House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Third Report

1 Getting value for money from government financial resources

1. In 2006-07, government departments spent around £558 billion on public services, an increase of 33% since 2003. Government expenditure is expected to grow further to £678 billion by 2010-11, although the rate of growth is forecast to slow. In addition, departments manage assets worth £441 billion. The 2007 Comprehensive Spending Review has placed great importance on effective management of financial resources. In particular, departments are expected to achieve £30 billion in value for money savings by 2011. In order to meet these challenges, departments must improve their capability in all areas of financial resource management, including setting accurate budgets, monitoring resource utilisation and operational performance, and accounting for expenditure.

2. In 2001-02, HM Treasury led the introduction of full Resource Accounting and Budgeting[3] to government, designed to provide departments with the information to determine the relative value for money of different activities, identify areas of waste or low productivity, improve the management of assets and liabilities and improve the quality of the services they deliver.[4] Progress in implementing these systems was initially slow. In 2003, only 28% of departments had made good progress in implementing full Resource Accounting and Budgeting, but this figure has now risen to 92% of departments.[5] Furthermore, almost all departments now consider that they have sufficient information to scale back, cease or switch resources between programmes.[6]

3. Fewer than half of central government departments produce their in-year reports based on data that is always accurate and up-to-date. In addition, although some progress has been made, only 39% of departments produce and forward in-year reports to their boards within 10 working days of the period-end, the standard used by HM Treasury.[7] Some 80% of departments who sponsor executive agencies and non-departmental public bodies report the financial information of the core department and their sponsored bodies on a uniform basis. Some departments have, however, experienced particular difficulties in collecting timely and reliable information from these bodies.[8]

4. Resource Accounting and Budgeting should enable departments to improve the management of their assets and liabilities, and HM Treasury's Green Book on investment appraisal contains longstanding guidance on the subject.[9] Furthermore, following the 2007 Comprehensive Spending Review, departments are now required to produce asset management strategies.[10] Notwithstanding the fact that central government is on course to achieve its target for the sale of surplus assets, management of assets and liabilities is an area in which departments remain weak. 19% of departments, collectively managing £23 billion of assets, consider themselves weak at balance sheet management.[11]

5. On the whole, departments have not significantly improved the reliability of their expenditure forecasts.[12] For example, between 2002-03 and 2006-07, there was a marked upward trend in underspending of capital expenditure. Almost 25% of planned capital expenditure for 2006-07 was carried forward into 2007-08 under the End Year Flexibility system, the mechanism to allow unspent provision in one year to be carried forward to the next (Figure 1).[13] Three departments—the Home Office, the Department for Constitutional Affairs and the Department for Culture, Media and Sport—spent less than 90% of their final forecast of capital expenditure in at least four of the five years between 2002-03 and 2006-07.[14] Total underspending against resource budgets between 2002-03 and 2006-07 was around £1.8 billion. Some departments, for example the Department for Children, Schools and Families, perform better than others in accurately forecasting and managing expenditure.[15] Although levels of underspending remain high, since 2001-02 fewer departments have spent more than their forecast final expenditure, resulting in fewer qualifications to their resource accounts on the grounds of an excess vote.[16]

6. There is relatively limited Parliamentary scrutiny of government spending plans and estimates compared with that for departments which overspend. The House of Commons Liaison Committee was critical of the quality of information supplied by departments in the Estimates Memorandum, which set out the principal reasons for, and likely operational impact of, the changes to the budgets proposed in their Supplementary Estimates. The lack of scrutiny of the robustness of departments' Main and Supplementary Estimates might present a perverse incentive for departments to, for example, build in an unnecessary level of contingency to their main and supplementary Estimates to ensure that they do not require an Excess Vote.[17]
Figure 1: Amounts carried forward as End Year Flexibility are increasing faster for capital expenditure than resource expenditure

Source: HM Treasury

7. Full End Year Flexibility, introduced by HM Treasury in 1999-2000, is designed to encourage departments not to spend any remaining budget on non-essential items in the last months of the financial year. In the current fiscal environment, HM Treasury have applied stricter controls on how much unspent resource departments will be able to draw-down. As a result, some departments had not being able to utilise the level of unspent resources which they had expected to be able to under the End Year Flexibility arrangements.[18]

8. While the quality of financial information that government departments produce requires improvement, departments are not using the information that they have in ways that could improve value for money. In particular, in spite of the existence of longstanding Treasury requirements and guidance about integrating financial appraisals into their decision-making processes, only 41% of departments invariably include a full financial appraisal in their policy proposals. Furthermore, only 20% of departments based policy decisions on a thorough assessment of their financial implications.[19] In one department (the Office of Fair Trading) operational decisions are never based on a thorough assessment of the financial implications and another department (the Charity Commission) only does so seldom.[20] If departments do not fully understand the financial implications of their policy and operational decisions, they are unlikely to know whether the services they deliver are providing value for money.

9. Few departmental boards receive integrated financial and operational performance information. Some 57% of departments submit separate financial and operational performance reports to the board, meaning that the board will not have a complete appreciation of how much is being spent on which programmes and to what effect.[21] The 2007 Comprehensive Spending Review requires departments to report financial and operational performance information about progress towards their Departmental Strategic Objectives together to HM Treasury.[22] There is still some way to go before this is fully achieved, although HM Treasury has stated that it will be completed during the current spending period.[23]

10. In spite of concerns over the quality of financial information that departments produce and the lack of integrated financial and operational performance information presented to decision-makers, the vast majority of departments consider that they have sufficient information on which to base decisions to switch resources from low value to high performing activity, scale back or cease programmes.[24] Failing programmes are, however, often not terminated in good time, resulting in reduced value for money. Furthermore, reallocations of resources between programmes do not occur regularly.[25] This is a particular challenge for Government and is intended to be addressed by the value for money targets set in the 2007 Comprehensive Spending Review. For example, departments are now allowed to claim 'allocative efficiency' savings which occur when a department moves resources from one programme to another, higher priority programme.[26]

3 Resource Accounting and Budgeting required departments to replace their cash-based accounting and budgeting systems with accruals-based systems, which enable departments to obtain better information on how resources are being used by understanding the true costs of providing services (rather than simply what is paid out in cash) and of owning assets. Back

4 Committee of Public Accounts, Managing financial resources to deliver better public services Back

5 C&AG's Report, Figure 8, para 3 Back

6 Q 42; C&AG's Report, para 4.12; Figure 17 Back

7 Qq 36-37; C&AG's Report, paras 3.4-3.6, Figure 9, Figure 10 Back

8 C&AG's Report, paras 3.11-3.13 Back

9 Q 10; Committee of Public Accounts, Managing financial resources to deliver better public services, para 2 Back

10 Q 2; C&AG's Report, para 3.9 Back

11 Q 2; C&AG's Report, paras 3.9-3.10, 4.20 Back

12 Qq 97-100; C&AG's Report, para 3.17, 4.2 Back

13 Qq 94-96; C&AG's Report, para 3.26 Back

14 C&AG's Report, para 4.9 Back