Memorandum submitted by Professor David
BUDGET 2006: THE PUBLIC EXPENDITURE DIMENSION
1. The weight of Budget and associated documents
has become disconnected from the significance and relevance of
their contents. Notwithstanding the Parliamentary theatre and
media attention, the Pre-Budget Report 2005 (Treasury 2005)
was more important than Budget 2006 (Treasury 2006a). The
pre-written verbiage of parts of the current Red Book, which overwhelms
in volume but not in informativeness, stands in contrast with
both older Red Books that were thin technical documents and the
excellence of the annual Public Expenditure: Statistical Analyses.
The weight of Budget documents is used as a technique of Executive
dominance, as the shortness of media attention means that most
coverage focuses on what the Treasury puts out on Budget day.
By the time clarification is secured regarding missing information,
attention has moved on. This effect is certainly not accidental.
2. Reading the Budget documents creates
an odd sensation. Some of the content (eg in Chapters 2 and 6)
is detached from reality:
The rhetoric of "transformation",
"reform", "investment", "transparency",
"devolution", "prudent", "cautious",
"audited" and "world class" is so indulgent
and self-congratulatory that one wonders if some drafters inside
the Treasury are parodying ministers.
Changes that are presented as devolving
and decentralising are in reality concentrating power at the core
of central government, weakening departments and other public
organisations and creating system fragility.
Notwithstanding political and media
debate focusing on pensions' sustainability, wage pressures in
the public sector and the financial implosion of parts of the
National Health Service in England, there is no discussion of
how these pressures will be handled during the step decrease in
public expenditure growth rates. This reduces the credibility
of fiscal forecasts and projections which show the two fiscal
rules just being met.
Whatever the considerable merits
of the fiscal rules, their credibility is stretched to breaking
point if one poses the question: "How would the Treasury
present a breach in the fiscal rules?". The fact that this
could not happen without a change in political control, whether
party or personal, should be a cause of great concern to Parliament.
This indicates dangerous territory, in which classification and
financial reporting may be distorted both by control systems and
by presentational imperatives.
3. There is nothing new or wrong about "advocacy",
and one should expect all governments to engage in this. However,
there need to be limits. I do not subscribe to the view that the
large increases in public expenditure in recent years have been
wasted, but I am very alarmed by the propagandizing nature of
current Budget documents. I am also reminded of Michael Power's
observation about potential differences between presentation and
reality in the "audit society": [the person in a public
organisation being audited] "hears the rhetoric of excellence
in official documents but lives a reality of decline" (Power,
2003, pp 199-200).
4. This memorandum illustrates these concerns
by concentrating on two issues:
The lead-up to Comprehensive Spending
Failures against the Treasury's own
test of transparency, which is one of the five principles of the
statutory Code for Fiscal Stability.
5. Under the post-1998 public expenditure
framework, the Budget in an even-numbered year normally sets the
spending envelope for the two "new years" of that year's
July Spending Review. Departing from this practice, Spending Review
2006 has been cancelled, replaced by Comprehensive Spending Review
2007 and a review of long-term issues in 2006. More details
of how this will work have been provided in Budget 2006, but these
in turn raise a new set of questions.
6. If there is going to be in 2006 "a
national debate on the future priorities for public spending and
public services, to inform the CSR" (Treasury, 2006a, Box
6.1 on page 131), then a number of questions arise:
Will the 2006 report on long-term
issues be published in July 2006, just before Parliament's summer
recess? (This would seriously inhibit timely work by select committees.)
Will a public consultation at a time
of slowing public expenditure growth not lead to clamours for
more expenditure? (If so, it would have been better to set the
spending envelope for 2008-09 to 2010-11 before the consultation
What is the logic of the early CSR2007
settlements (Treasury, 2006a, p 127)? (Public priorities might
be for more effective, less fraud-prone but more costly DWP administration
and/or more Home Office
expenditure on police and prisons.)
7. Chart 2.4 of the Budget Report (Treasury,
2006a, p 34), headed "Meeting the golden rule", shows
that the margins for this economic cycle are very tight: ".
. . there is a margin against the golden rule of £16 billion
in this cycle, including the AME margin, the same as at the 2005
Pre-Budget Report" (Treasury, 2006a, para 2.58 on page 34).
Notwithstanding the frequent use of "cautious" in relation
to the fiscal forecasts, Chart 2.8 of the Budget Report (Treasury,
2006a, p 39) shows that the golden rule would be breached in the
present cycle on the `cautious case' (which assumes trend output
one percentage point lower in relation to actual output than the
The Government is, on the basis of cautious,
independently-audited assumptions, meeting the golden rule in
the central case. In the cautious case, Chart 2.8 shows that the
cyclically adjusted surplus will be in balance at the end of the
projection period (Treasury, 2006a, para 2.74 on page 39).
It is necessary to go back to the Budget Report
2003 (Treasury 2003, para 2.69 on page 41) to find reference to
the "stress test" of the golden rule, namely that the
golden rule is also met on the cautious case. The adjective "cautious"
now effectively relates to the claimed caution of "independently-audited
assumptions". I have warned elsewhere (Heald and McLeod,
2002, para 505; Heald 2004, Ev 69) that auditing the Treasury's
macroeconomic assumptions is a task that the National Audit Office
should never have taken on. This relationship breaches a fundamental
principle of auditing, namely that an auditor must have "investigatory
freedom" (ie audit what it wants when it wants) as well as
reporting freedom (Porter, Simon and Hatherly 2003, p 43). The
former does not exist in this case and the expertise and resources
available to the National Audit Office for this task do not match
those of the Treasury.
8. Transparency is not achieved by incantation,
as in countless claims of "openness and transparency".
Its achievement depends fundamentally on the structuring of communication
in ways that help the user of government financial information.
However highly the United Kingdom may score on IMF check lists
of good fiscal transparency practices, defects in budgetary documents
and the budgetary process heavily qualify those results. The key
problems are overload (there is too much for users to absorb on
short, sometimes artificially constructed, deadlines) and bias
(uncomfortable facts are just disregarded and presentation is
selective). There is not space in this memorandum to fully develop
these points, but three substantive issues are now used as illustrations.
9. There is a Government commitment "to
continuing to report on progress against efficiency targets openly
and transparently, including through Departments" Autumn
Performance Reports and annual Departmental Reports' (Treasury,
2006a, para 6.14 on page 132). What is lacking in Chapter 6 is
a summary table of efficiency gains to date, analysed by department
and nature. Parliament, and the Treasury Committee in particular,
need to be able to see the broad picture and how that evolves
10. There is also the question of the validation
of efficiency gains, an issue addressed in part by a recent report
from the National Audit Office (2006). Given the lack of public
trust in government information, this is an area requiring careful
monitoring. Conceptually, it is difficult to measure efficiency
gains, not least because the inherent difficulties in measuring
public service output mean that it is difficult to hold the quantity
and quality of that output constant. This is necessary in order
to distinguish between genuine efficiency gains and expenditure
savings that lead to reductions in public output. There is an
obvious danger that the political imperative to meet targets becomes
the dominant objective, even at risk to service levels and quality.
Moreover, the National Audit Office is itself in a difficult position.
Given that its self-imposed performance target is to achieve £8
for the taxpayer for every £1 it spends,
the National Audit Office itself has an incentive to report savings
and have these signed off by its audit clients.
11. There are two distinct issues concerning
the Private Finance Initiative (PFI), namely: (a) whether PFI
projects are value for money, and (b) whether they are accounted
for on or off the public sector balance sheet. On Budget Day 2006,
the Treasury published a new document on the PFI, entitled PFI:
Strengthening Long-Term Partnerships (Treasury 2006b). This
121-page document concentrates on the value-for-money issue, but
makes some misleading statements about accounting:
decision to use PFI is taken on value
for money grounds alone, but not at the expense of employees'
terms and conditions. The accounting treatment of a PFI project
is not relevant to this decision. Around half of PFI projects
by value are reported on departmental balance sheets (Treasury,
2006b, p. 13, emphasis in original).
The accounting treatment of a PFI project on
a departmental balance sheet, and its reflection as an asset in
the national accounts, plays no part in the Government's decision
about when to use PFI. That decision is based on value for money.
Around 50% of PFI projects by capital value are reported on departmental
balance sheets. The accounting treatment follows rules set and
audited by a series of independent national and international
organisations (Treasury, 2006b, para 2.27 on page 23).
12. There have been long disputes about
PFI accounting, particularly about the criteria on which it should
be decided whether a PFI-financed asset should be on or off the
balance sheet of the public sector client (for the history, see
Heald 2003). Some of the present difficulties stem from tension
between (a) FRS5A (published by the Accounting Standards
Board) and (b) Technical Note 1 (Revised) published by
the Treasury. Assets are more likely to be on the public sector
balance sheet using FRS5A. In its annual reports, the Financial
Reporting Advisory Board has repeatedly stressed its concerns
about PFI accounting.
13. The current problems relate to:
The widespread perception in public
organisations that off-balance sheet PFI is often "the only
show in town", with there being no public money for conventional
procurement and no public expenditure cover for on-balance sheet
There is inconsistent treatment across
the public sector, both across territorial jurisdictions and across
There is evidence that some assets
are not on the balance sheet of either the public sector client
or of the private sector operator, to an extent that goes beyond
what might be expected from disagreements on marginal cases.
There is a dangerous interplay between
the market for advice on the accounting treatment of prospective
PFI schemes (leading to shopping for advice) and the provision
of auditing services.
14. It is disappointing that the Treasury
has the resources to produce a long report on other aspects of
the PFI, but so neglects these fundamental accounting issues.
This contrast is bound to fuel suspicion that the Treasury is
content to let matters drift on, rather than take necessary steps
that would be likely to increase the reported level of government
2004-05 WHOLE OF
15. The Whole of Government Accounts project
is a welcome Treasury initiative, first announced in 1998. The
published timetable was for there to have been a published Whole
of Central Government Account 2004-05, followed by a complete
Whole of Government Account for 2006-07 (to be published in Spring
2008). Without public announcement, the Treasury decided not to
publish the Whole of Central Government Account 2004-05, either
on an audited or unaudited basis. The following exchange took
place at the Public Accounts Commission (2006, p 28) meeting on
28 February 2006:
RICHARD BACON: Don't you think it damages public
confidence when there is a series of delays? The complete Whole
of Government Accounts . . . is scheduled to be prepared and audited
for 2006-2007, which means that it will be ready at a politically
sensitive time, in Spring 2008. Would you agree that not publishing
the Whole of Central Government account for 2004-2005 gives a
bad signal when fiscal transparency is a fundamental tenet of
the Statutory Code for Fiscal Stability?
SIR JOHN BOURN: Having said that they would do
it and then deciding not to do it certainly has the result that
16. Strong support has been given by Parliament
to the Treasury's Whole of Government Accounts project. It is
important that, if the Treasury departs from the public timetable,
there is a clear public statement of the reasons for delay. Otherwise,
the suspicion will arise that the reason for non-publication is
that the results make uncomfortable reading.
Brown, G (2006) "Budget speech", Hansard,
Heald, DA (2003) "Value-for-money tests
and accounting treatment in PFI schemes", Accounting,
Accountability and Auditing Journal, Vol 16(3), pp 342-71.
Heald, DA (2004) "Budget 2004: A limited
window on SR2004", in Treasury Committee, The Budget 2004,
Sixth Report of Session 2003-04, Volume II, HC 479-II, London:
Stationery Office, pp Ev 69-70.
Heald, DA and A. McLeod (2002) "Public
expenditure", in The Laws of Scotland: Stair Memorial
EncyclopaediaConstitutional Law volume, paras 480-551.
National Audit Office (2005) Helping the
Nation Spend Wisely: National Audit Office Annual Report 2005,
London: National Audit Office.
National Audit Office (2006) Progress in
Improving Government Efficiency, HC 802-I of Session 2005-06,
London: Stationery Office.
Porter, B, J Simon and D Hatherly (2003), Principles
of External Auditing, Second Edition, Wiley: Chichester.
Power, M (2003) "Evaluating the audit explosion",
Law & Policy, Vol 25(3), pp 185-202.
The Public Accounts Commission (2006) Uncorrected
Transcript 28 February 2006 (available at:
Treasury (2003) Budget Report 2003: Building
a Britain of Economic Strength and Social JusticeEconomic
and Fiscal Strategy Report and Financial Statement and Budget
Report, HC 500 of Session 2002-03, London: Stationery Office.
Treasury (2005) Pre-Budget Report December
2005, Britain Meeting the Global Challenge: Enterprise, Fairness
and Responsibility, Cm 6701, London: Stationery Office.
Treasury (2006a) Budget 2006: A Strong and
Strengthening Economy: Investing in Britain's FutureEconomic
and Fiscal Strategy Report and Financial Statement and Budget
Report, HC 968 of Session 2005-06, London: Stationery Office.
Treasury (2006b) PFI: Strengthening Long-Term
Partnerships, London: HM Treasury.
University of Sheffield
27 March 2006
27 I have been unable to find in the Budget Report
any reference to a Home Office freeze in real terms. However,
the following sentence appears in the Budget speech: "The
Home Secretary has agreed that we can invest more in priorities
like policing and security, while making savings in other areas
within a three-year Budget at its 2007-08 real-terms level"
(Brown 2006, col 300). Back
There does not appear to be an explicit derivation of this number
in the Budget Report. This would have been a useful topic for
a Box. Back
See "Statement of National Audit Office Financial Impacts
for 2004" in the 2005 Annual Report of the National Audit
Office (2005, pp 73-75). My personal view is that this target
of £8 for £1 is undesirable and that the numbers are
not credible as measures of savings. Back
Although a breakdown by departments is not given, it seems likely
that this percentage is heavily affected by the on-balance sheet
treatment of the London Underground PPP. Back
Sir John Bourn, the Comptroller and Auditor General, has criticised
the fact that the websites of the Department of Health and Department
for Education & Skills have encouraged this view. Back
In central government, where the National Audit Office is the
auditor, on-balance sheet treatment is more likely. In health
and local government, which in England falls under the Audit Commission,
PFIs in education and health are more likely to be off-balance
sheet, though there are known differences of view between appointed
auditors. In Northern Ireland, where local government is unimportant
in expenditure terms, accounting treatment for schools' PFI is
affected by the way in which the Northern Ireland Audit Office
is heavily influenced by NAO views and methodology. Back