19 Government Accounting in the United Kingdom

A. Premchand
Published Date:
June 1990
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The development of financial institutions and financial systems in the United Kingdom is closely bound up with important constitutional developments over many centuries, and the origins of some of the features of today’s procedures go back a very long time indeed. The Treasury has existed in one form or another since the Royal Exchequer was established in the twelfth century; the office of a key figure in the auditing of government accounts—the Comptroller and Auditor General—can be traced to at least 1314, though the role has changed considerably since then.

Much of the basis of modern government financial management and accounting was, however, formed in the mid-nineteenth century and changed only slowly until the 1970s. Indeed, at the beginning of the 1970s, judging from the writings of Goldman1 and Diamond,2 both of whom had recently retired, there was a somewhat complacent assumption that the system would need very little improvement in the future. Since the mid-1970s, however, the pace of change has accelerated remarkably, and the systems of financial planning and control have undergone what is in effect a major revolution.3 There have been three major stimuli for the changes. First, there was the crisis of high and variable inflation rates in the 1970s. Then came the political stimulus of a Conservative Government elected in 1979 and determined to review the operations of the public sector and if possible cut its size. Finally, and most important, through the 1970s but with increased emphasis in the 1980s, an attempt has been made to improve the management of the public sector in all its aspects. Developments in accounting have been very closely linked to the managerial changes. Before going through these developments, the following section gives a brief summary of institutions and their roles (for those unfamiliar with U.K. financial institutions). It should be noted that there are sometimes different arrangements for Scotland, Wales, and Northern Ireland.


The institutional framework for financial management must start with the constitutional position, which is the statement “The Crown demands money, the Commons grants it, and the Lords assent to the grant.” What this means has been summarized4 as follows:

The Sovereign, being the executive power, is charged with the management of all the revenue of the State and with all payments for the public service. The Crown, therefore, acting with the advice of its responsible Ministers, makes known the pecuniary necessities of the government; the Commons, in return, grant such Supply provision as is required to satisfy those demands, and they provide … the ways and means to meet the Supply which they have granted. The Commons do not vote money unless it is required by the Crown . . . .

The reality is less complicated in principle, though not in detail. It is up to the government of the day to propose expenditure and the taxes to pay for it. The House of Commons has to approve these proposals—it cannot itself propose increases in expenditure—and because the Government has a majority in the House of Commons, approval is normally assured. (To dispel any misunderstandings about whether the United Kingdom is still a feudal society, the Queen herself, despite the references above to “Sovereign” and “Crown,” has little role to play. And the House of Lords, a nonelected chamber, has no authority on money matters.)

Although revenue is raised each year through a variety of sources, the bulk comes from the taxes raised by central government. Authorization for the raising of these taxes comes from the House of Commons on the basis of the annual budget, which proposes the tax levels and changes, normally just before the beginning of the financial year starting in April. A debate on the proposals is held immediately after their announcement, and the Treasury and Civil Service Select Committee reports to the House of Commons on them at a later date. The details are included in the Finance Bill, which has to be considered by Parliament each year. The Bill must complete its passage through the legislature and, as amended, must be passed by early August to give the authority to the Government to levy taxes.

Of the key institutions, the most important part of government is undoubtedly the Treasury, known more formally as Her Majesty’s Treasury, which is responsible for most of the Government’s accounting and financial management functions. The planning and control of public expenditure is one of its central roles, and the Head of the Government Accounting Service is one of its senior officials. Another senior official is the Treasury Officer of Accounts, who is responsible for advising the Treasury and departments on Parliamentary expenditure matters and is the main link with Parliament. The Treasury is highly influential even in those functions for which it is not wholly responsible, such as financial relations between each department and Parliament.

The Treasury’s pivotal role in planning and controlling revenue and expenditure and acting as the focus for the development of managerial and accountancy practice is reinforced by several of its other functions. One is its duty to advise departments on economic and financial matters, which means in practice that they can do little without Treasury approval. Also important is its influence on pay negotiations and its close links with the Customs and Excise (whose responsibilities follow its name) and the Inland Revenue (responsible for administration of most of the other taxes).

Responsibility for implementing managerial change is divided between the Office of the Minister for the Civil Service (part of the Cabinet Office) and the Treasury. Separate from both is the Efficiency Unit, which works directly for the Prime Minister’s adviser on efficiency. In addition to its other work, the unit is involved in a limited number of efficiency scrutinies (see below), leaving the majority to be conducted within departments.

The department with responsibility for many of the mechanics of payments and receipts within government is the Paymaster General’s Office. This responsibility is in three main areas: paying public service pensions, providing banking services to the Government, and supplying information on central government expenditure to the Treasury and other departments.

Individual government departments have an accounting officer (usually the head of the department) responsible to Parliament for good management in prudent and economic administration. Among his or her main responsibilities is the duty to sign the Appropriation Accounts each year and ensure the regularity and propriety of expenditure from public funds. Support for financial work in departments is provided by the principal finance officer (PFO), who is responsible for financial and accounting matters within the department and will normally liaise closely with the Treasury. Detailed work within departments will usually involve Finance Division(s) and the Accounts Branch. The former deals with the processes of approving the financial content of proposals, obtaining the necessary funds, and promoting efficiency. The latter brings to account the payments and receipts and maintains proper books. Internal audit will also report to the PFO, though there will be access to higher levels if necessary.

On the parliamentary side there are also a number of key institutions. On the auditing side they are the National Audit Office (NAO) and the Public Accounts Committee. The NAO’s routine audit work is to ensure propriety and to ensure that the sums granted by Parliament have been used for the purpose intended. It is concentrated after the end of the financial year when departmental accounts are prepared as part of the certification process. The remit of the NAO, however, goes wider, since it is also charged with examining economy, efficiency, and effectiveness (that is, value for money). It is completely independent of government and is responsible to a commission of senior parliamentarians.

Reports of the NAO are issued under the signature of its head, the Comptroller and Auditor General, whose independence of government is similarly provided for. The NAO also examines (but does not certify) the accounts of government revenue. Its other activities include certification of the accounts of other public sector bodies and some international organizations. Apart from the formal audit, the NAO raises issues in its management letters, generally to recommend improvements in accounting systems, although errors and queries are also drawn to the attention of management.

The Public Accounts Committee role can be highly influential, since its duties are to consider not only the Appropriation Accounts and other accounts presented to the House of Commons but also value-for-money reports on government activities. This consideration is normally through examining the accounting officer as the responsible departmental official on matters that have been brought to its attention. The Treasury replies to these reports through Treasury Minutes, and there is a parliamentary debate on some of the reports of the Public Accounts Committee and relevant Treasury Minutes.

For scrutinizing expenditure plans, the departmental Select Committees, of which there are currently 13, play key parliamentary roles. Of the committees involved in scrutinizing government proposals, the Treasury and Civil Service Select Committee is the most prominent, reflecting the fact that it “shadows” the departments most concerned with financial matters. It has the general responsibility for examining economic policy and submits reports to the House of Commons as a whole to inform their general debates. Accounting and civil service management issues also come within its work. Other departmental Select Committees are less directly involved in these matters, although each has the opportunity to review and report on annual expenditure proposals, by questioning officials and/or ministers about expenditure plans.


Although it is now usual to regard the majority of the considerable changes in the activities covered in this chapter as occurring in the 1980s, the impetus of the Fulton Report published in 19685 helped to set the process of reform in motion. Improvements in the 1970s were piecemeal, however, and had less of a financial emphasis than those of the 1980s. In comparison with the 1960s, nevertheless, the pace of change of management in general and the financial planning and control framework in particular was already fast in the 1970s. It accelerated considerably in the 1980s, with change affecting almost all parts of the system. Only a brief allusion, however, can be made to the major innovations.

Planning and Control

The period was marked, above all, by intensive efforts to establish and maintain control over government expenditure. Until 1982, planning was in “volume” terms, with the emphasis on providing a required quantity of goods and services. A major development in 1976 was the introduction of cash limits—the net amount of cash that can be spent on services during a financial year—which ignored the volume element of spending.6 These limits were enlarged and consolidated in later years to cover about 60 percent of public expenditure.

The introduction of cash limits was a response to the uncertainties of planning in volume terms at a time when high and variable inflation rates were giving rise to concern that public expenditure was “out of control” and based on “funny money.” The limits were operated in parallel with a planning system still using constant prices until 1982 when “volume” planning was abandoned and government expenditure plans also were expressed in cash terms, allowing limits to be integrated with plans.

Recognizing that cash controls might give rise to problems, in 1983–84 an end-year flexibility scheme was introduced to allow a limited amount of certain capital expenditure allocations to be carried forward to the following year. The intention was to recognize the difficulties of planning such expenditure and to avoid a potentially uneconomic rush to spend at the end of the financial year.

In addition to cash limits, other controls were introduced during the 1980s as a means of exerting pressure to keep administrative costs down. These included both financial and nonfinancial measures. Of the financial measures, running cost controls are worth mentioning, three of which were introduced in 1986, and which in effect act as a cash limit within the cash limit for certain administrative costs. These limits are also monitored during the year.

One of the most difficult areas in the exercise of expenditure control has been in central government’s dealings with local government. In 1980 the Conservative Government passed the Local Government Planning and Land Act, which introduced a number of additional expenditure controls to those already in place, as well as inaugurating a “block” grant in an attempt to simplify the system of subventions to local authorities. But during the next few years, tension built up between some local authorities controlled by the opposition Labor Party and central government. Since local authorities are able to raise some of their own revenue, such authorities were able to circumvent the spending controls imposed by central government. The result was a succession of measures designed to stop them. Spending limits were introduced in 1981 but were not successful and were later scrapped. In 1982 the Local Government Finance Act was passed, altering the basis of grant and audit, and in 1984 the Rates Act, designed to stop using local taxation to fund additional expenditures. In 1988, there was another Local Government Finance Act, which altered the whole basis of local taxation. Further legislation was promised.

The period was also marked by attempts to control the amounts that nationalized industries could receive from central government. Like local authorities, nationalized industries proved difficult to control, not only because of trading uncertainties, but also because of ambiguities over policy objectives. The attempts to establish a control framework that had been the subject of debate for many years, culminated in a White (policy) Paper in 1978.7 Cash controls through external financing limits were introduced as part of a comprehensive control framework to include targets usually based on rates of return and nonfinancial measures. Although the framework in the White Paper lasted for many years as the basis of policy, by the middle of the 1980s the Government had effectively decided that it would sell off as many industries as possible to the private sector. The control problem was thus effectively resolved.

Reflecting the rate of change in procedures and parliamentary interest in monitoring and control, there were also major changes in the financial documents produced by the Government. They are described in detail in the section on the structure of the accounting system, but it is worth noting the rise in importance (and the huge improvement in presentation) of three information documents—the Autumn Statement, the Public Expenditure White Paper (PEWP), and the Financial Statement and Budget Report (FSBR). The first two of these merit further consideration. The FSBR, while expanded in scope and gradually becoming more approachable, fulfilled a similar role throughout the period.

The Autumn Statement had its origin in a report by an independent study group8 chaired by a former head of the civil service. The Treasury and Civil Service Select Committee recommended9 that a “Green” (proposed) budget should be published in the autumn, to allow time for discussion by Parliament and others. The Government rejected the idea of submitting proposals for general consideration but instead published a document, the Autumn Statement, which has become progressively more important since first published in 1982.

The second document, the Public Expenditure White Paper, was started in the late 1960s, but it became the main focus of parliamentary scrutiny of expenditure in the 1980s, until, with the growing importance of the Autumn Statement and the decision to phase in Annual Reports for Government Departments, it was planned to phase it out altogether by 1991. Reflecting the changes in the planning system, the figures in the PEWP were at first expressed in volume terms. However, after the problems of running a constant price planning system in a period of high and variable inflation rates, the PEWP mirrored the planning system and was expressed in cash terms from 1982.

One result of all these changes was that it became more difficult for outsiders to understand what expenditure figures meant. At the beginning of the period, information was based on a traditional system of parliamentary control of expenditure built on principles established in 1866. With the arrival of cash limits in 1976, a parallel system of control emerged, and for a time the “traditional” documents classified information in a way that was difficult to reconcile with those for cash limits and with the increasingly important information documents. There has been increasing alignment of the three throughout the 1980s, however, until it has become relatively easy to read across from one document to another.


One of the first actions of the Prime Minister of the incoming 1979 Conservative Government was the appointment of Lord (then Sir Derek) Rayner as efficiency adviser. He initiated a system of scrutinies, since then commonly known as the “Rayner scrutinies,” which were not only important in their own right as examples of how studies carried out within a government department in a short timeframe could identify possible efficiency improvements, but they also gave rise to different ways of thinking about management that generated a number of specific management improvements within departments. One example was the development of top management information systems within departments, of which MINIS (Management Information System for Ministers) in the Department of the Environment was the model for versions later modified in many other departments.

Rayner’s work was also influential in the thinking behind the Financial Management Initiative (FMI). The FMI, announced in a White Paper,10 gave as an objective that departments should have

a. a clear view of their objectives and the means to assess and wherever possible measure outputs or performance in relation to these objectives.

b. a well-defined responsibility for making the best use of their resources, including a critical scrutiny of output and value for money.

c. the information (particularly about costs)… which they need to exercise their responsibilities effectively.

This rather limited exercise in improving financial management, as Richards pointed out, “has come to symbolise all that has happened in the field of management change in the public sector . . . . It is a catch-all label commonly applied to all the current attempts to improve efficiency and effectiveness, such as importing commercial principles of management, improving the financial skills of civil servants, buying in goods and services through contracting-out rather than producing them in-house, and so on.”11

The FMI indicates the close connection between the financial and more general managerial changes that took place in the 1980s as well as emphasizing the importance of budgeting, control, performance measurement, and value for money as key elements of many of the later managerial innovations. The theme of allowing the development of devolved budgeting was reinforced in the multidepartmental review of budgeting,12 although there was soon clear evidence that central control had been loosened only to a very limited extent.13 Similarly, while there was evidence of progress over what had been available before,14,15 there was limited progress too in the development and use of performance measures.

The idea of devolving managerial responsibility was taken much further with the publication of a report by the Efficiency Unit known as “The Next Steps.” This recommended that “agencies” should be established to carry out the executive functions of government within a policy and resources framework set by a department,16 that staff should be properly trained to do so, and that an official at the most senior level should be appointed as “project manager” to carry it through. The recommendations were endorsed by the Government and by Parliament,17 the official was appointed, and at the time of writing, the initiatives were being pursued with considerable vigor. Several agencies had already been created and agency arrangements were being discussed with many more organizations.

In the accountancy area, the period saw an important development with the introduction of a new post, Head of the Government Accountancy Service. This post was created following government acceptance of the 1973 Melville/Burney Report, which recommended that the duties of the post should include career management of the Government Accountancy Service and development of closer relations with accountants outside the civil service and with senior administrators. It proved difficult to recruit the first two incumbents of the post,18 but the position gradually gained in stature as it was transferred into the Treasury from the Department of Industry and the importance of the work became more clearly established.


For Parliament, too, the period has been marked by significant changes, with two factors of major importance. First, there has been a resurgence in House of Commons activity in the scrutiny of expenditure after many years of playing a relatively insignificant role. This activity has been stimulated above all by reforms recommended by the House of Commons own Select Committee on Procedure in the 1977–78 session and implemented in 1979. The reforms provided for the setting up of departmental select committees to shadow the affairs of government departments and provide a more effective mechanism than had hitherto existed to enable them to scrutinize government expenditure plans. Further changes from the 1982–83 session made three days available each session for debates on expenditure matters raised by the committees.

The second major parliamentary change has been in the way the focus of the Public Accounts Committee has moved away from having matters of propriety and regularity as the main part of their work to concentrating on the value-for-money aspects of expenditure. This change was made possible above all by the creation of the National Audit Office in 1984. Through the National Audit Act 1983, the NAO took over the functions of the Exchequer and Audit Department, which had dated from reforms in 1866. Until the 1983 Act, value-for-money examinations were carried out only with parliamentary encouragement. Thereafter they had statutory authority for the first time.

In parallel with the emergence of these new roles, there was a dramatic improvement in the nature and quality of the financial information provided to Parliament. The long-established documents that provided the material for parliamentary scrutiny were still produced, but their relative importance was eclipsed by a group of new documents whose focus was largely on planning and information. These documents, notably the Public Expenditure White Paper, at first operated more or less independently from the traditional documents. Progressively the two became aligned.


While the structure of the accounting system has undergone considerable change in recent years, the basis of the system remains, however, annual and cash based, though certain transactions involving revenues are on an accruals basis. Two exceptions to the general pattern are public corporations—which use conventional commercial accounting (with special variations)—and, since the 1973 Trading Funds Act, trading funds. The intention behind the Act was to allow improved commercial operation and public accountability for certain central government trading entities by providing a more commercial framework in which to operate. But in practice trading funds have been little used.

The Government’s funds are handled centrally through the Consolidated Loans Fund—the Government’s bank account kept by the Paymaster General’s Office. Taxes and receipts other than those relating to loans are paid into it, and most government expenditure (including all funds granted by Parliament) are financed out of it. All relevant payments have to be authorized by the Comptroller and Auditor General to ensure that authority has been given for the payment. Certain items of expenditure come straight out of the Consolidated Fund and do not have to be voted by Parliament annually through the supply procedure (see below). These “Consolidated Fund Standing Services” include payments to service the National Debt and payments to the European Communities.

Two other key funds are the National Loans Fund and the National Insurance Fund. The former deals with borrowing and debt interest. Balances from the Consolidated Fund are paid each day into the National Loans Fund to minimize government borrowing. As a matter of long-standing principle, all revenues are paid into the Consolidated Fund and all expenditures are paid out of it. One exception in theory but not in fact is the National Insurance Fund, which is under the control not of the Treasury but of the Department of Social Security. This fund receives social insurance contributions from employers, employees, and the self-employed as well as government contributions voted by Parliament. These moneys pay for contributory-based benefits such as retirement and widows’ pensions and unemployment and invalidity benefits. In practice, the flows into and out of the fund form part of the general pool of government revenue and expenditure.


Government planning systems are in cash terms and operate for a period of three years, known as the survey period. They are conducted against the background of the Government’s medium-term financial strategy. The annual planning cycle starts in January, 15 months before the beginning of the financial year. In the months that follow, Treasury officials work with officials from other departments to draw up proposals to cover three years in a process known as the public expenditure survey. The Treasury Minister responsible, the Chief Secretary to the Treasury, presents the results. Ministers become involved at the later stages of the process and a Cabinet meeting (usually in July) decides the overall totals of public expenditure for the three years. In the case of the first two years, it is a question of deciding whether the plans agreed should stand or whether they should be altered.

Following the announcement of the total, departmental bids have to be reconciled with what has been announced. The Chief Secretary to the Treasury discusses whether this can be done with relevant ministerial colleagues in charge of spending departments. If no agreement can be reached through these “bilaterals,” a group of ministers known as the “Star Chamber” arbitrates between the competing claims. The decision about the allocation of the total between departments is usually taken in November and published in the Autumn Statement, together with an estimate of the outturn for the current financial year. A report on this document is made to the House of Commons by the Treasury and Civil Service Select Committee and forms the basis of a debate shortly thereafter. Full details of what each department will spend will be published in January up to 1990. From 1991 onward the information will be included as part of annual departmental reports that will be published in March.

Parliamentary departmental select committees have a chance to discuss these proposals and the supply estimates that are issued at the time of the budget. The supply estimates are the formal request to Parliament for funds and cover most, though not all, public expenditure (the balance consists mostly of local authority expenditure and social insurance funds). Parliamentary approval for the proposed expenditure must be given by early August. Time for parliamentary debate (Estimates Days) on issues raised by departmental select committees is set aside three times a year to allow consideration of matters chosen from those estimates (or supplementary estimates asking for additional funds) discussed by the committees. Individual matters can be brought to the attention of Parliament at any time by individual members of Parliament.


Central control and monitoring of expenditure during a year comes through the Financial Information System (FIS), which provides regular reports on what has been spent and the estimated outturn for the year. Departments draw up a quarterly profile of expected expenditure, which is agreed with the Treasury. Much information for monitoring comes each month from the APEX (analysis of public expenditure) records of receipts and payments to the Consolidated Fund maintained by the Paymaster General’s Office. Further information on half-yearly estimated expenditure is given by departments, each of which has an internal monitoring system, together with any revisions to budgets believed to be necessary. These figures are used to give estimated outturn figures in the main published documents on expenditure.

Control is also exercised on about 60 percent of government expenditure through cash limits that provide a system of government control of expenditure during a financial year. The other 40 percent consists mainly of expenditure which is “demand led,” that is, where policy has already determined entitlement to payments and where the expenditure is therefore effectively outside the direct control of government. Social security payments are an example. Once set, the limits are not normally changed.

Flexibility to meet unexpected events is nevertheless available during the year. First, for public expenditure as a whole, there is the reserve, which is an amount set aside at the beginning of the year to cover unforeseen items of expenditure and those items that cannot be properly quantified when plans are published. This applies even to those elements that are cash limited, where there is some flexibility. Cash limits can be revised during the year, and not infrequently are, though like all revisions, they will have to be approved by the Treasury.

Parliamentary control is exercised by the way in which the supply estimates are drawn up. These estimates restrict what the funds that are voted can be spent on (although a limited amount of switching within what is voted—virement—is available), stipulate that this is the maximum amount, and that it is approved only for the financial year. The Public Accounts Committee ensures that these provisions are adhered to as well as investigating value-for-money aspects.

Assuming the relevant item falls within the supply estimates, use of the reserve and increases in cash limits will require the approval of Parliament, normally through a supplementary estimate. The exceptions are where the expenditure is covered by a cash limit but not by an estimate, such as for much local authority capital expenditure. Pending this approval, the Government can use a contingencies fund for urgent expenditure, subject to certain restrictions.

Penalties for exceeding limits are largely moral, though there are financial penalties too. If supply estimates are exceeded, there will be an excess vote and, depending on the reasons, recriminations from the Public Accounts Committee. In the (rare) cases where a cash limit is exceeded, there will be an investigation into the reasons, and the amount set aside for the next year will usually be reduced.


References have already been made to the key reporting documents in the previous sections. It is clear that there have recently been major developments and that they are continuing. The rest of this section gives a summary of the features of these documents, which can be divided into three categories describing their major purposes—those providing information, those required for authorization, and those that provide accountability.

Information documents are the Autumn Statement and its statistical supplement, Departmental Reports, and the Financial Statement and Budget Report (FSBR). The Autumn Statement usually comes out in November giving a summary of economic prospects for the coming financial year, an outline of public expenditure for each department for the next three years, and other information, including tables showing the effects of illustrative tax changes. Its statistical supplement (until 1991 appearing as part of the Public Expenditure White Paper), published in January, analyzes and gives more detail about the overall plans announced in November.

The other information documents are departmental reports, which will be published in March from 1991 onward, giving full details about expenditure for each department in the context of policy objectives. Until 1991 a more limited form of the detailed departmental information will be published as Public Expenditure White Paper booklets in January. The final information document is the FSBR, which is published at the time of the budget, normally in March. It gives the macroeconomic background to the budget as well as details of budget tax measures.

At the same time as the FSBR is published, the first set of main authorization documents also appears. These are the supply estimates that give the information on expenditure to be authorized by Parliament in July or August through the Appropriation Act. Supply estimates also provide the basis for comparing estimated with actual expenditure and act as a highly detailed source of reference on expenditure items. Since the financial year starts in April, authorization comes four months after the beginning of the financial year. This is made possible by a Vote on Account granted before the beginning of the financial year to allow government operations to continue.

Accompanying the publication of supply estimates is a “summary and guide” that gives, as the title indicates, a summary of the detailed estimates and a (very useful) guide to readers on procedure and content of the documents. Other authorization documents are the revised estimates, which set out variations from the original supply estimates if known before the latter are authorized by Parliament; and supplementary estimates, which are presented at set times with requests for any additional funds. As noted above, sums that have been spent without parliamentary authority have to be authorized by Parliament through Excess Votes and these are gathered after the end of the financial year in a request for funds called Statements of Excess.

Finally, there are the accountability documents. The Appropriation Accounts are published by the National Audit Office a few months after the end of the financial year and give the details of the amounts spent compared with the sum granted by Parliament. The Appropriation Accounts will normally certify that this is so, but the accounts may be qualified if the NAO is not satisfied with them in some way. The grounds for qualification include departments spending more than authorized or uncertainty about the values of assets or liabilities. The NAO also produces value-for-money reports throughout the year covering matters of economy, efficiency, and effectiveness. An accountability document not covered by the NAO is the Cash Limits White Paper produced annually in July. It compares the original limits set, unless amended, with the outturn for the previous financial year.

The major documents set out above are supplemented by a large number of other reports, among which are the regular annual reports of many public bodies, some produced because of statutory obligations, others largely for public relations reasons. Outside the main systems of planning, control, and accountability, figures for National Accounts are produced that follow internationally accepted principles. They cover a wider field than those transactions involving only government income and expenditure and have included, though not on a regular basis, balance sheet information for all sectors of the economy comprising information on tangible, intangible nonfinancial, and financial assets and liabilities.19 The National Accounts data are used primarily in analyzing macroeconomic variables and in providing the basis for economic forecasts.

A first attempt at a financial accounting and reporting framework has recently been published for central government.20 This framework, produced in response to a request from the Public Accounts Committee and that may well be further developed, sets out principles underlying the preparation and presentation of financial statements by central government. The purposes of the published financial documents are categorized as being to:

  • (a) Describe its financial strategy and, in particular, explain how revenue projections, expenditure plans, and forecasts of borrowing intentions fit together within the strategy;

  • (b) Set out the Government’s proposed changes in taxation and its public expenditure needs and plans in a form suitable for parliamentary scrutiny;

  • (c) Provide an analysis of expenditure incurred and of outputs secured;

  • (d) Set out the income and expenditure of central government, local authorities, and the rest of the public sector; and

  • (e) Describe developments in the economy as a whole.

The framework for the documents is defined in terms of objectives (accountability, propriety and regularity, and auditability), concepts (prudence, consistency, materiality, matching, and accruals), and characteristics (completeness and relevance, timeliness, objectivity, cost effectiveness, and reliability).


The pace of innovation in the last 20 years has meant significant advances in government accounting and financial management. The ability to control the level of expenditure, both in total and at a detailed level, has improved dramatically. The standard of financial management is getting better as part of the improvement of management generally. Financial reporting, too, is of a much higher standard. But a number of problems remain, and certain issues continue to be the subject of vigorous debate. Some of these issues and problems are discussed below.

In the sphere of the management of government expenditure, the new control mechanisms continue to be controversial, though the problems are now more detailed than those that faced governments in the 1970s. Most of these problems are evident in other countries and indeed many are similar to those faced by private sector organizations.

Coping with the effects of inflation is one such problem. Although inflation in the 1980s was nowhere near the levels of the 1970s, accommodating the relative price effect—the phenomenon of prices in the public sector changing at a different rate to prices in the economy as a whole—is still a problem, particularly in those services such as defense, health, and road construction, where the relative price effect is significant. The response of the Government has been to put the onus for accommodation on the managers of each program and not to allow for the effects of differential inflation. But this action has undoubtedly caused some problems in programs failing to deliver the services that were assumed when plans were drawn up. It is true that the reserve is available for such cases, but its use in compensating for higher than expected prices has been discouraged. Whether the emphasis on control of cash outgoings is better than the loss of control by allowing for differential inflation rates is still a matter of debate outside government. Official policy is adamant about the primacy of control.

One controversy that has arisen from the introduction of the control mechanisms combined with the Government’s professed desire in the 1980s to restrain expenditure has been whether capital expenditure has borne an unfair burden as a result of the controls. It is of course true that public sector capital expenditure cannot be strictly compared to the definition used in the private sector, and whether capital expenditure has suffered from having to keep within overall limits is not easy to establish. Circumstantial evidence indicates that it has, and there is little doubt that public sector pay settlements in the 1980s have been higher than planned. To accommodate these, as two academic observers of the scene noted at the beginning of the decade: “At the end of the day, the quickest and easiest cuts remained those achieved by delaying or reducing capital spending, not cutting ‘chaps’ …,”21 sentiments echoed by a former Treasury Minister in a revealing book on his experiences.22

On the managerial side, the potential conflicts between more devolved management and central control of expenditure have also been the subject of concern. As noted above, many of the key elements of the FMI involved greater decentralization of expenditure. But as many have observed, with each move to give greater freedom of responsibility at lower levels in the organization the Treasury has been anxious to ensure that there would be no resulting loss of their control over expenditure. This situation gave rise to some disillusionment among managers when it was realized that the limits of financial freedom were to be tightly drawn. The creation of agencies is potentially of great significance in providing a much more flexible managerial framework for what could cover a great many parts of central government. It remains to be seen, however, how many organizations will qualify for agency status, what the rules will be, and how those rules will be interpreted.

Another managerial problem has been that the development of measures of performance in recent years has lagged behind the developments in financial control—partly because the effort in this field has not been as great as in other aspects of management and partly because of the problems of developing proxies for final output. As a result there has been only patchy progress among departments, a lack of standardization, and not enough attention devoted to quality and the trade-offs between different performance measures. Despite these problems, increasing sophistication is evident in these measures, and examples have been published that give an idea of the range of activities for which measures can be found and implemented.23

A subject of general discussion has been whether the public sector should be more “like” the private sector. This subject has been raised in the context of financial reporting and control as well as for managerial issues more generally. In the case of managerial practice, considerable discussion has taken place on whether the differences in institutional framework, the nature of accountability, and the political context of management make it difficult to transfer practice from one to the other. Despite these doubts, transfers have been made and some have undoubtedly been successful, while others have not.

For financial reporting there have been those who have advocated accrual accounting, arguing that cash accounting gives insufficient information on the use and depletion of capital, making it difficult to see whether replacement and maintenance are falling behind. They have also argued that cash accounting gives rise to the danger of misallocating resources if capital is apparently “free.” Those who have argued against have pointed to the absence of output measures, the difficulties of valuing public sector assets, and the problems of distinguishing between capital and current items of expenditure. The importance placed by the Treasury on the primacy of cash for macro-economic policy has in any case meant that these arguments have made little headway.

On the parliamentary side, although improved mechanisms now exist for assessing and controlling government expenditure along with improved information for doing so, it is not yet clear whether these mechanisms have been as effective as originally hoped. The quality of public expenditure monitoring by select committees is patchy, and those who had hoped for a much more active role by Parliament have been disappointed by the lack of effort given to scrutiny by individual departmental select committees. Ann Robinson doubts the level of interest of members: “If MPs are not, at heart, interested in the control and scrutiny of public expenditure, then all the procedural changes in the world will hardly encourage them to change their attitudes.”24

The Public Accounts Committee also, while receiving information that is now far more oriented to value for money, has been felt by some to be too narrow in its interpretation of accountability. Together with the NAO it has been criticized for not taking into account the importance of the managerial aspects of government operations.

One result of this huge increase in the scope and complexity of work in all the areas mentioned above is that there has been a major problem in recruiting and retaining the right caliber of people. Both the Government Accounting Service and the NAO have found it difficult to offer competitive salaries for capable professional staff at a time when such staff were also in great demand in the private sector. As a result, progress has been slower than hoped in some areas, and a good deal of work in departments has had to be offered to outside consultants. Bearing in mind the constraints of public sector pay, there is no obvious solution to this problem, and unless there is more flexibility in remuneration structures it seems likely that the use of outsiders will have to continue.

S. Goldman, Public Expenditure Management and Control (London: H.M. Stationery Office, 1973).

Lord Diamond, Public Expenditure in Practice (London: Allen & Unwin, 1975).

For full details of the public expenditure dimension, see Andrew Likierman, Public Expenditure: The Public Spending Process (London: Penguin, 1988). An excellent exposition, though in parts now dated, is by P. Mountfield, “Recent Developments in the Control of Public Expenditure in the United Kingdom,” Public Budgeting and Finance, Vol. 3, No. 3 (Autumn 1983), pp. 81–102. This article was also included in A. Premchand and Jesse Burkhead, Comparative International Budgeting and Finance (New Brunswick, New Jersey: Transaction Books, 1984).

G.C. Beard, Government Finance and Accounts (London: Cabinet Office, 1985), p. 9.

H.M. Government, Report on the Civil Service, Cmnd. 3838 (London: H.M. Stationery Office, 1968).

H.M. Government, Cash Limits on Public Expenditure, Cmnd. 6440 (London: H.M. Stationery Office, 1976).

H.M. Government, The Nationalized Industries, Cmnd. 7131 (London: H.M. Stationery Office, 1978).

William Armstrong, and others, Budgetary Reform in the U.K., Report of a committee chaired by Lord Armstrong of Sanderstead (Oxford; New York: Oxford University Press, 1980).

Treasury and Civil Service Select Committee, Budgetary Reform, 6th Report, Session 1981–82, HC 137 (London: H.M. Stationery Office, 1982).

H.M. Government, Efficiency and Effectiveness in the Civil Service, Cmnd. 8618 (London: H.M. Stationery Office, 1982), p.1.

Sue Richards, “The Financial Management Initiative,” in Reshaping Central Government, ed. by Anthony Harrison and John Gretton (Oxford: Policy Journals, 1987), p. 22.

H.M. Treasury, Multi-departmental Review of Budgeting (London: H.M. Treasury, 1986).

Treasury and Civil Service Select Committee, Civil Service Management Reform: The Next Steps, 8th Report, Session 1987–88, HC 494 (London: H.M. Stationery Office, 1988).

H. M. Treasury, Output and Performance Measures in Central Government: Progress in Departments, Treasury Working Paper No. 38 (London: H.M. Treasury, 1986).

H. M. Treasury, Output and Performance Measures in Central Government: Some Practical Achievements, Treasury Working Paper No. 45 (London: H.M. Stationery Office, 1987).

Efficiency Unit, Improving Management in Government: The Next Steps (London: H.M. Stationery Office, 1988), p. 9.

Treasury and Civil Service Select Committee, Civil Service Management Reform: The Next Steps, 8th Report, Session 1987–88, HC 494 (London: H.M. Stationery Office, 1988).

Treasury and Civil Service Select Committee, Head of the Government Accountancy Service, 2nd Report, Session 1983–84, HC 227 (London: H.M. Stationery Office, 1983).

C.G.E. Bryant, “National and Sector Balance Sheets, 1957–1985,” Economic Trends, No. 403 (May 1987), pp. 92–119.

H.M. Treasury, Central Government: Financial Accounting and Reporting Framework (London: H.M. Treasury, 1988), p. 14.

Hugh Heclo and Aaron Wildavsky, The Private Government of Public Money: Community and Policy Inside British Politics (London: Macmillan, 2nd ed., 1981), p. x.

J. Barnett, Inside the Treasury (London: Andre Deutsch, 1982), p. 190.

H.M. Treasury, Output and Performance Measures in Central Government: Progress in Departments, Treasury Working Paper No. 38 (London: H.M. Treasury, 1986); and H.M. Treasury, Output and Performance Measures in Central Government: Some Practical Achievements, Treasury Working Paper No. 45 (London: H.M. Stationery Office, 1987).

Ann Robinson, in The New Select Committees, ed. by Gavin Drewry (Oxford: Clarendon Press, 1985), p. 318.

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