1.1.1. Coverage of Institutions (Advanced)

4. In FY 2014/15 the UK’s public sector comprised 38,241 separate institutional units with various legal forms. As shown in Table 1.2, these can be broken-down into the following subsectors:

• Central government, which comprises of 7,858 units, including legislative, and executive bodies of the UK Government Departments, as well as the Monarchy, national insurance funds, non-departmental public bodies (such as national museums, devolved administrations in Scotland, Wales, and Northern Ireland, and Parliament); 469 National Health Service Institutions (including hospitals), 1,339 courts and 4,772 academies (central government controlled and funded schools) are also included;

• Local governments, which comprises 477 district councils, 10,500 parish councils in England, and 16,873 community schools, as well as another 821 bodies including, municipal departments, agencies, and nonprofit institutions which they control;

• Public nonfinancial corporations, which comprises 1,705 commercially-oriented corporations controlled by government units; of which, 1,634 are controlled by central government (most notably, the 1,577 registered providers of social housing in England, whose corporate policy is determined by government (through regulation) and 71 controlled by local government units; and

• Public financial corporations, which comprises the Bank of England (BoE, including the Asset Purchase Facility and Special Liquidity Scheme), RBS, a small municipal bank, and four financial auxiliaries.

Table 1.2.

United Kingdom: Public Sector Institutions and Finances, FY 2014/15

(Percent of GDP, unless otherwise stated)

Source: UK Authorities and IMF Staff estimates.

Table 1.2.

United Kingdom: Public Sector Institutions and Finances, FY 2014/15

(Percent of GDP, unless otherwise stated)

			Number of entities	Revenue	Expenditure	Balance	Intra-PS expenditure	Net expenditure	Net expenditure (Percent)
Public Sector			38,241	41.1	48.8	−7.7	0.0	48.8	100.0
	General government		36,529	38.6	46.6	−8.0	1.3	45.3	92.8
		Central government	7,858	35.2	42.7	−7.4	8.6	34.0	69.78
		Local governments	28,671	10.9	11.5	−0.6	0.2	11.3	23.1
	Nonfinancial public corporations		1,705	1.6	1.8	−0.2	0.0	1.8	3.7
	Central Bank		1	0.7	0.6	0.1	0.6	0.0	0.0
	Other financial public corporations		6	2.2	1.8	0.5	0.1	1.7	3.5

Source: UK Authorities and IMF Staff estimates.

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Table 1.2.

United Kingdom: Public Sector Institutions and Finances, FY 2014/15

(Percent of GDP, unless otherwise stated)

			Number of entities	Revenue	Expenditure	Balance	Intra-PS expenditure	Net expenditure	Net expenditure (Percent)
Public Sector			38,241	41.1	48.8	−7.7	0.0	48.8	100.0
	General government		36,529	38.6	46.6	−8.0	1.3	45.3	92.8
		Central government	7,858	35.2	42.7	−7.4	8.6	34.0	69.78
		Local governments	28,671	10.9	11.5	−0.6	0.2	11.3	23.1
	Nonfinancial public corporations		1,705	1.6	1.8	−0.2	0.0	1.8	3.7
	Central Bank		1	0.7	0.6	0.1	0.6	0.0	0.0
	Other financial public corporations		6	2.2	1.8	0.5	0.1	1.7	3.5

Source: UK Authorities and IMF Staff estimates.

5. The UK’s public sector accounted for around GBP 894.0 billion (48.8 percent of GDP) in expenditure in FY2014/15. Table 1.2 also summarizes the distribution of public resources across the different subsectors of the public sector in FY 2014/15 and shows that:

• General government accounts for GBP 829.9 billion (45.3 percent of GDP), of which 75 percent flows through the central government, and 25 percent is spent through local governments;

• Public corporations account for a further GBP 64.0 billion (3.5 percent of GDP) of which 16 percent is spent by nonfinancial corporations, and 84 by financial corporations.

6. The PSF are the most comprehensive fiscal reports, covering the entire public sector, in accordance the latest international statistical standards. The institutional coverage of this report is determined by classification decisions of the ONS, which are taken on a regular basis, as classification assessments are concluded. The assessments can be instigated by the ONS, and HMT, the Devolved Administrations, Eurostat, or other UK government departments. However, decisions are taken solely by the ONS, strictly in accordance with the ESA 2010/MGDD sectorization rules. Updates in unit classifications are incorporated in fiscal statistics, and applied retroactively, as quickly as practical.³

7. The WGA, while also aiming to cover the full public sector, excludes some units for a variety of reasons. As discussed above, HMT bases the consolidation boundary of WGA on ESA/MGDD rules. The deviations to these standards, explained in the WGA publication, refer to: (i) small entities that are excluded from consolidation on the basis of materiality; and (ii) small sized entities that are not responsible to an executive arm of government, including parliamentary and audit bodies, and a few other units.⁴ In addition, HMT decided not to consolidate the RBS in the WGA, but instead record it as a financial investment, on the grounds that its consolidation would distort the accounts and make it difficult to determine trends. Cost considerations also weighed on this decision, given the practical difficulties (different year end, different asset valuation policies) in carrying out a fully accurate consolidation. Consolidating RBS with the rest of public sector has a material impact on gross revenue, expense, assets, and liabilities, but the impact on the net borrowing or net worth measures is relatively small, reflecting RBS’s financial intermediation nature. From a fiscal transparency point of view, given the material impact of RBS in public sector aggregates, the disclosure of a presentational variant consolidating the WGA financial statements with those of RBS through a simplified/pragmatic approach, would somehow compensate for the deviation from standard accounting policies. Figure 1.1 shows the size of WGA departures from the full public sector coverage.

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United Kingdom: Coverage of Public Sector Institutions in the WGA

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK Authorities and IMF staff estimates.Note: “Not Reported” refers to expenditures of units not consolidated in summary fiscal reports.

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1.1.2 Coverage of Stocks (Advanced)

8. The WGA includes a complete balance sheet. The coverage of this balance sheet is more complete than most advanced economies, as it includes the value of both financial and nonfinancial assets and liabilities (including liabilities arising from the defined benefit pension schemes of public employees). The public sector balance sheet presented in Table 0.2, which is primarily sourced from the FY 2014/15 WGA balance sheet, provides a detailed breakdown of the public sector assets and liabilities, amounting to:

• GBP 982.6 billion (53.6 percent of GDP) in nonfinancial assets including 50.5 percent of GDP in fixed assets (buildings and structures, machinery and equipment, weapons systems, and other);

• GBP 1,591.4 billion (86.9 percent of GDP) in financial assets including 8.4 percent of GDP in currency and deposits, and 36.4 percent of GDP in loans granted to the private sector;

• GBP 4,736.6 billion (258.6 percent of GDP) in liabilities including 77.6 percent of GDP in debt securities, 84.9 percent of GDP in pension entitlements of civil servants, and 5.4 percent of GDP in accounts payable; and

• an overall net worth and net financial worth of 118.1 and -171.7 percent of GDP, respectively. (Figures 1.2 and 1.3 compare UK’s public sector balance sheet data with other countries for which comparable estimates are available).

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Public Sector Gross Liabilities in Selected Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK Authorities and IMF staff estimates.

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Public Sector Net Worth in Selected Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK Authorities and IMF staff estimates.

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9. The PSF reports disclose information on a much more limited set of assets and liabilities, and do not include market valuations. By following the definitions of the ESA 2010/MGDD-based Excessive Deficit Procedure (EDP),⁵ the PSF fails to cover several material categories of stocks, such as nonfinancial assets, non-liquid financial assets, and liabilities arising from civil servants’ defined benefits pension schemes or other accounts payable. Furthermore, liabilities are disclosed at face value (labeled “nominal value” in EDP), which does not reflect unpaid accrued interest or the fluctuation in market prices). ESA sectoral national accounts returns fill some of these gaps by including stocks of missing financial instruments (with the notable exception of pension entitlements) and estimates of fixed capital, except the ones constructed via PPP arrangements. Figure 1.4 compares the coverage of stocks of both the WGA, PSF, and National Accounts.

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United Kingdom: Coverage of Public Sector Balance Sheet in Fiscal Reports FY 2014/15

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK authorities and IMF staff estimates.

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10. If the State Pension (Pay-As-You-Go) System’s pension entitlements for private sector employees were included in public sector liabilities, overall public sector net worth would decrease to around -328 percent of GDP. The treatment of pensions in the government’s accounts raises difficult issues in the UK, as in many countries. At present, any financial assets of the social security scheme, resulting from excess of contributions received over benefits paid, are included on the balance sheet of the public sector, while the system’s liabilities are not. Although this asymmetric treatment follows international statistical standards, it has the effect of presenting a more favorable picture of the government’s fiscal position than is actually the case.

11. Reporting on oil and gas reserves is comprehensive and of high quality, and shows that the value of these assets is virtually null at present. The Oil and Gas Authority (OGA) publishes annual statements of cumulative production and the estimated remaining recoverable oil and gas reserves, along with an explanation of changes in reserve estimates (see Figure 1.5). The ONS publishes annual data on reserve volumes and provides a stock-flow reconciliation, attributing changes in reserve stocks over the year to either production or changes in reserve estimates. In addition, the ONS has recently started to estimate the monetary valuation for UK Continental Shelf (UKCS) oil and gas, in the context of the Environmental Accounts compiled in line with the System of Environmental-Economic Accounting. This exercise shows that the monetary value of oil and gas reserves has been reducing over time, reaching a zero value by end-2014 (see Figure 1.6).

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UK: Cumulative Oil Production and Remaining Oil Reserves

(in million barrels of oil equivalent)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: OGA.

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UK: Current Monetary Estimates of Oil and Gas

(in GBP billion)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: ONS.

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1.1.3 Coverage of Flows (Advanced)

12. The WGA covers all cash flows, accrued revenues, expenditures, and financing, and other economic flows. Following IFRS financial disclosure standards, the WGA includes: a statement of revenue and expenditure, with information on an accrual basis, including realized gains/losses in assets and liabilities; a cash-flow statement, with the cash flows from operating, financing, as well as from capital and financial investment; and a statement of comprehensive expenditure, with information on unrealized asset revaluation gains/losses and actuarial gains/losses associated with the pension liability.

13. Recognizing all accrued revenues and expenses would increase the public sector deficit (net borrowing) as currently reported in the PSF to 7.7 percent of GDP. The PSF does not disclose comprehensive information on cash flows and its coverage of accrual flows is substantially less comprehensive than that of WGA. Most of the missing flows are associated with the limitations in coverage of stocks discussed in the previous section, in particular, the unreported net accrual of pension entitlements of public employees, of GBP 56.0 billion (3.1 percent of GDP). With the exception of foreign exchange effects on gross debt (“Maastricht,” i.e., EDP, definition), no other economic flows are recorded in the PSF.

14. The government reports comprehensively on petroleum sector production, expenditure and tax revenue flows. The OGA produces monthly and annual reports on petroleum production at a field level, as well as an annual Income and Expenditure Statement for the UKCS, disaggregated by major revenue and cost category. With regard to tax collections, HMRC annually produces a detailed breakdown of government petroleum revenues, and the Department of Energy and Climate change (DECC – now BEIS, the Department for Business, Energy and Industrial Strategy) has reported on non-tax revenues collected (license fees and levies) in its annual report. Together, these publications allow a comprehensive sector-level understanding of the allocation of cash flows from the UKCS (see Figure 1.7).

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United Kingdom: Cash Flows from UKCS Petroleum, 1993–2015

(in GBP million)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: OGA, HMRC and IMF Staff calculations.Note: This figure considers the cash flows of the UKCS as a whole, using the OGAS’s Annual Income and Expenditure Statement. The figure illustrates the allocation of petroleum revenue between capital costs, operating costs and tax payments to government, and the resulting after-tax cash flow to industry. From 2013-15, revenue has been lower than the costs incurred and taxes paid, resulting in an overall negative after-tax cash flow to industry.

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15. Analyses of the petroleum sector would benefit from a more detailed disclosure of government-related flows. The government does not currently disaggregate reporting on investment allowances granted to petroleum companies, or the sector’s overall tax loss position (see Section 1.1.4 below). Doing so would facilitate analysis of the determinants of the current low and even negative levels of tax revenue from the sector. Furthermore, fiscal reports currently disclose petroleum revenue receipts only on an aggregate level, providing limited insight into the fiscal impact of UKCS decommissioning activity. Transparency would be enhanced if the government reported on decommissioning expenditure incurred each year, the associated tax losses generated, and any tax refunds paid to industry.

1.1.4 Coverage of Tax Expenditures (Good)

16. HMRC discloses a list of the main tax relief schemes and an estimate of their annual costs, identifying those schemes that are considered tax expenditures. The annual “Estimated cost of tax reliefs, expenditure and allowances” lists all active tax relief schemes (in December 2015, there were 401 active schemes), organized by type of tax scheme (tax expenditure, structural relief, or allowance) and by type of tax. For the tax schemes for which costs can be estimated, the publication shows the estimates of revenue loss for the previous fiscal year (t-1), the budget year (t), and two years following the budget year (t+1, and t+2), separating large schemes from minor cost schemes. The publication also contains a list of the schemes for which estimates were not produced,⁶ but these are relatively small in size. HMRC doesn’t aggregate the costs of separate schemes because it overstates the amount of taxes that could be collected by government, due, for example, to interactions between the schemes.

17. There is no control on, or budgetary objectives for, the size of tax expenditures, which are relatively high by international standards. Tax expenditure analysis is integrated with tax law design but not with budgetary decision making. As a result, performance of tax expenditure schemes can’t be assessed against quantitative measures in an analogous manner to spending programs. This may have contributed to the relatively high size of UK’s revenue foregone from tax expenditures (increased in recent years to 6.3 percent of GDP in FY 14/15), when compared to other countries (see Figure 1.8). Transparency would be enhanced if tax expenditures were embedded in decision making on the overall spending envelope, making it easier to assess whether the tax expenditure schemes can be justified on an ongoing basis as compared to other policy instruments.⁷

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Revenue Loss from Tax Expenditures in Selected Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK authorities; IMF Fiscal Monitor 2011, for other countries.Note: Estimates are for 2010, unless otherwise stated.

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18. Understanding the impact of various tax incentive schemes on the UK economy could be improved by breaking down tax expenditures according to specific criteria. Presently, the only available breakdown for tax expenditures is by type of tax, but the broad policy area can be inferred from the title of the tax relief scheme. The absence of a breakdown by criteria such as: function (COFOG); type of tax expenditure; industry sector of beneficiary; or geographical area hinders a more complete assessment of the redistribution of economic resources through the budget. For example, while the tax expenditure report shows data on the oil allowance, and other minor allowances granted under the Petroleum Revenue Tax (PRT), the more significant allowances granted to the petroleum sector companies for Supplementary Charge and Ring Fence Corporation Tax purposes are not separately disaggregated.

1.2.1. Frequency of In-Year Fiscal Reporting (Advanced)

19. The PSF are published monthly within 15 working days of the reference month. By compiling monthly data for the full public sector and its subsectors, the UK is at the forefront of in-year fiscal reporting practices. While the format of these reports follows national templates, they are compiled in accordance with ESA 2010 standards. In the context of the ESA TP, the ONS also releases quarterly general government data (nonfinancial and financial accounts, including a financial balance sheet) within 90 days of the reference quarter. These data are disseminated both domestically and in the databases of Eurostat and the IMF’s Statistics Department.

1.2.2 Timeliness of Annual Financial Statements (Not Met)

20. The audited WGA have consistently been released more than a year after the end of the fiscal year. Since the first WGA release (fiscal year ending March 31, 2010), the time lag of publication has been reducing steadily. However, with the exception of WGA FY 2013/14, the report release dates continued to take place more than a year after the reference period (see Table 1.3). The reasons for this include the wide institutional coverage of the WGA,⁸ and is due primarily to two issues: first, local government units are required to publish their accounts only six months after the end of the fiscal year, which delays the process of public sector consolidation; and second, there is a persistently large number of material inconsistencies in the recording of intra-public sector transactions and holdings, that need to be dealt with before releasing the draft WGA for auditing.

Table 1.3.

United Kingdom: Date of Publication of Whole of Government Accounts

Source: UK authorities.

^*Publication delayed due to late financial statements transmission by academies.

Table 1.3.

United Kingdom: Date of Publication of Whole of Government Accounts

Financial year	Date of submission to National Audit Office (NAO)	Date of publication	Time lag
2009/10	Dec 17, 2010	Nov 24, 2011	19m
2010/11	Feb 29, 2012	Oct 31, 2012	18m
2011/12	Feb 1, 2013	July 17, 2013	16m
2012/13	Jan 22, 2014	Jun 10, 2014	15m
2013/14	Dec 19, 2014	Mar 26, 2015	12m
2014/15	Jan 18, 2016	May 26, 2016*	14m

Source: UK authorities.

^*Publication delayed due to late financial statements transmission by academies.

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Table 1.3.

United Kingdom: Date of Publication of Whole of Government Accounts

Financial year	Date of submission to National Audit Office (NAO)	Date of publication	Time lag
2009/10	Dec 17, 2010	Nov 24, 2011	19m
2010/11	Feb 29, 2012	Oct 31, 2012	18m
2011/12	Feb 1, 2013	July 17, 2013	16m
2012/13	Jan 22, 2014	Jun 10, 2014	15m
2013/14	Dec 19, 2014	Mar 26, 2015	12m
2014/15	Jan 18, 2016	May 26, 2016*	14m

Source: UK authorities.

^*Publication delayed due to late financial statements transmission by academies.

21. These delays limit the use of the WGA as an input to policy making. The UK authorities tend to base their policy decisions on the PSF, given its timeliness and wide institutional coverage. However, as described in Sections 1.1.2 and 1.1.3, the PSF coverage of stocks and flows falls short of WGA’s on a number of material issues, that could be relevant for policy decisions (e.g., transactions, holdings and valuation of fixed and equity assets, cost of employment associated with pension entitlements, procurement of public assets via PPP arrangements). Furthermore, the PSF are not subject to the analysis of an external auditor, With the current time lag, WGA can only inform policy decisions two fiscal events after the fiscal year to which it refers.

22. HMT is taking steps to improve WGA timeliness. Starting with fiscal year 2017/18, local government units will be required to release their audited financial statements by end-July (i.e., within four months of the end of the fiscal year). Furthermore, local authorities will be required to implement the latest accounting standards, which will contribute to the decrease of consolidation inconsistencies in both size and quantity. Finally, in response to the Public Accounts Committee’s calls for making a better use of the WGA to inform policy decisions, HMT is increasing the level of accountancy skills in policy teams to facilitate a better understanding of information contained in financial statements.

1.3.1. Classification (Good)

23. Fiscal reports include administrative, economic, and functional classifications, consistent with international standards. The sector classification adopted in all fiscal reports, including the WGA, follows the subsector breakdown of national accounts compiled according to ESA 2010. In addition, Public Expenditure Statistical Analyses (PESA) present central government expenditure data by departmental group, following the UK government’s structure. The ONS releases to the European Commission, the IMF, and the OECD, include data classified by international standard economic and functional classifications. The common chart of accounts for central government units is based on IFRS standards, but is sufficiently detailed to allow its bridging to the economic classifications of international statistical standards, such as GFSM 2014 or ESA 2010. The functional classification, employed by all public sector units, follows United Nations’ Classification of Functions of Government (COFOG). For residency breakdowns, the ONS uses data available from external sector statistics, which are compiled in accordance with the Balance of Payments and International Investment Position Manual (Sixth Edition), thus following the same residency criteria and classification as ESA 2010 and GFSM 2014.

24. The lack of a program classification is compensated by the widespread use of a COFOG-compliant functional classification. Departmental groups manage their expenditure and disclose information on it both by economic category and COFOG sub-function⁹ (in some cases, it goes even beyond the sub-function level). PESA uses this information to disclose a cross-classification of expenditure by administrative and functional classifications, which allows the analysis of the effectiveness of government policies in each area, as well as international comparisons in this regard. In compliance with the ESA TP, the ONS also compiles and discloses a cross-classification of expenditure by economic and functional classifications.

1.3.2 Internal Consistency (Advanced)

25. The internal consistency checks prescribed by the FTC are included in the monthly PSF statistical bulletin. The PSF include monthly data reconciling the net borrowing (fiscal balance) and the net cash requirement (the cash borrowing measure). It also includes a reconciliation of the central government net cash requirement and the changes in net debt. These reconciliations are accompanied by a narrative and a diagram explaining how the main headline indicators of the bulletin fit together. The use of an integrated securities database for the compilation of data on the gilt portfolio ensures full consistency between debt issuances and debt holdings.

26. Discrepancies have been contained in recent years. In the EU Excessive Deficit Procedure notifications, the ONS also discloses a detailed reconciliation between the net borrowing indicator and the gross debt (Maastricht definition) of general government and its subsectors. The discrepancy between above- and below-the-line calculations (one of the reconciliation items) of the net borrowing indicator has traditionally been small, the only exception being between FY 2007/08 and FY 2008/09, due to the volatility created by the eruption of the financial crisis (see Figure 1.9).

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United Kingdom: Discrepancy Between Below- and Above-the-Line Net Borrowing of General Government

(Percent of Revenue)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK Authorities (ESA Table 25 and Table 27 returns).

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1.3.3 Historical Revisions (Good)

27. Revisions to fiscal statistics are transparently disclosed with an explanation for each major revision. The ONS has an open revision policy for the PSF, i.e., the historical series of these data can be revised every month for all time periods. Every monthly bulletin contains a section on revisions in headline indicators since the previous bulletin, and all major revisions are explained in detail. As a quality assurance procedure, every bulletin also contains a revisions analysis, based on a rolling 60-month series, which includes every vintage of a monthly observation and a statistical analysis of bias in the early estimates for each indicator. These analyses have demonstrated that the average revision between the first vintage and that of one year later has consistently been close to zero, although there have been high revision episodes in the past (mostly associated with classification decisions on government’s support to financial institutions in the context of the financial crisis) (Figure 1.10).

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United Kingdom: Revisions Analysis for Central Government Net Borrowing

(Percent of first published value)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: UK authorities (ONS Public Sector Finances revisions analysis).Note: Revisions are calculated by taking the change between the first estimate and the corresponding one-year revision, as a percentage of the first estimate. The outliers, episodes that fall above and below one standard deviation of the mean, are substituted with the five-year average from preceding years.

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28. To date, only changes in methodological frameworks were accompanied by a bridge table between the old and new time series. The ONS ensures that whenever sources and methods are changed, the statistical databases are updated retroactively and the available time series are historically consistent. While this practice makes bridge tables less relevant to users, it prevents the quantification of the impact of specific changes, when multiple updates occur at the same time. The only instance where a bridge table was published, related to the change from ESA95 to ESA 2010. The ONS published two explanatory notes on this update, the first one explaining all major methodological changes qualitatively, and the second one quantifying the impact of each change in the past time series of headline indicators.

1.4.1. Statistical Integrity (Advanced)

29. Most fiscal statistics are compiled solely by the ONS, which is a professional independent body. The ONS is the executive body of the UK Statistics Authority (UKSA), an independent agency (non-ministerial department accountable to Parliament) at arms’ length from the government, created in 2008, following the enactment of the 2007 Statistics and Registration Service Act. The ONS is bound by both the UK and the European Statistical System (ESS) Codes of Practice, and is frequently subject to reviews of the UKSA and Eurostat, regarding its central role as compiler of official fiscal statistics. The collaboration between government agencies in the compilation of official statistics is coordinated by the Government Statistical Service (GSS), a community of statisticians working throughout government, and led by the National Statistician. GSS members are all bound by the UK and ESS Codes of Practice.

30. The PSF are jointly produced by the ONS and HMT, but the responsibilities of the latter are essentially related to provision of good quality source data. This collaborative process was a consequence of HMT’s decision in 1998, to base its fiscal framework on National Accounts principles. Under this arrangement, the ONS is responsible for the application of those principles, in particular regarding the sector classification of institutional units and how to record transactions and related stock positions. HMT staff who work with the ONS when jointly producing the Public Sector Finances are GSS members. The ONS also has final responsibility for compiling the statistical measures, and ensuring that they comply with international statistical standards and with the Code of Practice for Official Statistics. This involves, inter alia: the design of data collection systems; ensuring the existence of expertise and guidance to allow government bodies to supply data complying with national accounts principles; collection, aggregation and quality check of data supplied by government bodies; and review of the output of ONS calculations.

31. Fiscal statistics are disseminated according to international dissemination standards. The UK was among the first subscriber to the Special Data Dissemination Standards (SDDS), having formally subscribed on June 5, 1996. Currently, it meets all the SDDS requirements and reports comprehensive and consistent fiscal data to international organizations.

1.4.2. External Audit (Good)

32. The NAO, a parliamentary body, is the Supreme Audit Institution in charge of auditing the WGA. The Comptroller and Auditor General (C&AG) and the staff of the NAO are not civil servants and do not report to a minister. The NAO independently decides which examinations to carry out and how to report results to the Parliament. The Parliament’s Public Accounts Commission oversees NAO’s work, approves its budget, scrutinizes its costs and performance, appoints its external auditors, and commissions value-for-money studies of its work.

33. The C&AG’s audit opinion on the WGA covers both the “true and fair view” and regularity approaches, consistent with international standards. The C&AG is required to form an opinion as to whether the WGA are free from material misstatement and comply with the relevant reporting requirements. It is also required to provide assurance that the transactions recorded in the financial statements are in accordance with Parliamentary or other authority. The audit is carried out in accordance with International Standards on Auditing (UK & Ireland), which are based on the International Standards on Auditing issued by the International Auditing and Assurance Standards Board.

34. Since their first release, the WGA have consistently been subject to major audit qualifications, but the number and size of these have been declining. The certificate and report of the C&AG includes specific recommendations for further action. Over time, the HMT has made progress in resolving the issues raised in qualifications. As a result, two major qualifications were removed and the extension of limitation of scope was reduced on the audit of the WGA for financial year 2014/15. The qualifications that persist refer to: the definition and application of the accounting boundary, particularly the exclusion of RBS; inconsistent application of accounting policies (due to a number of the consolidated bodies following accounting standards that differ from IFRS); audit qualifications on the financial statements of consolidated bodies (specifically the Ministry of Defense and the Department of Education); and, to a lesser extent, incomplete elimination of intra-government transactions and balances.

1.4.3. Comparability of Fiscal Data (Advanced)

35. Budget estimates are comparable with outturn data. Following the adoption of national accounts as the basis for the UK’s fiscal framework, departmental groups were required to prepare their budgets and track its execution following ESA2010 concepts and definitions. The institutional coverage of the consolidated public sector budget and the OBR’s EFO is also based on national accounts (as determined by the ONS’s classification decisions). The headline indicators of the Budget, Spending Estimates, and OBR’s forecasts are therefore prepared on the same basis as the outturn data published in the monthly PSF.

36. The WGA are reconciled with fiscal statistics (which are also the outturn data). The publication of WGA includes a standard chapter on comparison to national accounts. Along with a detailed description of each major difference between accounting and statistical standards, the chapter includes two tables reconciling the main indicators of financial statements and fiscal statistics: (i) the WGA Net Liabilities vs. the PSF’s Public Sector Net Debt; (ii) the WGA Net Expenditure vs. the PSF’s Current Deficit. Furthermore, the explanatory notes to the financial statements provide additional details on every major reconciliation item. Following the requirements of the Financial Reporting Manual, departmental groups also reconcile their outturn on a budgeting basis to the outturn in their resource accounts on an IFRS basis.

2.1.1. Budget Unity (Basic)

43. Budget documentation includes revenues, expenditures, and financing of all public sector bodies. This includes all departments, public sector bodies that fall outside of the general government, and unusually by international standards, the Bank of England. The only exceptions to the coverage are the government owned banks.

44. However, the bulk of revenues and expenditures provided are on a net basis, with 3.7 percent of GDP (FY 2016/17) of own-source revenues and related expenditures largely ignored. The headline total managed expenditure (the main fiscal aggregate) figure used within the key budget documents, does not include expenditure associated with departmental income by each agency. Reporting both revenue and expenditure on a gross basis increases total managed expenditure from 39.7 percent of GDP in 2016–17 to 43.4 percent of GDP, and current receipts to 40.3 percent of GDP, with no net impact on borrowing—assuming that all departmental income is spent within the budget year.

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Own Source Revenues

(Percent of Expenditure)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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45. Information on most departmental own source revenue is presented in supporting material, however this is presented well after the budget, in a way that is difficult to understand. The main estimates are presented a month after the main budget event, and after the beginning of the financial year, providing highly detailed, disaggregated information on budget funded spending as well as departmental income for each of the agencies. However, there is no reporting on how the departmental incomes is to be spent, or indeed whether they will be spent. The figures in the main estimates are presented on a different basis to the total managed expenditure discussed in the main budget documents, and while a rough bridge between the two figures can be derived, it is technically very burdensome. This makes comparing budgeted expenditure to outturns by department very difficult.

2.1.2. Macroeconomic Forecasts (Advanced)

46. The Economic and Fiscal Outlook (EFO) includes detailed six-year forecasts for the main macroeconomic variables, their components and underlying assumptions. There is a detailed discussion of the economic outlook, including the developments since the last forecast, the main drivers behind the forecast of each component and the risks and uncertainties surrounding the forecast.

47. The depth and breadth of the economic and fiscal analyses presented in the economic outlook can be considered as best practice, and could be used as a benchmark by other advanced economies. Some of the highlights that could be picked up by other countries include:

• An explanation for the assumptions underlying the budget, such as oil price, equity prices, exchange and interest rates, as well as how those assumptions have evolved over previous forecasts.

• A detailed discussion of key sectoral outlooks, such as the household and corporate and external sectors, addressing their interactions with the labor market and balance of payments.

• An explanation of more fundamental drivers of the economic outlook, including detailed analyses of potential output, productivity and the output gap, including a hard-nosed assessment of past forecasts.

• The impact of policy measures on growth, covering fiscal, monetary and macro prudential policy.

48. GDP forecasts are relatively accurate and unbiased for the budget year, but do indicate some optimistic bias that increases over the forecasting horizon. The UK has the most accurate real GDP forecasting record in Europe, even after accounting for the relatively stability of the economy (Figure 2.2), and one of the lowest biases (Figure 2.3). However, one area where macro forecasting has struggled is around nominal GDP—which feeds most directly into the fiscal forecasts, where forecast errors have been consistently overoptimistic, particularly following the crisis (Figure 2.4). This has been recognized by the OBR in its own forecasting assessments, and recently steps have been taken to understand what is driving this.

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Real GDP Forecast Accuracy – Absolute Error for Budget Year (2000–15)^1/

(Percent)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.^1/ Volatility adjustment is average absolute forecast error divided by standard deviation of growth over the period.

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Real GDP Forecast Bias – Average Medium-Term Forecast Error (2000–15)

(Percent)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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United Kingdom: Nominal GDP Forecast History (2000–15)

(Percent)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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2.1.3. Medium-Term Budget Framework (Advanced)

49. The UK has a long established medium-term budget framework based on multi-year spending agreements undertaken during comprehensive spending reviews. These spending agreements detail Departmental Expenditure Limits (DEL) that cover 25 central government ministries and around half of total managed expenditure, and are in place for fixed periods of (usually) three or four years. The remaining half of expenditure, known as Annually Managed Expenditure (AME) is largely made up of demand based programs, such as pensions and unemployment which is allowed to fluctuate according to needs.

50. The UK has a strong record of delivering on its medium-term commitments on the expenditure side, though overoptimistic revenue forecasts have translated to worse fiscal balance outcomes than projected. The UK is almost unique in Europe, in that there is no bias—either upward or downward—in its expenditure forecasts (Figure 2.5), indicating that over both the short and medium term the government delivers on what it promises. This is underpinned by the DEL expenditure limits that are closely adhered to, and the practice of making further policy adjustments to offset unfavorable movements in AME to bring expenditure outturns in line with commitments. However, while this is true on expenditure, persistent revenue forecast downgrades (Figure 2.6), particularly, but certainly not limited to the financial crisis, have translated into consistent underperforming against the fiscal balance targets (Figures 2.7 and 2.8).

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Expenditure Forecast Bias – Average Medium-Term Forecast Error (2000-15)

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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Revenue Forecast Bias – Average Medium-Term Forecast Error (2000-15)

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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Fiscal Balance Forecast Bias – Average Forecast Error (2000-15)

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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United Kingdom: Balance Budget Forecast History (2000-15)

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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51. The revenue forecast errors are closely linked to the overoptimistic nominal GDP forecasts, rather than due to problems with the revenue forecasting models. There is a strong correlation between the accuracy of the forecasts for growth in nominal GDP and overall revenues (Figure 2.9), with errors largely falling within the expected range with an elasticity of revenue to growth of 1–1½. Paired errors consistently falling outside of that range would be indicative of microeconomic problems with the forecasting model relationships, rather than macroeconomic errors.

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United Kingdom: Budget Forecast Errors on Nominal GDP and Revenue Growth

(Percent forecast error for t+1)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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52. The fixed year nature of the framework means that as the end of the agreement period approaches, the framework horizon becomes shorter and shorter. For instance, by the last year of the 2010 Comprehensive Spending Review (CSR) period, by the time of the 2013 Budget, the spending limits by agency only applied for one year. In addition, the 2013 CSR was only for a one-year period. This meant that for 2014 and 2015 while aggregate expenditure figures continued to be provided over the medium term, ministries essentially reverted to an annual budget process.

2.1.4. Investment Projects (Good)

53. Major government projects are now managed by the Infrastructure and Projects Authority (IPA). The IPA was formed in January 2016 through the merger of Infrastructure UK (IUK) and the Major Projects Authority (MPA), and it is responsible for project development, project financing, project assurance, and project support for major government projects.

54. General government investment in the UK is relatively low compared to many other countries (Figure 2.10). However, public sector investment in UK is much higher, around 4 percent of GDP in 2016. There are also a number of very large investment projects slated, including the High Speed Rail project, an extension of airport capacity (decision pending) and the Hinkley Point nuclear power plant. Planned investment in UK economic infrastructure across different sectors has a combined value of GBP 425 billion (see Table 2.1).

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Public Investment in Selected Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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Table 2.1.

Planned Investment in UK Economic Infrastructure

(GBP billion in 2014/15 prices)

Source: National Infrastructure Pipeline.

Table 2.1.

Planned Investment in UK Economic Infrastructure

(GBP billion in 2014/15 prices)

Sector		No. of projects & programmes	Total (£bn)	2016/17	2017/18	2018/19	2019/20	2020/21	Post 2020/21
Communications		6	6.0	2.8	2.2	0.4	0.3	0.2	0.0
Energy		167	255.7	24.8	26.7	26.0	20.1	19.9	138.3
	Hinkley Point C	1	16.0	−	−	1.0	2.1	2.1	10.9
Flood		29	4.1	0.5	0.6	0.6	0.5	0.5	1.4
Science and Research		32	5.5	1.1	1.1	1.1	1.1	1.1	0.0
Transport		329	134.5	17.6	17.0	16.6	18.5	18.8	46.1
	High speed rail	1	53.7	0.8	1.6	2.7	4.4	4.3	40.0
Waste		10	0.5	0.4	0.1	0.0	0.0	0.0	0.0
Water		29	19.3	5.0	5.0	4.7	4.0	0.5	0.1
Economic Infrastructure Investment Total		602	425.6	52.2	52.7	49.2	44.5	41.0	185.9
Social Infrastructure Investment Total			57.6
Grand Total			483.2

Source: National Infrastructure Pipeline.

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Table 2.1.

Planned Investment in UK Economic Infrastructure

(GBP billion in 2014/15 prices)

Sector		No. of projects & programmes	Total (£bn)	2016/17	2017/18	2018/19	2019/20	2020/21	Post 2020/21
Communications		6	6.0	2.8	2.2	0.4	0.3	0.2	0.0
Energy		167	255.7	24.8	26.7	26.0	20.1	19.9	138.3
	Hinkley Point C	1	16.0	−	−	1.0	2.1	2.1	10.9
Flood		29	4.1	0.5	0.6	0.6	0.5	0.5	1.4
Science and Research		32	5.5	1.1	1.1	1.1	1.1	1.1	0.0
Transport		329	134.5	17.6	17.0	16.6	18.5	18.8	46.1
	High speed rail	1	53.7	0.8	1.6	2.7	4.4	4.3	40.0
Waste		10	0.5	0.4	0.1	0.0	0.0	0.0	0.0
Water		29	19.3	5.0	5.0	4.7	4.0	0.5	0.1
Economic Infrastructure Investment Total		602	425.6	52.2	52.7	49.2	44.5	41.0	185.9
Social Infrastructure Investment Total			57.6
Grand Total			483.2

Source: National Infrastructure Pipeline.

55. Investment projects are transparently reported. The WGA, which provides information on all multi annual obligation, including investment projects, and budgets accompanying spending reviews provide details on planned investments. In addition, the new National Infrastructure Pipeline database includes information on the planned investment in all UK economic infrastructure across both the public and private sectors. The IPA also produces detailed reports on major projects.¹⁰

56. All major investment projects go out for competitive tender and require cost-benefit analysis, though these are not necessarily published. These projects will either be developed and approved through a structured business case methodology using the Treasury five case model that includes cost benefit analysis, or a cost effectiveness analysis where more appropriate. The Green Book¹¹ presents the frameworks, processes and techniques that should be used. It covers different stages of the policy cycle, including setting objectives for a planned policy, project or program, appraising the options, implementing the solution and performing an ex post evaluation. All proposals are expected to use this methodology and are subject to appraisal including a cost-benefit analysis, and are required to go to a competitive tender. While some cost benefit analyses are released publicly due to Freedom of Information requests, they are not all published as a matter of course, bringing down the assessment to a good level.

2.2.1 Fiscal Legislation (Basic)

57. The bulk of the UK budget process is understood through convention, precedent and procedures that have been adopted over time, with relatively little provided in framework legislation. The budget timetable is governed by standing orders and conventions, as are the legislature’s powers to amend the budget. The Charter of Budget Responsibility sets out the government’s fiscal objectives, and provides the budget content requirements.¹²

58. Nevertheless, the system is well understood by budget actors, with the budget operating on stable timeframe, and the legislature makes almost no amendments—though this is more a reflection on the limits of parliamentary power. The Parliament is typically controlled by the government which has majority in the lower house. In general, the government maintains strict discipline on parliamentary votes, particularly on budget bills, where any failure to pass would represent a vote of no confidence, which could ultimately lead to the government resigning. Further, Parliamentary debate on the budget is relatively limited, with the initial oral debate on the budget starting immediately after the Chancellor gives his statement, leaving no time for anyone to scrutinize the budget before being required to give their opinion; while the (later) detailed debate within the parliament is limited to two votes (departments), with all the others rolled up into one omnibus vote. The House of Lords is even more restrained in terms of powers to amend supply bills, with no ability to amend, and can only delay passage by a month.

59. The convention-based system has a number of weaknesses. They system is very difficult for outsiders to understand. With few legislative requirements in place, the government has been able to change core budget features when convenient. For example, the medium-term budget framework was in effect abandoned in 2015 when the spending review was only done for a single year, instead of the usual four; performance targets as laid out in public sector agreements were dropped in 2010; and carryovers of unspent funds ceased in 2010, in response to savings needs.

2.2.2. Timeliness of Budget Documents (Not Met)

60. The UK’s budget process is completed very late in the fiscal year, with the budget presented to parliament only two to three weeks prior to the beginning of the new financial year. This does not meet the basic practice in the FTC of presenting the budget one month prior to the beginning of the financial year, and is well short of the three-month requirement to meet the advanced level. Furthermore, the detailed spending estimates are provided a month after the budget is presented, and after the financial year has begun. This gives very little time for the Parliament or the public to scrutinize the budget before new policies are due to take effect.

61. The budget is not approved by Parliament until July, three months after the April 1 beginning of the financial year. This again does not meet the basic practice of approving the budget at least one month before the financial year begins. Spending authority for the new financial year is derived from the passage of the previous year’s supplementary budget, that is introduced to Parliament a month prior to the budget (Table 2.2), but this does not account for policy changes announced in the budget. The Vote on Account that is passed alongside the supplementary estimates provide legal authority for spending equivalent to 45 percent of the previous year’s budget. The authority to collect revenues for the first seven months of the financial year is provided through the Budget Resolution Bill, that is provided to parliament four days after the main budget event in mid-March.

62. The Autumn Statement is intended to operate as a mid-year update, but in recent years has taken on increasing importance, in some instances eclipsing the budget itself.

There are typically large-scale policies announced in the autumn, such as the results of the 2015 spending review, and a major savings exercise in 2014, which are often taken to bring fiscal policy in line with announced targets following changes in the outlook (see Figure 2.15 below). Its role has increased in importance over time, where it started off as a pre-budget announcement, and evolved into an effective mini-budget.

Table 2.2.

United Kingdom: Key Dates in the Current Budget Cycle

Table 2.2.

United Kingdom: Key Dates in the Current Budget Cycle

Timing	Event	Purpose
February	Supplementary Esimates Presented	Introduce changes from the previous autumn statement
Early March	Supplementary Esimates Passed	Pass policy changes from the previous Austumn Statement Provide legal appropriation for spending in the first months of the coming FY
Mid-March	Main Budget Event	Introduce aggregate budget information and new policy measures Present economic and fiscal forecasts
+ 4 days	Budget Resolution Bill Presented	Provide authority toraise taxes in the coming financial year
1-Apr	New Financial Year Begins
April	Main Estimates Presented	Present detailed expenditure information by department
July	Main Estimates Voted Through Public Exp Statistics Analysis Presented	Provide authority to spend for the remainder of the financial year Presents detailed spending data in line with the main budget docs
Nov/Dec	Autumn Statement	Update economic and fiscal forecasts plus introduce new policy measures
February	Supplementary Estimates Presented	Introduce changes from the autumn statement

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Table 2.2.

United Kingdom: Key Dates in the Current Budget Cycle

Timing	Event	Purpose
February	Supplementary Esimates Presented	Introduce changes from the previous autumn statement
Early March	Supplementary Esimates Passed	Pass policy changes from the previous Austumn Statement Provide legal appropriation for spending in the first months of the coming FY
Mid-March	Main Budget Event	Introduce aggregate budget information and new policy measures Present economic and fiscal forecasts
+ 4 days	Budget Resolution Bill Presented	Provide authority toraise taxes in the coming financial year
1-Apr	New Financial Year Begins
April	Main Estimates Presented	Present detailed expenditure information by department
July	Main Estimates Voted Through Public Exp Statistics Analysis Presented	Provide authority to spend for the remainder of the financial year Presents detailed spending data in line with the main budget docs
Nov/Dec	Autumn Statement	Update economic and fiscal forecasts plus introduce new policy measures
February	Supplementary Estimates Presented	Introduce changes from the autumn statement

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Distributional Analysis –Tax and Spend Paid/Received by Income Quartile

(Percent of total expenditure/revenue)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: HM Treasury: “Impact on households: distributional analysis to accompany Budget 2016.”

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OBR’s March 2016 Assessment of Performance Against the Fiscal Targets

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

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Treasury (2000–09) versus OBR (2010–16) Average Forecast Errors ^1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.^1/ Medium-term forecast errors assessed on Treasury’s forecasts from the 2000–09 Budgets, and OBR’s forecasts from the 2010–16 budgets.

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UK: Budget versus Outturn

(Percent of Total Managed Expenditure)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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UK: MT Policy Decisions (2010-16)

(Percent of Expenditure)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

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2.3.1. Fiscal Policy Objectives (Not Met)

63. The Government’s overall objectives for fiscal policy are set out in the Charter for Budget Responsibility. These are to:

• Ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness, and ensure the effectiveness of wider government policy; and

• Support and improve the effectiveness of monetary policy in stabilizing economic fluctuations.

64. These broad objectives have been made operational by adopting specific fiscal objectives. The Charter for Budget Responsibility, approved by Parliament in October 2015, sets out the fiscal objectives as follows:

• The government’s fiscal mandate was described as a surplus on the headline measure of Public Sector Net Borrowing (PSNB) by 2019-20, maintaining a surplus in normal times thereafter (“fiscal mandate”);

• This was supplemented by a target for debt as a share of GDP to be falling in each year until 2019-20, after which it would continue to do so if the fiscal mandate is met (“supplementary target”);

• The fiscal mandate was further supplemented by a cap on a subset of welfare spending, at cash levels set out by the Treasury in the most recently published Budget report, over the rolling five-year forecast period, to ensure that expenditure on welfare is contained within a predetermined ceiling (“the welfare cap”).

65. If these fiscal policy objectives had been maintained, they would have been assessed at a good level of practice, albeit hindered by their frequent adjustments. While they are both precise and time bound, the frequent changes to the specific fiscal objectives reduces their credibility in guiding medium-term fiscal policy. For instance, the most recent budget surplus and net debt targets had only been in place for a year before being abandoned, with the previous targets introduced only seven months prior to that (Table 2.3).

Table 2.3.

Recent UK Fiscal Rules

Source: UK Budget documents.

Table 2.3.

Recent UK Fiscal Rules

Introduced	Dropped	Target
May 1997	Dec 2008	Golden rule over the cycle
Dec 2009	May 2010	Annual reduction in Pulic Sector Net Borrowing to 2015-16, halving it from 2009-10 levels by 2013-14
June 2010	July 2015	Cyclically adj current budget balance by end of 5 year forecast period (target date continually pushed out)
		Public sector net debt falling by 2015-16
Dec 2014	July 2015	Achieve cyclically adjusted current balance by the end of the third year of the forecst period (amended)
		Public sector net debt as a percentage of GDP to be falling in 2016-17 (target year pushed out)
March 2014		A capon welfare spending below limits set in the 2014 Budget
July 2015	August 2016	Budget Surplus in 2019/20
		Debt falls as percent of GDP each year
		Keep welfare spending below cash limits set in July 2015 (amended)

Source: UK Budget documents.

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Table 2.3.

Recent UK Fiscal Rules

Introduced	Dropped	Target
May 1997	Dec 2008	Golden rule over the cycle
Dec 2009	May 2010	Annual reduction in Pulic Sector Net Borrowing to 2015-16, halving it from 2009-10 levels by 2013-14
June 2010	July 2015	Cyclically adj current budget balance by end of 5 year forecast period (target date continually pushed out)
		Public sector net debt falling by 2015-16
Dec 2014	July 2015	Achieve cyclically adjusted current balance by the end of the third year of the forecst period (amended)
		Public sector net debt as a percentage of GDP to be falling in 2016-17 (target year pushed out)
March 2014		A capon welfare spending below limits set in the 2014 Budget
July 2015	August 2016	Budget Surplus in 2019/20
		Debt falls as percent of GDP each year
		Keep welfare spending below cash limits set in July 2015 (amended)

Source: UK Budget documents.

66. However, while the targets remain formally in place, they have been publicly abandoned by both the current and previous Chancellors, leaving effectively no fiscal objectives in place during the assessment period.¹³ This results in an assessment of “not met” under the code, but this is in all likelihood a temporary aberration, as new objectives are anticipated to be adopted alongside the 2016 Autumn Statement.

67. The OBR performs regular assessments on fiscal performance against the Government’s fiscal targets. The Charter for Budget Responsibility requires the OBR to judge whether the Government has a greater than 50 percent chance of hitting its fiscal targets under the current policy. These are assessed and published in each of the OBR’s EFOs.

2.3.2. Performance Information (Basic)

68. The budget provides information on the spending provided under each of the government’s main policy areas. The main supply estimates provide spending information by agency, what the agencies main objectives are, and provides a broad breakdown of where the overall funding will be directed, though this is more on an administrative basis.

69. However, the details provided on outputs and outcomes are less clear, and are not linked to the budget. In general, the UK’s policy objectives and related funding are decided on during the CSR agreements. However, these agreements only cover the funding under DEL, which makes up only half of total expenditure, and are not updated during subsequent budgets. The current incarnation of agreements is the “Single Departmental Plans (2015–20),” that lay out total DEL funding, high level objectives, and report on the indicators underlying them. However, there is no link within the plans as to what funding is available or what outputs will be produced, nor are there any targets for the indicators, though the plans do include specific commitments related to the government’s pre-election manifesto. Previous versions of departmental plans have taken different approaches to planning and performance. For example, the 2011–14 business plans laid out objectives and specific actions that would be taken to the meet them, and the Public Service Agreements (1998–2010), provided objectives and targets.

70. Ex post reporting on how the government is performing against the objectives is included in each department’s annual report. These provide a description of the policy actions departments are taking to meet the objectives, and provide the results of a number of indicators. However, most have no targets against which these indicators are measured against, nor any link back to how the inputs were used to meet them.

2.3.3. Public Participation (Basic)

71. In many ways, the UK meets advanced practice for public participation, particularly through the provision of clear, easily understood budget materials. There are easily understood descriptions of the budget, major policy measures and some information about the distributional impacts of spending and tax across different segments of the population—although the latter have been scaled back, are relatively high level, and difficult to link to particular policy decisions. Figure 2.11 presents an example of distributional analysis included in the budget documentation.¹⁴

72. However, citizens are given no formal voice in budget deliberations. A lively and well-informed media and public discussion of public and budget policy in some ways negates this, however in order to meet advanced practice, the government could introduce a formal call for budget submissions from the public (as in Australia), or public participation component in the estimates committee hearings (as in Canada).

2.4.1 Independent Evaluation (Advanced)

73. The independent OBR prepares all economic and fiscal forecasts for the UK Budget, and provides an assessment of whether the fiscal targets are being met (Figure 2.12). The OBR was set up in 2010 in an effort to increase the credibility of the government’s fiscal forecasts, due to perceived political influence on government forecasts, as well as frequent tinkering with budget classifications made in order to meet fiscal targets.¹⁵

74. The OBR is completely responsible for all economic forecasts, although the fiscal forecasts partly depend on Treasury DEL figures. While it is also responsible for fiscal forecasts, and prepares the revenue and AME forecasts, it accepts the DELs as determined by the Treasury, making some adjustments for over or under spending. This became an issue in the March 2015 budget, when the medium-term DEL projections (that had not been subject to a spending review, as this only applied for the first year of the forecasts period) implied a large decline in DEL spending. While OBR accepted those projections, it did demonstrate that Treasury’s figures implied a sharp decline in real spending per capita.

75. While it is still relatively early in terms of its track record, the OBR’s forecasting record indicates a lower degree of bias than under the Treasury forecasting regime. Revenue forecasts have proven to be less optimistic than was the case when the Treasury was responsible, while the degree of expenditure overspends has been broadly similar, resulting in a lower bias on fiscal balance projections (Figure 2.13). While the Treasury’s forecast period includes the global financial crisis, which worsens the errors, excluding the crisis years still yields a similar, albeit less dramatic pattern. In order to demonstrate its lack of bias ex ante, the OBR provides all of its models to the public, and performs rigorous ex post forecast evaluations.

76. The OBR also has a sign off responsibility for policy costings prepared by the Treasury. The OBR endorses (or not) these costings in each economic and fiscal update, and provides an uncertainty rating based on the data underpinning it, the complexity of the modelling and the possible behavioral impact of the policy. If the OBR disagreed with the Treasury’s published costing, it would put its own referred costing in the forecast.

2.4.2. Supplementary budget (Advanced)

77. Any changes to the total or composition of the budget require a supplementary budget before funds can be spent. In exceptional circumstances, departments can be given access to the contingency fund, however this has very strict conditions and will need to be fully repaid. The supplementary budget is usually announced in the autumn statement, and appropriated through the supplementary estimates in February (one-and-a-half months prior to the end of the financial year). While it is possible for agencies to overspend relative to their appropriations, this is then subject to an (embarrassing) excess vote procedure, and consequently these are relatively rare.

78. Over the past decade, the budget has been a credible guide to the actual fiscal outturn, with total managed expenditure averaging 0.2 percent lower than the announced figure. While year-on-year both supplementary budgets and execution errors have been significant (and sometimes in the same direction), the outturns have averaged out. The legal appropriations have seen considerably larger variability (Figure 2.14), though the largest of these, in 2015, related to adding in a provision for nuclear decommissioning that had no impact on the headline expenditure figures. There have only been two cases where spending has exceeded legal authority, in 2009 and 2013.

79. While changes to the budget year have been small, the Autumn Statement has focused on announcing medium-term policy changes in order to meet the fiscal targets. Indeed, the quantum of policy decisions announced in the Autumn Statement exceed those announced in the Budget by a considerable margin, particularly on the tax side (Figure 2.15). This poses a challenge to the universality of the budget, with decisions not being taken at a single point in time, preventing comparison on trade-offs and comparisons across decisions. This has also led to complaints from business and commentators on the frequency of changes to the tax system, and a call from commentators to move to a single fiscal event to provide greater certainty and stability, to release resources for better consultation, and to produce higher quality legislation.

2.4.3. Forecast Reconciliation (Advanced)

80. The OBR produces an ex post evaluation of its forecast performance on an annual basis. This evaluation analyses in detail the differences between outturn and fiscal forecast. Furthermore, each OBR forecast report includes a detailed breakdown of changes since the previous forecast.

81. The OBR provides a reconciliation of changes to the fiscal forecast in each of the budget updates. It classifies the forecast revisions into three categories:

• Classification changes: these are typically the result of decisions taken by the ONS since the previous forecast;

• Underlying forecast changes: these are the result of OBR’s judgements about how forecasts—primarily economic—should change in light of new information since the previous forecast; and

• Policy changes: the results of Government decisions that are announced in each Budget and Autumn Statement, or in the period since the previous fiscal event

82. On average, since 2010 the forecast deficit has been revised up by 0.2 percent of GDP over the medium term in each of the updates (Figure 2.16). This has been driven by continual downward revisions to economic parameters, which have led to a deterioration of 0.3 percentage points to the deficit, while policy decisions have tended to offset this, with the exception of 2015, when policy decisions cost the budget Finally, there have been two large instances of accounting and classification changes, which reduced the forecast deficit in March and December 2012.

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United Kingdom: Average Revision to Headline Public Sector Net Borrowing Forecasts Over the Next Five Years

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF staff estimates.

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3.1.1. Macroeconomic risks (Advanced)

85. Macroeconomic risks are among the most important. Even a modest shortfall in the growth of the economy relative to forecasts can lead to losses for the government much larger than those caused by the realization of many other risks, like flooding or a call on a typical government guarantees. Changes in growth mostly affect the government’s tax revenue, though spending on unemployment benefits is also sensitive to the state of the economy.

86. The UK economy and tax revenue are more stable than those of many countries. Despite the financial crisis of 2008–09, the UK’s large and diversified economy is relatively stable and, largely as a result, the government’s revenue is also relatively stable (Figure 3.1). This relative stability, combined with the government’s policy of borrowing in local currency at long maturities, puts the government in a good position to manage fiscal risks.

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Volatility of GDP and Government Revenue, 2000–15, Selected Advanced Economies

(Percent)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF World Economic Outlook database, April 2016Note: Volatility is measured as the standard deviation of the annual growth rate. Revenue is for general government and is deflated by the consumer-price index. The sample is the G7 plus Western Europe.

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87. The OBR’s Economic and Fiscal Outlooks analyze macro risks in three ways. Fan charts indicate the extent of uncertainty about future deficits and debts, on the assumption that current forecasts are no more accurate than past forecasts. Sensitivity analyses show how forecast outcomes could change with small changes in important forecast assumptions, taken one by one. And scenario analyses show how outcomes could change if several assumptions were varied simultaneously in plausible ways. These analyses are used to assess whether the government is likely to meet its fiscal targets. Taking a broader perspective, the OBR could also investigate the likely effects of a very steep recession on public finances (a fiscal stress test),¹⁶ while the Treasury could consider how it would respond to such a shock.

3.1.2. Specific fiscal risks (Not Met)

88. Specific fiscal risks are those not easily analyzed in typical macroeconomic models. They include the risks that explicit and implicit guarantees will be called and the risk that the government’s assets will lose value. Many are discussed in the following sections.

89. No report summarizes specific risks, though relevant information is disclosed. The OBR’s medium- and long-term fiscal projections discuss some specific fiscal risks, and the notes to the WGA disclose a lot of information on an overlapping set of risks. But some important sources of risk, including the possible direct and indirect fiscal costs of another financial crisis, are not discussed. And no report offers a comprehensive summary of specific fiscal risks and their possible implications for public finances. (This is likely to change when the OBR publishes its planned report on fiscal risks in 2017.)

3.1.3. Long-term sustainability of public finances (Advanced)

90. The aging of the population is expected to create large, uncertain fiscal costs. The OBR estimated in 2015 that bringing net public-sector debt back to 40 percent of GDP would require a permanent fiscal consolidation beyond that already planned of 1.9 percent of GDP. In the absence of policy changes, it forecast that the government would start to run a primary deficit (that is, a deficit excluding interest payments) in 2033–34, and that public debt would start to rise inexorably (Figure 3.2). These estimates are, as the OBR stresses, highly uncertain. If productivity growth were slower than forecast, for instance, debt would rise more quickly. The apparent unsustainability of the government’s policies mirrors problems faced by most advanced economies. The European Commission’s Fiscal Sustainability Report 2015 judged that the UK was one of 14 European countries facing a “medium sustainability risk in the long-term” (p. 8) and that sustainability would require consolidation of 3.2 percent of GDP (p. 156).

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OBR’s Projections of the Deficit and Debt, 2019–20 to 2064–65

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: OBR, Fiscal Sustainability Report, June 2015, Chart 1.

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91. The OBR regularly publishes long-term projections under different assumptions. The projections, which have a term of about 40 years, consider all spending, not just its age-related components, and show how the debt and deficit will evolve under a baseline scenario and under other scenarios based on different assumptions about pension rules, interest rates, demography, and so on. The Fiscal Sustainability Reports containing the projections were published every year until 2015, along with several background papers, but with the new work created by the referendum on the EU and the introduction of the planned biannual report on fiscal risks, the OBR plans to publish the Fiscal Sustainability Report only in the years in which the risk report is not published. This make sense, but it would also be useful to publish short, updated summaries of each report in the “off” years.

3.2.1. Budgetary contingencies (Good)

92. The budget contains reserves to deal with unexpected spending. In Budget 2016, the budget-year reserve for expenses (resource DEL) was GBP 3.6 billion and the budget-year reserve for capital expenditure (capital DEL) was GBP 1 billion. In total, the two reserves equal 0.6 percent of budgeted spending. This puts the United Kingdom about in the middle of the range observed in other countries for which data are readily available (Figure 3.3). Each department has its own departmental unallocated provisions (DUP), and the two reserves are intended to meet only those needs that are both unforeseen and unmanageable within departmental budgets. There are no restrictions on the types of spending that may be funded from the reserves, but before calling on the reserves departments are expected to respond by “managing the pressures down; using their DUP; re-prioritizing and making offsetting savings elsewhere in the budget; deferring spending elsewhere in the budget; and transferring provision from Resource DEL to Capital DEL (if the pressure is in Capital DEL).”¹⁷ Transfers from the reserve to the relevant appropriations are typically made in the supplementary budget. If the unforeseen spending needs are urgent, spending can temporarily be funded from a contingencies fund if certain criteria are met and the Treasury’s approval is given.¹⁸ There is no in-year reporting of the use of reserves.

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Size of Contingency Reserves in Selected Countries

(Percent of Expenditure)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF Fiscal Transparency Evaluations and other IMF Staff estimates.Notes: * Reserve at end of forward-estimates period.

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3.2.2. Management of assets and liabilities (Basic)

93. The government has large liabilities and also valuable financial assets. Its holdings of financial assets rose during the financial crisis, as it rescued failing banks, while its debt grew even more. At the end of March 2016, the financial assets of general government amounted to 30.4 percent of GDP, while its liabilities were worth 114.5 percent (Figure 3.4). The value of the liabilities was higher than headline measures of debt, including the Maastricht estimate of the debt of general government (87.7 percent of GDP),¹⁹ partly because the headline measures of debt exclude certain kinds of liabilities including derivatives and accounts payable amounting to about 7 percent of GDP. The rest of the difference arises because Maastricht debt is recorded at its face value, which, with the fall in interest rates, is now less than its market value.²⁰

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United Kingdom: Financial Balance Sheet of General Government 1987 Q1 — 2016 Q1

(Market value in percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: Eurostat Government Finance Statistics, Quarterly Financial Accounts for General Government, July 2016.Notes: The negative of liabilities is shown. Pension liabilities to public servants are not included in these data or headline measures of debt.

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94. The risks related to debt are disclosed. The Treasury’s annual Debt Management Report describes debt-related risks and shows a probabilistic forecast of debt-service costs. There is also a clearly disclosed debt-management policy, which is to borrow in pounds, mostly at fixed rates, for long-average maturities (Figure 3.5), without use of derivatives. There is relatively little discussion in public documents of the risks surrounding the government’s other liabilities, such as pensions, or of the risks surrounding its assets.

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Level and Average Maturity of Debt in Advanced Economies, 2015

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF, Fiscal Monitor, April 2016, Table A23.

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3.2.3. Guarantees (Basic)

95. Government guarantees have fallen in recent years, but remain significant. During the financial crisis, the government used guarantees to support banks and encourage them to lend to households and businesses. By 2010, guarantees issued by general government to others amounted to 28 percent of GDP. Since then, they have fallen to 8.9 percent, about average in Europe (Figure 3.6). These figures exclude guarantees given by the Treasury to other units in general government, such as Network Rail, and include guarantees given to public corporations, such as the Bank of England. Government guarantees given to private entities amount to 5.6 percent of GDP.²¹ The government’s plans to contain reported spending while encouraging investment may encourage greater use of guarantees that have no immediate effect on the headline measures of the debt and deficit.

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Government Guarantees in Europe, 2014

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: Eurostat Government Finance Statistics, Contingent Liabilities and Potential Liabilities Notes: The number for Cyprus is from 2013.

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96. Guarantees are disclosed, but there is no legal limit on their issuance. Information on the total level of guarantees (of the kind shown in Figure 3.6) is available from the ONS. The WGA and the Treasury’s departmental accounts also disclose and explain guarantees. Some guarantees are recognized on the face of the WGA balance sheet and a smaller range are recognized on the statistical balance sheet. Most, however, remain off-balance-sheet in the statistics and thus not subject to spending targets based on the headline measure of the deficit. Moreover, no guarantee liabilities are counted in the key measure Public Sector Net Debt.

3.2.4. Public-private partnerships (Good)

97. Public-private partnerships (PPPs) also create off-balance-sheet liabilities. Although concession-type PPPs are very old, the UK pioneered the use of a kind of PPP in which the government pays for the service provided by the PPP company. Although such projects, referred to in the UK under the rubrics Private Finance Initiative (PFI) and Private Finance 2 (PF2), may sometimes be more efficient than traditional public investments, they are widely perceived to have been used to keep government spending and liabilities out of headline measures of the deficit and debt,²² which creates problems for the management of fiscal risks. The capital value of off-balance-sheet PPPs (as defined by Eurostat) remains greater in the UK than in most of Europe, at 1.7 percent of GDP (Figure 3.7), but has declined slightly in recent years as the use of these projects has slowed. The commitments associated with these PPPs is much larger than their capital value because the government is obliged to pay the expected costs of not only the construction of the assets but also their maintenance and associated services. The simple sum of all projected payments to PFI companies from 2016–17 to 2043–44, when the last projected payment will be made, is GBP 210 billion (10.9 percent of GDP), of which GBP 177 billion (9.2 percent of GDP) is off-balance-sheet in fiscal statistics.²³ The present values of these amounts, at the government’s borrowing costs, are equivalent to 9.8 and 8.3 percent of GDP, respectively.²⁴

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Off-Balance-Sheet PPPs in Europe, 2014

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: Eurostat Government Finance Statistics, Contingent Liabilities and Potential Liabilities.Notes: The number for Cyprus is for 2013.

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98. Recent years have seen the development of new kinds of PPP. The government has encouraged the private financing of infrastructure projects by guaranteeing the associated borrowing (see Section 3.2.3) and, in the case of electricity projects, by entering into contracts for difference with generators. These contracts effectively fix the price the generators receive: the government receives money from the generators if the market price of electricity exceeds the strike price, and it pays money to the generators if the market price is below that price. The liability created by contracts for differences on March 31, 2016 was GBP 31 billion (1.6 percent of GDP), none of which counts as debt in the headline measure published by the ONS.²⁵ The cost of the proposed contract for difference for the Hinckley Point C project has been estimated at GBP 30 billion (1.5 percent of GDP).²⁶

99. The implications of PPPs for public finances are disclosed. Although most PPPs are off-balance-sheet in the statistics used for setting fiscal targets, most are on-balance-sheet in the WGA. Following new Eurostat rules, the ONS also publishes an estimate of the value of PPPs that are off-balance-sheet in the statistics (shown in Figure 3.6). Finally, the Treasury publishes projected government payments in PFI and PF2 projects by project for every year of each project’s life. There is no limit on the total financial obligations the government can incur over the life of PPP contracts, but aggregate spending on PFI and PF2 projects over the five years beginning in 2015–16 has been subject to a limit of GBP 70 billion.²⁷

3.2.5. Financial sector (Advanced)

100. The fiscal risks created by banks are among the most important. Some of the risks are direct: the government may be required, or may choose (subject to legal restrictions), to bail out a failing bank. One of the government’s main legal obligations is to support the Financial Services Compensation Scheme (FSCS), which guarantees deposits up to certain limits.²⁸

In addition, there is the effect that financial crises have on the wider economy and thus the government’s revenues. Figure 3.8 compares the government’s actual and currently forecast revenues with those that could have been forecast before the global financial crisis by extrapolating historical rates of growth. The loss of revenue relative to the pre-crisis forecast between 2008 and 2015 was about GBP 700 billion (38 percent of 2015 GDP)—an enormous amount compared to the losses likely to be caused by most other risks considered here.

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United Kingdom: Revenue Loss Relative to Pre-Crisis Extrapolation

(Billions of 2016 pounds)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: IMF, World Economic Outlook database, April 2016Note: The extrapolation assumes that revenue grows after 2007 at the rate that it grew between 1998 and 2007.

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101. Much has been done since the financial crisis to reduce fiscal risks form the financial sector. There are new rules designed to increase banks’ capital, reduce their vulnerability to temporary funding problems, isolate their basic deposit-taking and payment functions from their speculative activities, and otherwise ensure that private creditors bear losses before taxpayers. Overall, the reforms have aimed to ensure that problems in financial institutions, no matter how large or complex, can be resolved without jeopardizing financial stability or imposing costs on taxpayers. There is some evidence that the value of implicit government guarantees has declined since the crisis.²⁹ More generally, the IMF’s most recent assessment of the stability of the sector concluded that the reforms had greatly increased the sector’s resilience.³⁰

102. Yet the sector remains extremely large and highly leveraged. Figure 3.9 shows that the sector’s non-equity liabilities (which are what creates risk) have fallen since the peak of the crisis, but were still larger as a percentage of GDP in 2015 than they were in 2007. Figure 3.10 shows that the sector’s liabilities in 2014 were greater in the UK than in any other large European country. Table 3.2 breaks the UK sector’s liabilities into categories, including some that are explicitly government guaranteed and some that may benefit from some remaining implicit guarantees. The sector is also complex. (The data discussed here include the Bank of England and other public financial corporations; see Section 3.2.2 for more on publicly owned banks.)

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United Kingdom: Liabilities of Financial Corporations, 1995–2015

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: Eurostat, Financial Balance Sheets, updated September 5, 2016.Note: The figure shows total consolidated claims (also called liabilities) less equity claims.

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Liabilities of Financial Corporations in Europe, 2014

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: Eurostat, Financial Balance Sheets, update of September 5, 2016.Note: The figure shows total consolidated claims (also called liabilities) less equity claims. Some countries are excluded for lack of data.

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Table 3.2.

United Kingdom: Liabilities of Financial Corporations, 2015

Sources: Eurostat, Financial Balance Sheets, updated September 5, 2016. Notes: The Eurostat data are those described as consolidated. Deposits include transferable and other.

Table 3.2.

United Kingdom: Liabilities of Financial Corporations, 2015

Liabilities	Amount in percent of GDP
Deposits	265
Debt securities and loans	166
Insurance, pensions, etc.	207
Derivatives	243
Other	8
Total	892

Sources: Eurostat, Financial Balance Sheets, updated September 5, 2016. Notes: The Eurostat data are those described as consolidated. Deposits include transferable and other.

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Table 3.2.

United Kingdom: Liabilities of Financial Corporations, 2015

Liabilities	Amount in percent of GDP
Deposits	265
Debt securities and loans	166
Insurance, pensions, etc.	207
Derivatives	243
Other	8
Total	892

Sources: Eurostat, Financial Balance Sheets, updated September 5, 2016. Notes: The Eurostat data are those described as consolidated. Deposits include transferable and other.

103. Explicit support for the sector is disclosed and financial stability analyzed. The WGA and the Treasury’s departmental accounts report the government’s explicit support for the sector. The Bank of England’s twice-yearly Financial Stability Reviews discuss the soundness of the financial sector and report the results of stress tests. The OBR also reports on the net fiscal effects of the government’s interventions in the financial sector. There is, however, no reporting on the broader risks that another financial crisis could cause for public finances, either because of possible implicit guarantees or, most important, the effect of another financial crisis on economic activity and thus government revenues. Nor does the total exposure of the FSCS appear to be reported.

3.2.6. Natural resources (Advanced)

104. North Sea oil and gas is no longer an important source of revenue. Low sector profitability, a reduction in tax rates, high levels of investment, increasing decommissioning activity and the payment of refund liabilities resulting from the carryback of trading losses have led to a decline in tax revenue over the last three years, culminating in negative overall revenues in 2015/16.

105. The government analyses the risks associated with commodity price, production, and cost movements. Analysis by the OBR shows that economic factors have been the biggest source of forecasting error over the last five years, in large part due to the difficulty in predicting oil and gas prices. The 2015 FSR provided a comparison of price, production and revenue forecasts and outturns since 2010, and price and production sensitivity analysis on its long term forecasts. Reflecting the considerable price uncertainty, the March 2016 forecast assumed a conservative $35.5/barrel price for 2016/7, increasing to $44/barrel over the period 2018–21, generating negative overall revenue projections until 2021 (Figure 4.1 (f)).

106. A key fiscal risk arises from the loss carryback treatment for decommissioning costs. These tax losses will be absorbed by the general budget, either through reduced tax revenues or refunds to industry, since there has been no historical saving of revenues in anticipation of these liabilities. In 2015, total decommissioning costs for the UKCS over the next 25 years were estimated at approximately GBP 43.7 billion: GBP23.7 billion for PRT-paying fields and GBP20 billion for non-PRT paying fields.³¹ However, there is considerable uncertainty around these figures and how they are likely to be distributed over time.³²

107. The PRT is the principal source of near-term tax refund liabilities. Following cessation of production, losses can be carried back almost indefinitely.³³ The amount of the repayment due will depend on the company’s tax history and the tax rate that applied in the year that the loss is carried back to, as well as any interest due on the repayment. The principal portion of the repayment is then taxable for ring-fence corporation tax (RCFT) and the supplementary charge (SC). Losses can also be carried back against payments of RFCT and SC to 2002, at rates of 30 and up to 20 percent respectively. However, since these payments are subject to the company level petroleum ring-fence (see Chapter IV) rather than being paid at a field level, HMRC estimates that such losses will be offset against a company’s taxable income resulting in reduced tax payments, rather than a refund.

108. Detailed analysis on the potential timing and impact of decommissioning-related tax losses is not published. Figure 3.11 shows OBR’s medium-term estimate of decommissioning expenditure, as well as the minimum tax refunds implied by its negative medium-term petroleum revenue forecast.³⁴ These figures suggest a net refund liability of approximately GBP 1bn per year over the next five years, which amounts to between 40 and 65 percent of decommissioning costs incurred annually. In its 2015/16 accounts, HMRC estimated a net GBP 6.9 billion contingent liability provision for anticipated refunds for PRT fields over the 2016–42 period, of which only GBP 1.7 billion is anticipated in the 2016–21 period. Publication of greater detail of the assumptions underlying these figures would increase transparency surrounding the government’s anticipated refund liabilities.

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Medium-Term Decommissioning Costs and Net Tax Refunds

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Source: OBR and IMF staff estimates.

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3.2.7. Environmental risks (Basic)

109. Natural disasters and other environmental problems create some fiscal risk. Floods are common and create spending needs that cannot always be met in departments’ existing budgets. In recent years, at least, the necessary spending has not been very large as a proportion of total public spending. For example, floods in the winter of 2013–14 led to “exceptional additional” funding of GBP 180 million (0.01 percent of GDP) in 2014–15, as well as smaller amounts in other years.³⁵ Of course, more costly floods are possible, as are other disasters such as an influenza pandemic or an accident at a nuclear power plant. In the long term, climate change creates major risks.

110. The government reports on a wide range of risks in the National Risk Register. The 2015 edition of this biennial report discusses risks related not only to floods, pandemics, and other natural hazards but also the risks of various kinds of terrorist attacks. It is based on a more comprehensive analysis that for reasons of national security is not published. Though valuable, the National Risk Register does not estimate the possible budgetary consequences of the emergencies it discusses.

3.3.1. Subnational governments (Basic)

111. Public finances have traditionally been highly centralized. In 2011, local governments collected only 5 percent of all taxes (Figure 3.12), compared to an OECD average of 15 percent. Their share of spending was higher, at 27 percent, compared to an OECD average of 32 percent.

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Subnational Tax and Spending, OECD, 2011

(Percentages of totals)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Sources: OECD, Fiscal Decentralization Database, Tax Autonomy Indicators and Consolidated Expenditure.

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112. Local governments’ borrowing is modest, at 5 percent of GDP. Moreover, most of their debt is owed to central government.³⁶ Local governments can borrow from the central government’s Public Works Loan Board, usually for less than they can borrow from others. The share of local governments’ debt in the total debt of general government has also fallen sharply since 2001 (Figure 3.13). Local governments’ borrowing from third parties is not generally guaranteed by the government, but it may benefit from implicit government guarantees. Standard and Poor’s says in its rating of the Greater London Authority that it believes that central government “would be willing to provide timely extraordinary support to the GLA, if required.”³⁷

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Debt of Local Government, 1998–2015

(Percent of GDP, except for share of total)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Sources: ONS, Public Sector Finance, Appendix Table PSA8A2.Notes: Debt not owed to the central government is assumed to be equal to total local-government debt less “LG/CG cross holdings of debt” and thus it is assumed that the central government does not have any debt to local government.

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113. Devolution may create some fiscal risks, at least in the transition. Local governments in England are being given somewhat greater revenue-raising powers, and their grants from the central government are declining. Authority for some government functions has also been transferred to the devolved administrations of Northern Ireland, Scotland, and Wales, and the Scottish Government is getting further fiscal powers—though its borrowing will be limited to GBP 4.7 billion (0.2 percent of 2016 GDP).³⁸ The move to a new regime brings with it the risk of fiscal problems, at least in the transition. Some local governments may initially lack the skills to manage their new responsibilities and lenders’ may exploit perceived implicit guarantees. Transferred revenue streams could also turn out in some cases to be too small or too uncertain to allow local governments to carry out their responsibilities.

114. Good information is available on subnational finances. The ONS includes data on the local-government sector’s spending and revenue and debt in its monthly Public Sector Finances. (For the purposes of these statistics, the Northern Ireland Executive, the Scottish Government, and Welsh Government are treated as parts of central government.) There are also annual data on local governments in England, Scotland, and Wales.³⁹ English local governments are required to run a balanced current budget and, in aggregate, local governments in the UK have run a current surplus in nine of the last ten years.⁴⁰ There is no numerical limit on the amount that they can borrow to finance investment, although the chief financial officers of English local governments are required to ensure that any borrowing is prudent, and all local governments are required to comply with the Prudential Code produced by the Chartered Institute of Public Finance and Accountancy.⁴¹

3.3.2. Public corporations (Basic)

115. Before the financial crisis, the public-corporations sector was remarkably small. In the mid-2007, its debt (as defined by the ONS) was just GBP 18 billion (1.2 percent of that year’s GDP) (Figure 3.14).⁴² This was the result of the privatizations of the 1980s and 1990s, and probably also the application of debt and deficit targets to the entire public sector, instead of to general government as, for instance, in the Euro Area. The broad coverage of the targets gives the government no incentive to carry out public policies using government-controlled entities that are just commercial enough not to count as part of government, but does encourage it to use quasi-public entities that are classified by ONS as part of the private sector (e.g., Network Rail and PFI companies, at least when they were created).

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United Kingdom: Public Corporations’ Gross Debt, 2005–16

(billion pounds)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Sources: ONS Table PSA8B for June 2016, columns 16 and 20, for data, and ONS, Treatment of Public Sector Banks in Public Sector Finances, November 21, 2014, for classification of banks.

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116. The public-corporations sector is now dominated by RBS. With the nationalizations of the crisis, the sector’s gross debt peaked, at the end of 2008, at an extraordinary GBP 2,154 billion (141.7 percent of that year’s GDP).⁴³ With the restructuring and sales of the other nationalized banks, RBS is now the only commercial bank still classified as a public corporation. Even though its balance sheet has shrunk considerably since nationalization,⁴⁴ its liabilities still dwarf those of other public corporations (Figure 3.15). On June 30, 2016, they amounted to GBP 848 billion (45.5 percent of 2015 GDP).⁴⁵ Next most important were the housing associations that were reclassified in 2015 as public corporations, and then London Underground and London Buses.⁴⁶ There are also many government-owned companies that are classified as part of general government. One of the most indebted is Network Rail, which at the end of June 2016 owed GBP 30 billion (1.6 percent of 2015 GDP).⁴⁷

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United Kingdom: Public Corporations’ Liabilities, 2015–16

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 351; 10.5089/9781475553451.002.A001

Sources: RBS, Interim Results, 2016, p. 24, for RBS; ONS, Classification Announcement: “Private Registered Providers” of Social Housing in England, p. 2, for housing associations; ONS, Contingent Liabilities and Other Potential Liabilities, 2015 (spreadsheet), Table 2, for others. IMF, April 2016 World Economic Outlook database, for GDP.Notes: The data are for June 2016 (RBS), October 2015 (housing associations), and March 2015 (others). GDP is for 2015. The estimate for housing associations is the ONS’s provisional estimate of the effect of the reclassification on its measure of the net debt of the public sector.

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117. Eight years after its nationalization, RBS is still a fiscal problem. Despite the efforts to improve its finances, it has lost money every year since nationalization, the size of its losses ranging from GBP 8 billion in 2013 (0.5 percent of GDP) to GBP 1 billion in 2015.⁴⁸ The share price of the 73-percent-government-owned bank has fallen from over 400p at the end of 2014 to 193p at the time of writing (August 11, 2016). As with many banks, its leverage is very high. At the August 11 share price, its June 2016 assets of GBP 902 billion are supported by common equity worth only GBP 23 billion. (Its leverage and Common Equity Tier 1 ratios, as defined by banking regulations, are 5.2 and 14.5 percent, respectively.⁴⁹) Although RBS does not benefit from explicit government guarantees, it may benefit from some implicit guarantees, though probably less than before the financial-sector reforms mentioned in Section 3.2.5. Among RBS’s “credit strengths,” Moody’s mentions a “moderate probability of government support” for its “junior deposits” and “operating company senior unsecured debt.”⁵⁰

118. Public banks are also excluded from headline measures of public finances. Although the ONS publishes an estimate of gross public debt that includes the debt of RBS, and previously other public banks, Net Public Sector Debt—the measure used for setting debt targets—excludes it. As is evident from Figure 3.10, the exclusion has greatly reduced the headline measure of debt. Similarly, although some transfers between public banks and the government affect the headline measure of the deficit—Public Sector Net Borrowing Excluding Public Sector Banks—their profits and losses do not.⁵¹ There may of course be good reasons for setting targets for the finances of only a subset of the public sector, but the exclusion of RBS from the headline debt measure could cause its finances to be less carefully scrutinized than those of other government entities—especially if it continues to remain in government ownership for some time.

119. The Bank of England is also a public corporation, albeit of a different kind. It is not classified as such in ONS statistics (it is sui generis), and is therefore excluded from the data examined above. It is consolidated in the WGA and treated as a public financial corporation for the purpose of segment reporting. However, its operations are in general included in headline measures of the debt and deficit. Exceptions have occurred because of the creation of statistical measures that exclude the “temporary” effects of the government’s interventions to solve the financial crisis, which among other things led to the abovementioned exclusion of public banks’ debt from the headline measure. Another consequence was that a transfer of accumulated dividends from the Bank of England to the Treasury reduced the reported deficit, even though it had no effect on the finances of the public sector.⁵²

120. Transfers between the government and public corporations are disclosed, but there is no annual report on the finances of the sector. The annual reports published by the Shareholder Executive and UK Financial Investments (which have now been combined in UK Government Investments) included relevant information on public corporations and other government-owned companies, but not enough to assess the risks created by the sector. Another problem is the antiquated nature of the Bank of England’s accounts. Although the Bank of England operates in practice as “one bank,” it presents separate financial statements for its banking and issue departments and does not consolidate its subsidiaries including the one that carries out quantitative easing.⁵³