Government borrowing and the Whole of Government Accounts Contents

2Analysing and managing the Government Balance Sheet

12.The Whole of Government Accounts (WGA) brings together the financial activities of more than 6,000 organisations across the public sector, including central and local government as well as public corporations such as the Bank of England. There is no more complete record of what the Government owns, owes, spends and receives. HM Treasury (the Treasury) published the 2015−16 WGA in July 2017. It is the seventh WGA to be published.

13.In its 2016 evidence session on the Government balance sheet and 2014−15 WGA, the previous Committee asked the Treasury to make the WGA clearer and more useful to the reader by providing a better understanding of the regional distribution of public money and what is causing significant movements on the balance sheet. The previous Committee also recommended that the Treasury needs an enforceable plan to produce WGA more quickly after the year-end.30

Progress in improving the WGA

14.In response to recommendations by the previous Committee and the National Audit Office (NAO), the Treasury said it had made an effort to focus on the key risks, issues and movements in the accounts–particularly the pension obligations–in the performance report at the front of WGA 2015−16.31 In the latest WGA, the Treasury has provided comparative information showing how major income, assets, liabilities and financial risks have changed and explained the main movements in assets and liabilities, particularly the major impact of the discount rates used to value assets and liabilities in today’s prices. For example, the Treasury sets out in the WGA that £125 billion (96%) of the increase in provisions (liabilities which government will probably need to pay in the future but where the timing or amount is uncertain) was due to a change in the discount rate. The Treasury recognised there was more to do and committed to continuing to improve the report and build in more information that is available elsewhere. For example, the WGA still lacks detail on the distribution of spending by region or by government activity. The Treasury explained that it would be a large undertaking to get this level of information on a financial reporting basis from each organisation which feeds into the WGA.32 Instead, it committed to include in the WGA information from the Treasury’s annual publication on the Public Expenditure Statistical Analyses (PESA) which provides a breakdown of annual expenditure by objective based on National Accounts definitions.33

15.The Treasury explained that it has a target to publish the WGA within one year of the financial year-end, but it hopes to bring this deadline forward to nine months in the future. It said that the 2015−16 WGA was published 16 months after the year-end mainly because of the impact of the general election. The Treasury told us that the key areas affecting the timeliness of publication were the later deadline for local authorities to publish their annual accounts and the time taken to produce the sector report for Academy schools. Currently, local government bodies have a deadline to publish their accounts by end of September compared to July for central government, although this is coming forward to July in 2017−18 which the Treasury said should enable them to bring forward the WGA timetable.34 The Department for Education produced the first consolidated accounts for the Academy Schools Sector in England 2015−16 in October 2017, 14 months after the academic year they are reporting on.35 The Treasury said that now the sector report was established, it hoped to work with the Department to get the information into the WGA on a more timely basis and make staged improvements to bring forward publication, potentially publishing the 2018−19 accounts by the end of December 2019, although it recognised this would be a “stretch target”.36

16.The Treasury told us that whereas it uses the National Accounts, which provides a statistical, monthly view of the public finances, for in-year budgeting, it uses the WGA to provide a view of fiscal risks. In WGA 2015−16, the Treasury has improved on the reconciliation between the national accounts and WGA.37 In 2016, the Treasury began using a further statistical measure, public sector net financial liabilities (PSNFL), which is a more comprehensive measure than PSND. PSNFL includes all financial assets and liabilities in the National Accounts which is helpful when considering the broader impact on the public finances of selling assets. For example, selling government-owned shares would reduce PSND regardless of the profit or loss made on the sale, whereas PSNFL would reflect the loss of the value of the asset sold as well as the income gained. Responding to our concerns that different measures could be misleading if used inconsistently, the Treasury acknowledged the challenge of explaining these complex figures to the Government, Parliament and the public.38

17.We challenged the Treasury over how the WGA could inform decision-making given it is reporting out-of-date numbers long after the year-end. In response, the Treasury highlighted the broad and unique view of the public finances that it feels the WGA provides which it said had been valuable in identifying risks, such as foreign exchange liabilities, that may not have been picked up elsewhere. The Treasury also gave examples such as clinical negligence where the exact number of the liability being considered was less important than the trend over time when determining the response needed.39 It said there had been a greater focus within the Treasury and in Departments, as a result of WGA, on risks attached to significant items on the balance sheet such as liabilities arising from clinical negligence and nuclear decommissioning.40 We asked whether the WGA will set out clearly how much it costs to leave the EU, particularly in terms of the money given to those departments most affected by the need to prepare to exit. The Treasury told us that a significant impact would not be seen in the 2016−17 WGA but that future funding allocated would be voted by Parliament in the usual way. In some cases the relevant department may need to spend money to prepare to take on another function in March 2019 but will not have legal or parliamentary authority to do so until the European Union (Withdrawal) Bill is passed. In this event, the Treasury explained that it has asked Accounting Officers to seek a ministerial direction: a formal instruction from a minister to an Accounting Officer to proceed, where the Accounting Officer has expressed concerns that the spending involved does not meet the tests of regularity, propriety, value for money or feasibility.41

The Treasury’s approach to balance sheet management

18.The previous Committee recommended in 2016 that the Treasury do more to analyse its balance sheet and develop contingency plans while also getting a grip on specific liabilities, such as clinical negligence.42 Similarly, the International Monetary Fund’s evaluation of the UK’s fiscal transparency recommended the Treasury increase controls over off-balance sheet commitments such as guarantees and publish a report setting out risks to the balance sheet.43 In response, the Treasury has created balance sheet and fiscal risks analysis teams to develop its fiscal risk modelling and stress testing of the public finances, and bring together analysis carried out by teams across the Treasury. This work is at an early stage. Both teams support the newly-established Balance Sheet Group, Fiscal Risk Group and executive management board’s view of risk.44 The fiscal risks branch will be responsible for responding to the OBR’s report on fiscal risks in summer 2018. The Treasury has also strengthened its budgetary and approvals process around any newly-created contingent liabilities which might exceed £3 million and which are either novel, contentious or could impact other parts of the public sector.45 Around 24 new contingent liabilities had gone through the revised process as at November 2017.46

19.We asked how the Treasury was going to make sure its balance sheet analysis informs decisions made so that we harness the value from our assets and manage down our liabilities. The Treasury told us that its Balance Sheet Group and Fiscal Risk Group already brings together directors from across the Treasury, so everybody has the same information and the groups are fully integrated into the work of the department. In addition, the Treasury explained that it had announced a balance sheet review in Autumn Budget 2017 which, drawing on the information in WGA, aims to make more effective use of assets, improve the return of investments and reduce the cost of liabilities. The Treasury will report on progress at Budget 2018. The Treasury told us it hopes to find considerable savings from this review which can be invested in public services.47 We stressed the importance of getting value from intangible assets such as software and intellectual property, and the Treasury confirmed that intangible assets would be part of the review.48

30 Committee of Public Accounts, The Government Balance Sheet, Nineteenth Report of Session 2016–17, HC 485, October 2016, conclusion 1

31 Q54–55

32 Q 79; HM Treasury, Whole of Government Accounts: year ended 31 March 2016, HC 254, July 2017, note 22, para 6.4−6.5

33 Qq 79−80; HM Treasury, Public Expenditure Statistical Analyses 2017, Cm 9467, July 2017

34 Qq 74–75

36 Qq 75–77

37 Qq 54–61; HM Treasury, Whole of Government Accounts: year ended 31 March 2016, HC 254, July 2017

38 Qq 60–63

39 Qq 48, 70

40 Qq 61, 70

41 Qq 114–118

42 Committee of Public Accounts, The Government Balance Sheet, Nineteenth Report of Session 2016–17, HC 485, October 2016, conclusions 4 and 5

43 International Monetary Fund, United Kingdom: Fiscal Transparency Evaluation, November 2016

44 Q 66; C&AG Report, para 16

46 C&AG Report, para 16

47 Qq 60, 64–66; HM Treasury, Autumn Budget 2017, HC 587, November 2017

48 Q 64

25 January 2018