"Financial sustainability of some local authorities presents a significant risk to government" says PAC

The Treasury is failing to demonstrate that risks to public finances are well managed or how it works with other government bodies to “actively manage the significant fiscal challenges” evident in Government accounts even before Covid - including £152 billion liability for nuclear decommissioning, the £85 billion clinical negligence provision for the NHS and the precarious financial position of local authorities.

Where new risks such as COVID-19 emerge, there is an apparent lack of ownership by the Treasury of the analysis and scenario planning activities necessary to making difficult decisions about public spending.

The financial sustainability of some local authorities presents a significant risk to government. While local authorities have autonomy over their spending, the Treasury is the ‘funder of last resort’ should a local authority become insolvent. As COVID-19 has increased the fiscal pressures many government bodies face, the Committee “expects that more local authorities will soon be unable to balance their books and will be forced to issue section 114 notices in order to suspend non-essential expenditure.”

The Committee says it expects the Treasury to have oversight of local government finances in the round in order to properly manage the wider risk to the public finances, but the Redmond review highlighted a lack of this oversight, and serious issues in the local government sector, including failures in current local audit arrangements. It says the government’s response to the Redmond review should be agreed and implemented as soon as possible.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “As we reported earlier this year, some local authorities have taken on extremely risky levels of debt in recent years in an effort to shore up dwindling finances, much of it investments in commercial property. The pandemic has doubly exposed that risk – in the huge extra demands and duties it is placing on local authorities, and in the hit to returns on commercial investments.

“The Treasury has a worryingly laissez faire attitude to what now presents a significant risk to the whole of government. It must step firmly back into the driving seat, demonstrating that it has a clear handle on significant risks in our public finances and is managing them – and that it’s ready to take on the unprecedented additional impact of COVID-19 and EU Exit.”

PAC report conclusions and recommendations

1. The WGA still does not provide Parliament and the public with the information that they need to better understand the government’s financial position and exposure to fiscal risk. Using the annual report to give the reader an understanding of the development, performance and position of an organisation’s business, including a consideration of how forward-looking risk is managed is standard practice across the private and public sector. The WGA falls significantly below this standard and is not meeting the needs of its users. We have made previous recommendations that the Treasury should include more information on the principal risks and uncertainties facing the economy in the WGA, but it remains a backward-looking document that does not tell the reader about these risks or how they are being managed. There is considerable unprecedented uncertainty over the health of the UK’s public finances as a result of EU Exit and the COVID-19 pandemic. We expect the WGA to fully explain how these events may impact the economy and what government is doing to achieve the best outcome. The key information around expenditure on COVID-19 disclosed in the WGA is based on a NAO report, rather than data collected and monitored by the Treasury. In its role as centre of government, the Treasury can collect spending data from departments in relation to the pandemic and present this in one place, giving a whole of government view.

Recommendation: The Treasury should ensure that the WGA is a forward-looking document, providing the public and Parliament with the information that they need to better understand how the government manages its financial position and exposure to fiscal risk.

2. There is an apparent lack of ownership by the Treasury of the analysis and scenario planning activities necessary to manage the impact of COVID-19 on government finances. The scale of the likely increase in government borrowing to fund government’s response to COVID-19 is a significant new challenge to the Treasury’s objective to place the public finances on a sustainable footing. While the Office for Budget Responsibility is responsible for producing economic forecasts and analysis of the public finances, it is a matter for government to determine how that information is used to make policy decisions. The Treasury has not explained how the current and future impact of COVID-19 would affect planned or committed investments, projects and programmes, and how these would be prioritised should decisions be needed on which to delay or cancel. When it comes to future spending decisions, it is important for the Treasury to have a detailed plan in order to make strategic decisions about where planned funding can be cut or re-deployed to meet changing priorities. However, the Treasury has not conducted scenario analysis on how the economic impact of COVID-19 might affect decisions to set aside projects and investments, and plans to only undertake such scenario planning as part of the next spending review. The Treasury has also not undertaken analysis of how increases in the UK’s ratio of debt to GDP as a result of COVID-19 may impact the country’s credit rating or analysed how long the country can continue to borrow at the current rate.Whole of Government Accounts 2018–19

Recommendation: The Treasury should write to the committee setting out what pecific analysis it is currently undertaking as it manages the economic impacts of COVID-19.

3. The WGA does not provide assurance that significant risks to the UK’s financial sustainability are well managed. A key consideration for any organisation is its financial sustainability. There are several government liabilities disclosed in the WGA that, due to their size and nature, represent significant risks to the UK finances. For example, the liabilities related to nuclear decommissioning are complex and costly, being valued at some £152.2 billion at 31 March 2019. The provisions arising from clinical negligence are now valued at £85.3 billion, with a similar level of new cases being reported every year. In future years, the government will be further exposed to liabilities arising from its response to COVID-19 that will require strategic management. Yet the WGA does not explain how the Treasury works with other departments and bodies who manage the activities underlying the liabilities to ensure that the risks to financial sustainability are well managed and that taxpayers are getting value for money.

Recommendation: The Treasury should provide meaningful insight through the WGA into how it works with other government bodies to ensure risks to financial sustainability are appropriately managed.

4. The financial sustainability of some local authorities presents a significant risk to government. While local authorities have autonomy over their spending, the Treasury is the ‘funder of last resort’ should a local authority become insolvent. As COVID-19 has increased the fiscal pressures many government bodies face, we expect that more local authorities will soon be unable to balance their books and will be forced to issue section 114 notices in order to suspend non-essential expenditure. We would expect the Treasury to have oversight of the sector in order to properly manage the wider risk to the public finances and expect it to report on how it is managing this risk in the WGA. The Redmond review has highlighted a lack of oversight of local government and serious issues in the local government sector, including failures in current local audit arrangements.

Recommendation: The Treasury should work with the Ministry of Housing, Communities and Local Government to ensure government’s response to the Redmond review is agreed and implemented as soon as possible. It should set out how it knows its oversight of local government fiscal risks is effective in the WGA given government’s exposure as the funder of last resort.

5. The Treasury has aspirations to standardise financial reporting across government but has not set out how this will make the WGA more useful or accessible. The Treasury faces difficulties when trying to categorise transactions and balances reported by over 9,000 organisations into robust categories that are useful to the user. The Government Finance Function within the Treasury is undertaking work to align finance processes across government such as expense claims. It is also planning to standardise how Departments categorise their balances and transactions, which should reduce the significant manual work required to produce the WGA. We welcome all efforts to enhance the quality of information provided in the WGA and support the Treasury’s work to achieve this aim. We previously recommended that financial reporting within the WGA could be improved by providing more detailed disclosures, in addition to that required by financial reporting standards. We expect the work of the Government Finance Function could result in the WGA including more useful information for users, such as much more detailed analysis of how taxpayers’ money is spent on the purchase of goods and services, the costs across government of EU Exit and the cost of COVID-19. The Treasury’s plans to publish underlying data alongside the WGA is an innovative solution that could further improve transparency and accessibility.

Recommendation: The Treasury should report against the progress of the work carried out by the Government Finance Function in the WGA given how key it is to improving both the production of the WGA and the insights it can provide. It should ensure its programme includes and accelerates plans to implement tools and processes to improve the information it gathers on cross-government issues such as EU Exit and COVID-19.

6. The quality of the next WGA will suffer if the Treasury does not resolve challenges in its accounts production process. In recent years, the WGA has improved in quality and the Treasury has taken steps to address our recommendations, such as improving the breakdown of the purchase of goods and services note. We would like to see these improvements continue at pace. We are, however, concerned that delays in local government audit and the extension of the administrative deadlines for central government accounts will lead to delays in the Treasury receiving returns for the WGA. In the current WGA, the delay in completion of audits of local government bodies has already led to a lower quality picture of the financial performance and position of the UK public sector than in the previous year. In addition, the consolidation module of the new OSCAR II IT system is not yet finalised. These are significant challenges to Treasury’s expectation to publish the WGA 2019–20 in June 2021, one month earlier than was achieved for the WGA 2018–19.

Recommendation: The Treasury should set out how it is going to meet the challenging timetable it has set for the WGA 2019–20 without leading to a decline in the quality of the account