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Budgeting June 2005 Version
External Environment to Budgeting
External Environment to Budgeting: Central Government
Developments in Central Government Public Expenditure Planning in the UK
The Spending Review Process
The 1998 Comprehensive Spending Review and the Introduction of Public Service
Agreements
2000 Spending Review
2002 Spending Review
2004 Spending Review
2005 Spending Review
Devolution in Scotland and Wales
Introduction of Resource Accounting and Budgeting in Central Government
Sources of Further Information
Comment . 2005 Spending Review info still awaited
May 2004
Developments in Central Government Public Expenditure Planning in the UK
The last decade has seen significant developments in central government
expenditure planning which have transformed the way in which budgets are
developed, monitored and controlled. The most significant of these occurred
immediately after the 1997 General Election when a new regime for public
expenditure planning and control was introduced based on periodic reviews of
public expenditure or ‘Spending Reviews’. This replaced the previous annual
spending cycle with a system of rolling three year budgets.
In July 1998 the government published the results of the first spending review:
Modern Public Services for Britain – Investing in reform. The second and third
reviews were published in 2000 (Prudent for a Purpose Building Opportunity and
Security for All) and 2002 (Opportunity and Security for all – Investing in an
enterprising, fairer Britain). Under this new regime the UK’s public spending
framework was to be based on four key principles:
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consistency with a long-term, prudent and transparent regime for
managing the public finances as a whole;
the judgement of success by policy outcomes rather than resource inputs;
strong incentives for departments and their partners in service delivery to
plan over several years and plan together where necessary, and;
the proper costing and management of capital assets to provide the right
incentives for public investment.
Under the spending review regime the Government sets policy to meet two firm
fiscal rules:
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the Golden Rule which states that over the economic cycle, the
Government will borrow only to invest and not to fund current spending,
and;
the Sustainable Investment Rule which states that net public debt as a
proportion of GDP will be held over the economic cycle at a stable and
prudent level. Other things being equal, net debt will be maintained below
40 per cent of GDP over the economic cycle.
The new planning and control regime is divided between Departmental
Expenditure Limit (DEL) spending, which includes most departmental programme
expenditure, and which is planned and controlled on a three year basis through
the Spending Review process; and Annually Managed Expenditure (AME), which is
reviewed twice yearly as part of the Budget and Pre-Budget Report process. The
aggregate of AME and DEL - Total Managed Expenditure (TME) - provides the
broadest measure of total public spending.
In Spending Reviews, firm DEL plans are set for departments for three years. To
encourage departments to plan over the medium term any unspent DEL
provision may be carried forward from one year into the next. Three year
budgets and end-year flexibility are intended to give those managing public
services the stability to plan their operations on a sensible time scale without the
fear that resources may be cut back in the following year. End-year flexibility can
also offer the advantage of removing the perverse incentive for departments to
use up their provision as the year end approaches without regard to value for
money.
Departmental Expenditure Limits (DEL)
The government has argued that Departmental Expenditure Limits give greater
financial stability to departments and enable them to manage their expenditure
programmes over the medium term. The combination of the stability conferred
by firm three year budgets with the ability to carry over unspent resources from
one year to the next is intended to encourage the efficient use of resources by
departments, rather than a ‘use it or lose it’ approach to expenditure.
Under the new regime departments traded the benefits of greater levels of
medium term certainty about their budgetary allocations with stricter
enforcement of their DEL limits. Departments are expected to prioritise
competing pressures and fund these within their overall annual limits, as set in
Spending Reviews. Resources from the very limited, centrally held, DEL Reserve
are available only for genuinely unforeseeable contingencies which departments
cannot be expected to manage within their DEL. Some funds within DEL are
retained centrally (e.g. the capital modernisation fund which supports genuinely
innovative approaches to service delivery) and allocated to departments for
specific projects.
Annually Managed Expenditure (AME)
Annually managed expenditure - which currently accounts for around one third of
total managed expenditure - typically consists of:
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programmes which are large, highly volatile and demand-led, and which
therefore cannot reasonably be subject to firm multi-year limits. The
biggest single element is social security spending. Other items include
Housing Revenue Account Subsidy, Common Agricultural Policy payments
and negative income taxes classified as public expenditure, including
Mortgage Interest Relief and Tax Credits for pensioners and those with
children. These tax credits (which are classified as expenditure by the
Office for National Statistics because they are given to non-taxpayers as
well as taxpayers) appear under "accounting and other adjustments";
Local Authority Self Financed Expenditure (LASFE) and Scottish Parliament
spending financed by non-domestic rates and higher income tax; and
lottery spending.
AME is not subject to the same three year expenditure limits as DEL, but is still
part of the overall envelope for public expenditure. Affordability is, however,
taken into account when policy decisions affecting AME are made.
The Spending Review Process
The Budget preceding a Spending Review sets an overall envelope for public
spending that is consistent with the fiscal rules, for the period covered by the
Spending Review. In the Spending Review, the Budget AME forecast for year one
of the Spending Review period is updated, and AME forecasts are made for years
two and three of the Spending Review period.
The 1998 Comprehensive Spending Review and the Introduction of Public
Service Agreements
The 1998 Comprehensive Spending Review (CSR) combined both a
comprehensive appraisal of departmental aims and objectives alongside a zerobased analysis of each spending programme to determine the best way of
delivering the Government's objectives. This review defined the Government’s
key long term economic goals as:
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abolishing child poverty within 20 years and halving it by 2010;
providing educational opportunity for all;
employment opportunity for all – so that by end of the decade there would
be a higher percentage of people in employment than ever before;
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raising prosperity – so that ‘over the next decade Britain would have a
faster rise in productivity than its main competitors as it closes the
productivity gap’;
‘delivering strong and dependable public services’.
A crucial innovation introduced in the 1998 review were Public Service
Agreements (PSAs) under which output targets would be agreed between the
Treasury and other government departments detailing the outcomes which were
expected to be delivered with the resources allocated to them. The new spending
regime placed a strong emphasis on setting either outcome targets (e.g. better
health and higher educational standards) or service standards. The PSA system
has been subsequently rolled out to local authorities and the NHS.
Government departments are required to monitor progress against their PSA
targets, and report in detail on their performance in annual Departmental
Reports which can be scrutinised by Parliament and the general public.
2000 Spending Review
The 2000 review introduced further new features to the public expenditure
planning and control framework, including Service Delivery Agreements; the
implementation of the first stage of resource budgeting; Departmental
Investment Strategies; and a wide range of cross-cutting reviews.
The 2000 Spending Review also developed the Public Service Agreements as set
out in the 1998 CSR by reducing the number of targets (from around 300 to
160); and including at least one target in each departmental PSA about
improving efficiency or value for money.
2002 Spending Review
The 2002 spending review was the first to be conducted on a full resource
budgeting basis. It set out the Governments Plans for the 2003/04 to 2005/06
financial years and the accompanying PSA white paper set out the related
performance targets. Within this framework the Governments Budget is
announced in the spring of each year with a Financial Statement and Budget
Report (FSBR) being produced in March setting out - in broad terms - macroeconomic policy, prospects for the economy, fiscal policy and the outcome of the
Public Expenditure Survey.
2004 Spending Review
A number of reviews of key issues focusing on the drivers of performance and
efficiency in the public services were identified for the 2004 Spending Review.
This indicated a general intention by the government to focus on increasing
devolution to the front line which, in principal, would enable public service
providers to respond flexibly to local needs. This emphasis on increasing
efficiency across the public sector suggests that the spending review process will
continue to play a key role in the determination of national funding allocations
for the foreseeable future.
2005 Review
Add in new info when available
Devolution in Scotland and Wales
The Scotland Act 1988 and the Government of Wales Act 1988 established separate
National Assemblies and devolved government in these countries. In respect of
finance the basis principle is that the UK parliament retains responsibility for macro
management of the economy and hence total expenditure levels, but the detailed
allocation of expenditure is for the National Assemblies to determine
Government funding for the devolved budgets is determined within spending reviews
alongside other departments in the United Kingdom. The UK Parliament votes the
necessary provision to the Secretaries of state , who make payments to the devolved
administration. However this grant can be supplemented by local sources of tax such
as non domestic rates, and through borrowing.
The allocation of public expenditure between the services under the control of the
devolved administrations is for the devolved administrations to determine.
The
administrations are normally expected to accommodate unforeseen pressures on
their budgets by finding offsetting savings elsewhere.
In order that the UK Treasury may effectively carry out macro management of the
economy , there devolved administrations are expected to regularly supply
information on spending plans .
Introduction of Resource Accounting and Budgeting in Central Government
Another key external influence on public expenditure planning and control has
been the introduction of resource accounting and budgeting (RAB) within central
government following the enactment of the Government Resource Accounting
Act 2000. Prior to April 2001 central government accounted for its expenditure
and achievements only in terms of the total cash paid out and received which did
not give a true picture of the costs of its activities. In particular, cash accounting
did not demonstrate how central government had made use of its capital assets
such as buildings and equipment. This system had hardly altered since the
nineteenth century and was considered to be inadequate and unsustainable in
light of the challenges facing the public sector particularly in terms of
procurement and resource management.
Resource budgeting was introduced, therefore, with the intention of:
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delivering new incentives for the management of assets and investment;
ensuring the full cost of government services were accurately measured by
matching expenditure to the correct time period, including non cash assets
(e.g. cost of capital) and treating capital expenditure more accurately by
spreading the cost and consumption over the useful life of each asset;
implementing a long-term planning framework which removed distortions
and perverse incentives intrinsic in the old budgeting system, and built in
new incentives to reward good management;
providing better information for managers on the costs of providing public
services on which to base decisions, and better information for Parliament
and the public, and;
creating higher quality financial management throughout Government.
Resource budgeting concentrates on the resources consumed in meeting targets
over a given period, regardless of when cash is paid or received and is intended
to apply the best commercial accounting and reporting practices to central
Government.
Sources of Further Information
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Spending Review Process
‘Modern Public Services for Britain – Investing in reform’ (HM Treasury –
July 1998) (Summary available)
Prudent for a Purpose Building Opportunity and Security for All (HM
Treasury - July 2000)
Opportunity and Security for all – Investing in an enterprising, fairer
Britain (HM Treasury – July 2002)
Government Resource and Accounts Act 2000
www.hm-treasury.gov.uk/spending review