Controlling Public Spending:
An International Perspective
Ross Campbell
Deputy Director – Government Financial Reporting
Overview:
•
International overview
•
The UK position and the role of HM Treasury
•
The UK Fiscal and Spending Framework
•
The Office of Budget Responsibility
•
The Budgeting System & Spending Control
•
Annual Accounts & the National Audit Office
•
Whole of Government Accounts
2
International overview
3
Accounting and cost control - context
•
Globally, government entities use a mixture of accruals & cash
accounting for financial reporting and cost control
•
European Union – of 28 member states
– 17 use some form of asccrual or modified accruals –
based either on IFRS (e.g. UK, France) or on IPSAS (e.g.
Austria at Federal level)
– 4 use cash accounting
– 5 use a hybrid of cash and accruals
•
Differences exist within states (e.g. between Federal and Local
Government)
•
Most countries’ practices are heavily influenced by their
history and local context.
4
Source: PWC report: Collection of information related to the potential impact, including costs, of implementing accrual accounting in
the public sector and technical analysis of the suitability of individual IPSAS standards 2013/S 107-182395
5
International approaches to Accounting
•
Of 112 countries where we could identify an official position
on public sector accounting:
– 26 have accruals accounting systems broadly consistent
with IFRS/IPSAS
– 8 have part adopted accruals-based accounting
– 42 have either stated an intention or have plans in place
to adopt accruals-based IPSAS
– 36 had no plans to adopt accruals or only to adopt cashbased IPSAS.
•
Overall, while many countries still cash account for
government costs, there is a movement towards wider use of
accruals accounting.
6
Why adopt accruals based public spending control and
accountability frameworks?
•
Countries that have adopted accruals accounting for public
expenditure control purposes, generally do so to ensure:
– Greater transparency of future liabilities leading to
Improved budgeting taking account of commitments
incurred but remaining to be settled at year end
– Improved asset management through better
understanding of asset value and condition
– Greater transparency and enhanced public accountability
– Reduced borrowing costs as a consequence
7
European Public Sector Accounting Standards (EPSAS)
•
European Commission led project to look at introducing a
standard set of accounting standards for use by Government
entities across the EU.
•
Following the 2008 Financial Crisis the aim of the EPSAS
project is to improve the quality of reporting on public
expenditures, assets and liabilities
•
EPSAS will introduce accruals accounting across the EU
member states
•
At the present time there are no plans for budgeting to be
within the scope of the EPSAS project.
8
European Public Sector Accounting Standards (EPSAS)
Implementation
•
Needs to take account of widely differing accounting and
financial management practices – countries are starting from
very different positions.
•
Impact assessment study by PWC shows a wide range of
potential cost from Euro 1.2bn – 6.8bn, depending on:
– Existing accounting practices
– Extent to which accounting systems will need updated
•
Agreement is needed on an approach to adoption and some
key standards – i.e. consolidation boundaries and valuation
approaches.
•
Target date for implementation is 2020.
9
The UK position and role of HM Treasury
10
The Role of HM Treasury in the UK context
•
HM Treasury has a statutory role and is responsible to Parliament for control of
Public Resources.
•
Departments need Treasury consent before undertaking expenditure or
committing to other resource consumption.
•
All legislation with expenditure implications, both primary and secondary, must
have the support of the Treasury before it is introduced.
•
Policy decisions with financial implications must be cleared with the Treasury
before they are submitted for collective approval by the Cabinet.
•
The Chancellor and the Chief Secretary (lead Minister for Public Spending) both
sit on the Cabinet.
•
The need for Treasury approval embraces all the ways in which departments
might make public commitments to expenditure, not just Estimates or
legislation.
11
The UK Fiscal and Spending Framework
12
Fiscal Framework
•
The spending framework is based on the fiscal rules that are set in
relation to the fiscal aggregates
13
National Accounts
•
•
•
•
•
National Accounts are a set of economic accounts.
Records and describes economic activity in the UK – both
private and public sector.
In the UK this is produced by the independent Office for
National Statistics (ONS).
Based on the European System of Accounts 2010 (ESA10)
methodologies, (from September 2014).
ESA10 is derived from the worldwide manual for national
accounts (SNA 2008)
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Fiscal Mandate & Fiscal Aggregates
In 2010 the UK Government set fiscal plans to restore the public finances to a
sustainable path, and introduced a forward looking fiscal mandate.
Deficit : Surplus on Current Budget
•
Fiscal Mandate: To achieve cyclically-adjusted current balance by the end of the
rolling, five year forecast period (2015-16)
•
Relevant fiscal aggregate: Surplus on Current Budget (SOCB) = current receipts,
less current expenditure, less depreciation
Debt: Public Sector Net Debt
•
Fiscal mandate: Public Sector Net Debt (PSND) as a % of GDP to be falling at a
fixed date of 2015-16
•
Relevant fiscal aggregate: PSND = public sector financial liabilities less liquid
public sector financial assets
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Key Measures of Spending
•
Public Sector Current Expenditure (PSCE) = recurring expenditure including
pay and procurement; and
•
Public Sector Net Investment (PSNI) = capital spending net of disposals and
depreciation...add back depreciation to get Public Sector Gross Investment
(PSGI).
Impact on fiscal aggregates:
• Any increase in Public Sector Current Expenditure and Gross investment
increases borrowing and debt; and
• Increases in Public Sector Current Expenditure will also impact on the current
surplus/deficit (borrowing excluding investment), i.e. the fiscal mandate.
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The Office of Budget Responsibility
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What is the Office for Budget Responsibility?
•
The OBR is the UK’s first fiscal council – a body that can be
referred to as an independent fiscal institution (IFI) or fiscal
watchdog.
•
Rise in number of fiscal
councils
Internationally, fiscal councils have existed in varying forms
for over 60 years. The oldest is the Netherlands’ Central
Planning Bureau (CPB) which was first formed in 1945.
•
However as this chart shows, since the financial crisis there
has been a significant rise in the creation of these bodies.
•
Within the range of fiscal councils across the world, there is
no consensus either on (i) what the core tasks these bodies
should do or (ii) on what institutional form they should have.
•
Interesting international examples include:
•
United States – Congressional Budget Office (CBO)
•
Canada – Parliamentary Budget Office (PBO)
•
South Korea – National Assembly Budget Office
(NABO)
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What does the OBR do?
•
•
•
Core duty is to provide independent and authoritative analysis of the
sustainability of the public finances. In practice, twice a year:
•
Produce the official forecasts of the economy and public finances
•
Assess progress against the government’s fiscal targets (Economic
and fiscal outlooks).
Also reports annually on:
•
the sustainability of the public finances and the health of the public
sector balance sheet (Fiscal sustainability report)
•
how forecasts compare to subsequent outturns (Forecast
evaluation report)
•
information the trends in and drivers of welfare spending (Welfare
trends report).
During fiscal event forecast process, the OBR also has a scrutiny role in
challenging Treasury costing of policy measures.
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Why is the OBR different?
•
OBR is unique among its international peers in that it produces the
government’s official forecasts. While other councils do publish forecasts this
tends to be primarily in a shadowing function.
•
While the OBR’s remit to ‘report on the sustainability of the public finances’ is at
first glance fairly broad, the parameters for this are restricted..
•
The OBR is an advisory rather than a policy-making body that is:
• Restricted under legislation to provide only positive rather than normative
policy recommendations.
• Can only focus on existing government policy rather than alternative
policy options.
•
Institutionally, the OBR is independent of government but accountable both
to the Chancellor and to Parliament for the work it produces. BRC members
regularly attend Treasury Select Committee (TSC) hearings to account for the
analysis in their publications.
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Who are the OBR?
Advisory
Panel
•
•
Lord Burns
Dame Kate
Barker
Ben Broadbent
Prof Wendy
Carlin
• Carl Emmerson
• John Llewellyn
• Prof Andrew
Scott
• Prof Peter
Spencer
• Prof Simon
Wren
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OBR’s governance structures, or ‘watching the
watchdog’
•
OBR’s remit formally set out in a range of documents:
•
Budget Responsibility and National Audit Act
•
Charter for Budget Responsibility
•
Framework document (jointly agreed by Treasury and the OBR)
•
Memorandum of Understanding (signed by HMT, OBR, DWP and HMRC)
•
These are all designed to protect the OBR’s independence.
•
Points to note:
•
The OBR have a legal right to information and assistance from within government
•
Budget Responsibility Committee members are accountable to, but
independent from, politicians.
•
BRC appointments (and dismissals) are made by the Chancellor but the TSC
also have a veto in any appointment decision. This ‘double-lock’ is unique
among other public appointments in the UK.
•
OBR have a multi-annual budget settlement which is made public. There are
a range of international examples (e.g. Hungary) where budget disputes have
been a major source of tension between a fiscal council and the government.
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The Budgeting System & Spending Control
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The Budgeting System
•
•
Public Spending is controlled through the
Budgeting System, in line with the
Government’s fiscal policy and objectives.
TME, DEL and AME
It is designed to create incentives for
Departments to manage spending well so as
AME = 47%
to provide high quality public services that
offer Value for Money.
•
The rules are set out in the Consolidated
Budgeting Guidance (CBG).
•
Spending is split into Departmental
Expenditure Limits (DEL) and Annually
Managed Expenditure (AME).
•
Within that it is split again into Current and
Capital spending.
Total Managed
Expenditure =
£720bn
DEL = 53%
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Evolution in the approach to allocating budgets
Prior to
1992
• Public Expenditure Surveys.
• Annual bilateral negotiations between Treasury &
departments.
• More top-down approach.
• Overall “control total” set each year for next three years.
1992-1998 • Only first year set in stone.
• Separation into DEL/AME and current/capital.
• Firm and fixed three-year departmental budgets set in SRs.
• Introduction of End Year Flexibility (EYF) system (changed to
1998-2010 Budget Exchange in 2011)
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Spending Review 2010
•
October 2010 Spending Review set
out how the Government will
reduce public spending to meet its
deficit reduction plan.
•
Delivered spending reductions of
£81bn in public spending between
2010-11 and 2014-15 (four-fifths of
total £106bn consolidation)
•
Set firm and fixed departmental
budgets for four years from 201112 to 2014-15 and included key
items of Annually Managed
Expenditure (including welfare and
public service pensions)
Approximate real change to resource
spending in Spending Review 2010
£bn, 2010-11 prices
26
Spending Round 2013
•
On 26 June 2013, we announced departmental budgets for
the 2015-16 financial year.
•
£11.5bn savings from current spending (o/w £5bn will
come from efficiency) to provide for a £3bn increase in the
capital envelope.
•
The Government took a zero-based approach to capital
spending to prioritise those projects with the highest
economic value.
27
Spending beyond 2014-15
•
Total Managed Expenditure to fall at same pace in 2015-16,
2016-17 and 2017-18 as in the four year SR10 period
28
Changes to budgets
•
Budgets are set at Spending Reviews – these are fixed for
four years and should not change. This is particularly the
case in the current fiscal climate.
•
But there are two main ways in which a budget can change
in-year:
1. Increasing a department’s overall spending power –
increase their budgets above their current levels
through a Reserve claim.
2. Allowing changes/ flexibility within their budgets,
leaving the total unchanged – through ‘Switches’.
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Controlling Budgets
•
All spending is in DEL unless approved by Treasury Ministers
•
There are four key Treasury control totals:
• RDEL excluding depreciation (i.e. current spending)
• Capital DEL (CDEL),
• an admin budget (within Resource Budget DEL),
• depreciation ring-fence within Resource Budget DEL
Near-cash
Resource DEL
Depreciation ringfence (non-cash)
Capital DEL
administration costs
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DEL Reserve
•
The DEL Reserve is a small unallocated amount within the total DEL
allocated in the Spending Review. It is available for:



•
•
Genuinely UNFORESEEN contingencies
Which are UNAVOIDABLE
That departments CANNOT ABSORB themselves
Claims on the Reserve are only agreed in exceptional circumstances
and need to be authorised by the CST. Process is:
•
SoS letter to Chief Secretary
•
Advice to CST from HM Treasury officials
•
Letter back from CST rejecting or accepting the claim.
Reserve claims are repayable to HMT and are non-recurrent (do not
impact on departmental baselines)
31
Annually Managed Expenditure (AME)
•
AME programmes are often demand-led or otherwise volatile
programmes which are unpredictable and large compared with the
department’s DEL, making it difficult for departments alone to bear the
risks associated with variations in spending
•
AME programmes are spending like any other. They impact on the fiscal
framework in the same way as DEL spending. They need taxes to be
raised to finance them.
•
Careful monitoring and management is just as important as it is with
DEL. Two key forecasts produced by the OBR: Autumn and Budget
•
Departments are now required to seek HMT permission for increases in
AME spending, and may be required to make offsetting savings.
•
This includes permission for policy reforms, any administrative changes
which impact on expenditure (e.g. measures to promote take-up), and
forecasting changes
32
Flexibility between years: Budget Exchange
•
Budget Exchange (BX) was introduced in 2011-12 to replace the End
Year Flexibility (EYF) system.
•
Under BX, Departments are allowed to surrender an underspend to
HMT at the Supplementary Estimate in return for a DEL increase in the
following year, subject to a % limit that has been set for each
department.
•
Carry-over from one year will be netted off what can be carried
forward in the next year, to prevent the accumulation of spending
power over time.
•
As a result of the significantly large underspends in 2012-13, HMT
relaxed the published BX rules.
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Over-spenders
•
If a Department overspends its DEL in any given year, then the
Treasury will investigate the reasons for the breach.
•
Where appropriate, we will reduce the Department’s budget in the
next year by an equal amount.
•
Other penalties can also be imposed e.g. Lowering of delegated
authority
•
The Department will also face an independent investigation from the
National Audit Office (NAO), who report to Parliament.
•
The Accounting Officer (senior official) and Minister will then be
summoned to a Parliamentary hearing to explain the overspend.
•
Any breach of a voted limit leads to an Excess Vote
34
Annual Reports & the National Audit Office
35
Annual Report & Accounts
•
Each department receiving supply is required by the
Government Resource Accounting Act (GRAA) 2000 to
prepare annual accounts which must be laid before
Parliament in accordance with a statutory deadline.
•
These accounts must be prepared in accordance with
Generally Accepted Accounting Practice (GAAP) which
for the UK public sector is IFRS with minimal amendment
•
An independent board oversees and advises on the
process of amending IFRS for public sector use and
reports to Parliament on what amendments are made.
•
Parliament reviews departmental accounts and exercises
oversight through the select committee structure.
36
The National Audit Office
•
Departmental accounts are subject to independent audit
carried out by the National Audit Office
•
The Comptroller and Auditor General who leads the NAO
reports to Parliament on whether the accounts are “True
& Fair” and on whether spending is “regular” – i.e.
whether it is consistent with what Parliament intended.
•
If departments have spent in excess of amounts voted to
them by Parliament a separate report is prepared by the
NAO and sent to the Public Accounts Committee.
•
The NAO also prepare reports to Parliament covering a
wide range of public expenditure which assess whether
departments achieved “value for money’.
37
Whole of Government Accounts
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Whole of Government Accounts
•
The aim of the Whole of Government Accounts (WGA) is to
present a comprehensive accounting standards based picture of
public expenditure and the assets and liabilities of the entire public
sector.
•
In the UK nearly 4,000 public entities are consolidated in the WGA
including regional & local government
•
A significant benefit over the national accounts is that WGA
captures comprehensive information on assets & liabiltiies – for
example state employee pensions and nuclear decommissioning
liabilities
•
It has had a significant impact on public policy decisions around
state control (e.g. Rail Infrastructure) and the provision of long run
state benefits (e.g. State employee pensions)
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Questions?
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