Select Committee on Liaison Second Report

3  The Government's financial system


27. The characteristics needed in the Government's financial reporting are comprehensiveness, clarity and transparency. Unfortunately the UK Government's financial arrangements and reporting are exceptionally complex, resulting in a lack of transparency.[17] This complexity results mainly from the fact that they bring together three different financial frameworks created at different times for different purposes:[18]

  • Departmental budgets, largely determined in Spending Reviews and used by the Government to control public spending; they are administrative controls rather than giving authority to incur expenditure;[19]
  • Estimates, which seek (annually) parliamentary authority for expenditure which Parliament has not authorised in other ways; and
  • Resource Accounts, which report the expenditure Departments have actually made (the "outturn").

28. Since all these operate on different bases, it is extremely hard to read across from one to another, and complicated reconciliations are needed to relate them to each other. In particular:

  • more than a third of government spending included in budgets is not voted in Estimates (for example "standing charges" such as judges' salaries which are authorised by existing legislation and therefore do not need annual approval);[20]
  • conversely, about a sixth of what is included in Estimates is not included in budgets (mainly Departments' grants to Non-Departmental Public Bodies and block grants to the devolved administrations);
  • about a quarter of expenditure and income in Resource Accounts is not in Estimates;
  • of the 53 types of transaction, 34 fully align across budgets, Estimates and Resource Accounts, but the remaining 19 do not; and
  • there are similar misalignments between the capital spending recorded in each framework.

The causes of these misalignments and the reasons for them are set out in Annex 1.

29. The problem is reflected in the contents and the number of documents which report planned or actual expenditure to the House. There are twelve types of reporting document (Table 1). This looks like an embarrassment of riches, but it is not, both because the figures in the different documents cannot easily be compared and because the information is not always presented in a helpful way or adequate for the purposes of scrutiny, as we discuss in the next chapter.Table 1. Current financial publications presented to Parliament
Publication Purpose Type of financial data included Date published
Main Estimates Seek parliamentary approval for Departments' resource and cash requirements for current financial year EstimatesApril/May (5 weeks after Budget)
Supplementary Budget Information (SBI) Reconciles between spending plans in Main Estimates and Departmental Reports Estimates and budgets April/May (5 weeks after Budget)
Public Expenditure Statistical Analyses (PESA) Bring together outturn data and spending plans for UK public expenditure as a whole BudgetsApril/May (5 weeks after Budget)
Departmental Reports Provide an overview of Departments' performance and spending plans BudgetsMay
Summer Supplementary Estimates Seek parliamentary approval for changes to Departments' in-year resource and cash needs EstimatesJune
Departmental Resource Accounts Report Departments' outturn for the previous financial year against plans AccountsJune/July
Public Expenditure Outturn White Paper Provides provisional outturn data for Estimates and various budgeting controls Estimates and budgets July
Autumn Performance Reports Report Departments' performance against their Public Service Agreements -November
Winter Supplementary Estimates Seek parliamentary approval for changes to Departments' in-year resource and cash needs EstimatesNovember
Votes on Account Seek parliamentary approval for Departments' spending in the early months of the next financial year EstimatesNovember
Spring Supplementary Estimates Seeks parliamentary approval for changes to Departments' in-year resource and cash needs EstimatesFebruary
Statement of Excesses Seek parliamentary approval for overspends EstimatesFebruary

Source: HM Treasury

Results of complexity

30. This situation has damaging consequences for parliamentary scrutiny:

Had such a system been deliberately designed, it could fairly be assumed that it had been set up with the specific purpose of making it impossible to hold the Government and Departments to account.

31. But the consequences extend beyond parliamentary scrutiny, since Government Departments themselves struggle to compile and understand the figures. The complexity is burdensome and costly to them, makes the control of spending more difficult and weakens the incentives for good financial management and the ability to provide it. As the Government has put it, "the current state of affairs can be confusing for users and consumers; restricts good financial management in Departments; is costly and inefficient for Government; and makes it difficult for the House of Commons to track how resources are being used".[21]

32. It could be argued that government finances are inherently complex, and will only ever be understood by experts. We reject this view. Undoubtedly the financial processes and the details of financial management are and will remain complex, but the overall shape of the Government's finances and changes in it are matters which could and should be presented comprehensibly, like the overall finances of any other organisation.

Plans for reform

33. The Treasury Committee, chaired by a member of the working group, commented in June on the disjunction between the sums formally authorised by the House and those set out in the Comprehensive Spending Review, and recommended:

34. The Government responded in its Governance of Britain Green Paper that it would improve the transparency and accountability of government expenditure, in line with the Treasury Committee's recommendations. In particular it "will ... simplify its reporting to Parliament, ensuring that it reports in a more consistent fashion, in line with the fiscal rules, at all three stages in the process; on plans, Estimates and actual expenditure outturns." It notes that this "will make it easier for Parliament to understand how the Government has used the resources voted to it, and thus to hold the Government to account. It will also mean greater administrative efficiency."[24]

35. The Treasury has established a project known as the "Clear line of sight" or the Alignment Project. Its objectives are to:

  • "align budgets, Estimates and accounts in a way that allows [the Treasury] to control what is needed to deliver the fiscal rules, incentivises value for money, and reduces burdens on government departments.
  • "combine and/or align the timing of publication of government financial reporting documents ... in order to avoid duplication and make them more coherent, and simplify the language/terminology used in them to bring it more into line with commercial practice."

36. The Project's "vision" (which awaits approval by stakeholders) is "to create a single, coherent financial regime, that is effective, efficient and transparent, enhances accountability to Parliament and the public, and underpins the Government's fiscal framework, incentivises good value for money and supports delivery of excellent public services by allowing managers to manage."

37. The Project is highly ambitious. It is likely to result in proposals for changing the whole basis of Parliament's financial control, shifting this to a system based on the controls currently used in budgets (Departmental Expenditure Limits, or DELs, and Annually Managed Expenditure, or AME, together with the Net Cash Requirement), and for a recasting and consolidation of the entire range of reporting documents. It may not be possible to remedy all the misalignments, and there are likely to be some difficult issues to resolve. The extent to which the House approves any breakdown within the overall departmental totals and the level of detail which the House is informed of will need to be considered. The Project will take time: detailed project planning took place from January to March 2008, the new system will be designed in 2008-09, implementation planning will take place in 2009-10, and implementation of the new system is intended to begin in 2010-11, subject to resolving legislative and other issues.


38. We regard removing complexity from the Government's financial system as fundamental to improving financial scrutiny, as well as to improving financial management in Departments. The Alignment Project offers the possibility of achieving this. In revising the basis of Parliament's financial control and the system of reporting to Parliament, it is potentially a historic development in the long story of Parliament's scrutiny of government finances.

39. The Alignment Project is still at a very early stage, and much will depend on the detail of any proposals. We cannot speak for the House as a whole in this matter. The Treasury has undertaken to consult "key stakeholders", including the House, and we would be happy to assist in that consultative process, which needs to extend beyond members of select committees. Any change in the form of the Estimates requires approval by the PAC and the Treasury Committee, but the scope of the changes which may be proposed suggests that approval by the House will be needed. We note that the Steering Committee includes one of the Principal Clerks of Select Committees and a representative of the NAO. We particularly welcome the involvement of the NAO.

40. In the meantime we emphasise the magnitude of the prize which is potentially available: a comprehensible and coherent system of planning, authorising and reporting government expenditure, making it possible for the House and select committees to scrutinise the Government's finances far more effectively. We commend the Alignment Project to the House.

17   For a description of the system (and scrutiny of it) see Committee Office Scrutiny Unit, Financial Scrutiny Uncovered: How the Government Manages its Finances and how Parliament Scrutinises them ( Back

18   A fourth framework is that of the National Accounts, used in fiscal and monetary policy (e.g. for the Chancellor's "golden rule"). Back

19   Spending Reviews determine Departmental Expenditure Limits (DELs), but not Annually Managed Expenditure (AME), such as social security benefits, which the Government does not think it appropriate to subject to firm multi-year limits. Back

20   In 2006-07, the Estimate for the Department for Environment, Food and Rural Affairs was under-spent by £751 million (12%), while its budget was over-spent by £17 million. Back

21   Ministry of Justice, The Governance of Britain, Cm 7170 (July 2007), para 110. See National Audit Office, Managing Resources to Deliver Better Public Services, HC 61 (2003-04). Back

22   Each Department has a budget - DEL (Departmental Expenditure Limits). This does not cover Annually Managed Expenditure (AME), but the Government's overall expenditure plans encompass aggregate AME. Back

23   Treasury Committee, Sixth Report of 2006-07, The 2007 Comprehensive Spending Review: Prospects and Processes, HC 279, para 110 Back

24   Ministry of Justice, The Governance of Britain, Cm 7170 (July 2007), paras 109-111 Back

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Prepared 18 April 2008