Whole of Government Accounts 2018–19 Contents

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1Treasury’s role in managing risk

1.Based on the Whole of Government Accounts (WGA) for the year ended 31 March 2019, we took evidence from HM Treasury (the Treasury) on 19 November 2020.1

2.The WGA is a unique document which provides the most complete and accurate picture available of the UK public sector finances. It is a set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS), which brings together information on the financial performance and position of over 9,000 organisations across the UK public sector, including: central government departments; local authorities; devolved administrations; the NHS; academy schools; and public corporations such as the Bank of England.2 The Treasury published the WGA 2018–19 on 21 July 2020, 15 months after the end of the financial year. The Comptroller & Auditor General again qualified his opinion on the 2018–19 accounts as a result of longstanding financial reporting issues including: the omission of some significant bodies from the accounts, including the Royal Bank of Scotland; inconsistent accounting policies across the organisations included in the WGA; qualifications owing to issues in the underlying accounts of organisations included in the WGA, such as the Ministry of Defence; and the impact of academy schools having a different financial year to the rest of government.3

3.We have previously recommended that the Treasury: use the WGA to provide better insight into how well the government is managing risks to fiscal sustainability, including providing more information on how well government is performing against its key policy objectives relating to managing fiscal risks; ensure that users of the accounts have access to the information they find valuable in the WGA and make improvements in harmonisation of the information provided by individual components; and focus its efforts on making the WGA as useful as possible to its users, whether that be through bringing the publication earlier or through enhancing the insight it provides.4

Government’s financial position and exposure to fiscal risk

4.In 2018–19, the WGA included net expenditure (total expenditure less income) of £56.2 billion and net liabilities (the difference between assets and liabilities) of £2.5 trillion. At 31 March 2019, government borrowing was £1.4 trillion and the net liabilities of public sector pension schemes was £1.9 trillion.5

5.In November 2020 the Office for Budget Responsibility (OBR) reported that COVID-19 had, at that date, caused the economy to shrink by 11% in 2020, the largest drop in over 300 years. Support for public services, households and businesses had pushed the deficit to £394 billion (19% of GDP, the highest since 1944), and debt above 100% of GDP (for the first time since 1960).6 The Treasury told us that this was a consequence of lower economic activity, support provided through additional spending and tax cuts and deferrals resulting in an extremely serious and a very significant hit to the fiscal position.7

6.As this Committee has previously reported, while the WGA is a set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS), the Treasury can provide additional information that it considers useful to the reader in the notes to the accounts and in its commentary in the performance report.8 In our letter to the Treasury last year, we stated that we would like the WGA to provide better insight into how well the government is managing risks to fiscal sustainability, stressing how important it is that the accounts include the major outflows of income and expenditure that we know will happen in future years - including the state pension, future tax receipts or planned major changes to government spending, including any impact relating to EU Exit – to enable the public and Parliament to get the full picture of the fiscal risks facing the economy.9 How the Treasury manages these fiscal risks, and the new emerging risks due to COVID-19, was not explained in the WGA 2018–19.

7.The WGA 2018–19 disclosures relating to COVID-19 relied heavily on a summary of a report produced by the National Audit Office.10 The Treasury did not attempt to explain to Parliament or the user of the accounts how it was managing the fiscal risk COVID-19 poses for the economy, nor how it may impact the government’s fiscal position going forwards. In our evidence session the Treasury reiterated its position that it views the WGA as a backward-looking, retrospective document and said that while it wants to set out the risks across government and how these risks were mitigated and controlled, it was not convinced that the WGA was the best place to set out how it was managing forward-looking risk.11 This is despite the fact this is standard practice across public and private sector accounts, and that stakeholders, including this Committee, have given Treasury clear feedback to make the performance report forward looking and requested that it cover issues such as government debt, the burden of paying for COVID-19 and the maturity of liabilities.12

Management of significant risks to financial sustainability

8.The WGA discloses a number of significant liabilities that due to their size and nature pose unique risks to the UK’s financial sustainability and government’s ability to achieve value for money. At 31 March 2019, the UK’s liability in relation to nuclear decommissioning was some £152 billion.13 Whilst this was a fall from £263 billion in the previous year, nearly all of that decrease was due to the change in the discount rate used to calculate future liabilities, and not related to a change in the underlying nature of the UK’s liability.14 Similarly, new clinical negligence cases remained broadly flat year on year, contributing to a provision for clinical negligence of £85 billion.15

9.We have recently raised concerns regarding the uncertainty of the estimated costs of decommissioning the civil nuclear estate and highlighted a shortage of skills at the Nuclear Decommissioning Authority (NDA) and a lack of oversight from the Department for Business, Energy and Industrial Strategy (BEIS) under previous models of outsourcing decommissioning.16 We therefore asked what control the Treasury was exerting over the whole of the project. The Treasury told us that it is closely involved in the management of the liability, working alongside BEIS, but provided no specific examples of how it does this.17 When we asked what controls it had in place to ensure that the NDA was ensuring that the most cost-effective options were being used during decommissioning, the Treasury said that while its spending team works with BEIS, the parent department, the expertise sits within the NDA and therefore the Treasury was unable to second-guess them.18 The Treasury agreed to consider whether itself and BEIS, in managing the liability with NDA, needed a change in mindset to ensure that the required work is being done in the most cost-effective way.19

10.Regarding the provision for clinical negligence, the WGA shows a levelling off of new cases and explains that in the second year of its new strategy to tackle clinical negligence laid out in April 2017, NHS Resolution mediated 380 cases, or 110% more than the previous year.20 We asked the Treasury what progress was being made to control the liability. The Treasury responded that clinical negligence had been picked up by the balance sheet review and that the lead for this area was the Department for Health and Social Care, working with a cross-government taskforce that involved the Treasury.21

Analysis and scenario planning

11.The scale of the likely increase in government borrowing to fund government’s response to COVID-19 is a significant new challenge to the Treasury’s objective to place the public finances on a sustainable footing.22 In its report on Evaluating the government balance sheet: borrowing published in November 2017, the NAO noted that the Treasury had begun to strengthen its approach to analysing the government’s balance sheet and evaluating fiscal risk, but the work at that time was at an early stage and not sufficiently embedded to provide the Treasury with a common view of risk to inform its decision-making.23

12.We were therefore interested in what analysis the Treasury had now been conducting in order to give assurance that it had a handle on the fiscal risks the pandemic poses to the UK economy and fiscal sustainability. We asked what projections the Treasury had for tax receipts in the short and medium term and whether it had been working with Her Majesty’s Revenue and Customs (HMRC) to produce those projections. The Treasury responded that projection is the job of the OBR.24

13.With the UK’s debt as a proportion of GDP above 100%, any increases in interest rates would have a significant impact on the economy and government spending. When asked whether it was modelling for interest rate increases, the Treasury confirmed that it did, but deferred to the OBR as the prime place for this information, noting that the OBR’s fiscal risk report specifically identifies rising interest as one of the big risks for the public finances. When pushed to expand on the impact of rising interest rates on the public finances, the Treasury outlined in general terms how interest rate rises would result in bigger debt interest costs and less for other public spending.25 When asked whether it had conducted any analysis or forecasting on further significant increases in debt to GDP ratios, the Treasury deferred to the OBR.26 The Treasury also confirmed that it had not conducted any analysis on how the increased debt to GDP ratio may impact the UK’s credit rating.27

14.Although at some points during our evidence session the Treasury stated that it was conducting forecasting and scenario planning, it was not clear what this entailed, how this differed from work by third parties such as the OBR, and whether this was business as usual or additional work specifically to address risks arising from COVID-19.28

15.If debt payments increase, or tax receipts decrease, there will be a decrease in budget available for other public spending.29 We asked the Treasury whether it had identified what current projects may need to be cancelled, or what potential investments foregone, due to the ongoing impact of COVID-19 on the economy. The Treasury said that due to the huge uncertainty surrounding the pandemic, government had decided to not have an autumn budget and had replaced the planned three-year spending review with a one-year review, and it would be at this full spending review next year where it would consider priorities for the rest of the Parliament.30

Financial sustainability of local authorities

16.As the UK Government has a devolved structure, local authorities have significant autonomy over their spending and have powers to invest in commercial property. We have, over a number of years, raised concerns over the behaviour of local authorities with regards to commercial property investments, noting as far back as 2016 that the government appeared complacent to the risk that these investments posed to local authority finances.31 In our recent July report into Local authority investment in commercial property, we concluded that the Ministry of Housing, Communities and Local Government (MHCLG) had failed to ensure local authorities adhered to guidance, which led to many taking on excessive and risky debt. We also found that MHCLG did not have the data it needed to carry out its oversight responsibilities.32

17.In September 2020, Sir Tony Redmond published his report Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial Reporting (Redmond Review), noting that the local audit market is very fragile.33 He concluded that current local audit arrangements fail to deliver, in full, policy objectives underpinning the Local Audit and Accountability Act 2014, and reported an overriding concern that there is a lack of coherence and public accountability within the existing system.34 Local Government statutory accounts are the only information provided by local authorities that are independently verified through external audit and so function as a key assurance mechanism for government.35 The Treasury stated it was working with MHCLG on the Redmond Review and were looking to published a co-ordinated response to the review by the end of 2020.36

18.The Treasury confirmed to us that it ultimately bears the financial risk for local authorities. We expressed concerns about the level of oversight and control that the Treasury is exercising and whether it has a sufficient handle on this issue. The Treasury responded that it is working very closely with MHCLG to collect real-time data, but these regular data collection exercises have been limited to special-ringfenced funding allocations for COVID-19.37 The Treasury also stated that MHCLG has shared its assessment of the number of councils that are in significant financial difficulty and that its spending teams work closely with MHCLG.38