Control and Management of Central Government Finances in the United Kingdom

THE MACHINERY AND PROCEDURES by which the U.K. budget is formulated, authorized, and controlled are not specified in any single law or document but are largely a matter of constitutional development and practice. Thus, although the most important method of expenditure control is by means of annual surveys of public expenditure (discussed on pp. 338–39), there are certain additional rules and principles that have their origin in the constitutional relationship between the Executive and Parliament and govern the British budgetary process.


THE MACHINERY AND PROCEDURES by which the U.K. budget is formulated, authorized, and controlled are not specified in any single law or document but are largely a matter of constitutional development and practice. Thus, although the most important method of expenditure control is by means of annual surveys of public expenditure (discussed on pp. 338–39), there are certain additional rules and principles that have their origin in the constitutional relationship between the Executive and Parliament and govern the British budgetary process.

I. Prominent Features of the British System of Financial Administration

THE MACHINERY AND PROCEDURES by which the U.K. budget is formulated, authorized, and controlled are not specified in any single law or document but are largely a matter of constitutional development and practice. Thus, although the most important method of expenditure control is by means of annual surveys of public expenditure (discussed on pp. 338–39), there are certain additional rules and principles that have their origin in the constitutional relationship between the Executive and Parliament and govern the British budgetary process.

Constitutional elements and fundamental principles

Sir T. Erskine May explains the relationship with respect to financial matters as follows:

The Sovereign, being the executive power, is charged with the management of all the revenue of the State, and with all payments for the public service. The Crown, therefore, acting with the advice of its responsible ministers, makes known to the Commons the pecuniary necessities of the government; the Commons, in return, grant such aids or supplies as are required to satisfy these demands; and they provide by taxes, and by the appropriation of other sources of the public income, the ways and means to meet the supplies which they have granted. Thus the Crown demands money, the Commons grant it, and the Lords assent to the grant: but the Commons do not vote money unless it be required by the Crown; nor do they impose or augment taxes, unless such taxation be necessary for the public service, as declared by the Crown through its constitutional advisers….1

The relationship between the Executive and Parliament, described above, is maintained and secured primarily by the rules of parliamentary financial procedure. These rules are a complex blend of parliamentary practice, standing orders, and enacted laws.2

The important rule is that any proposal for a charge, i.e., bringing an increased burden upon the people or the public revenue, cannot be taken into consideration unless it is recommended by the Crown. This rule not only places the responsibility for the preparation and submission of the budget entirely on the Executive but also, in effect, preserves for the ministers a virtual monopoly of parliamentary initiative in financial matters.3 A member of Parliament may only move for the reduction or elimination of a budget estimate; he may not propose to increase it, attach conditions to it, or vary its destination. Therefore, once an estimate is presented, the only way to increase the budget estimate is to propose a reduction with such explanation that the Government may realize that it is a request that the estimate be withdrawn and increased. In practice, all votes on finances are treated as votes of confidence, hence any change in the budget (except those on “the Chancellor’s motion”) voted by Parliament would bring about the fall of the Government. Expenditure and revenue estimates are considered by the House of Commons and voted upon in the form of supply and finance resolutions, respectively.

In addition, there is what may be called the “rule of law” in finance. It provides the legal basis for the accountability of the Government to Parliament. By constitutional practice, a charge cannot have full validity until authorized by legislation; it must originate in the House of Commons and be appropriated in the same session. Consequently, when the House of Commons concludes its deliberations of the supply and finance resolutions, a supply bill and a finance bill are then introduced by the Chancellor of the Exchequer, which—on enactment—receive the well-known titles Appropriation Act and Finance Act, respectively.

The Appropriation Act recites all the supply votes passed by Parliament and sets the general conditions of expenditure. Implied in this Act are three general precepts of financial administration in the United Kingdom: (1) a sum appropriated to a particular service cannot be spent on another service; (2) the sum appropriated is a maximum sum; and (3) the sum is available only in the current financial year. Accordingly, any sum found to be saved on a vote at the end of the financial year must be surrendered. As, however, Parliament does not normally complete its supply business and pass the Appropriation Act by the time the new financial year commences, special interim votes on account are passed in order to enable the Government to carry on its activities in anticipation of the Appropriation Act. Such a Consolidated Fund Act passed before the beginning of the financial year authorizes these sums on account to be issued out of the Consolidated Fund, but appropriation is deferred until the Appropriation Act in July. Similarly, any supplementary sums required after the passage of the Appropriation Act are voted, by means of Supply Resolutions, and their issuance authorized in Consolidated Fund Acts, appropriation again being deferred until the next Appropriation Act, which therefore covers not only expenditure of the current financial year but also expenditure voted in previous years.

It should be noted here that the Supply Services voted by Parliament each year to be met “out of money to be provided by Parliament” do not represent the total expenditure of the Central Government. Some services of the Government are financed permanently, by statute, “out of the Consolidated Fund.” These services, known as Consolidated Fund Standing Services, are charges upon the public revenue that have been removed from politics. They include such expenditures as the expenses of the Royal Household; salaries of judges, the Leader of the Opposition, and the Speaker of the House; and expenses of parliamentary elections. The distinction between Supply Services and Consolidated Fund Standing Services is important because the annual financial procedure is required only for the first category of expenditures.

Since all taxes except the income tax are appropriated for an indefinite period in the United Kingdom, the purpose of the Finance Act is to allow for the continuation of the income tax, the introduction of new taxes, and any proposed changes in existing taxes. It is interesting that all the resolutions of the Committee of Ways and Means that form the basis for the new tax laws are taken immediately after the Government makes known its tax proposals without debate. These resolutions, according to the Provisional Collection of Taxes Act and subject to retrospective approval of the Finance Act, give immediate statutory effect to newly imposed taxes and to proposed changes in existing taxes. Newly imposed taxes would otherwise have to await the full course of the legislative process before they could be collected. Other arrangements are also available to permit the Government provisionally to vary customs duties and the rates of the purchase tax in advance of parliamentary authority. Thus, while legislation is needed to give final sanction to budgetary policies, the British Government enjoys certain temporary arrangements that give immediate validity to its financial policies unless and until Parliament decides otherwise.

The Consolidated Fund and other operating accounts

Although the Consolidated Fund is the principal account in the U.K. budgetary system, it is by no means the only account in which government transactions are recorded. Thus, departments are authorized to retain certain receipts, such as charges for services rendered to the public, and to use them as “appropriations-in-aid” to defray part of their expenditures, and there are a number of statutory funds that are wholly or partially maintained by receipts that do not pass through the principal account. The most important of these are the National Insurance Fund and National Loans Fund.

The National Insurance Fund is administered by the Secretary of State for Social Services and is used for the payment of benefits under the National Insurance scheme. The regular income of this fund arises from employers’ and employees’ contributions and from investment returns. The Government also pays, through the annual supply votes, a certain supplementary amount in respect of all insured persons and covers any excess of current expenditure over current income of the fund.

The National Loans Fund, which came into effect as recently as April 1968, removed from the Consolidated Fund most of the domestic lending and all of the borrowing transactions of the Government. All unsubsidized loans to nationalized industries, local authorities, and other public bodies, which were in the past financed by advances out of the Consolidated Fund and for which the Treasury was authorized to borrow, are now financed out of the National Loans Fund. Loans that contain an element of subsidy, such as those given for aid purposes under the Colonial Development and Welfare Act, the Export Guarantees Act, and the Commonwealth Development Corporation, have since been borne entirely on the annual supply votes.

The service of the national debt previously charged on the Consolidated Fund is now met from the new fund, which receives (1) the interest payable on loans to nationalized industries and other public bodies and (2) the profits of the Issue Department of the Bank of England, which were formerly paid into the Exchange Equalization Account.4 The net cost of servicing the national debt after applying such receipts is charged on the Consolidated Fund as part of the Consolidated Fund Standing Services.

The Consolidated Fund receives the revenue from taxation and miscellaneous receipts, such as interest on subsidized loans made from the annual supply votes. After meeting the ordinary Supply Services and the Standing Services, any surplus in the Consolidated Fund at the end of the financial year is payable into the National Loans Fund.

The accounting arrangements resulting from the establishment of the National Loans Fund confirmed the practice introduced in 1965 of separating the borrowing and lending of the Central Government from other receipts and payments; in the process, the famous line was abolished. The transactions previously classified below the line are broadly those that were transferred to the new fund in addition to debt servicing. All other expenditures, Supply and Standing Services, will now appear in the budget estimates to be met out of the Consolidated Fund. The operation of the Central Government as a financial intermediary has thus been separated from the budget accounts, and the balance in the Consolidated Fund will now reflect more closely the “over-all surplus or deficit” of the Central Government’s budgetary operations.

The Auditor General and the Public Accounts Committee

The arrangements that Parliament has for satisfying itself that the Government does not raise or spend money other than that which has been authorized revolve around two key institutions: the Comptroller and Auditor General, and the Public Accounts Committee of the House of Commons.

The Auditor General, whose full title is “The Comptroller General of the Receipt and Issue of H.M. Exchequer and Auditor General of Public Accounts,” is the head of the Exchequer and Audit Department. Although the Exchequer Department is staffed by civil servants, the Auditor General is appointed, in accordance with the Exchequer and Audit Department Act, for an indefinite period. He is responsible solely to the House of Commons and is subject to removal from office only on a petition from the two Houses of Parliament. He is almost always selected from the civil service, usually he is a former member of the Treasury, and rarely is he an accounting specialist.

As a comptroller, the Auditor General’s approval is required for all issues out of the Consolidated Fund and the National Loans Fund. This function, as will be described later, has in some respects become largely a formality. As an auditor general, he audits the department accounts and checks that all expenditure has been approved by Parliament. The audit work is done in the departments and agencies throughout the year by means of spot or test audit. The function of audit has been described by a former Comptroller and Auditor General as follows:

The nature of the audit has therefore developed on lines suited to the needs of Parliament, and varies in certain respects from ordinary commercial audit. It consists broadly of three parts. The first is the straightforward accounts audit designed to ensure that the accounts as presented are a true record of receipts and payments and the balance sheets in the commercial accounts give a true picture of the position. The second part is what may be termed a finance audit and deals with such matters as adequacy of internal financial control and internal audit, the state of store-accounting and frequency of stocktaking, methods of safeguarding cash and stores and the system for collecting all receipts due. The third part of the audit may be termed an appropriation audit and is designed to ascertain whether any expenditure has not been in accordance with the intentions of Parliament in voting the grant; what are the reasons for discrepancies between Estimates and outturn of both income and expenditure; whether there has been any exceptional use by the Treasury of its power at the end of the year to authorise transfers between surpluses on one sub-head of a vote and deficiencies on another. This appropriation audit must also ascertain that any expenditure incurred conforms to the authority which governs it.

In addition, the Comptroller and Auditor General has been encouraged by successive Parliamentary Committees to extend his audit beyond what the professional auditor normally does and also beyond his own statutory duties by investigating and reporting on any apparently wasteful or uneconomical expenditure, on the working of the system for placing contracts and accepting tenders and on any losses due to extravagance or lack of reasonable foresight.5

The reports of the Auditor General are entrusted by the House of Commons to a small, select committee known as the Public Accounts Committee. This is the oldest committee of the House of Commons and consists of 15 members selected from the two major political parties. By custom the chairman of the Committee is always a senior member of the Opposition party, and almost always an ex-Treasury Minister. The Committee conducts hearings and examines witnesses. The accounting officers of each department (usually the head of the department) who appear before it are required to explain and defend the expenditures or actions that have been questioned by the Auditor General. The Auditor General and a representative of the Treasury are usually in attendance when heads of departments are questioned. The reports of the Committee, although addressed to the House, are really directed to the Treasury. The Treasury in consultation with the departments prepares the official view of the Government on the criticisms and recommendations in the Committee’s reports. These reports are published by the Treasury and are considered by the Committee in the following parliamentary session. The reports of both the Treasury and the Committee are then taken up by the House.

Through the years the Committee has become a powerful instrument for the exposure of waste, inefficiency, and financial maladministration; criticisms are feared, and its recommendations are usually accepted by the Treasury.

The Select Committee on Estimates

The consideration of the Estimates by the House of Commons in Committee of Supply is of a general character. The parliamentary time allotted for the business of supply is in fact placed at the disposal of the Opposition to be used for criticizing the broad policy and administration of the Government.6 The House of Commons is, however, assisted in the scrutiny of expenditure by a Select Committee on Estimates appointed at the beginning of each session.

The Estimates Committee is required, by its terms of reference, “to examine such of the estimates presented to this House as may seem fit to the committee and report how, if at all, the policy implied in those estimates may be carried out more economically and, if the committee think fit, to consider the principal variations between the estimates and those relating to the previous financial year and the form in which the estimates are presented to the House….”7 The Committee’s major contribution is made through its exploration of departmental administration and treasury control of expenditure. Although the policy implied in any estimate is outside the competence of the committee, it is acknowledged that “it is very difficult to criticise an Estimate without dealing, at least to some extent, with the policy implied therein.” 8 The Committee reports its findings to the House except when publication is not considered to be in the public interest (e.g., security matters). The government departments are expected to submit their own observations on the Committee’s criticism and on its proposals, which are also published. The reports of the Estimates Committee and the Public Accounts Committee are eligible for debate in the House of Commons during three of the allotted supply days.

The Estimates considered by the Committee are those that have already been presented to the House, and therefore modifications in their form or amounts are not likely to be possible, but criticism of the Committee usually leads to improvement in succeeding years, not only in the Estimates criticized but also in others where similar considerations might apply.

The influential position of the Estimates Committee appears to stem from its composition and the traditional methods of its work. The Committee is composed of 43 members chosen in such a way that the party proportions represent the balance in the House of Commons, and the chairman is usually a member of the majority party but not a member of the Government.9 A feature of this Committee is the nonparty approach that prevails in its work. It conducts its business through subcommittees, which may inquire into a single department, some subjects of expenditure cutting across organizational lines, or some particular method of financial provision (e.g., the system of grants-in-aid). The committees are free to call witnesses—official and nonofficial—and to request written explanations and oral evidence from government departments. The use of small subcommittees, often under the chairmanship of members of the Opposition, has given Parliament and the public valuable information on problems of government administration and management.

The cash basis of budget accounts

The control of government finances in the United Kingdom rests upon a system of cash accounting on both the revenue and the expenditure side. The budget estimates, the appropriation accounts, and the Central Government accounts are all statements of receipts and payments during the financial year. They relate, therefore, to cash transactions that have occurred during the financial year regardless of whether or not the goods and services involved were supplied during the same financial year, or whether or not they were immediately consumed. Accordingly, the budget estimates do not provide for liabilities that will be due for payment in a later year, nor do they distinguish between cash required to meet outstanding liabilities and cash required to meet liabilities incurred in the current year.

The appropriation accounts show only the sum that has actually been paid by departments during the year, including any checks issued but not cashed by the end of the financial year. The Central Government accounts show the actual amounts released to the departments from the Consolidated Fund and the National Loans Fund. Any unspent balances are surrendered by the departments at the end of the year (as explained on p. 378). The mechanism of adjustment between estimates, Consolidated Fund issues, and departmental expenditure is explained in Section V, Spending, Accounting, and Auditing, pages 374–81.

The form and basis of government accounts in the United Kingdom has been a subject of continuous debate during the last decade. Two criticisms are usually made against the cash basis of budgetary accounting there: (1) it does not disclose the true cost of goods and services consumed or produced in any given period of time, which might be revealed by an income-expenditure accounting system such as practiced by enterprises and (2) it does not permit a prior control of commitments by Parliament. As a result of extensive inquiries and the recommendations of such bodies as the Committee on Estimates,10 the Crick Committee on the “Form of Government Accounts,” 11 the Plowden Committee on “Control of Public Expenditure,” 12 and the Treasury’s report on “Reform of the Exchequer Accounts,” 13 it was decided not to make any change in the cash accounting system of the Government. There was, however, unanimous agreement that the system should be supplemented by commercial-type accounting for all trading enterprises of the Government, and by the extension of cost systems to departments wherever feasible and desirable. The control of commitment by Parliament was not deemed necessary but, in the words of Lord Plowden, it was recognized that “it would be desirable for the Government to develop means of informing Parliament and enabling it to consider and approve …expenditure for some years ahead at the time when the effective decisions are taken.”14

The financial year

Since 1855 the British financial year has been from April 1 to March 31. The actual date of presenting the budget to Parliament is governed by the year of assessment for the income tax and surtax. Since the Government cannot continue to collect this tax for more than one month after it is due to expire, and the income tax year of assessment ends on April 5, the budget must be introduced before May 4.

II. The Budget-Making Process

In recent years the process of policy formulation and related budgetary practices and procedures in the United Kingdom have been subjected to detailed examination, review, and adjustments. In 1958 the Parliamentary Select Committee on Estimates wrote a highly critical report on treasury control methods, and the process of policy making in general, and concluded that an independent committee should look into the mechanics of treasury control and operations throughout the public sector.15 On the basis of this recommendation a committee under the chairmanship of Lord Plowden was appointed. It was the report of the Plowden Committee16 that sparked a new direction in British financial administration and economic management.

The organization of economic planning: a full circle

The Plowden Report, published in July 1961, contained three major recommendations: (1) government expenditure should be planned and reviewed as a whole over a period of years in relation to prospective resources; (2) the Treasury should be reorganized to assume this responsibility, and government departments should be required to improve their management efficiency;17 and (3) the budget documents should be so structured as to improve the opportunities for constructive parliamentary control over government policies and operations and for the development of an informed public opinion.

Long-term planning of government expenditure had been undertaken in the past for the defense departments and for public investments. The novel element in Plowden’s recommendation was the regularization of such an exercise and its extension to total government operations within the framework of comprehensive estimates for the national economy as a whole. It was argued that only within such a frame of reference could the budget policy be decided upon and components of public expenditure, in relation to each other and to private consumption and investment, be evaluated.

The advocacy for long-term planning in the government sector soon spread—largely as a result of the mid-1961 sterling crisis—to include the nationalized industries and the private sector. Consequently, a framework of longer-term economic planning and consultation among government, industry, and trade unions began to evolve early in the 1960’s.18 One important stage in the evolution of planning machinery was the creation by the Labor Government in October 1964 of the Department of Economic Affairs (DEA), which was entrusted with the task of framing long-term economic plans for the economy as a whole and the general coordination of industrial and regional policies, including policies for incomes and prices. Planning agencies that existed before the DEA—such as the National Economic Development Council (NEDC) and the Economic Development Committees for individual industries (Little Neddies)—were maintained as advisory bodies to the new Department.

The Treasury, which had hitherto held the first place among the economic agencies of the Government and which was the coordinating department par excellence in the British system of economic management and financial administration, found its duties restricted to so-called short-term aspects of economic policy. In particular, the Treasury was to be responsible for policies to regulate aggregate demand and the balance of payments and for the planning and control of public expenditure.

The separation of economic matters between long-term and short-term aspects and the division of responsibilities on this basis between the DEA and the Treasury was, however, a continuous subject of controversy within the British Government and among academicians.19 In practice, however, the unrelenting urgency for the improvement of the balance of payments in the latter part of the 1960’s and the subsequent abandonment of the National Plan in July 1966 kept the Treasury in the forefront of economic policy.20 The long-term expenditure surveys prepared each year by the Treasury continued to provide the main perspective for the development of the national economy. Nevertheless, the DEA was able during this period to build up a computerized model for the British economy in which the consequences of alternative assumptions regarding important variables could be calculated, and in general contributed to the development and use of quantitative techniques of economic analysis within government departments. The very success of the DEA in this respect, and the tendency to move to intermediate-term forecasts of about three years as the most reasonable period to look ahead for the purposes of economic planning, foreshadowed the end of the DEA, and its functions began gradually to fall away. In 1968 price and income policies were transferred to the Department of Employment and Productivity, and the Ministry of Technology had by then assumed responsibility for a number of specific industries. In October 1969 the DEA was finally discontinued, and its remaining functions were devolved onto the other ministries. An expanded Ministry of Technology working closely with the Little Neddies assumed full responsibility for questions of industrial efficiency and growth in both the private and public sectors, including regional economic development. The Ministry of Housing and Local Government took over the organization of Regional Planning Councils and Regional Economic Planning Boards. And, finally, the medium-range and long-range economic projections reverted to the Treasury, which also assumed the responsibility for coordinating those aspects of NDEC that relate to the preparation, production, and follow-up of planning documents and for coordinating the consultations between the various departments and industry on these questions. The Prime Minister remained, however, the Chairman of NDEC, which is formally responsible for approving the National Plan. Thus the various attempts during the 1960’s to make the government structure more responsive to planning requirements ended in 1970 by restoring the Treasury to the center of economic management in the United Kingdom.

The Treasury was reorganized in 1963 along functional lines into two sides,21 one for economic and financial policy and the other for the administration of the Civil Service. Subsequently, however, further changes were made to take account of the new developments and of the transfer in November 1968 of the administration of the Civil Service to a new Civil Service Department under the direction of the Prime Minister.22 The present structure of the Treasury consists of three departmental groups or sections, each dealing with a specific aspect of its functions. There is the Treasury Economic Section, which carries out a wide range of activities and studies relating to the analysis and forecasting of short-term economic trends and the management of over-all demand. Presumably this Section has also assumed the responsibility for the preparation of long-term projections, previously made by the DEA. The Economic Services Section prepares the projections of gross domestic product, tax revenues, etc., within which the Public Sector Group responsible for the planning, budgeting, and control of public expenditure makes its evaluation of prospective expenditure in relation to tax receipts and the whole national economy. The third group, called the Finance Group, deals with management of the public debt, international financial negotiations, and foreign exchange policies.

Long-term planning of public expenditure

Following the recommendation of the Plowden Committee, the first long-term survey of public expenditure was made in 1961, and since then surveys have been made each year, covering five years ahead from the last completed financial year. Although the actual procedure of preparing public expenditure surveys in the United Kingdom may differ from year to year, the essential elements of these surveys consist of three interrelated steps: (1) a decision on the rate of growth of public expenditure over the plan period; (2) the allocation of aggregate public expenditure among the various government services over the same period; and (3) annual phasing and allocation of expenditure within the general limits set under (1) and (2). Each of these steps involves separate procedures and techniques of analysis.

To determine the rate of growth in public expenditure, the Treasury prepares an initial assessment of the growth in demand for resources that could, in its opinion, be expected over the next five years. As a result of this exercise, the Cabinet decides on the desirable rate of growth in public expenditure over the plan period and instructs departments to prepare detailed cost accounting of their programs for five years ahead. The programs are divided into “basic” programs, which are to be drawn up within limits laid down in advance and related to the development of current services, and “additional” programs, which represent the cost of further improvements that can be undertaken if more resources are made available.23 The program costs are prepared in constant prices to provide a consistent measure of the demands that programs will make on real resources over the survey period. The Treasury examines the figures to ensure that financial implications of existing policies have been fully taken into consideration and that realistic cost accounting has been made of “additional programs.” Individual programs of departments are further analyzed to see how they fit in with national priorities, and what they imply for the demand on resources and for the consequent impact on national income and expenditure accounts.

The decision on priorities is facilitated by classifying the cost figures submitted by the departments into functional blocks. Each main block—defense, education, health and welfare, housing, etc.—falls predominantly within the scope of one minister, and it is up to the minister concerned to consider how the resources in his block can best be distributed among specific programs. The extent, however, to which the whole block of expenditure is under the detailed control of the minister differs from case to case. But, even when the minister has no formal control, as is true for much of local authorities’ expenditure, the department’s policy and the procedures for determining the level of government grants to local authorities, or for approving loan sanctions for capital expenditure, bring the development and the direction of the various services within the sphere of influence of the Central Government. A second and perhaps more important purpose of the expenditure survey is to enable the total prospective demand of the public sector, the private sector, and the balance of payments to be measured against the prospective level of the nation’s total economic resources. For this purpose, departments are required to show their cost figures by economic categories, as in national income statistics.

Thus, the major steps involved in the preparation of long-term expenditure surveys in the United Kingdom may be summarized as follows: (1) a long-term projection of national income and within that a long-term projection of public expenditure and receipts; (2) the allocation of expenditure by broad functional categories within the limit set for aggregate public expenditure; (3) the distribution of functional expenditure among specific programs at the departmental level; (4) identification of types of expenditure by economic categories under each program; and (5) coordination of departmental programs at ministerial level.

Although these surveys have been prepared annually since 1961 and have formed the basis for the Government’s decisions regarding the annual budget and other public expenditure, they have not been published regularly or systematically;24 and Parliament has continued to consider Supply Estimates in isolation from the broader framework within which the Estimates were made. In April 1969, however, the Government published a Green Paper 25 in which it proposed henceforth to publish at the end of each calendar year the result of these annual surveys in a new and more comprehensive form, to be laid before Parliament as a basis for discussion and political debate of the wider issues of economic policy and the priorities of the Government.

The first White Paper in this new series appeared in December 1969.26 The paper was indeed the most comprehensive and advanced presentation of public expenditure surveys yet made in the United Kingdom. First, it showed, on a comparable basis, the whole spending of the public sector, comprised of the current and capital expenditure of the Central Government and local authorities, together with the capital expenditure of nationalized industries and other public corporations and debt interest. Another major innovation was to present, side by side with expenditure estimates, future receipts from existing taxes at existing rates—including National Insurance contributions and the estimated gross trading surplus of nationalized industries—on the same constant price basis as the figures for expenditure.

Perhaps the most important part of the new form of presentation is that the total of public expenditure and receipts is classified into economic categories that give a broad indication of their impact on currently available resources. Thus, total public expenditure is set out under three groups: direct use of Resources, Transfers, and Assets, as shown in Table 1. The transactions that represent a direct call on Resources include public sector outlays on currently produced goods and services, public sector grants to private nonprofit-making bodies, and capital grants to persons. The transactions involved in Transfers cover those public sector outlays that represent an indirect call on resources through associated receipts, tax deductions, and savings by companies or persons that must be allowed for to arrive at the possible use of resources. The transactions included in Assets are those that affect mainly the asset structure and liquidity position of companies and persons thereby causing a given amount of public expenditure to produce a different effect on the use of resources from transactions involving Resources and Transfers. The components of expenditure and receipts under each category are shown in Appendix I, Table 8.

Table 1.

United Kingdom: Public Expenditure and Receipts, 1968/69 to 1971/72

(In millions of pounds at 1969/70 outturn prices)

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Source: Public Expenditure, 1968–69 to 1973–74 (Cmnd. 4234). The forward figures for debt interest are based on the assumption that interest rates continue at their present levels.

Excluding debt interest paid abroad, which is included in Section A, “Resources.”

The survey also includes unbudgeted contingency reserves to cover any excess over current program estimates caused by factors outside the spending authority’s own control, and to provide an element of flexibility if the economy does not expand as assumed in the projection. Since such uncertainties increase over time, contingency reserves are estimated at an increasing rate, and they are all included under use of current resources, as their implication for demand would be greatest if they were to be used for purchases of resources. In the same way, the new presentation makes allowance for the fact that prices in the public sector rise faster than the over-all price level primarily because a large part of public sector transactions is made up of wages and salaries, which tend to rise faster than prices. The relative-price factor adjustment is also debited to use of current resources.27

Finally, the new presentation covers the year preceding publication (1968/69 in Table 1), the year of publication (1969/70), and four succeeding years (i.e., up to 1973/74). However, only the projection for the current financial year in which the survey is published and the following two years represent more or less definite decisions of the Government (i.e., 1969/70 to 1971/72). The third year (1972/73) is therefore the one on which the Government focuses attention in the process of re-examining, confirming, or modifying its earlier decisions and in rolling the plan forward a year further. One reason for this is that by the time Parliament each year receives and discusses the forecasts the current financial year will be largely over and the estimates for the following year will be in their final stages, while the preparation of estimates for the focus year will be only about one year ahead.28 In fact, the presentation differentiates between the forecasts up to 1971/72 and those for the following two years by presenting them separately. Moreover, the survey discusses in detail the scope and composition of individual programs only up to 1971/72.

The basic assumption on which the projections were made was that the economy would expand at about 3 per cent annually, taking one year with another. In the three years 1969/70 to 1971/72 total public expenditure (line 14 of Table 1) is estimated to rise at an average of 3 per cent a year. The rates of increase between one year and the next from 1968/69 to 1971/72 are 2.4 per cent, 3.5 per cent, and 3.2 per cent, respectively.

Net expenditure on resources (shown in line 3), the category having the most powerful effect on demand, is estimated to rise by 4 per cent annually.29 The figures on real resources indicate the latitude that the Government will have in reducing taxes without cutting real expenditure. Taking the balance of expenditure and receipts in the area of resources and transfers (line 10), the table shows that an inflationary impact of more than £.1,000 million in 1968/69 fell to £17 million in 1969/70 and will remain small in the immediate years ahead. Net expenditure on assets (line 11), which has the least impact on demand in the short run, is shown to rise at an annual rate of a little over 1 per cent. The over-all balance (line 15) shows a financial deficit of £278 million in 1968/69 turned to a surplus of £542 million in 1969/70. The prospect is that, at existing tax rates, total receipts and expenditure of the public sector will be more or less in balance during the following two years. The actual result will, of course, depend on the level of taxation decided upon from year to year, the actual expenditure incurred, and the changes in the level of prices.

The general framework of the prospects of public expenditure as shown in Table 1 is supplemented by detailed analysis of individual programs of spending. Table 2 gives a summary of these programs as classified in the White Paper. Each individual program is further discussed in a second part of the paper and is analyzed by spending authority and economic category in a third part.30

Table 2.

United Kingdom: Public Expenditure by Program, 1968/69 to 1971/72

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Source: Public Expenditure, 1968–69 to 1973–74 (Cmnd. 4234).

At outturn prices. Social security benefits are expressed in terms of existing levels of penefits, since it is not possible to forecast the exact date and amount for increases in future penefits. A net adjustment is, however, included in relative-price effect for social security so that the total of public expenditure will provide a measure of the estimated demand as resources.

The importance of the second part of the White Paper, which sets out in more detail than before the components of each program, is that it brings out the options open to the Government for adjusting its economic and social priorities to meet conditions that might alter the basis upon which the economic assessment was made. The detailed analysis of individual programs has the additional merit of providing the basis for firm planning and execution of programs. However, since not all the programs are susceptible to short-term changes or to direct control by the Central Government, the annual budget becomes the major instrument for the reassessment of national priorities in the short run. Thus, the establishment of short-run priorities and policies for demand management and the allocation of resources is usually made within the framework of the annual budgetary procedures.

Annual budgeting

The preceding section described in general terms the methods by which long-term expenditure policies are being undertaken in the United Kingdom. They start from the Government’s decision to contain total public expenditure within a certain limit over a five-year period and to set out the pattern of expenditure that is likely to develop in the succeeding two financial years. But since public expenditure is a large element in the national economy, it cannot be treated entirely on a long-term basis independent of a short-term economic situation. Otherwise, the burden of stabilization measures would have to fall exclusively on private consumption and investment. For this reason, the long-term expenditure estimates do not represent irrevocable commitments by the Government but are regarded as moving or “rolling” estimates that provide a certain margin of expansion or contraction in the interests of contracyclical policy.31

A major constraint on public expenditure is set by the total resources available to the economy—gross national product (GNP) less the amount that goes to the private sector, both consumption and investment, and less the remainder of foreign payments. If, for example, the rate of growth of GNP and the balance of payments are the main constraints, measures for expansion would probably tend to be directed to productive investment—both public and private—and to the encouragement of exports, while restrictions would aim at consumption and in particular at the sectors with a large import content. The incidence of measures of restrictions on expansion in the various sectors (public investment, public consumption, private investment, and private consumption) compatible with long-run objectives will depend on the relative disadvantages (or benefits) that are deemed likely to occur from changes in each sector. The decision in these matters is the so-called budget judgment of the Chancellor of the Exchequer. Three times a year, the Chancellor evaluates the short-term economic situation and decides, through the budgetary process, how much to spend in the public sector within the limits set by short-term constraints of resources and by the ability to raise taxes without damaging incentives.

The process through which the annual budget and other short-term policy measures are formulated is generally complex. It involves many conflicting interests and many sources of information and influence, and it is not always clearly divided into orderly stages of decision making. Also, the stages are sometimes changed and often overlap. Nevertheless, the material assembled and presented here demonstrates reasonably well the way in which budgetary policy takes form in the United Kingdom.

It may be said that the Chancellor of the Exchequer and the Treasury have three main tasks to perform prior to the presentation of the annual budget to the Cabinet and Parliament. First, the cost of carrying out government policy, as assessed by the executive departments, is examined. Second, an assessment is prepared of the forward prospects of the economy as a whole and is designed to indicate what general direction the budget—tax and expenditure policies—should take. Third, a choice is made among the various methods of raising the amount of revenue indicated by the general economic assessment of the economy. These activities are, of course, interdependent and cannot therefore be undertaken in any clear-cut sequence, but must flow back and forth on a regular cycle of operation.

Three times a year, in February, June, and October, the Treasury, in cooperation with the Central Statistical Office, the Bank of England, and the Board of Trade, prepares national income forecasts on the assumption that current fiscal and credit policies are unchanged.

The timing of the three main forecasts is geared to the annual Budget which is normally in the first half of April. In the autumn a preliminary appraisal of the outlook to the end of the following calendar year is prepared. In the new year forecasts are made spanning the whole of the coming financial year as part of the material required in the preparation of the Budget. In early summer a third set of forecasts is made, taking into account any changes made in the Budget and other developments and again extending the forecast period further ahead.32

The national income forecasts try to give a picture of how the economy will move ahead quarter by quarter and are supplemented by a forecast of world trade and of the U.K. balance of payments. The methods employed in short-term forecasting will depend upon the nature of the basic problem at the time. In periods of high demand, the most important task is to estimate the level that the national product will reach in the following year. This level, augmented by the value of expected imports, defines the resources that will be available to meet expected exports, investment, public expenditure, and personal consumption. Assumptions about price changes and about the level and distribution of money incomes are compared with estimates of the amounts that consumers are likely to spend at current rates of taxation, and a cross-check is provided by a comparison of the probable level of private and public investment with the personal and institutional savings likely to be obtained, including the probable volume of public savings on the basis of existing policies.

In periods when the demand for money is not excessive, the forecasts begin with demand. Estimates are made of the probable level of exports, investment, public expenditure, and personal consumption, and the sum of these demands is compared with the volume and pattern of domestic output, employment, and imports.

Apart from the national income and expenditure and production figures there are a large number of indicators available on a monthly basis which help in the task of diagnosing trends in the most recent period (i.e., the last four or five months). Perhaps the most important are the figures relating to demand for labour, especially those for over-time, registered job vacancies and unemployment; the figures for retail sales (which account for about half personal consumption), for registrations of new cars and for hire purchase transactions; for exports and imports; and for new housing starts and completions.33

The task of evaluating short-term economic trends, on which budgetary policies are based, rests with a small Budget Committee whose exact composition and methods of work are not publicized. It is known, however, that the Committee is under the chairmanship of the Permanent Secretary to the Treasury and includes the chairmen of the two revenue departments (Inland Revenue and Customs and Excise); the heads of the Treasury’s Public Sector Group, the National Economy Group, and the Finance Group; the Economic Advisor; a representative of the Bank of England; and also presumably a representative from the Board of Trade.34

The Budget Committee begins its work in July and continues in session until the end of March. On the basis of the national income forecasts of June, the Committee examines the effects of the previous and current budgets on the economy to see whether any changes in the current budget are required and what policy instruments should be used. The instruments to be used could include variations in public expenditure (i.e., supplementary estimates or a slowing down in the rate of expenditure), limited tax variations under the so-called Regulator Provision of 1961, and monetary measures.35

Also in July the spending departments send to the Treasury preliminary forecasts of their requirements in the following financial year, and revenue departments prepare revenue forecasts on the basis of existing rates for the same period. The information is used by the Treasury in drawing up the Exchequer Prospects Table, indicating revenue and expenditure of the government accounts for the coming financial year. However, the preparation of the budget estimates formally begins early in October each year by a circular letter asking that formal estimates for the financial year commencing on the following April 1 be submitted by the beginning of December in the detailed form prescribed by the Treasury. Prior to this, the October national income forecast would have given the Chancellor of the Exchequer and the departments an idea of the policies to be followed under current economic conditions and, thus, the framework within which the estimates must be prepared.

After the estimates are submitted in December, there is a period of about three months for their examination by the Treasury, and for settling the differences among departments, before the estimates are finalized and published in March.

The procedure in the examination of the estimates submitted by departments is designed to ensure that there is proper justification for the expenditure proposed, to establish the accuracy of the estimates, and to measure the proposals against availability of funds. In carrying out this task in such a short period of time, the Treasury is assisted by the fact that throughout the year it has had the duty of supervising expenditure by departments and of considering new expenditure that departments may wish to put to the Cabinet at any time during the year. Under the British practice, no policy issues involving expenditure can be submitted to the Cabinet without having been discussed with the Treasury first. Most of the new expenditure proposals would, therefore, have been decided during the year and have usually been embodied in legislation. This is particularly true of defense expenditure and expenditure in the social field.36 In such cases, the examination of the estimates is essentially a matter of questioning their accuracy.

When the Treasury divisions have finished their discussions with departments, a revised Exchequer Prospects Table is prepared, and the Budget Committee submits its first report to the Chancellor on the budget judgment. Thereafter, the Chancellor himself becomes increasingly involved in the process, and the Prime Minister is usually brought into the picture. Other ministers are consulted on particular points that affect their departments but are not shown the whole budget. During this period the Chancellor and the Treasury will receive representations from groups of special interests, such as the Trades Union Congress, the Confederation of British Industry, and the Chamber of Commerce. As a result of these processes and the previous surveys made by the Budget Committee, the Chancellor turns to the final task of budget making, namely, the task of deciding the nature and size of the budget. The final comprehensive analysis and review is made in February and March when the February national income forecast and revised estimates of revenue are supplied. He may have to decide whether any changes in taxation are necessary to meet the expenditure estimates that have already been published, and to consider their probable influence on the economy as a whole. His final judgment depends primarily on the probable effects of tax changes outside the immediate budgetary context, such as their effects on monetary policy and the structure of interest rates.

The Chancellor of the Exchequer does not reveal his budget proposals to the Cabinet until just before he announces them to Parliament.

The Estimates containing the Government’s proposals for expenditure are presented to the Cabinet and Parliament in February and March. The Estimates for civil departments are presented by the Financial Secretary to the Treasury, who is the Chancellor’s junior minister; those for defense are presented by the ministers of the service departments. These proposals are then considered by the House of Commons along the lines discussed in Section I and finally approved in the Appropriation Act. Since the Appropriation Act is usually not passed until July, Parliament passes “votes on account,” which authorize expenditure to be incurred in the period up to the passage of the Appropriation Act. Meanwhile, the revenue proposals have been presented separately to Parliament by the Chancellor of the Exchequer on Budget Day.37 They are considered separately and enacted in the Finance Act. The government proposals are put before Parliament as an issue of confidence and must be accepted or rejected accordingly.

III. The Budget Documents

The budget material presented annually to Parliament consists of three principal documents: the Estimates, the Memorandum, and the Financial Statement. As a background for these documents a series of White Papers is issued before or on Budget Day containing statistical material on the economic conditions of the country and other related matters.

The Estimates

The Estimates contain only the expenditure proposals for Supply Services (p. 328). They show the total expenditure requirements and the receipts incidental to the ordinary business of a department, such as fees, sales, and charges. The appropriation applied for is the net balance between departmental receipts and expenditure requirements. The receipts that departments are allowed to keep and use to defray part of their expenditure are known as appropriations in aid of votes. If the actual receipts exceed the amount estimated, the excess may not be spent and must be paid into the Consolidated Fund as “extra-receipts.” If, on the other hand, the receipts are less than estimated, the deficiency must be offset by a corresponding reduction in gross expenditure of the department.

The Estimates are presented in two main divisions: (1) the Defense Estimates divided into Defense (Central), Defense (Navy), Defense (Army), and Defense (Air); and (2) the Civil Estimates covering all civil departments and published under so-called classes of expenditure: Government and Finance; Commonwealth and Foreign; Home and Justice; Communications, Trade, and Industry; Agriculture; Local Government, Housing, and Social Services; Education and Science; Museums, Galleries, and the Arts; Public Building and Common Governmental Services; Other Government Departments; and Miscellaneous. A class of expenditure has no formal significance but is simply a convenient means of publishing together estimates that fall within a general sphere of government activity.

The form of the Estimates is determined by the Treasury, but it is the established procedure that no important changes can be made without consultation with the Public Accounts Committee and the Select Committee on Estimates. In recent years there have been substantial changes in the form of Estimates; the present form for each department or service has two parts. Part I specifies the service and the purpose for which the Estimate is presented and the net amount of the appropriation required. This Part is known as the ambit of the vote. It is incorporated in the Appropriation Act and thus forms the legal basis of supply. A department may have more than one estimate and therefore more than one vote, depending on the number of activities it performs. Part II sets out the subheads under which the vote is to be accounted for and includes such additional information as Parliament may require.

The Form of an Estimate

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Source: House of Commons, Civil Estimates, 1968–69, H.C. 126-VI (London, 1968).

The subheads of a vote have no statutory significance, and the Treasury may by virement approve the use of savings under one subhead to meet an excess in expenditure under another subhead within the same vote. For Defense Estimates, transfers may be made between votes within the same service and subsequently reported to Parliament for legislative sanction. There is, however, a firm understanding between Parliament and the Treasury that virement will not be used to augment grants, institute new services, or cover anything clearly outside the scope or ambit of the vote, without further authority from Parliament, normally through a Supplementary Estimate.

The subheads of a vote are related as closely as possible to the organization and the distribution of responsibility within a department or a service. The present practice is to show capital expenditure, expenditure on goods and services, and grants to outside bodies under separate subheads. The estimates related to buildings are, in addition, supported by appended schedules listing large projects and showing the amount of the original estimate for the project, the current estimate of the total cost of the project, the amount spent to date, and the amount requested for the budget year. The Estimates for each department also show the cost of allied services, such as stationery, accommodation, and heating, borne by other departments for services rendered to it. An additional note is also appended to each estimate showing how the total of a vote is divided among the categories used in the National Income Blue Book.

The Estimates for the budget year are compared with the amounts appropriated for the past year; they do not show actual or provisional figures for the prior year.

The Memorandum

After the Estimates are published, a separate booklet, Memorandum by the Financial Secretary to the Treasury and Tables, is issued. The Memorandum has existed as a major budgetary document for more than one hundred years. Its present purpose is to compress in broad meaningful categories the mass of details given in the Estimates and to provide some idea of the size and direction of the prospective expenditure.

The contents of the Memorandum include (1) a summary of Estimates by class of expenditure supported by (a) a general functional analysis of the Estimates highlighting major variations relative to the preceding year and providing brief explanations of significant differences and (b) a national accounts classification of supply expenditure; (2) a series of tables, which members of Parliament have requested from time to time, consolidating from different estimates the total provision made for different purposes, such as agricultural support services, research and development in various government activities, subscription to international organizations, assistance to private industry, and public service remuneration; and (3) a series of tables on expenditure by each vote and class for a ten-year period, showing expenditures that have been discontinued during the period and those that have been recently introduced.

The Financial Statement

On Budget Day, the Chancellor of the Exchequer opens his budget by delivering a speech on the general position of the economy and government finances in the past year and the year in prospect, and relates the expenditure programs given in the Estimates and those appropriated by special parliamentary acts (Consolidated Fund Standing Services and transactions of the National Loans Fund) to the expected revenue from existing taxes. He then discloses his proposals concerning changes in taxation required to support the proposed expenditure and to attain the broader objectives of the economy as a whole, as they have been defined in his budget speech.

The figures that the Chancellor of the Exchequer uses in his budget speech, or the figures that help to explain those which he so uses, are the subject matter of the Financial Statement made available immediately after the budget speech. The full title of the Financial Statement was changed in 1969/70, and its layout and content were greatly improved.38 The Financial Statement and Budget Report now has three parts.

Part I

Part I (called the Economic Background to the Budget) presents a review of the progress of the economy during the past year, based on the National Income and Balance of Payments studies made by the Treasury. It also describes the monetary developments in the preceding calendar year and gives an assessment, in general terms, of the domestic prospects (on a national accounting basis) and balance of payments for the year ahead. This section also usually provides recent developments in the United Kingdom’s short-term and medium-term foreign borrowing. Part I of the Financial Statement deals therefore with the general economic factors underlying the budgetary policy proposed for the forthcoming financial year.

Part II

This part (called Public Sector Transactions) deals with the transactions of the public sector (at current prices) as a whole on a national income accounting basis.39 The tables in this part show, in terms of the main national income categories, how the transactions of the various authorities comprising the public sector are combined to produce a consolidated account for the whole sector; the major transactions between the subsectors, which disappear on consolidation, are also displayed separately (see Table 3). They also highlight capital expenditure of each subsector and show how it is financed. (See Table 4.)

Table 3.

United Kingdom: National Income Accounts Classification of Public Sector Transactions—Analysis by Subsector, 1968/69 and 1969/701

(In millions of pounds)

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Source: U.K. Treasury, Financial Statement and Budget Report, 1969–70, April 15, 1969.

Payments are indicated by minus sign.

Excludes transactions on operating account, i.e., receipts from sales and subsidies, and payments for current goods and services.

Local rates.

Before allowing for depreciation and stock appreciation.

Table 4.

United Kingdom: Capital Transactions of the Public Sector, 1968/69 and 1969/70

(In millions of pounds)

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Source: U.K. Treasury, Financial Statement and Budget Report, 1969–70, April 15, 1969.

This is the current surplus in the current accounts of the Central Government and local authorities, and the undistributed income (including additions to interest and tax reserves) in the appropriation account of public corporations. Saving is measured before allowing for depreciation and stock appreciation.

Includes borrowing of £215 million to finance redemption of nationalized industries’ stock.

Includes unidentified transactions.

The definition of the public sector corresponds to that used in preparing the long-term expenditure surveys discussed in Section II, and the figures are also consistent with the relevant components given by calendar year at constant prices in Part I of the Financial Statement. Although the long-term public expenditure plans are given in real prices and the annual estimates in current prices, Part II of the Financial Statement does provide the link between the long-term plans and the annual estimates for the whole of the public sector on the basis of the actual budget proposals for the financial year. It reveals, therefore, whether or not the estimates for total public expenditure, after budget changes, are within the target figure of the long-term plan.

Part III

This part deals with the Central Government transactions only, first on the conventional cash basis of the budget accounts, and second on a national income basis.

The balance on cash revenue and expenditure account (i.e., the Consolidated Fund Account) and the net position of the National Loans Fund determine the cash requirements to be financed by borrowing from extrabudgetary funds (National Insurance Fund and departmental cash balances held with the Paymaster General), other domestic resources, and abroad. This part may therefore be described as the budget proper, i.e., a balanced statement of cash receipts and expenditure of the Central Government. A summary statement of the Consolidated Fund is usually given in the following form (see Table 5).

Table 5.

United Kingdom: Summary of Consolidated Fund Receipts and Issues, 1968/69 and 1969/70

(In millions of pounds)

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Source: U.K. Treasury, Financial Statement and Budget Report, 1969–70, April 15, 1969.

The summary shows how expenditure is offset against revenue to yield a surplus (or deficit). The surplus by law has to be devoted to the redemption of debt, but in practice it has come to be regarded as an offset to the increase in the net lending program of the National Loans Fund. Any remaining deficit (or surplus) represents the over-all budget deficit (or surplus), i.e., the net borrowing requirements (see Table 6).

Table 6.

United Kingdom: National Loans Fund—Summary of Receipts and Payments, 1968/69 and 1969/70

(In millions of pounds)

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Source: U.K. Treasury, Financial Statement and Budget Report, 1969–70, April 15, 1969.

Minus sign indicates a net repayment of debt.

The general shape of the budget is clearly demonstrated by these two key tables of the Financial Statement. For 1969/70, Consolidated Fund revenue from taxation and other receipts is estimated at £ 14,551 million before taking into consideration the budget changes. Total expenditure from the Consolidated Fund is estimated at £12,364 million, an increase of £749 million over the expected outturn or actual result of the previous budget. On the basis of the then-existing taxation, the surplus on revenue/expenditure account to be transferred to the National Loans Fund would thus have been £2,187 million. Disbursements from the National Loans Fund to nationalized industries, other public corporations, local authorities, and the private sector is estimated at £1,631 million. Therefore, there is an over-all cash surplus estimated at £556 million (shown in Table 6 as £215 million borrowing to finance issues for the redemption of nationalized industries’ stocks and £771 million net repayment of debt).

The total tax increases and adjustments were, however, expected to yield £457 million. The net result (after adjustments in expenditure on Supply Services) was to increase the estimated surplus to be transferred to the National Loans Fund from £2,187 million to £2,457 million and thus to increase the over-all budget surplus to £826 million (shown in Table 6 as £215 million borrowing and £1,041 million a net repayment of debt).

Tables 5 and 6 are supplemented by explanatory tables giving the details of changes in individual taxes, expenditure categories, and loans from the National Loans Fund. This information is then recast in national income terms and a reconciliation between the two sets of figures is provided.

Finally, an Annex to the Financial Statement summarizes the tax changes proposed in the budget speech and gives their estimated effect on the revenue.

Other documents

The Chancellor of the Exchequer when opening his budget makes known his proposals to the House of Commons, which is not wholly unprepared for them. Three White Papers are published in the weeks preceding the budget: Preliminary Estimates of National Income and Balance of Payments Accounts, Loans from the National Loans Fund, and the Civil Vote on Account. The first publication reveals the economic background against which the Chancellor’s proposals will be made, and the last two provide some indication of the Government’s total spending proposals. These publications, and other reports prepared at the time of the budget, such as the annual public expenditure surveys and the annual Defense White Paper, reflect the issues confronting the Government in shaping its budget and disclose, to some extent, the intentions of the Government in dealing with these issues prior to the formal presentation of the budget.

IV. Cash Management and Methods of Financing

The Financial Statement, as described in the previous section, closes with the cash surplus or deficit that will arise by the end of the financial year as a result of the budget transactions on the Consolidated Fund Account and of the net lending operations of the National Loans Fund. It does not show how such a deficit will be financed or a surplus disposed of. The reason for this omission is that the precise methods of financing a deficit or disposing of a surplus depend on a complicated set of factors connected with the day-to-day financing of the Government and the management of the national debt as a whole.

The flow of budgetary receipts and payments is, of course, uneven from day to day and from one time of the year to another. In the United Kingdom, although the revenue-expenditure account almost always shows a surplus over the year as a whole, there is normally a deficit in the first three quarters of the fiscal year followed by a large surplus in the fourth quarter, when tax revenue is at its highest. Apart from these well-known seasonal movements, on any one day the Treasury may be short of cash to meet its expenditure on that day. If so, the Treasury must borrow to fill the gap between budgetary receipts and payments. Also, to the extent that the net amount disbursed by the National Loans Fund in any one day is not covered by a surplus in the revenue account, the Treasury’s borrowing requirements will be correspondingly increased. Moreover, the Treasury may borrow to repay a maturing debt insofar as such a debt is not converted or renewed and repayment cannot be financed from a revenue surplus. Conversely, the Treasury may have more cash in one day than it needs, and the problem is to dispose of the surplus that day by a repayment of a corresponding amount of debt. The governing principle in these daily operations is to meet the cash requirements of the Government in the most economical way possible and with the least disturbance to the money market.

The sources from which the Treasury may borrow and to which it may repay debt are many and varied. They include extrabudgetary funds that are statutorily independent of the Treasury but are administered by the Central Government, external transactions, fiduciary note issues, nonmarket borrowing from the public, and market borrowing.

Extrabudgetary funds

In the interest of economy, the Treasury utilizes all available cash resources within the Central Government before borrowing from other sources. Accordingly, the daily cash balances on extrabudgetary accounts are kept down as far as possible to nominal amounts. Any surplus, not available for final transfer to the Treasury and not immediately required by a fund for its own use, is borrowed temporarily by the Treasury either in the form of special “tap” treasury bills or in interest-free ways and means advances. The former are bills sold outside the weekly tender of treasury bills to government funds and accounts, and the latter are the shortest possible form of debt, since it is outstanding from day to day and is repayable on demand whenever a fund needs to withdraw part of its lending to meet its own liabilities. In this way, the Treasury has the use of extrabudgetary funds and to that extent can either borrow so much less at interest from the market or repay so much more interest-bearing debt to the market. But in any particular period one or more of these funds may need the money that they have previously lent to the Treasury, and then cash requirements will be increased.

The principal extrabudgetary funds are the Paymaster General, the Post Office, the National Debt Commissioners, and the National Insurance Fund.

The Paymaster General

In the United Kingdom, government departments do not hold cash balances to draw on, nor do they build up temporary surpluses, seasonal or otherwise, on a bank account for use when required. Departmental deposits with the commercial banks are relatively small and stable, representing working balances of those departments that need to maintain accounts throughout the country for local disbursements and receipts. The Paymaster is the banker for all government departments except the Inland Revenue, Customs and Excise, and the Post Office. Supply grants from which the expenditure of departments will be met are transferred day by day from the Central Government Account to the Account of the Paymaster General at the Bank of England. These issues are usually made to meet immediate requirements of the departments, but some portion may be lying idle temporarily. The revenue departments maintain daily balances in this central account at the Bank of England to meet their expenses, and they transfer the remainder to the Consolidated Fund.40 Departmental payments to the public are made by means of payable orders drawn on the Paymaster General’s Account. These orders are similar to checks, and the recipients of them obtain payments from commercial banks whose accounts at the Bank of England are in turn reimbursed by the Paymaster General. The Paymaster General also holds various deposit accounts on behalf of departments that represent the current credit deposit on a number of extrabudgetary funds. Whatever balances are available on all these accounts are lent to the Treasury on a day-to-day basis in interest-free ways and means advances. Thus, funds drawn from the Consolidated Fund by government departments and not yet spent are automatically lent back to the Treasury until actually required.

The Post Office 41

All the post office income is paid into a self-contained fund under the Postmaster General, and all its expenditures are met from this fund. The Post Office also receives money on behalf of the Treasury (e.g., national savings securities) and other departments. It settles its accounts weekly with the Treasury and departments, and, in between settlements, it lends such receipts and its cash balances to the Treasury on a day- to-day basis in interest-free ways and means advances.

National Debt Commissioners

The Commissioners are responsible for the investment and management of a number of public funds, e.g., the Post Office Savings Bank Fund and the National Insurance Fund. A proportion of the assets of these funds is required to be kept permanently liquid, and to that extent it is invested in treasury bills and kept in that form. In addition, funds that are awaiting investment in longer-dated securities are usually lent to the Treasury on a day-to-day basis in interest-bearing ways and means advances.

The National Insurance Fund

Any surplus on current income over current expenditure of the Insurance Fund is lent temporarily to the Treasury by the Paymaster General, who holds the Insurance Fund’s current cash assets in interest- free ways and means advances. As and when it is decided to invest the surplus, it is transferred to the National Debt Commissioners and lent to the Treasury in the way described in the preceding paragraph.

By combining the surplus or deficit on the Consolidated Fund Account and the net lending of the National Loans Fund with net receipts from extrabudgetary funds, the consolidated total represents the cash position of the Central Government as a whole. The total also reflects payments at the time when they are made by the spending agencies rather than when the funds are issued from the central accounts. As this total changes, sometimes largely from day to day, the effects on the commercial banks’ liquid reserves and, consequently, the net availability of money market funds may be out of line with the general aims of credit policy and short-term interest rates. An excess of the Central Government income over expenditure is broadly reflected as a shortage in the money market as a whole, and, conversely, an excess of expenditure over receipts results in a surplus. As part of the process of reducing the impact of the daily net flow of government payments and receipts on the money market, the Treasury aims at maintaining the daily balance on the National Loans Fund Account with the Bank of England at about £2 million. The adjustments necessary to bring this about are made toward the end of each working day as soon as the effect of the main transactions can be assessed, including the open market operations that the Bank of England, in the execution of monetary policy, may have pursued that day. If these transactions will leave the National Loans Fund with a surplus larger than £2 million, the surplus is used to redeem debt held outside the Central Government; and if the outcome is a deficit, it is made up by an increase of such debt or by ways and means advances from the Bank of England.42 In this way, the total of daily receipts is made approximately equal to the total of daily payments.

External transactions

The net amount of cash that the Treasury needs to raise from day to day and over the whole year is altered not only by the net cash position of extrabudgetary funds but also by the operations of the Exchange Equalization Account and other external transactions of the Treasury.

Exchange Equalization Account (EEA)

The United Kingdom’s official gold and foreign exchange reserves are held by the EEA, a government account operated by the Bank of England. In addition to gold and foreign currencies, the EEA holds sterling that is lent to the Treasury against treasury bills, or through the Paymaster General in ways and means advances. To pay for its purchases of foreign exchange day by day, the EEA withdraws sterling from the Treasury, thus increasing the Treasury’s need to borrow from other sources. When the EEA sells foreign exchange for sterling, the proceeds are lent to the Treasury, thus reducing the need to borrow elsewhere. In this way, an increase in reserves adds to the cash needs of the Treasury, and a decrease of reserves reduces such a need.

The functioning of the EEA mechanism is intended to insulate the impact of inflow or outflow of foreign funds on the domestic credit system. Thus, when the country’s gold and foreign exchange reserves are increasing, the EEA calls in some of its lending to the Treasury to meet its purchases of foreign reserves, and the Treasury, in order to repay the EEA, must borrow elsewhere. The EEA pays the sterling received from the Treasury into the banking system for the credit of those who are selling the foreign exchange.43

Other external transactions

External transactions of the Treasury include not only changes in the holdings of gold and foreign exchange by the EEA but also any changes in overseas holdings of government stocks, treasury bills, and other forms of debt. The debt item represents (1) foreign currency deposits of overseas central banks with the Bank of England; (2) government borrowing from and repayment to overseas governments and institutions; and (3) the United Kingdom’s net position with the International Monetary Fund (IMF).

These types of transaction do not affect the day-to-day cash requirements of the Treasury in the same way as do the transactions of the EEA. For example, the support for the reserves received in the last two or three years from the IMF and other central banks had, in itself, no effect on the amount of sterling finance available to the Central Government. The foreign exchange advanced by the IMF to the Treasury is sold by the Treasury to the EEA, but to pay for this the EEA must call in an equivalent amount of its lending to the Treasury and then pay it back as the purchase price for the foreign exchange reserves. The Central Government has to pay to the IMF the same amount in sterling, which is then lent back to the Treasury in return for noninterest-bearing notes. The net effect of these transactions is that the Central Government ends with the same amount of cash, with only a change from one form of government debt to another. The Central Government debt to the EEA is reduced by an amount equivalent to its notes to the IMF. In other words, the total of external transactions of the Treasury will not be affected by transactions that result both in a change in the EEA holdings of foreign reserves and in an equal change in overseas holdings of government debt. For similar reasons, the total of government external transactions and the immediate cash position of the Treasury are not affected by all other forms of government borrowing from abroad. Only as and when the increased foreign exchange reserves are sold to the private sector is the Treasury able to borrow more sterling from the EEA than it otherwise can do. If, however, any of the additional reserves are needed by the Government to meet its own expenditure abroad, the Treasury itself buys the foreign exchange from the EEA, and after borrowing the sterling back again from the EEA in the normal procedure, its sterling cash position remains the same.

The external transactions of the Treasury, described above, correspond to the balance of payments position of the country insofar as this position is reflected in changes in official reserves or in overseas holdings of government debt. In other words, to the extent that a surplus or a deficit in the balance of payments gives rise to changes in the net external liabilities of commercial banks, local authorities, and the private sector, the balance of payments situation is not reflected by the total of external transactions of the Treasury. Nevertheless, it is clear that the cash that the Treasury needs to borrow over the whole year not only depends on decisions of a budgetary nature but also relates to the country’s balance of payments position.

Fiduciary note issue

The Issue Department of the Bank of England is entrusted with the responsibility of the banknote issue and the management of the public debt. Since the transfer of the gold reserves to the EEA in 1939, the whole of the banknote issue has become fiduciary backed by government securities and treasury bills. Any change in the amount of banknotes issued is therefore directly matched by a similar change in the amount of government debt held by the Issue Department. The Issue Department plays, however, a passive role in the supply of banknotes. It is less concerned with the total note circulation than with the supply of money as a whole—broadly defined as bank deposits, notes, and coins. Apart from changes in the fiduciary issue as a result of the long-term trends, the total of notes in circulation at any given time and from day to day reflects, therefore, public demand for this particular form of money. The Issue Department responds by issuing more notes to the extent that there is demand for them and by redeeming them when the public wishes to cash them in.

The additional notes required by the public are sold in the first place by the Issue Department to the Banking Department of the Bank of England and added to the latter’s reserves for sale to the commercial banks. The Banking Department pays for the notes by a transfer of treasury bills of equivalent value to the Issue Department, which adds them to the assets already held against the whole issue. When the Banking Department’s reserves of notes become unnecessarily large, the reverse of this transaction takes place. Thus, all that happens when the fiduciary issue is altered is a change in the form of borrowing by the Treasury through the Issue Department, and a switch in the assets of the Banking Department of the Bank of England from treasury bills to banknotes, or vice versa. However, since the profits of the Issue Department (i.e., interest paid by the Treasury on government securities held by the Issue Department and cash payments to the Department on conversions of government securities less expenses of the note issue) are transferred to the National Loans Fund, the net effect of an increase in the fiduciary note issue is that the Treasury borrows the amount of increase in the note issue from the public, free of interest. Conversely, a reduction in the note issue means a corresponding repayment of debt by the Treasury.

The Issue Department is also a potential lender to the Treasury at other times. If, as part of its open market operations, it sells existing securities and does not at once reinvest the proceeds by buying other existing securities, it will have free cash to lend to the Treasury in the form of new treasury bills. On the other hand, if the Department buys on balance more securities than it sells, it must find the necessary cash by calling in some of its loans to the Treasury. Also, to the extent that the Issue Department is able to sell long-term or medium-term securities and at the same time buy shorter-term securities, it postpones the time when the Treasury will have to pay out cash to the public.

Nonmarket borrowing from the public

The Treasury borrows direct from the public by the issue of two kinds of nonmarketable securities—national savings securities and tax reserve certificates.

National savings securities

There are at present four national savings securities on sale: National Savings Certificates, National Development Bonds, Premium Savings Bonds, and British Savings Bonds.44 National Savings Certificates, issued in units of £1, bear tax-free interest and may be cashed at par on demand. There is a limit on individual holdings of 750 units of the current issue. National Development Bonds, sold in units of £.5 with a maximum holding of £2,500, are repayable at par on one month’s notice. Premium Savings Bonds are in units of £1, and individual holdings are limited to £1,250. After a qualifying period of three months, the bonds give investors a chance to win tax-free prizes instead of receiving interest. There is a monthly drawing with prizes ranging from £25 to £5,000, and one prize of £25,000 quarterly. In addition to these securities, the deposits of the Post Office Savings Banks and the Ordinary Departments of the Trustee Savings Banks are invested in government securities. Both banks pay the same rate of interest on deposits, and there is a tax concession on the first £15 received as interest. Withdrawals can usually be made on demand, although notice is required for large sums.

Tax reserve certificates

Another source of nonmarket borrowing from the public is the tax reserve certificates. These certificates are instruments by which individuals, partnerships, and companies can anticipate their eventual tax payments to the Inland Revenue Department and thus bridge the gap between the earning of income and the payment of tax on it. The certificates are issued in multiples of £5 and bear tax-free interest (at rates determined from time to time by the Treasury) until the tax is deemed to be due or for a maximum of two or three years, according to the type of holder. When the certificates are surrendered to the Inland Revenue, both principal and interest are credited against tax liability. In government accounting terms, when a certificate is issued the purchase money is paid into the National Loans Fund, and on surrender the face value of the certificate and the interest are paid from the National Loans Fund to the Inland Revenue Department, which then includes the proceeds in tax transfers to the Consolidated Fund. Thus, tax reserve certificates are considered loan financing rather than advance payment of tax.45

Market borrowing

It is clear that most of the above sources of finance are outside the control of the Treasury as regards both the amounts and the timing of drawings and repayments. Receipts from extrabudgetary funds are substantial and vary widely from day to day and from year to year. The borrowing by the Treasury of the sterling holdings of the EEA is even more uncertain, depending upon the movements of the gold and dollar reserves, and, finally, Central Government receipts from and repayments of National Savings Certificates and other securities redeemable on demand depend on the day-to-day decisions of individual holders. Thus, the Treasury depends ultimately on the sale of negotiable longer-dated stocks (gilt-edged) and treasury bills to finance its net cash requirements from day to day and over the whole year. The choice between stocks and bills will be influenced by general economic policies, including national debt and monetary policy, which are outside the scope of this paper. Generally speaking, however, if the policies pursued are restrictive, the authorities will presumably try to raise as little as possible of their cash requirements by treasury bills, but if they are expansionary, they may lean more heavily on this source of finance.

Gilt-edged securities

New government stock is issued from time to time either by a conversion of a maturing issue or for cash. Except where the terms include cash payments, no money passes on a conversion issue, and it has therefore no immediate effect on the Central Government’s cash position. The liability for subsequent interest and repayments will, of course, be altered.

Stock issues for cash are usually made for amounts larger than can reasonably be taken by up the public in one day; they are therefore taken up first by the Issue Department of the Bank of England and later on sold to the market. Similarly, in order to avoid large disturbances in the market on the day when stock is redeemed, maturing issues are mostly bought from the market by the Issue Department during the preceding months or weeks. Apart from selling newly issued stock and buying maturing stock, the monetary authorities act as residual jobbers or middlemen in the gilt-edged market by selling or buying other issues largely in response to market demand. Thus, the net amount of stock acquired or disposed of by the public depends not only on the amount of new issues and redemptions but also on the amount of net sales from and purchases by official accounts and agencies. The gilt-edged market operations are not therefore a daily occurrence directly related to the Treasury’s need for immediate financing, but once they are effected, they have their impact on its day-to-day cash position.

Treasury bills

Treasury bills constitute the residual element in the financing requirements of the Treasury. Each Friday the Treasury offers a given amount of treasury bills for sale by tender46 to be taken up day by day in the following week. The bills normally have a life of 91 days, but in 1955–62 to counteract the changes in the Treasury’s cash position from deficit to surplus in the last quarter of the financial year, 63-day bills were issued in November and December so as to increase the maturities falling due in January and February.

The bills carry no stated rate of interest, but would-be purchasers bid for a quantity at a discount, that is, a price below the redemption price. Tenders may be submitted only by a London bank on behalf of clients, discount houses, and overseas banks with branches in London. In addition, the Bank of England may enter the tender on behalf of its clients, such as overseas central banks. Although the commercial banks are the main holders of treasury bills, they do not tender on their own behalf but obtain their bills by subsequent purchases from the discount houses and other sources. Because of the understanding that exists between the London Discount Market Association and the Bank of England, the Treasury is assured that the discount houses will always bid, at an agreed price among themselves, for the full amount of bills offered.47 The price at which the discount houses bid is therefore regularly the lowest accepted price. Tenders at prices higher than this receive allotments in full, but they are rarely sufficient to cover the whole issue, and the discount houses generally receive a considerable part of the total issue.

After exploring all the preceding sources of finance, the amount of bills offered each week is calculated to cover the net cash requirements of the Treasury, including the amount of maturing bills in the forthcoming week, with some additional margin. The additional margin is meant to produce a shortage in the money market that the authorities may then relieve in whatever way is best suited to the policies pursued on short-term interest rates. If the monetary authorities do not wish to influence short-term rates in one direction or another, they may relieve the shortage by buying treasury bills directly from the discount houses, or indirectly from the commercial banks, which in turn will use the cash to buy treasury bills from the discount houses or relend at call to them. If the monetary authorities choose not to relieve the shortage in these ways, however, the discount houses will be forced to borrow from the Bank of England at the bank rate or at a higher rate in order to raise the cash they need for their operations. This will have direct effects on the short-term interest rate, particularly the rate at which the discount houses will bid for treasury bills in the following week’s tender. Short of a change in the bank rate itself, this is the main way by which the Bank of England and the Treasury exert influence on short-term interest rates.

If a surplus in the money market is expected on a certain day, e.g., as a result of excess government expenditure over income, it helps both to balance the Central Government accounts and to place the monetary authorities in a strong position for their market operations on that day if some of the maturing bills on that day are bought back in advance. These operations take place every day with the Issue Department buying or selling treasury bills as may be necessary to meet the Treasury’s need for cash and to achieve the desired degree of stringency or ease in the money market.48 The Issue Department always has cash to make such purchases because the Department’s assets are so disposed as to ensure that a number of treasury bills and other loans to the Treasury mature each day. Should the proceeds not be required for purchases of bills from the market, they are re-lent to the Treasury at the end of each day. Since, therefore, bills issued initially to the public at the tender may subsequently be bought for official portfolios, and since those issued by “tap” to official holders may be resold to the market, it is not the amount issued each day but rather the changes both in the total amount held outside official hands and in the types of holder that are the more significant financing factors.

The lender of last resort

If on any day the Treasury appears to be short of cash after allowing for all the transactions discussed previously, the Issue Department, acting for the Treasury, sells treasury bills to the Banking Department of the Bank of England. Conversely, if the Treasury ends the day with a surplus, the Issue Department buys treasury bills from the Banking Department. In this way, the Issue Department disposes of the net surplus or covers a net deficit of the Central Government group as a whole. To the extent that surpluses or deficits cannot be foreseen by the end of the day, the Treasury will end either with a surplus to be employed for redemption of debt the next day or with a debt to the Banking Department in the form of ways and means advances, which are taken up in multiples of £250,000, to restore the Central Government balance to £2 million by the end of the day.

An illustrative example

The main features of Central Government financing are summarized in Table 7. The table is in two parts: the first shows the major factors that determine the Treasury’s net cash requirements, and the second analyzes how these requirements are financed.

Table 7.

United Kingdom: Central Government Borrowing Requirements and Their Financing, 1966/67 to 1968/69

(In millions of pounds)

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Source: Bank of England, Quarterly Bulletin.

It is evident that the net amount of cash that the Treasury needs to raise bears little relation to the over-all budget deficit, as shown in the Financial Statement. In examining the cash needs, one must take into account the net receipts of extrabudgetary funds in order to arrive at the cash deficit or surplus of the Central Government as a whole. Also, since an inflow or outflow of foreign funds and changes in the fiduciary note issue automatically affect the Central Government’s cash position, these can be considered as determining factors of that position.

V. Spending, Accounting, and Auditing

Disbursements of funds

In the British budgetary system, the authorization of the budget by Parliament does not give the Treasury automatic authority to release public funds to the spending departments. Technically speaking, public funds are held by the Bank of England to the order of Parliament, and accordingly only Parliament can authorize issues out of the Consolidated Fund or the National Loans Fund. The first step, therefore, after the approval of the budget is for the Treasury to request from the Comptroller and Auditor General a credit upon one or the other of these two funds. For the Supply Services, which form the major issues from the Consolidated Fund (see p. 328), the overriding limit to such credits is the total amount authorized by the relevant Consolidated Fund Act or Appropriation Act. At this stage the Comptroller and Auditor General is not concerned with the separate amounts issued to the departments, as long as they fall within the individual sums voted by Parliament for the year. Credits for the Consolidated Fund Standing Services and for issues from the National Loans Fund, on the other hand, must always be related to the specific parliamentary authority for the payment. If the Comptroller and Auditor General is satisfied that the request for funds is in order, he informs the Bank of England that the credit is granted.

For example, money from the credit granted for the Supply Funds is issued by the Treasury to the Paymaster General rather than direct to the department.49 As and when departments need money, the Paymaster General secures the necessary funds by making requisition to the Treasury, which in turn orders the Bank of England to transfer the money called for from the credits granted by the Comptroller and Auditor General to the account of the Paymaster General.

The Paymaster General makes such payments to the departments as their accounting officers request from time to time. He keeps a separate account for each vote, to which he credits the sums issued to the accounting officers of departments and debits the amounts of the various orders or checks drawn by him. Eventually, the Paymaster General forwards to the several accounting officers the vouchers in support of his transactions on their account; and at the end of each month, he furnishes to each a statement of account showing payments made during the month and the balance remaining in his hands. The departmental accounting officers, after examination of this account, forward to the Paymaster General certificates of correctness of the total amounts of payments and receipts included therein. These certificates are furnished by the Paymaster General to the Auditor General as vouchers to his banking account. It should be noted that the responsibility of the Paymaster General is limited to that of satisfying himself that the orders for payment by the departmental accounting officers are in due form and are supported by the appropriate documents; he has nothing to do with the examination and settlement of claims by departments.

The Paymaster General, as explained in the section on cash management, receives money from sources other than the Treasury. He receives the monies that are realized by the departments in the normal course of their administration, i.e., receipts used as appropriations-in- aid. These accounts are all kept distinguishable from each other in the Paymaster General’s books, but he does not keep at all times a cash balance on each account. In order to simplify the arrangements for putting the Paymaster General in funds to meet departmental expenditures, the Treasury’s practice is to make daily issues from the Consolidated Fund on the larger votes only. These issues are used for the time being as a general balance in the Paymaster General’s books from which he may defray any of the departmental orders for Supply Services presented to him. Toward the end of each month the position on each vote account is corrected by means of an issue from the Consolidated Fund sufficient (together with any issues made earlier in the month) to cover the month’s expenditures on that account. At the end of the fiscal year (on March 31), all necessary adjustments between the Consolidated Fund and the various other accounts are made to ensure that the issues from the Consolidated Fund will correspond as closely as possible to the finally audited expenditure as declared some nine or ten months later by the Comptroller and Auditor General.

Departmental accounting and financial control

Perhaps the most distinctive feature of the British system of financial control is the departmental accounting officer. Once a department receives the money made available by Parliament, the responsibility for spending it in the most efficient manner consistent with budget policies and for accounting for it rests with the accounting officer of the department. The accounting officer is appointed by the Treasury, and he is almost always the Permanent Secretary of the department. Thus, financial and administrative responsibility are concentrated under one man.

In his capacity as an accounting officer, the Permanent Secretary is charged with the supervision and control of all financial operations of his department, as well as with the accuracy of the accounts that he is required to sign. Whenever an accounting officer is appointed, a letter is sent to him stating in detail his specific responsibilities. These may be summarized as follows:

(1) To ensure that public funds entrusted to him are properly safeguarded. In this connection, the letter points out “that, whatever the internal organization of a department for safeguarding public funds, it should invariably include, without regard to personal considerations, independent and effective checks of cash balances in the hands of any officer.” 50

(2) To ensure that these funds are applied only to purposes intended by Parliament. The accounting officer is personally responsible for seeing that the law and regulations are strictly adhered to, and that expenditure is made to the best possible advantage. He is, therefore, expected to appear in person before the Public Accounts Committee to answer any queries that the Auditor General may have raised. For any irregular or unauthorized expenditure, the Public Accounts Committee can recommend, if it so wishes, that the accounting officer be required to meet part or the whole of the unjustified expenditure. The possibility is recognized, however, that the accounting officer may object to an expenditure as being irregular or improper and be overruled by his Minister. In such circumstances, he is required to set out his objection in writing and to make payments only on a written order from the Minister. Nevertheless, the whole idea of the personal responsibility of the accounting officer is not in practice interpreted literally. What the accounting officer is, in fact, expected to do in discharging these responsibilities is to ensure that arrangements have been made for proper control of expenditure.

(3) To ensure that the Treasury is consulted both in technical matters affecting the accounts and in matters relating to the propriety of transactions and the wider aspects of financial administration.

(4) To ensure that, within his department, financial considerations are taken into account at all stages, both in reaching policy decisions and in executing these decisions. The letter of appointment states: “It is for this reason that it is the general rule that the Permanent Head of the Department is the Accounting Officer: the Accounting Officer must be prepared to answer for the efficient and economical conduct of the Department as a whole, and the only Officer who is in a position to do that is its Permanent Head.” 51

(5) To ensure that the organization and the staffing of the department permit proper delegation of duties and sound financial management. For the financial responsibility, the accounting officer is usually assisted by a finance branch to which he must largely look for these duties to be discharged on his behalf.

The principal officer who heads the finance branch has a special position in the administration of the department. His appointment, like that of the accounting officer, requires the approval of the Prime Minister; and he has the right to put forward his views directly to his Minister, if he feels it necessary.

The work of the finance branch falls into two main categories: accounts and finance.

The emphasis placed by the British system of financial administration on propriety is reflected in the way the accounts are kept. Like the estimates, they are on a cash basis showing the actual amounts paid or received during the year, including any orders for payments that were issued by March 31 but not cashed. The form of the appropriation accounts follows closely Part II of the Estimates (p. 352) and compares subhead by subhead the provisions in the estimates and the actual expenditure with explanatory notes on variations. The internal accounts of the department from which the final appropriation accounts are made also follow the same lines, except that detailed information is given about any loss or irregularity involving even quite small sums and about any unusual transactions.

To prevent any abuse of the cash system of accounting, it is mandatory that a liability must be met in the year in which it has matured and is due, and that a department must not postpone payment for the purpose of avoiding an excess on its vote. The departments are also required to supply the Treasury by the end of December with an estimate of the probable outcome of its vote account, showing by subheads how far the provision is expected to be underspent or overspent, which gives the Treasury an indication of the need for supplementary votes or the extent to which issues from the Consolidated Fund can be restricted.

The appropriation account signed by the accounting officer is submitted to the Comptroller and Auditor General some six months after the close of the financial year. The main reason for the long period allowed to the departments in closing their accounts is that an order for payment is valid for three months, which means in effect that the accounts cannot be closed and audited until three months after the close of the financial year. If at the end of the year there is a saving on a vote, it is automatically surrendered, not in cash but by reducing the amount issued from the same vote during the year following the year of the account.

Apart from accounting, the finance branch has the responsibility for examining the financial aspects of the policies of the department and for pointing out alternative courses of action that may cost less money. The work of the finance branch thus involves regular contact with the administrative side of the department and with the Treasury, not only at the estimates time but throughout the year.

Treasury control of expenditure

The starting point in understanding the role of the Treasury in controlling expenditure is the recognition of the fact that under the British system the spending of appropriations by departments is not mandatory. In other words, approval of expenditure by Parliament for a certain purpose is a permission to spend and not an order to spend. Thus, the Government has complete control over the rate of its expenditure. The general rule, although not embodied in law, is that the appropriation of money for a department does not give that department automatic authority to spend the money voted; the approval of the Treasury is also required. This does not mean, of course, continuing control by the Treasury over the spending of each department. For continuing items of expenditure, such as wages at existing rates of pay and salaries and maintenance costs, no further reference to the Treasury is required. The same is true for many other types of payment, such as subsidies and compensation, where the rules governing the amounts and conditions of payment have been separately agreed upon or enacted into law. But if it is a new item of expenditure or a new service, or if there is a departure from prior practice or policy, the express sanction of the Treasury must first be obtained.

The most obvious examples of the type of expenditure that the Treasury must be consulted about are those for buildings and procurement of equipment. The discussion between the Treasury and departments in such matters is not confined to the timing of the expenditure, or to the most economical way of carrying out the budgeted activity, but may include re-examination of the need for the project. If it is decided not to incur the approved expenditure at all, then it becomes a decision of the Government, and there is no question of having to report to Parliament to justify the decision. A reduction in approved expenditure has only to be reported to the legislature when the appropriation accounts are published.

An important area in treasury control is the provision of new services and commitments of future expenditure. In the British system there is no legislative limit to the financial commitments into which a department may enter in terms of either time or money. But, obviously, this must be done within the general policies of the Government as laid down by the minister of the department. It is the practice for departments to consult the Treasury and to secure its agreement before committing certain types of expenditure, e.g., expenditures on new policies and on politically sensitive projects and large items of expenditure. In recent years, however, it has been the practice for the Treasury to delegate to departments the authority to commit expenditure without the need to seek explicit treasury approval, as long as the expenditure is within the Budget Estimates of the totals agreed for the department during the annual survey.

Finally, mention should be made, once again, of virement. This is the authority given to the Treasury to use savings from one activity for another purpose where an increase is sought beyond the approved amount.

In weighing the significance of the continuing control of the Treasury over departments, it is important to realize that the Treasury exercises its privileges not by interfering with the mechanics of control, i.e., passing orders, vouchers, contracts, etc., but through consultations and the approval or disapproval of specific actions. In general, treasury control of expenditure serves to restrict the tendency of departments to use up their appropriations without regard to need and to the general conditions of the economy as a whole, but it in no way detracts from the financial responsibility of accounting officers to Parliament. This aspect of treasury control is further supported by the insistence of the Comptroller and Auditor General that treasury approval must first be obtained in all important matters involving the expenditure of money.


A description of the duties of the Comptroller and Auditor General has already been given, and his role in relation to the issues from the Central Government accounts has been explained. It would be impracticable to attempt any detailed description of the procedures employed in conducting the audit. However, a brief word on the extent and general nature of the audit is in order.

Audit in the British system of financial administration is a continuous activity carried out inside the departments themselves. In fact, only a few of the auditors are stationed in the headquarters of the Exchequer and Audit Department; the others are either situated in the departments in London or traveling around the country. The auditors are required under the Exchequer and Audit Act of 1921 to satisfy themselves that “the money expended has been applied to the purpose or purposes for which the grants made by Parliament were intended to provide and that the expenditure conforms to the authority which governs it.” 52 Parliament, therefore, expects the Auditor General to direct its attention to any divergence between the departments’ intentions, as shown in Part II of the Estimates, and actual expenditure. He is also expected to ensure that the expenditure of departments is governed by the instructions and regulations of the Treasury.

A recent development, however, is the shift in emphasis from the statutory functions of audit to questions of efficiency and prudence. Cases of pure regularity or conformity to law have almost disappeared from the Auditor General’s reports. Criticism of internal financial control within departments—particularly with reference to contractual matters—and questions of waste and extravagance—as consequence of neglect, inefficiency, or maladministration—have become the main topics of published reports and criticisms of the Auditor General and the Public Accounts Committee. Legal audit is now more concerned with the procedures and methods adopted to prevent irregularities. The Auditor General is now empowered to accept charges to the account without requiring supporting evidence, provided that he is satisfied that vouchers have previously been examined and certified as correct by the departments concerned. Accordingly, there has been a greater reliance on internal auditing of regularity; the Auditor General now conducts only test audits instead of a complete audit, unless the Treasury requests it. In his daily auditing of public accounts, the Auditor General has no power to disallow an item of expenditure that in his opinion has been improperly made. All he can do is to bring the matter to the attention of the Treasury concerning any action to be taken and subsequently to inform Parliament.

As the audit proceeds pari passu with the cash transactions of the department, the reports of the Auditor General are submitted to the Treasury within a short period after the closed accounts have been received from the departments. The reports of the Auditor General preface each appropriation and trading account. The reports are essentially factual and precise and usually contain the explanation furnished by departments in reply to his queries. The Auditor General avoids any kind of recommendations in his reports, leaving this to the Public Accounts Committee, but in evidence before the committee he may express his own views and advice on the action to be taken.


I. The Budget-Making Process

Table 8.

Component of Receipts and Expenditure for Resources, Transfers, and Assets

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The following table gives in a summary form the process of budget making discussed in Section II. Although these procedures certainly exist and have their effects on the decision-making process, it must be remembered that the realities of how decisions are taken go much deeper than this.

Table 9.

Timetable of the Budget-Making Process

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II. Selected Budget Documents

In describing the preparation and submission of the budget estimates, the control of treasury issues, the process of spending and accounting, and the nature of audit, reference was made to various financial reports and documents. The following is a list of some of these reports, which together give full information on the financial conditions and operations of the Central Government.

The financial reports are of three types: (1) reports based on Central Government issues and receipts; (2) reports showing final audited expenditure and receipts of government departments; and (3) statistical reports.

Central Government: receipts and issues

The treasury returns

In the first week of each month the Treasury publishes in the London Gazette details of the receipts into and issues out of the Consolidated Fund and the National Loans Fund during the current financial year up to the close of the previous month; figures for the corresponding period of the previous year are also included. These returns include items not covered in the Financial Statement and Budget Report, such as the detailed transactions on the national debt and other extrabudgetary operations. They also show the totals of treasury bills and ways and means advances outstanding at the end of each month. Since the returns are based on the cash receipts and issues of the Consolidated Fund and National Loans Fund, they do not show the actual receipts and expenditure of government departments. The difference between the two sets of figures is, however, generally small. With experience, the returns can therefore allow one to compare revenue and expenditure during the year with the expectation shown in the Financial Statement and Budget Report.

Finance Accounts of the United Kingdom

These Accounts are published as a House of Commons paper about six months after the close of the financial year. It is a summary of government income and expenditure as shown by Central Government issues and receipts, presented in a very compact form. The report contains information on government revenue, expenditure, Consolidated Fund loans, borrowing and repayment of debt, and external transactions. It also provides information on the financial assets and liabilities of the Consolidated Fund.

The figures contained in the Finance Accounts, like those of the treasury returns, cannot be taken as furnishing a complete statement of government income and expenditure, and even where they are complete they are not of a character to give full information regarding the details of expenditure. Expenditure is not shown by votes or classes of votes but only according to defense or civil purposes. The Finance Accounts are not certified by the Comptroller and Auditor General but are published on the sole authority of the Treasury.

Loans from the National Loans Fund

This is a command paper published at the beginning of each financial year. It gives information on government lending operations and on the financing requirements of the nationalized industries in the recent past and during the coming financial year.

Audited expenditure and receipts of departments

The appropriation accounts

The only information available on final audited receipts and expenditure, as opposed to Central Government issues and receipts, is to be found in the appropriation accounts, which are published and certified by the Comptroller and Auditor General some nine months after the end of the financial year. Each vote is the subject of a separate account, and therefore there are as many appropriation accounts as there are votes. The only attempt to bring together the figures contained in the several accounts is represented by tables in which the facts are summarized by individual votes and classes of vote.

Trading accounts and balance sheets

Accounts and balance sheets of trading or commercial services conducted by government departments are published each year in one volume, which covers a great variety of services required to keep commercial accounts. These include the credit, insurance, and other schemes of the Export Credit Guarantee Department, the State Management Districts, the Stationery Office bookshops, and the management by the Board of Trade of certain airports and the air navigation services. Manufacturing accounts are also prepared in respect of the Royal Ordnance Factories and the Naval Dockyards.

The form of trading account varies according to the service concerned and is explained in a foreword that precedes each group of accounts. The trading accounts are submitted to the Auditor General in the same way as are the appropriation accounts and are published together with the Comptroller and Auditor General reports thereon. The only difference is that, while the Comptroller and Auditor General certifies that the appropriation account is in his opinion correct, his certificate to a trading account states that “in my opinion these Accounts and Balance Sheet are properly drawn up so as to exhibit a true and fair view of the transactions and state of affairs of the services to which they relate.” 53 The difference between the two certificates is obviously due to the fact that the former is a purely cash account, while the latter includes imputed items such as depreciation, notional charges for insurance, and services provided free by other departments.

Statistical reports

Prior to 1958 financial statistics were scattered through a wide range of publications. Since then, the monthly Financial Statistics, prepared by the Central Statistical Office, and the Bank of England Quarterly Bulletin have provided comprehensive figures. The former is not only more frequent and up to date but also covers a wider range, often in greater detail. The latter is more selective, being confined largely to figures of immediate interest to banking; it also contains articles that comment on the figures and interpret them.

The monthly Financial Statistics contains perhaps the most comprehensive figures relating to the Central Government transactions. The tables on the Central Government Account provide summary totals of receipts and payments of the Treasury as shown in the Financial Statement. That is to say, all revenue receipts and the greater part of government expenditure are included, but issues to and repayments by the Exchange Equalization Account, transactions with international financial organizations, and transactions in national debt are not included. However, the statistics go further to show the borrowing requirements or net balance of the Government by taking into consideration the Central Government net indebtedness to extrabudgetary funds. This net balance is the amount that the Government has to borrow less any increase (or plus any decrease) in its holdings of gold and currency reserves. Details of changes in the financial assets (and liabilities) of the Central Government, which in aggregate is equal to the Central Government’s borrowing requirement (net balance), are then given in a separate table, together with the net indebtedness of the Central Government to each of the various sectors of the economy, i.e., banking sector, nonbanking private sector, and overseas sector. Finally, a national income accounts classification of Central Government transactions is also given.

Contrôle et gestion des finances publiques au Royaume-Uni


Les prévisions à long terme des dépenses publiques annuelles fournissent le cadre dans lequel les finances publiques sont gérées et contrôlées au Royaume-Uni. Il existe toutefois certains principes et règlements fondamentaux découlant du rapport constitutionnel existant entre l’Exécutif et le Parlement qui régit le système britannique d’administration financière. Parmi ces principes et règlements, qui sont décrits de façon détaillée dans la première section de cette étude, on peut citer les prérogatives du Parlement et de l’Exécutif en ce qui concerne les questions financières, les fonctions du Select Committee on Estimâtes (commission parlementaire chargée d’examiner les évaluations de dépenses publiques), du Vérificateur Général aux Comptes et du Comité des comptes publics; ainsi que la base juridique des mouvements de fonds et la structure des principales rubriques du système budgétaire.

La section II décrit les dispositifs institutionnels chargés de la planification économique et de la préparation des études établissant des programmes à long terme des dépenses publiques, et explique la méthode utilisée pour établir ces études et la forme sous laquelle elles sont présentées. D’une façon générale, les projections à long terme des dépenses publiques s’établissent en cinq étapes étroitement liées. 1) Projection à long terme des comptes nationaux dans laquelle on insère les programmes à long terme des dépenses et recettes du secteur public; 2) répartition entre les principales catégories fonctionnelles et économiques des dépenses publiques dans les limites imposées à l’ensemble des dépenses publiques; 3) répartition des dépenses de fonctionnement entre les divers programmes; 4) identification des dépenses par catégories économiques dans chaque programme et 5) coordination des programmes départementaux au niveau ministériel.

Tous les ans, on établit un nouveau plan quinquennal qui contient des directives spécifiques pour les principaux services gouvernementaux pendant les cinq années du Plan. Ce plan quinquennal fournit le contexte pour l’établissement du budget annuel tout en tenant compte des ressources disponibles et des possibilités de changer la fiscalité sans affecter l’économie. Les méthodes et procédures utilisées par le Trésor et le Chancelier de l’Echiquier pour évaluer la situation économique à court terme et arriver à une décision en matière budgétaire sont expliquées ensuite en détail.

La disposition et l’importance des documents budgétaires en matière de contrôle financier et d’analyse économique sont expliquées dans la section III de l’étude.

Le budget britannique indique l’excédent ou le déficit global de trésorerie de l’exercice, mais ne révèle pas les méthodes de financement de ces résultats. La raison de cette omission est que la méthode précise de financement d’un déficit ou d’utilisation d’un excédent, dépend de tout un ensemble complexe de facteurs liés aux opérations quotidiennes de financement de l’Etat, au marché monétaire et à la gestion de la dette publique. Le fonctionnement de cette opération compliquée est étudié à la section IV. Les principaux facteurs qui déterminent les besoins de caisse nets du Trésor et la façon dont ces besoins sont financés sont ensuite expliqués de façon détaillée.

Enfin, dans la section V, l’auteur décrit les procédures relatives aux opérations de dépenses, à la comptabilité et à la vérification des comptes en indiquant notamment comment fonctionne le système de contrôle financier départemental et le rôle assumé par le Trésor dans le contrôle des dépenses publiques.

Control y gestión de la hacienda pública central del Reino Unido


La hacienda pública central del Reino Unido se controla y administra dentro del marco de los planes a largo plazo para el gasto anual del conjunto del sector público. No obstante, hay ciertos principios y normas fundamentales que tienen su origen en la relación constitucional entre el poder ejecutivo y el Parlamento, y por los cuales se rige el sistema británico de administración financiera. Esos principios y normas, que quedan explicados en la Sección I del trabajo, incluyen las prerrogativas del Parlamento y del poder ejecutivo en cuestiones financieras; las funciones del Comité Parlamentario seleccionado para las Estimaciones, del Interventor General de Cuentas y del Comité de Cuentas Públicas; y el sistema legal de contabilidad en base a caja, así como en general la estructura contable del sistema presupuestario.

En la Sección II se describe el ordenamiento institucional existente para la planificación económica y la preparación de estudios sobre el gasto público a largo plazo, explicándose también la metodología y forma de presentación de dichos estudios. En términos generales, la preparación de un plan de gasto público a largo plazo engloba cinco fases relacionadas entre sí. 1) Una proyección a largo plazo del ingreso nacional, y dentro de ella una proyección a largo plazo de los gastos e ingresos del sector público; 2) la asignación del gasto público según amplias categorías funcionales y económicas dentro del límite marcado por el gasto público agregado; 3) la distribución del gasto funcional por programas concretos; 4) la identificación de los tipos de gasto por categorías económicas dentro de cada programa; y 5) la coordinación a nivel ministerial de los programas departamentales.

Los planes de largo plazo se despliegan para abarcar un año más todos los años, y ellos contienen las directrices para el desarrollo de los principales servicios gubernamentales. El presupuesto anual se configura dentro de este marco, teniendo en cuenta las limitaciones de corto plazo dictadas por los recursos y la capacidad de recaudar impuestos sin dañar los incentivos. Después se explican en detalle los métodos y procedimientos que siguen la Tesorería y el Canciller del Exchequer para evaluar la situación económica de corto plazo y dar su dictamen sobre el presupuesto.

En la Sección III del trabajo se explican la elaboración y el significado que los documentos presupuestarios tienen para el control financiero y el análisis económico.

El presupuesto británico se cierra con el superávit o déficit global de caja que exista al final del ejercicio fiscal, pero no revela cómo se va a financiar el déficit o en qué forma se va a disponer del superávit. La justificación de esta omisión es que el método preciso para financiar un déficit o disponer de un superávit depende de una serie compleja de factores relacionados con la financiación cotidiana del gobierno, con el mercado del dinero, y con la administración de la deuda nacional en conjunto. En la Sección IV se examina la mecánica de esta complicada operación. Se explican con cierto detalle los principales factores que determinan los requisitos de caja neta de la Tesorería, y la forma en que se satisfacen dichos requisitos.

Por último, en la Sección V, se describen los procedimientos para el gasto, la contabilidad, y la auditoría de los fondos gubernamentales, incluido el sistema de control financiero departamental y la función que corresponde a la Tesorería en el control del gasto del sector gobierno.


Mr. Khalid, Advisor in the Fiscal Affairs Department, is a graduate of Khartoum University and of the University of Saskatchewan. He was formerly with the United Nations Fiscal and Financial Branch. He also served as UN fiscal expert in Somalia and was on the faculty of the Institute of National Planning in Cairo. He is presently assigned as budget advisor to the Indonesian Ministry of Finance.


Erskine May’s Treatise on the Law, Privileges, Proceedings and Usage of Parliament, ed. by Sir Barnett Cocks (London, seventeenth edition,, 1964), p. 705.


Since, in accordance with the Parliament Act, 1911, the withholding of assent by the House of Lords to financial provisions submitted by the House of Commons is no longer effective in financial matters, “Parliament” means, in effect, “the House of Commons.”


This rule of behavior is considered such a major constitutional principle that it is further supported by a standing order which gives it uncontested validity—Standing Order No. 82 reads that “this House will receive no petition for any sum relating to public service or proceed upon any motion for a grant or charge upon the public revenue, whether payable out of the Consolidated Fund or out of money to be provided by the Parliament …unless recommended from the Crown.” Standing Orders of the House of Commons, H.M. Treasury, 160 (London, 1969), p. 64.


The Issue Department of the Bank of England and the Exchange Equalization Account are discussed in Section IV, Cash Management and Methods of Financing, pp. 360–74.


Sir Frank Tribe, “Parliamentary Control of Public Expenditure” (address to the annual conference of the Institute of Municipal Treasurers and Accountants), Public Administration, Vol. XXXII (1954), p. 372.


Standing Order No. 18 provides only 29 days before August 5 in each session for the business of supply. Since the parliamentary session has no relation to the financial year—it runs from one autumn to the next—in any one session, the House of Commons may have to consider supply relating to more than one financial year within the allotted 29 days. Standing Orders of the House of Commons (cited in footnote 3), p. 21.


Standing Order No. 80, ibid., pp. 62–63.


Sir Frank Tribe, op. cit, p. 369.


Although the formal number of the committee is 43, in practice fewer members may be appointed. It is also interesting that since 1945 most of the “chairmen of the Estimates Committee have assumed their responsibilities towards the end of their political careers.” Gordon Reid, The Politics of Financial Control (London, 1966), p. 107.


Sixth Report from the Select Committee on Estimates, Session 1957–58: Treasury Control of Expenditure (London, 1958); hereafter referred to as Treasury Control of Expenditure.


Final Report of the Committee on the Form of Government Accounts (Cmnd. 7969, London, 1950).


Control of Public Expenditure (Cmnd. 1432, London, 1961); hereafter referred to as the Plowden Report.


Reform of the Exchequer Accounts (Cmnd. 2014, London, 1963).


The Plowden Report, p. 24.


See Treasury Control of Expenditure.


The Plowden Report.


Under “management” the Plowden Report includes the preparation of material upon which decisions are taken, the technical efficiency of administration, the cost-consciousness of staff at all levels, and the selection, training, and use of personnel with special skill. (Ibid., p. 16.)


Readers interested in the evolution of planning machinery and methods in the United Kingdom are referred to the following publications: Everett E. Hagen and Stephanie F.T. White, Great Britain: Quiet Revolution in Planning (Syracuse University Press, 1966); George Polanyi, Planning in Britain: The Experience of the 1960s (The Institute of Economic Affairs, London, 1967); Samuel Brittan, The Treasury under the Tories, 1951–1964 (London, 1964); Samuel Brittan, Steering the Economy: The Role of the Treasury (London, 1969).


See Brittan, The Treasury under the Tories, pp. 334–36; Polanyi, op. cit., pp. 46–47; T.W. Hutchison, Economics and Economic Policy in Britain, 19641966 (London, 1968), pp. 265–70; Douglas Jay, “Government Control of the Economy: Defects in the Machinery,” The Political Quarterly, Vol. 39 (1968), pp. 134–44.


It is interesting that Samuel Brittan, who served in the DEA from November 1964 to January 1966, states, “The Treasury was sometimes prevented in 1964–6 from deflating as far as it would have liked; but the result was a series of short-term compromises with no coherent longer-term strategy at all, and the balance of power gradually shifted back to the Treasury under the pressure of events in the sterling market. Moreover, these sporadic DEA forages into demand and balance-of-payments policy usually took place at a summit or near-summit level. It is true that the DEA and Cabinet Office were taken into consultation on the economic forecasts; but, generally speaking, the DEA economists first heard of the Budget decisions at the same time as the rest of the population—when the Chancellor announced them.” Brittan, Steering the Economy: The Role of the Treasury, p. 58.


For a detailed description of the 1963 reorganization of the Treasury, see Lord Bridges, The Treasury (London, 1964), Chapter XV, pp. 145–48.


See The Civil Service, Report of the Committee, 1966–68, Vol. 1, Lord Fulton, Chairman (Cmnd. 3638, London, 1968).


Public Expenditure: Planning and Control (Cmnd. 2915, London, 1966).


The surveys that were published during this period in the form of White Papers are as follows: Public Expenditure in 1963–64 and 1967–68 (Cmnd. 2235, London, 1963); Public Expenditure: Planning and Control (cited in footnote 23); Public Expenditure in 1968–69 and 1969–70 (Cmnd. 3515, London, 1968); Public Expenditure, 1968–69 to 1970–71 (Cmnd. 3936, London, 1969). The term “White Paper” is generally used to refer to parliamentary papers, against official nonparliamentary papers. Parliamentary papers are those prepared primarily for the use of members of both Houses in carrying out their duties. They include papers printed on the authority of Parliament, papers prepared for ministers and presented to Parliament by command of the Crown (i.e., Command papers), and Acts of Parliament.


Public Expenditure: A New Presentation (Cmnd. 4017, London, 1969).


Public Expenditure, 1968–69 to 1973–74 (Cmnd. 4234, London, 1969).


For a discussion of the manner in which the relative-price effect is calculated, see Public Expenditure: A New Presentation (cited in footnote 25), pp. 22–24. In general the procedure followed is to calculate the proportion that the various categories of expenditure bear to gross national product at current factor cost for each year covered by the survey as indicated by the long-term economic projection, and to apply these proportions to the corresponding estimates at constant factor cost.


See the timetable of the budget-making process in Appendix II.


About 1¼ per cent is attributable to the relative-price effect included in this category, and ½ of 1 per cent to the contingency reserves for resources.


The third part consists of tables that distinguish those elements of expenditure to be incurred by the Government, showing vote-financed expenditure (supply) separately from that financed from the National Insurance Funds and other Funds, as well as expenditure of local authorities and public corporations. This presentation thus allows the realignment and reconciliation of the budget estimates (supply expenditure) of the Central Government with total planned public expenditure. See Public Expenditure, 1968–69 to 1973–74 (cited in footnote 26), pp. 65–72.


In the words of the White Paper, Public Expenditure: Planning and Control (cited in footnote 23), p. 17, “The Survey of public sector expenditure is an annual one, and the 1966 operation will decide what aggregate increase over the level established for 1969–70 will be practicable for 1970–71, and how this is to be allocated between the main programmes. This is how part of the Plan will roll forward another year, with guide-lines for the development of the main services for a further year ahead.”


“Short-term economic forecasting in the United Kingdom,” Central Statistical Office, Economic Trends, August 1964, p. ii. The article describes in some detail the methodology of short-term forecasting in the United Kingdom.


See the article in Economic Trends (cited in footnote 32), p. iii.


See Brittan, The Treasury under the Tories, p. 108. Mr. Brittan also states that “The Budget Committee’s work is in general treated like a military secret—except that Budget security is usually more effective. Each member of the Committee can appoint one deputy to serve in his stead, but even this overstates the number in the know (because some members may have a deputy in common). Until the pre-Budget printing and legal drafting—early in March—no more than two dozen people are allowed to see the whole picture; and even with the inclusion of secretaries and typists, the total number is no more than about forty.”


The British Government has the power to vary the rates of certain indirect taxes (the purchase tax and all customs and excise taxes except protective duties) by as much as 10 per cent during the fiscal year without advance authority from Parliament. If rates are raised, Parliament must approve the decision within 21 calendar days, and if they are lowered, Parliament must approve only within 21 sitting days. On the other hand, the slowing down of the rate of expenditure during the fiscal year is a prerogative of the Executive.


It is now the practice in the United Kingdom to carry out a major review of defense policies leading to a public statement of policy in the annual Defense White Paper published before the Estimates.


See the timetable of the budget-making process in Appendix II.


Prior to 1969/70 the full title was “Statement of Revenue and Expenditure as laid before the House by the Chancellor of the Exchequer when opening the Budget.” The words “Statement of Revenue and Expenditure” have since been changed to “Financial Statement and Budget Report.”


Detailed description of the principles on which national income accounts are compiled in the United Kingdom is to be found in National Accounts Statistics: Sources and Methods (London, 1968).


For the mechanics of transfer of revenues to the Consolidated Fund, see Sir Herbert Brittain, The British Budgetary System (London, 1959), pp. 69–70 and 85–86.


The Post Office became a Public Corporation in October 1969 and, strictly speaking, should no longer be included under extrabudgetary funds; however, it is my understanding that the facility for the Post Office to deposit surplus monies with the Treasury on a day-to-day basis continues.


A fuller explanation of these operations is given on pages 371–73.


For a description of the effects of inflow and outflow of foreign funds, see “Inflows and Outflows of Foreign Funds,” Bank of England, Quarterly Bulletin, Vol. II (1962), pp. 93–102. See also ‘The Exchange Equalisation Account: Its Origins and Development,” Bank of England, Quarterly Bulletin, Vol. 8 (1968), pp. 377–87.


British Savings Bonds were introduced in April 1968 and eventually will replace the National Development Bonds.


For a further discussion of the role of tax reserve certificates in the financing of the Treasury, see ‘Tax Reserve Certificates,” Bank of England, Quarterly Bulletin, Vol. II (1962), pp. 176–85, and Vol. 8 (1968), pp. 391–401.


This is not part of the treasury bills issued by “tap” to the Issue Department and various other government accounts mentioned on pages 362–63.


In the British banking system, the discount houses provide the main market for treasury bills and other government securities, as well as commercial bills, with a final redemption date of less than five years. It is to these houses, and not to the commercial banks, that the Bank of England acts as a lender of last resort, and, for this reason, the commercial banks are ready to keep their first-line cash reserves with the discount houses in the form of money lent at call or short notice.


The procedure of these operations is explained in detail in “The Management of Money Day by Day,” Bank of England, Quarterly Bulletin, Vol. III (1963), pp. 15–21.


The exception to this rule is the revenue departments, which are authorized to defray their expenses directly out of collected revenue and before it is paid into the Consolidated Fund. At regular intervals the accounts between the revenue departments and the Consolidated Fund are adjusted. Revenue departments present to the Treasury a statement of the amount that they have spent and, provided that these are within the limits of the votes, the Treasury issues corresponding amounts to the departments out of the proper vote; then the departments repay them to the Consolidated Fund as revenue in adjustment of the amounts temporarily used.


Brittain, op. cit., p. 248.


Ibid., p. 250.


E.L. Normanton, The Accountability and Audit of Governments (Manchester University Press, 1966), p. 61.


Brittain, op. cit., p. 268.

IMF Staff papers: Volume 17 No. 2
Author: International Monetary Fund. Research Dept.