June 2009 Role of the Treasury - expenditure control

Restricted 2 The NAO is a parliamentary body totally independent of Government and led by the Comptroller and Auditor General. Government cannot interfere with its work. The Treasury takes lead in managing Government’s relationship with Parliament and NAO on public finances. The NAO audits the accounts of all UK central government departments, the agencies and most public bodies of which Treasury takes a keen interest. NAO also carries out some 60 value for money studies into various spending programmes which are the basis of public hearings conducted by the Public Accounts Committee. Treasury often proposes studies. The National Audit Office and HM Treasury NAO value for money report

Restricted 3 Across central government, Treasury (through the Treasury Officer of Accounts team) also takes the lead in setting and maintaining high standards of parliamentary and public accountability, governance, regularity and propriety in handling and using public resources. Treasury appoints Accounting Officers. Treasury, on behalf of Government, works closely with and consults the NAO, on behalf of Parliament, to ensure that these shared, high standards are constantly maintained. Treasury Officer of Accounts team assists Accounting Officers to ensure that they give clear, convincing and accurate evidence to the PAC on their organisations’ performance. NAO supports the PAC in holding hearings and liaises with departments and Treasury as appropriate. The National Audit Office and HM Treasury

Restricted 4 The NAO audits the accounts of all United Kingdom central government departments, their agencies and a wide range of public bodies. Qualified accounts may result in a PAC hearing. NAO also conducts around 60 value for money studies each year. NAO and departments cooperate closely to ensure that NAO value for money reports are accurate, thorough and comprehensive in order to provide Parliament with a full picture of performance. NAO also works closely with Accounting Officers (usually heads of departments) in preparation for PAC hearings. NAO’s recommendations taken seriously by departments and often implemented following PAC’s own report. The National Audit Office and United Kingdom government departments and public bodies

Restricted 5 The fiscal and spending framework Fiscal rules National accounts aggregates PSCE and PSNI Budgets Split into resource/capital and DEL/AME Aim to control against fiscal rules and incentivise vfm Estimates Annual Parliamentary approval for spending in budgets Resource Accounts Report annual spending on a departmental basis. Follow commercial Generally Accepted Accounting Practice (GAAP) “as adapted for the public sector”.

Restricted 6 The fiscal rules – Before PBR 08 The Golden Rule: over the economic cycle, the Govt will borrow only to invest. In other words, current expenditure must be paid for by taxes, the Govt can borrow to fund capital spending The sustainable investment rule: over the economic cycle, net public debt as a proportion of GDP will be held at a stable and prudent level (below 40%).

Restricted 7 Current and capital spending split into DEL and AME Controllable: Departmental Expenditure Limits (DEL) Difficult to control: Annually Managed Expenditure (AME) DEL + AME = Total Managed Expenditure (TME)

Restricted 8 Departmental Expenditure Limits (DEL) All spending is in DEL unless approved by the CST Three year DEL limits for each department are set in Spending Reviews SRs allocate DEL envelope derived from fiscal position minus the AME forecast There is a small DEL Reserve (0.5% of DEL) to deal with contingencies

Restricted 9 Annually Managed Expenditure (AME) For spending which is unpredictable/volatile and large relative to departmental programmes Putting items in AME removes them from prioritisation process and makes it difficult to offset rises in AME with reductions elsewhere But putting items which genuinely cannot be managed and absorbed into DEL hinders rather than helps spending control.

Restricted 10 What’s in AME? *based on Budget 09 forecasts

Restricted 11 What’s in DEL? *based on Budget 09 forecasts

Restricted 12 Spending review outputs Outcome based targets (PSAs) Value for Money savings Three year spending envelopes for RDEL and CDEL Three year departmental budgets Pay targets TME minus updated AME forecast

Restricted 13 Parliamentary Control Departmental spending within budgets set by Government needs Parliamentary approval. Supply Estimates are the vehicle Still an annual control over cash requirements, although now includes information on resources too Breaches very serious and result in PAC appearance so taken very seriously

Restricted 14 Resource accounting vs cash accounting Accruals - Spending happens when it happens, not when cash is handed over. Costs of holding assets score in resource budget: A hospital which will last for 30 years costs 1/30 of its value each year - depreciation If value of assets declines must score an impairment Also a cost of capital charge because capital ties up resources. Provisions – departments must provide in their accounts now for likely future outlays (eg court cases) Balance sheet records assets and liabilities

Restricted 15 Whole of Government Accounts Will provide a consolidated picture of the whole of UK public sector (c.1300 entities across central government, devolved administrations, local authorities, NHS and public corporations), prepared on the basis of GAAP Aim of Government is to provide improved data for fiscal planning, to increase transparency and to improve accountability to Parliament. Account will increase completeness of published financial data through the inclusion of provisions, contingent liabilities, etc. Requires bodies within the public sector to prepare data on a consistent basis aiding comparability of financial data First audited and published account for is planned for , in line with move to International Financial Reporting Standards

Restricted 16 Internal Audit Accounting Officers are required to make provision for internal audit in accordance with the Government Internal Audit Standards (GIAS). Internal Audit provides an independent and objective opinion to the Accounting officer on risk management, control and governance. This supports the Accounting Officer in producing their Statement on Internal Control.

Restricted 17 IA Good Practice Guides Audit Strategy Consultancy Reporting Risk based approach Co-operation between internal and external audit Co-operative assurance relationships Resource budgeting Resource based financial systems ….etc.