The Government Balance Sheet Contents

Conclusions and recommendations

1.The Whole of Government Accounts is world-leading in terms of its scale and coverage of a nation’s public sector finances. However, improvements are needed so that the information it provides is more timely, clear and transparent. The 2014–15 Whole of Government Accounts (WGA) is the largest consolidation of public sector accounts in the world and is a vital tool for Parliament to hold the Treasury and the Government to account. We recognise the improvements that the Treasury has made to the quality of the underlying data and the timeliness of publication since the first WGA, for 2009–10, was published in November 2011. However, delays to the Department for Education’s accounts and limitations in some academies’ data meant that it was still 14 months after the year end that the 2014–15 WGA was published. Although the WGA is vast, the information it provides does not make clear the main reasons for significant year-on-year changes in the Government’s finances. For example, it is not clear why the net public sector pension liability increased by £190 billion in 2014–15 or how much of the annual increase in provisions is due to accounting factors. We are disappointed that the WGA still does not show the public money being spent by region despite public service delivery becoming increasingly devolved. This will become increasingly important as the Government pursues its devolution agenda.

Recommendation: HM Treasury needs an enforceable plan to produce WGA more quickly after the year-end, and to make it clearer and more useful to the reader; for example providing a better understanding of the regional distribution of public money and what is causing significant movements on the balance sheet.

2.The WGA provides the most complete view of the Government’s financial risks, which complements the Government’s preferred statistical measures. However, a lack of alignment between different sources of information on the Government’s financial position hinders understanding of the health of public finances. The WGA’s broad coverage of the Government’s financial risks means it is an important part of the information the Government uses to manage the public finances; there is no more complete record of what the Government owns, owes, spends and receives. Yet HM Treasury uses other sources of information to assess the Government’s economic and fiscal position; notably the Office for Budget Responsibility’s (OBR’s) forecasts in its Fiscal sustainability report and the measures of Current Deficit and Public Sector Net Debt produced by the Office for National Statistics (ONS). The WGA is an ideal opportunity to make clear how these different sources of information about the nation’s finances relate to each other and inform government decisions but it is not yet doing so. The narrower focus of the ONS measures means that ‘net debt’ does not capture the potential impact of liabilities such as public sector pensions or future risks reported in the WGA. For example, in 2014–15, the WGA reported ‘net liabilities’ of £2.1 trillion on an accounting basis while ‘net debt’ (the Government’s main measure of financial resilience, produced by ONS, and cited when setting fiscal policy) stood at £1.5 trillion. Similarly, the Government’s assessments of affordability are informed by the OBR’s projections but these forecasts exclude some significant accounting movements seen in the WGA, such as the impact of the discount rate used to value liabilities in today’s prices.

Recommendation: HM Treasury needs to find a way in the WGA to provide clarity over how the different sources of information used by the Government are employed in managing public finances and the impact that these have on the affordability of key liabilities.

3.Despite some progress, the Government’s approach to financial planning needs to be more long-term and sophisticated. Despite HM Treasury’s introduction of multi-year budgets, departments still focus on the current financial year and longer-term plans are often lacking in detail. Yet many projects and programmes are long-term and multi-faceted and need more sophisticated management. We are worried that this lack of long-term planning can lead to perverse incentives and poor decisions such as departments spending remaining budget at the year end. We recognise that the Government has made some progress in this area, the OBR’s fiscal sustainability report considers long-term trends and the Major Projects Authority scrutinises long-term projects. However, as HM Treasury itself acknowledges, there is a long way to go before long-term financial planning is factored fully into political decisions around spending reviews and budgets and before its management of the balance sheet is as effective as management of in-year spend.

Recommendation: HM Treasury needs to prioritise its plans for strengthening financial management across government. By March 2017, it should set out what steps it will be taking to improve the quality of long-term decision making across government departments.

4.Significant liabilities on the Government’s balance sheet could crystallise in the event of a significant shock to the economy. Since the first WGA for 2009–10, provisions have increased by 71% and contingent liabilities (possible future obligations for government) have gone up by 85%. The Government is increasingly using its credit rating to issue guarantees and, by the end of March 2015, had committed £18 billion to significant guarantee schemes against a possible exposure of £100 billion. A major economic shock could cause these liabilities to crystallise and the Government’s ability to meet these costs would also depend on economic growth. It is unclear in the WGA what the impact might be if these liabilities were to crystallise but the International Monetary Fund’s analysis shows that it could be equivalent to around 10% of Gross Domestic Product. HM Treasury told us that they expect a negative economic shock due to Brexit and that the potential impact on public finances will be seen in the OBR’s forecast in the autumn and in its first fiscal risk statement in 2017. We understand that an exercise is underway to assess the skills and resources which the Civil Service will need to manage the risks and opportunities that Brexit presents.

Recommendation: HM Treasury should analyse its most significant liabilities and guarantees to understand the factors which could cause them to crystallise and, as a priority, develop contingency plans for those most affected by an economic downturn.

5.The potential cost of the Government’s liability for clinical negligence claims has continued to rise in recent years. Since 2009–10, the WGA has drawn attention to significant liabilities such as clinical negligence. Despite this, the clinical negligence provision has almost doubled to £28 billion and the contingent liability for cases where the likelihood or amount of payment is less certain increased by 87% to £14 billion over the last 6 years. We are concerned that the Government’s failure to admit liability in a timely way for individual cases could be driving up costs and note HM Treasury’s estimate that some legal costs can be three times more than the compensation received: a problem first highlighted by the Committee of Public Accounts in 2002. HM Treasury told us that the Department of Health had carried out a recent review of the NHS Litigation Authority and begun a consultation into how to reduce the cost of resolving claims.

Recommendation: As the Government’s finance ministry, the Treasury needs to exert its authority and work with the Department of Health and the NHS Litigation Authority to get a grip on the clinical negligence liability.

6.The Government’s pension liability is significant and rising but the year-on-year movements recorded in the WGA are distorted by the discount rate. Since 2009–10 the net liability for public sector pensions has increased by 32%, reaching £1.5 trillion at the end of March 2015. HM Treasury told us that it expects the liability to increase as people are living longer and because of the impact of the discount rate used to value the liability in today’s prices. HM Treasury estimates that around two thirds of the increase in recent years is due to the impact of the accounting discount rate which is based on the return on corporate bonds. Nonetheless, the WGA does not does not show the impact of the discount rate nor explain the other reasons for year-on-year changes in the liability. Because unfunded pensions, which make up most of the liability, will be paid from future tax revenue and therefore depend upon long-term economic growth and trends in GDP, the Treasury instead uses the OBR’s forecasts to assess risks to affordability. Currently, the OBR estimates that the cost of unfunded pensions, expressed as a proportion of GDP, will fall from 2.1% to 1.1% by 2064–65.

Recommendation: HM Treasury should provide extra analysis and commentary in the WGA to explain the movement in the liability and to bridge the gap between the presentation in the accounts and the information it uses to assess affordability.

7.Market volatility could mean the Government having to retain assets for longer than previously intended or risk losing value on the sales. Following sales of its shares in Royal Mail and Eurostar, the Government is planning to sell more assets over the remainder of the Parliament. However, falling share prices mean the Government expects it will take longer to exit from its significant shareholding in the Royal Bank of Scotland (73% ownership) than originally predicted. Given the current volatility in the market, HM Treasury expects to revisit and announce its plan for this and other sales, such as the Bradford & Bingley mortgage book, around the time of the next autumn statement. The face value of the student loan book has more than doubled in size in the last six years to £64 billion and the Government forecasts it could reach £400 billion by 2040. However, it also estimates around 20–25% of the current loan value will not be recovered. We reiterate the point made by the previous Committee in 2014 about the importance of having a robust understanding of the realistic value of the student loan book in advance of any sale. We will expect the Treasury to be clear and transparent about the options available for the disposal of any such assets.

Recommendation: To maximise value for the taxpayer, the Treasury needs to take a long-term view based on a robust understanding of the value of its assets. It must explain clearly the methodology it has used to value its assets when deciding whether, when and how to sell them.

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10 October 2016