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) 14
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 15
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. 16
The Office of Budget Responsibility 17
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. 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) Rise in number of fiscal councils 18
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. 19
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. 20
Who are the OBR? Lord Burns Dame Kate Barker Advisory Panel Ben Broadbent Prof Wendy Carlin Carl Emmerson John Llewellyn Prof Andrew Scott Prof Peter Spencer Prof Simon Wren 21
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. 22
The Budgeting System & Spending Control 23
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 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. AME = 47% Total Managed Expenditure = 720bn DEL = 53% 24
Evolution in the approach to allocating budgets Prior to 1992 Public Expenditure Surveys. Annual bilateral negotiations between Treasury & departments. 1992-1998 More top-down approach. Overall control total set each year for next three years. Only first year set in stone. 1998-2010 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 Budget Exchange in 2011) 25
Spending Review 2010 October 2010 Spending Review set out how the Government will reduce public spending to meet its deficit reduction plan. Approximate real change to resource spending in Spending Review 2010 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 2011-12 to 2014-15 and included key items of Annually Managed Expenditure (including welfare and public service pensions) 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. 29
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 30
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. 33
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 38
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) 39
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Questions? 41