Conclusions and recommendations
1.UK government debt remains too high relative to economic performance, potentially reducing government’s capacity to respond to future shocks and uncertainty. At £1.7 trillion and 86% of gross domestic product at March 2017, the Government recognises that public sector debt is too high. We are also concerned about the rising level of personal debt which could have a significant impact on the economy and public finances in the longer term. In November 2017, the Office for Budget Responsibility (OBR) revised down its forecasts for UK productivity and economic growth, estimating that the Government has £14 billion headroom to meet its borrowing target in 2020−21. The Government recognises that productivity growth over the last few years has been disappointing. It has now increased the amount it expects to borrow by £55 billion between 2018−19 and 2021−22 but this estimate will be affected by economic performance, the terms agreed for exiting the EU and significant changes to government’s balance sheet. The DMO has proven it can raise funds quickly and cost-effectively, with its annual remit (the amount Treasury tells them to borrow) increasing from £80 billion in 2008−09 to £220 billion in 2009−10. However, it may be more challenging for the DMO to meet government’s borrowing needs in the future given the already high level of debt, the uncertainty in the public finances arising from the UK’s exit from the EU, and the eventual unwinding of the quantitative easing programme. Index-linked gilts now make up 34% of the gilt portfolio, increasing the exposure to inflation risk, which could raise the cost of borrowing considerably. In July 2017, the OBR published its first Fiscal risks report which provides an independent view of risks to the public finances, and the Government has committed to responding formally to the first report in summer 2018.
Recommendation: In its formal response to the OBR’s report, the Treasury should ensure it sets out its assessment of the key risks to the public finances, and explain how it will measure and report on the impact its investment is having on the economy.
2.NS&I faces an inherent tension in balancing the differing interests of the taxpayer, savers, and the wider retail savings market at the same time as delivering specific policy objectives for the Government. NS&I must offer a fair return for savers in order to be able to successfully raise funds to meet government’s borrowing needs. But it must also minimise finance costs to taxpayers, and maintain market competition and stability. For example, after 2008−09 NS&I had to reduce returns offered to savers, thus reducing demand, following the ‘flight to safety’ response to the financial crisis when investors sought the security of its government-backed investments. Around 9% of the £1.7 trillion UK retail savings market is held with NS&I currently. In 2016−17, NS&I’s measure of cost-effectiveness showed that borrowing through the NS&I had saved £74 million compared to borrowing through gilts, although this has fallen from £1.4 billion saved in 2009−10, largely due to government bond rates falling faster than the interest rates on NS&I products. For some products, NS&I faces the challenge of balancing wider policy objectives with the need to provide cost-effective borrowing. For example, its 65+ Guaranteed Growth Bond, introduced by the Government in 2015 to reward a specific group of savers, offered market beating rates, and we are told became the “biggest selling retail financial product in Britain’s modern history”. The estimated costs of such products are set out alongside the relevant Budget when they are launched, but the costs are excluded from NS&I’s measure of cost-effectiveness.
Recommendation: The Treasury and NS&I must find a way to communicate to Parliament and the public how future products with specific policy objectives strike an appropriate balance between meeting government’s wider policy aims and delivering value for money.
3.It is not yet clear how the move to one annual fiscal event in the autumn will work in practice to enable greater Parliamentary scrutiny. In Autumn Statement 2016, the Chancellor abolished future autumn statements and spring budgets in favour of just one Autumn Budget each year. This change was in response to the International Monetary Fund’s recommendations to enhance the UK’s fiscal transparency and aims to allow greater external and Parliamentary scrutiny of new tax and spending measures before they are introduced in the next financial year. The OBR is legally required to publish two forecasts each year and until now has published these forecasts alongside the Spring Budget and Autumn Statement. The Government will respond to the OBR’s March forecast in a Spring Statement in 2018. Although the Treasury assures us that Parliament will still have the information it has available today, it is considering how it will respond to the OBR’s spring forecasts and communicate changes to the budget in subsequent years.
Recommendation: By March 2018, the Treasury should set out how and when it will provide Parliament with the opportunity to scrutinise and debate decisions affecting the public finances.
4.The Treasury has made progress in improving the WGA but the time it takes to produce, and the limited information included in some areas, continue to restrict its use as a tool for decision-making and accountability. In the 2015−16 WGA, the Treasury has provided more insightful narrative information on government finances and on significant movements in major assets and liabilities than it did previously. The Treasury recognises that there is still more to do to develop the narrative in the WGA to meet the recommendations of the previous Committee, in particular on pension liabilities and regional spending. The Treasury published the 2015−16 accounts 16 months after the financial year-end, despite its goal to publish within a year. To produce the WGA more quickly, the Treasury will need to address bottlenecks in the consolidation process. While the Treasury is increasingly using the WGA to analyse trends and long-term risks to the public finances, it must rely on other, more timely information to make decisions in the short term. For example, alongside public sector net debt (PSND) and its fiscal targets, the Treasury has begun using a further statistical measure, public sector net financial liabilities, to assess the impact of decisions on government’s balance sheet. It is important that these measures are used consistently. As we prepare to leave the EU, disclosures in the WGA which show the impact and related risks will be particularly important for transparency.
Recommendation: By March 2018, the Treasury needs to set out its plans and timetable for producing the WGA more quickly after the year end, and for improving the disclosures, as recommended by the previous Committee.
5.Unless actions to maximise the value from assets and reduce liabilities are embedded in routine financial management across departments, any gains from the Treasury’s balance sheet review are likely to be short term. In response to recommendations from the previous Committee as well as the International Monetary Fund and the NAO, the Treasury has been building its understanding and analysis of government’s balance sheet and working with the OBR to improve its oversight and analysis of fiscal risk. However, this work is at an early stage and will need to be embedded in routine decision-making and its existing oversight arrangements with departments. The Treasury has now announced plans to carry out a review of government’s balance sheet to ensure it is getting the best return from its assets while monitoring and reducing the cost of liabilities. The Treasury expects the review will help to release resources for future investment in public services and improve the sustainability of the public finances. As part of the review, the Treasury will look for further income-generating opportunities and we are keen that it harnesses the value from intangible assets, such as intellectual property, in particular. The Treasury expects to report on its review at Budget 2018.
Recommendation: The Treasury needs to ensure that its review has a long-term impact on the cost-effective management of government assets and liabilities. It should report to us on its progress by June 2018.
25 January 2018