The British budgetary system: transparency, performance, accountability

Rachel Fentem and Richard Williams

January 2015

First session

• Introduction to HM Treasury

• Introduction to the Department for Communities and Local Government

• The UK context – political, economic and fiscal

2

UK context

• Legislative sits in Houses of Parliament:

– House of Commons – principal chamber; filled by General Election every 5 years

– House of Lords – largely appointed chamber; more limited role particularly on fiscal matters

• Executive drawn from Parliament

• Supported by permanent, non-political civil service

• Various responsibilities devolved to Scottish, Welsh and

Northern Irish Parliaments.

3

HM Treasury – who we are

• HM Treasury is the UK government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy, and working to achieve strong and sustainable economic growth.

• We are responsible for:

– public spending: including departmental spending, public sector pay and pensions, annually managed expenditure and welfare policy, and capital investment

– financial services policy: including banking and financial services regulation, financial stability, and ensuring competitiveness in the City

– strategic oversight of the UK tax system: including direct, indirect, business, property, personal tax, and corporation tax

– the delivery of infrastructure projects across the public sector and facilitating private sector investment into UK infrastructure

– ensuring the economy is growing sustainably

4

Treasury Ministers

Lord Deighton

Commercial Secretary

Andrea Leadsom

Economic Secretary

David Gauke

Financial Secretary

Danny Alexander

Chief Secretary to the Treasury

Priti Patel

Exchequer Secretary

George Osborne Chancellor of the Exchequer

5

HM Treasury within the UK Government

6

HM Treasury

Cabinet Office

No. 10 – Prime Minister

Departments and Local Government

Office for Budget

Responsibility

Outline of UK public finance system • Fiscal policy set by HM Treasury – Chancellor determines system of fiscal rules,

which are assessed by independent Office for Budget Responsibility (OBR)

• The OBR produces 5 year forecasts of tax and spend for the annual “Budget” and “Autumn Statement”, with Chancellor making any policy adjustments necessary to meet his fiscal rules

• This gives a total spending envelope, which is allocated to departments as part of the “Spending Review” process – eg SR10, SR13

• Typically this is done on a 3 year basis, although 1 year allocations may be made closer to an election.

• In the annual “Budget” and “Autumn Statement”, the Chancellor will make any further adjustments to tax policy and spending consistent with meeting his fiscal, economic and political objectives

• Departmental spending is usually only subject to minor changes at the Budget

7

Treasury’s role in the public finance system

- Statutory role, accountable to Parliament for controlling spending

- Designs budgeting and public spending framework

- Sets annual Budget (including tax changes); and allocates multi-year Spending Reviews (currently set to 2015/16)

- Departments need Treasury consent before committing any expenditure

- In practice, departments are delegated the authority to commit spending up to an agreed limit without Treasury consent

- The official head of each department is also accountable to Parliament for their spending (as an ‘Accounting Officer’)

8

INTRODUCTION TO DCLG – ROLE IN FUNDING AND SETTING

POLICY FOR LOCAL AUTHORITIES

9

DCLG Responsibilities

Includes housing supply and regulation, Local Economic Growth and local

communities issues as well as Local Government funding and policy

i.e some functions of Ministry of Finance in Ukraine (local budget

planning and execution) and some of Ministry of Regional Devt,

Construction and Municipal Economy

Current ministerial priorities

• putting local councils and businesses in charge of economic growth and

bringing new business and jobs to their areas

• getting the housing market moving again so there are more homes to buy and

to rent at prices people can afford

• ensuring Council Tax payers get value for money and making their local

council accountable to them

• turning round the lives of troubled families, giving them the chance of a better

life and reducing the cost to the taxpayer

• bringing people together in strong united, communities

10

Funding local government

Local government spending accounts for around a quarter of public spending in

England. Local authorities are funded through:

• business rates (tax paid on business property, based on rentable value)

• central government grants

• council tax (tax on household, based on value of residential property)

• income from rents, fees and charges, sales, investments

The main areas of local authority spending in England are:

• spending on capital projects such as roads or school buildings

• revenue expenditure, mainly on pay and other costs of running services

• revenue spending on council housing;

Local Authorities have approx. 1,300 statutory duties (e.g. to provide social care,

child protection), and provide a variety of discretionary services, e.g. lesiure

11

Setting budgets and allocating funds:

• Every 1-3 years, DCLG negotiates Local Government Budget (Departmental

Expenditure Limit) with Treasury in each Spending Round

• Each year, the Local Government Finance Settlement sets out how this will be

distributed between 350 local councils. Often set out 2 years ahead.

• Typical timetable:

• Public consultation in summer

• ‘Provisional’ settlement announced to Parliament in December, with

detailed information for each area on grant and overall ‘spending power’

• December/ January – ministers take representations from councils and

other interested parties

• Early February – Final settlement approved by Parliament

• Feb: Each council sets its budget and its level of council tax in light of this

information [have to hold referendum if they wish to raise council tax 2% or

more]

• 1st April: start of financial year

12

UK political context

- General Election in May 2010 returned a Coalition Government: Conservative (Prime Minister – David Cameron) and Liberal Democrat (Deputy Prime Minister – Nick Clegg)

- Coalition Agreement set out strong commitment to deficit reduction – largely through spending cuts rather than taxation

- General election due in May 2015

13

Economic context: financial crisis hit UK harder than most other G7 countries

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90

95

100

105

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GDP levels after Q1 2008

Canada France Germany Italy Japan UK US Euro area

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The result was the highest deficit since WW2

-6

-4

-2

0

2

4

6

8

10

12

1948 1953 1958-59 1963-64 1968-69 1973-74 1978-79 1983-84 1988-89 1993-94 1998-99 2003-04 2008-09

Public sector net borrowing

% GDP

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The need for fiscal consolidation

Source: OBR March 14 EFO

UK Spending: Expenditure v Receipts

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35

37

39

41

43

45

47

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1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07 2010-11 2014-15 2018-19

Per ce

nt o

f G

DP

Current receipts Total managed expenditure

Forecast

Source: ONS, OBR. Excludes Royal Mail and APF transfers.

16

Fiscal rules

• In 2010 the Coalition government set out 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

17

Latest fiscal forecast

• Latest progress slides (AS14)

18

Second session

• Overview of the public spending framework and fiscal cycle

• Overview of the Budget process and and tax policy making framework

19

UK institutional framework

20

Parliament

Votes each year to approve tax policy through Finance Bill and spending plans through Estimates

HM Treasury

Sets economic and fiscal policy and public spending plans

HM Revenue & Customs

Collects taxes

Central government

departments

Provide public services and

welfare

Regional / local government

Responsible for some public

services + some taxation

TAX SPEND

Office for Budget

Responsibility

Independent Forecaster

Office for National

Statistics

Collects and publishes

statistics

National Audit

Office

Audits accounts and

assesses vfm

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GIS

LA

TU

RE

IN

DE

PE

ND

EN

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BO

DIE

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GO

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The Treasury’s role in public spending

• There is an established convention that Parliament

expects the Treasury to control all other

departments in matters of finance and public

expenditure.

• This is achieved through:

o designing the budgetary framework (rules

are set out in Consolidated Budgeting

Guidance)

o setting departmental budgets through the

multi-year Spending Review process

o controlling departments’ spending on an

ongoing basis so they, and the public sector

as a whole, stay within budgets

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The public spending framework in 2015

• Move from cash to resource account budgeting in 2001

• Budgets devolved to departments, split into resource and capital, DEL and AME:

– Departmental Expenditure Limits (DEL): fixed

line ministry budgets e.g. health, education,

defence.

– Annually Managed Expenditure (AME): demand-

led expenditure e.g. welfare/social security, debt

interest.

• DEL contingency reserve

• Restrictions on switches and end-year carry over

• Departmental Unallocated Provision

• Strict response to breaches of departmental limits

AME 51.5%

DEL 48.5%

Total Managed Expenditure (TME) for 2014/15 = £732bn

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What is it spent on?

Total Managed Expenditure (TME) is expected to be around £732bn in 2014-15:

23

A brief history of Spending Reviews

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Prior to 1992

• Public Expenditure Surveys.

• Annual bilateral negotiations between Treasury & departments.

1992-1998

• Overall “control total” set each year for next three years.

• Firm and detailed plans published for the year ahead.

1998-2015

• Firm multi-year departmental budgets set in Spending Reviews.

• Separation of spending into DEL/AME and current/capital.

UK Spending Review process

Start

• Set envelope for period of Spending Review

• Announce key policies: e.g. public sector pay

• Zero-based capital review

• Set priorities – e.g. for current government, spending on health, schools and overseas aid.

1-2

months

• Guidance to line ministries, including planning assumptions

• Bilateral discussions between HMT and departmental Secretaries of State

• Discussions in Cabinet

SR Day

• Spending Review published and announced to Parliament

• Debate in Parliament and scrutiny by Treasury Select Committee – but no vote until the annual Estimates process

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-2

0

2

4

6

8

10%

pts

of

GD

P

Reduction in cyclically-adjusted primary spending as a % GDP, 2009-2015.

Source: European Commission

Through its Spending Review process, the UK has been able

to deliver relatively large spending reductions over this

parliament

Official – Sensitive 26

-60% -50% -40% -30% -20% -10% 0% 10% 20%

CLG Communities

Environment, Food and Rural Affairs

Cabinet Office

CLG Local Government

Transport

Work and Pensions

Justice

HM Treasury

Law Officers' Departments

Business, Innovation and Skills

Foreign and Commonwealth Office

Home Office

Culture, Media and Sport

Energy and Climate Change

Small and Independent Bodies

DWP with non-baselined spending

HM Revenue and Customs

Defence

Single Intelligence Account

Wales

Scotland

Northern Ireland

Education

NHS (Health)

International Development

Reductions to departmental budgets reflect government priorities

27 Percentage real-terms cumulative RDEL baseline reduction from 2010-11 to 2015-

16

Schools, health and aid protected

(aid budget expanded to reach 0.7%

GNI from 2013)

Local Government

spending power is

estimated to fall by

around 15% over 2010-11

to 2015-16.

Many of the savings have been delivered through cross-cutting measures

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Welfare £18bn savings by 2014-15 (announced SR10) and a further £3.6bn savings in 2015-16

Public sector pay 2-year pay freeze and subsequent increases of ≤1% expected to save £12bn by 2014-15

Public sector pensions Independent review; new scheme designs, RPI/CPI switch and contribution increases expected to save £430bn over 50 years

Efficiency £14bn annual efficiency savings delivered by April 2014, underpinned by engagement with Cabinet Office Efficiency and Reform Group

Central government administration

By the end of 2015-16, central government’s administration costs will have fallen by over 40% in real terms since 2010-11, or around £7bn

Parliamentary authorisation and control of public spending

• Supply Estimates Process is long-standing parliamentary process for providing legal authority for spending and retention of income by departments

• Parliament scrutinises, debates and votes on spending in the annual Estimates

• All spending (DEL and AME) within a department’s budget is included – both the core department, and spending by any Arm’s length Bodies

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• HMT sets the standards for spending control in Managing Public Money.

• Formally, departments need Treasury consent before undertaking expenditure or committing to other resource consumption.

• In practice, limits of delegated authority are set, above which HMT approval is required.

• But:

• all legislation with spending implications 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

• HMT has approval over anything novel, contentious or repercussive

• The need for Treasury approval embraces all the ways in which departments might make public commitments to expenditure (e.g. speeches, publications), not just Estimates or legislation.

In-year spending control

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• 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, and that departments cannot absorb themselves.

• Claims on the Reserve are only agreed in exceptional circumstances and need to be authorised by the Chief Secretary.

• Reserve claims are repayable to HMT and are non-recurrent (i.e. they do not impact on departmental baselines).

DEL Reserve

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What happens if a department overspends?

• Overspending of the specific spending limits approved and voted by Parliament is regarded as an Excess Vote.

• Any excesses are identified at the end of the financial year when outturn is compared to the provision in the Estimate and published in the Annual Report and Accounts.

• The cross-party parliamentary Public Accounts Committee reports on any Excess Votes.

• Parliament grants formal retrospective approval to any unauthorised spending.

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Welfare cap

• New mechanisms to control spending continue to be developed: welfare cap introduced by the current government from 2015-16

• Welfare cap is a nominal spending limit for welfare spending within scope in each year of the spending forecast

• Spending on the state pension and counter-cyclical unemployment benefits are excluded from the cap. All other welfare spending is included.

• There is a 2% forecast margin to allow for forecast change.

• If spending breaches the cap in any year, Parliamentary accountability measures are triggered.

• The government must report on performance against the cap each year.

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Cash management

• The Debt Management Office manages government cash flow.

• Departments provide daily forecasts of spending and receipts, and HM Revenue & Customs provides a daily forecast of taxation revenues.

• Departments’ cash requirements are calculated on a monthly basis and paid on the first working day of each month.

• HM Treasury monitors the accuracy of departmental forecasting, and annual performance is notified to Parliament.

34

Planning and performance frameworks

Next Steps

2010 - Present 1998 - 2010 1988 - 1998

Citizens Charter

Business Plans Public Service Agreements

• Measured agency performance

against ministerially set targets

• Set rights for standards of

services

• Set long-term priorities and aligned

central and departmental outcomes

• Coalition priorities linked to

policy outputs

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The Budget

• The single most important financial and economic statement made by the Chancellor of the Exchequer each year.

• Key role of Budget is controlling public finances – by setting the overall ‘fiscal stance’ (revenue, spending, borrowing).

• Overall fiscal stance is made up of many individual tax and spending measures.

• These must also support the Government’s wider economic objectives – second key role of Budget.

• Budget measures are often enacted in the Finance Bill, which begins its annual process just after Budget.

• Budgets typically take place in March, followed by an Autumn Statement later in the year.

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Budget day

• On the day of the Budget, the Chancellor makes a speech to Parliament. The Budget document (and multiple supplementary documents) are published in hard copy and online.

•The Budget typically includes over 250 separate policy announcements

• Alongside the Budget, the Office for Budget Responsibility publishes an economic and fiscal forecast.

• The Budget receives much scrutiny from the UK media.

• The announcement is followed by debates in the House of Commons and House of Lords, and by hearings by the Treasury Select Committee.

• Parliament votes on Provisional Collection of Taxes Act (PCTA) Budget resolutions.

• Press office coordinates media briefing.

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The Scorecard

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The Office for Budget Responsibility

• Produce independent 5 year forecast for the economy and public finances as well as commentary in their Economic and Fiscal Outlook

• Scrutinise and assess the costs of all policies affecting the public finances

• Forecast and costings involve iterated challenge sessions with officials from the Treasury, HMRC and the Department of Work and Pensions (DWP)

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Objectives for tax policy

• HMT objectives:

• Ensure stable and sustainable tax receipts to fund Government spending in the least distortive way.

• Chancellor’s principles for the tax system:

• Efficient and support growth;

• Certain and predictable;

• Simple to understand and easy to comply with; and

• Fair, reward work, support aspiration and ask the most from those who can most afford it.

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How we make tax policy

Tax policy is a joint responsibility of the Treasury and HMRC.

Subject to a framework developed in 2010 to improve predictability, stability and simplicity within the tax system.

Main aspects are:

• Earlier announcement of intended policy changes – a longer policy cycle

• Fewer, better changes to the tax system – taking advantage of the longer cycle to conduct robust impact analysis, consult on policy options and get legislation right

• Fewer changes, and work by the Office of Tax Simplification (OTS) to identify ways to simplify the tax system

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UK fiscal and tax-policy making cycle

Forecast Fiscal Event Finance Bill

Spring OBR economic and fiscal forecast

BUDGET Policy announcements (may include tax, spending, supply-side, financial services, etc)

Confirm policies for inclusion in forthcoming Finance Bill. Introduce legislation.

Summer Consultation on tax policies announced at Budget.

Autumn OBR economic and fiscal forecast

AUTUMN STATEMENT

Policy announcements

(may include tax, spending,

supply-side, financial

services, etc)

Publish draft legislation for

following year’s Finance Bill.

Publish uprating tables.

Winter Consultation on tax policies announced at AS.

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The Finance Bill • The Finance Bill turns the Budget into law

• At least once a year or there’s no income tax

• Founded on Budget Resolutions

• Lead Minister is the XST

• Budget statement and First Reading

• Budget Debate – four day debate

• Second Reading – one day debate

• Committee of the Whole House – two day debate

• Public Bill committee – five to six weeks (detailed scrutiny)

• Report Stage and Third Reading – two day debate

Fourth session

• Accountability and transparency

• Public communications

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Managing Public Money

• This HM Treasury publication provides guidance on how to handle public funds to ensure that taxpayers’ money is spent responsibly.

• Some of this is about common sense and sound financial management.

• There are also some rules and conventions about how certain things are handled, which ensure that policies, programmes and projects work smoothly and serve their intended purposes.

45

Annual Report & Accounts

• Each department is required by law to prepare annual accounts which must be laid before Parliament by a certain deadline.

• These accounts must be prepared in accordance with IFRS accounting standards.

• 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.

OFFICIAL - SENSITIVE 46

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 prepares reports on whether departments are achieving value for money.

OFFICIAL - SENSITIVE 47

Whole of Government Accounts

• Whole of Government Accounts (WGA) consolidates the audited accounts of over 3800 organisations across the public sector in order to produce a comprehensive, accounts-based picture of the financial position and performance of the UK public sector.

• WGA is based on International Financial Reporting Standards (IFRS), the system of accounts used internationally by the private sector. The same standards are used for the production of Departments resource accounts.

• It is a major step forward in transparency and accountability, and globally the most ambitious public sector consolidation.

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There is also a key role for NGOs

• Institute for Fiscal Studies – independent research institute with aim of informing public debate on economics in order to promote the development of effective fiscal policy

• Institute for Government – independent body working to improve government effectiveness through research, training, events and advice

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Transparency on funding and local

spending

PROVISIONAL 2015-16 SPENDING POWER

liverpool

Spending Power Components

2014-15

adjusted 2015-16

1 Council Tax Requirement excluding parish precepts £m 124.86 124.96

2 Settlement Funding Assessment £m 350.83 294.43

3

SFA: Adjustment to reflect Section 31 grants for business rates

initiatives £m 1.67 2.34

4 minus Council Tax Support Funding to Parishes £m 0.00 0.00

Efficiency Support Grant £m 0.00

Commons Registration Authorities £m 0.00 0.00

Inshore Fisheries Conservation Authorities £m 0.05 0.05

Lead Local Flood Authorities £m 0.07 0.04

Community Right to Challenge £m 0.01

Community Right to Bid £m 0.01

Fire Revenue Grant (FireLink and New Dimension elements) £m 0.00 0.00

5 Council Tax Freeze Grant 2015-16 £m 1.73

6 New Homes Bonus £m 5.39 7.38

New Homes Bonus: returned funding £m 0.53 0.52

Council Tax Support New Burdens Funding £m 0.34 0.16

7 Local Council Tax Support and Housing Benefit Admin Subsidy £m 5.78 5.08

Social Housing Fraud £m 0.00

City of London Offset £m 0.00 0.00

GLA Transport Revenue Grant £m 0.00 0.00

8 Department of Health Revenue grant £m 0.53 0.72

Public Health Grant (Ring-fenced) £m 41.44 41.44

9 Adult Social Care New Burdens £m 2.30 2.30

1

0

Better Care Fund

£m 19.84 39.83

Provisional Revenue Spending Power including Better Care

Fund £m 553.65 521.00

Change in Provisional Revenue Spending Power 2015-16 £m -32.66

Change in Provisional Revenue Spending Power 2015-16 -5.9%

Example: Funding for Liverpool City Council Transparency Code 2014 Local authorities must publish details of each

individual item of expenditure that exceeds £500.

This includes:

• individual invoices

• grant payments

• expense payments

• payments for goods and services

• grants

• grant in aid

• rent

• credit notes over £500, and

• transactions with other public bodies

For each individual item of expenditure the

following information must be published:

• date the expenditure was incurred

• department which incurred the expenditure

• beneficiary

• summary of the purpose of the expenditure9

• amount

• Value Added Tax that cannot be recovered,

• merchant category (eg. computers, software) 50

Fiscal event communications

• Official documentation: the Budget Red Book, supplementary documents, material for tax specialists

• Digital communications: website, infographics, Facebook

• Ministerial speeches, media appearances, visits

• https://www.gov.uk/government/topical-events/budget-2014

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Overall levels of benefits, tax credits and public service spending receipt, after tax of households in 2015-16 as a percentage of 2010-11 net income (including households’ benefits in kind from public services) before and after consolidation.

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Analysis of distributional impact is also published

HM Treasury website – Budget 2014

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Stamp duty land tax fact sheet – Autumn Statement 2014

HM Treasury twitter feed

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HM Treasury digital products are used by the BBC and others

Stakeholder engagement

• Publish a ‘call for representations’ from stakeholder groups (including business representation bodies, tax specialists, local government, charities, etc.) in advance of the Budget

• Chancellor and other Treasury ministers meet with highest profile stakeholder groups e.g. CBI; officials meet with others to discuss their ideas and ‘asks’

• Some may be invited into the Treasury for roundtable discussions on particular topics

• On the day of the Budget, phone calls from ministers and senior officials to key stakeholders

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Budget 2015 – call for ideas

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Spending Review communications in 2010

• Spending Challenge: public sector workers and public submitted ~ 40,000 ideas through a website, leading to 25 policy suggestions for SR

• Independent Challenge Group: external experts and Civil Service leaders worked with HMT and departments on innovative ideas for public spending reforms, reporting to CX and CST

• Permanent Secretaries Spending Review Group: to address cross-cutting issues (e.g. localism, efficiency)

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