8. the failed Carillion contracts have driven costs up £15m a year above budget [Stewart seemed to argue that because MoJ has been spending £65m a year prior to contracting with Carillion, there was no loss from the failure. Yes there was: you reduced costs by £15m then increased them again. Odd remarks from Stewart implying that a contractor cannot cut the cost previously incurred in house without cutting the service: Corbyn's view precisely! Confusingly, then Stewart added that MoJ is now putting £100m a year into maintenance and that is double what it was 3 years ago – which seems irreconcilable to the £65m a year spend now proposed, which says MoJ is what they were paying before contracting out....]
9. losing European Social Fund grants – I recall the splendid pioneering work by Area Managers that drew that money in! - will cost another £32m, which is needless to not covered by SR15.
10. MoJ claim that 'unless something astonishing changes' the prison population will exceed 92,000 or 93,000 [this is complete nonsense: 91,800 is the extreme worst case of the 2017 projections – a mere 5% probability! They don't understand their own projections!]

Questions posed by the Committee which the MoJ could not or did not answer:

• What is the real terms increase over the SR period? [In a way, this is irrelevant: the SR settlement is no longer the basis for MoJ budgets]

• Does the MoJ accept the figures in the paper I produced for the Prison Reform Trust on the funding gap, and if not, what are their figures? 

• What is the source of funding for £175m for security and extra staff? [I assume the answer is the £300m extra referred to above, for extra staff – but what about security?] 

• Is the switch from capex to revenue £125m in 17-18, £245m in 18-19 and £185m in 19-20? 

• Will the extra funding of £245m for 18-19 continue in future years [this is surely currently being negotiated with HMT]

• Confusion still reigns. However there is nothing here to suggest that my analysis of 14 May wasn't broadly right.

If I were advising the Committee. I'd say: don't take more oral evidence until MoJ have supplied a table showing:

a) the provision agreed in SR 15 and the main assumptions used, including prison population;

b) revised provision showing what increases agreed since the SR were for, including changed assumptions, and how funded;

c) what MoJ now thinks it needs next year and to, say, 22-23, separating capital and revenue, and the population assumptions it is using;

d) the revised building and closure programme, showing when new prisons will start and when become operational, how much capacity they will provide, and when existing prisons will close, the capacity lost through closure

e) to match d), all costs of the programme including building, fitting out and staffing and opening new prisons, estimated capital receipts from closure, transitional revenue costs of closure e.g. redundancy and of opening e.g. training, showing extent of double running (old capacity still operating while new is still not fully operational).

When the Committee has that, it could have a useful further oral examination. Trouble is, I doubt MoJ know half these things.

A final curiosity. The CFO told the Committee not once, but three times, that MoJ has a 'very strong system of financial management'. Now, believe it or not, I am very sympathetic to the position finance officials in MoJ and elsewhere in Government find themselves in. It is a far more challenging job than the one I had as FD of the HMPS around 2000, and to know that you are spending your working life systematically degrading vital public services, while publicly supporting minsters' pretence that funding is adequate to maintain services, must be hellish.

Still, when one considers that on their own admission, the last SR was disastrously mishandled, that on their own admission, maintenance contracts collapsed because MoJ didn't understand its own costs, resulting in additional spending, that MoJ has been forced to partially reverse deeply damaging cuts in prison staffing and hence exceed again the SR 2015 settlement, that probation contracts have become unsustainable because MoJ didn't understand volume risk and this too may exceed the settlement provision, that MoJ's massive building programme has utterly failed, that MoJ cocked up increases in fees, that the court modernisation programme is costing more than budgeted but say the NAO may realise fewer savings than planned, that MoJ is so far adrift financially that its PUSS has had to tell Parliament he can't yet set a proper budget for the current year – when you consider all those things, then if I were the CFO, I would not go around telling Commons Committees that the MoJ has 'very strong financial management systems'.

Julian Le Vay

I was formerly Finance Director of the Prison Service and then Director of the National Offender Management Service responsible for competition. I also worked in the NHS and an IT company. I later worked for two outsourcing companies.