PAC: "Brexit's impact on public finances must be made clear in accounts"

REPORT SUMMARY

The Whole of Government Accounts (WGA) continues to be essential reading for anyone looking for a comprehensive view of the UK’s public finances.

HM Treasury (the Treasury) has responded to the Committee’s previous recommendations and improved the clarity, quality and usefulness of the WGA.

However, we continue to be concerned that the time it takes to produce means that the WGA is still not achieving its potential as a tool for making decisions about the public finances.

While we welcome the Treasury’s move towards using the WGA to help better manage the government’s assets and liabilities, the Treasury’s actions to maximise value from assets and reduce liabilities will need to be embedded in day-to-day financial management across government if they are to have a lasting impact. 

There is more that could be done to improve how the WGA is used. Despite the overall aim of the WGA to enhance transparency, the Treasury doesn’t fully understand who uses it, or how it is used.

The WGA will be increasingly important for accountability and transparency of the public finances in the future, particularly in enabling the public to understand the longer-term impact of Brexit on the public finances.

The Treasury needs to assure the public and Parliament that the WGA’s disclosures on the impact of Brexit will be comprehensive and clear.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“The Whole of Government Accounts still don’t tell the whole story.

“Uncertainty about the true costs of Brexit highlights the importance of producing the WGA in a more timely and transparent manner.

“This document offers the most complete picture of the UK’s public finances. But the 2016-17 WGA was published in June last year, some 15 months after the end of the financial year – a year in which the Comptroller & Auditor General qualified his opinion on Government accounts for multiple reasons.

“That is too long to wait for information that could play a critical role in shaping decisions on public spending.

“The Government has listened to concerns raised previously by our Committee but there is more it can and should do to improve the WGA’s usefulness to taxpayers, Parliament and other decision-makers.

“In the coming months we expect Government to explain how it intends to extend its commentary on the WGA; ensure the WGA is published more quickly, and encourage its use more widely.”

CONCLUSIONS AND RECOMMENDATIONS

The usefulness of the WGA remains limited by the time it takes to produce. We support the Treasury’s ambition to publish the WGA within nine months of the end of the financial year. However, we remain concerned that the time it takes to produce the WGA means that government is not making the most of this valuable resource as a decision-making tool. The Treasury published the WGA 2016-17 in June 2018 – just 15 days faster than the previous year. The Treasury expects to publish the WGA 2017-18 in May 2019 (14 months after the end of the financial year) and says that work is currently a month ahead of schedule.  The Treasury is working to reduce the amount of time it takes to produce the WGA. It plans to publish WGA 2018-19 by the end of March 2020 (12 months after the end of the financial year), and WGA 2019-20 by January 2021 (around 9 months after the end of the financial year). Meeting these plans relies on the Treasury getting the right quality information – on time – from all public bodies, including academies and local government. For WGA 2017-18, the information the Treasury has received from local authorities show that they have so far responded well to an earlier reporting deadline. The Treasury is investing in a new IT system to aid the process of bringing together the financial accounts of all the organisations included in the WGA. Despite the challenges, the Treasury asserts that it is confident it can achieve its plans to bring the timetable forward.

Recommendation: Treasury should write to the Committee by March 2019 with details of its plans and timetable to publish the WGA within nine months of the financial year-end. This should include its expectations of the publication dates of future WGAs and the timing of key milestones. 

The Treasury does not fully understand how the WGA is used, which means that the WGA still does not provide the public and Parliament with the information they need to understand the public finances and hold government to account. The Treasury has made clear progress in improving the commentary in the WGA, providing better quality analysis of finances across government and explaining the main causes of year-on-year changes in the accounts. But it could do more to disseminate the WGA. The commentary included in it needs to be relevant and useful to the public and Parliament. While the Treasury is bound by financial reporting standards when producing the WGA, it has more discretion over the amount of detail it chooses to include in the notes to the accounts and its commentary in the performance report. The Treasury accepts it could say more in the commentary about some transactions and balances which are not included in the accounts (such as future taxation receipts and the future liabilities for the state pension). The Treasury says it will look at providing more detail on some areas of the accounts, including a breakdown of what it reports under Purchases of goods & services. Users also need more detailed information on government’s potential exposure to future liabilities as an insurer of last resort; for example, on decommissioning fracking sites. This additional information, along with a focus on greater consistency of reporting from year-to-year, would provide greater transparency over finances in the public sector.

Recommendation: The Treasury should write to the Committee by March 2019, with details of how it plans to improve and extend the accounts commentary in future years. This should include how it plans to encourage the wider use of the WGA and engage with the public, academics and Parliament, and how further transparency will be provided.

Without additional detail in future, the WGA may not provide the comprehensive information that Parliament and the public expect on the impact of Brexit on the public finances. The WGA is increasingly important to ensuring accountability for public spending, particularly in enabling the public and Parliament to understand the current and likely future impact of Brexit on the public finances overall. The Treasury’s aim to publish WGA 2017-18 in May 2019 means that it is likely to be the first major set of accounts published after the UK’s exit from the European Union (EU) in March 2019. Although any agreed financial settlement of the UK’s exit from the EU will not be seen in the numbers of WGA 2017-18, the Treasury will provide detailed notes and commentary on the likely impact of Brexit. The Treasury expects it will need to report on three areas in the WGA: the amount spent preparing for exit; the financial settlement; and the replacement of EU schemes such as agricultural support. We expect these disclosures to include a comprehensive explanation of the likely impact on the public finances in the current and future years. It will also able be important for the Treasury to consider how any ‘Brexit Dividends’ are disclosed transparently in the WGA in future years. 

Recommendation: The Treasury should write to the Committee by March 2019, detailing how it will present information on the impact of Brexit on the public finances in WGA 2017-18 and in future years, and ensure that the information it includes is comprehensive and easily understood.

Government is not yet making the most of its assets, and it remains to be seen whether Treasury’s review of the public sector balance sheet will have a lasting impact on the public finances. The Treasury announced in the Autumn Budget for 2017 that it was carrying out a review of government’s balance sheet with the aim of maximising the return from its assets and reducing the cost of its liabilities. We welcome the move to using the WGA to help manage the government’s balance sheet more effectively. But, as we have said previously, this approach will need to be embedded in departments’ and the Treasury’s day-to-day financial management if it is to lead to lasting benefits. Government has a long way to go to harness the benefits of public sector intangible assets such as intellectual property and maximise the return it gets from these assets. Plans for realising the potential benefits from government’s property assets are ambitious and will require considerable effort and co-ordination across departments. At the same time, we remain concerned that clinical negligence liabilities have continued to rise to almost £77 billion and expect the cross-government strategy announced in the 2018 Budget to ensure the government gets a grip on these rising costs. The Treasury plans to report on its balance sheet review at the next Spending Review, expected in 2019. It has not set out yet how its management of assets and liabilities will change following its review of the balance sheet. 

Recommendation: The Treasury should ensure that its balance sheet review has a long-term impact on the cost-effective management of government assets and liabilities. It should report to us how the benefits of the review will be monitored and reported; with the first update on progress by June 2019.

We are concerned that the Treasury’s lack of a clear plan for what will replace PF2 risks the financial burden falling on the taxpayer. In the 2018 Budget, government announced that it would no longer use PF2 for new projects, having found the model to be inflexible and overly complex. The Treasury is not planning to replace PF2 with a single preferred approach and has not confirmed whether planned projects will now be part, or fully, funded by the public purse. For example, the A303 road project was expected to use PF2 but the Treasury could not tell us how this project would now be funded. The Treasury is confident that it will be able to use other existing funding models in the place of PF2, particularly as government made little use of PF2. The Treasury will decide on which model to use on a project-by-project basis. However, we are concerned by the value for money of some of these alternative funding models, such as contracts for difference. We will expect assurance from the Treasury that these concerns have been addressed.

Recommendation: The Treasury should write to the Committee by March 2019, clearly outlining the range of financing structures available to fund capital expenditure in the future, and how it will appraise the cost and risk implications of these options to protect the public finances over the long-term.