Key reforms since 1998
Introduction
Principles of the framework
Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME)
Resource and capital budgets
Departmental Expenditure Limits (DEL)
Annually Managed Expenditure (AME)
Spending Reviews
Public Service Agreements (PSA)
Service Delivery Agreements (SDAs) and Technical Notes
Cross-cutting reviews
Resource accounting and budgeting (RAB)
Departmental Investment strategies (DIS)
This paper provides background information on the framework for the planning and control of public expenditure in the UK. It explains the role played by Spending Reviews within the framework, explains why important changes to the framework were introduced in the 1998 Comprehensive Spending Review (CSR) , the different classifications of spending for budgeting purposes and why these distinctions have been adopted. It discusses how the public expenditure framework is designed to ensure both sound public finances and an outcome-focused approach to public expenditure.
The UK’s public spending framework is based on four key principles:
These key principles are reflected in reforms to the planning and control regime which have been implemented in the 1998 Comprehensive Spending Review (CSR) and in successive Spending Reviews.
The Government sets policy to meet two firm fiscal rules:
The Government sets its spending envelope, consisting of DEL and AME spending, to comply with these fiscal rules.
Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME)
The framework for public expenditure is divided between
In Spending Reviews, firm DEL plans are set for departments for three years. To encourage departments to plan over the medium term and avoid wasteful “end year surges” , departments may carry forward unspent DEL provision from one year into the next. For the full benefits of this flexibility and of three year plans to feed through into improved public service delivery, it is important that end-year flexibility and three year budgets are cascaded from departments to executive agencies and other budget holders.
Three year budgets and end-year flexibility give those managing public services the stability to plan their operations on a sensible time scale without the fear that resources may be cut back in the following year. Further, it means that departments cannot now seek to bid up funds on an annual basis. So the credibility of medium-term plans has been enhanced at both central and departmental level. Departmental Expenditure Limits provide a clear incentive for departments to control their own costs. End-year flexibility also removes the perverse incentive for departments to use up their provision as the year end approaches without regard to value for money.
Within DEL, resource (current) and capital spending are planned and managed separately to reduce any bias against capital investment (see below for more information).
There is a small centrally held Reserve to deal with emergencies and genuine contingencies, which increases in size over the budgeting period. AME is reviewed twice a year as part of the Budget and Pre-Budget Report process. The close integration of the tax and benefit system provides a strong rationale for consideration of AME in the annual budget cycle.
Together, DEL plus AME sum to Total Managed Expenditure (TME), the broadest measure of total public spending. More information about DEL and AME is set out below.
To correct a natural bias against capital expenditure and to ensure consistency with the Government’s fiscal rules, since the 1998 CSR departments have been set separate resource (current) and capital budgets. This is consistent with the fiscal rules and prevents the is a tendency to cut capital expenditure, the benefits of which may only be seen in the medium or long term, to fund current pressures.
Public sector net investment is set to grow to about 2 per cent of GDP by 2005-06, from about 0.6 per cent of GDP in 1997-98.
Departmental Expenditure Limits (DEL)
DEL gives greater financial stability to departments and helps enable them to manage their expenditure programmes over the medium term. The combination of the stability conferred by firm three year budgets with the ability to carry over unspent resources from one year to the next encourages the efficient use of resources by departments, rather than a ‘use it or lose it’ approach to expenditure.
While departments now have certainty over the budgetary allocation over the medium term, these multi-year DEL plans are strictly enforced. Departments are expected to prioritise competing pressures and fund these within their overall annual limits, as set in Spending Reviews. Resources from the very limited, centrally held DEL Reserve are available only for genuinely unforeseeable contingencies which departments cannot be expected to manage within their DEL.
Within the longer planning horizon provided by DEL, it has been possible to remove unnecessary lower level controls on spending, operating instead through overall spending limits and performance targets (see section on PSAs below) rather than on micro-management through a detailed system of approvals.
Some funds within DEL have been retained centrally - such as the Capital Modernisation Fund - and are allocated to departments for specific projects. Allocations are made from the Capital Modernisation Fund to support genuinely innovative approaches to service delivery.
Longer term budgets have been set for health of five years (in the 2002 Budget) and transport with a ten year plan, recognizing the need for longer-term planning and stable growth in these areas.
Annually Managed Expenditure (AME)
AME typically consists of:
AME is not subject to the same three year expenditure limits as DEL, but is still part of the overall envelope for public expenditure. Affordability is taken into account when policy decisions affecting AME are made. The Government has committed not to take policy measures which are likely to have the effect of increasing social security or other elements of AME, without taking steps to ensure that the effects of those decisions can be accommodated prudently within the Government's fiscal rules.
Given an overall envelope for public spending, forecasts of AME affect the level of resources available for DEL spending. Cautious estimates and an AME reserve – the AME margin – are built in to these AME forecasts and reduce the risk of overspending on AME.
The Budget preceding a Spending Review sets an overall envelope for public spending that is consistent with the fiscal rules, for the period covered by the Spending Review. In the Spending Review, the Budget AME forecast for year one of the Spending Review period is updated, and AME forecasts are made for years two and three of the Spending Review period.
The 1998 Comprehensive Spending Review (CSR), which was published in July 1998, was a comprehensive review of departmental aims and objectives alongside a zero-based analysis of each spending programme to determine the best way of delivering the Government's objectives. The 1998 CSR allocated substantial additional resources to the Government's key priorities, particularly education and health, for the three year period from 1999-2000 to 2001-02.
Delivering better public services does not just depend on how much money the Government spends, but also on how well it spends it. In recognition of this the 1998 CSR introduced Public Service Agreements (PSAs). Each major government departments was given its own PSA setting out clear targets setting out what departments aimed to achieve in terms of public service improvements.
The 2000 Spending Review introduced further new features to the public expenditure planning and control framework, including Service Delivery Agreements; the implementation of the first stage of resource budgeting; Departmental Investment Strategies; and a wide range of cross-cutting reviews. The 2000 Spending Review also developed the PSAs set out in the 1998 CSR by reducing the number of targets (from around 300 to 160); and including at least one target in each departmental PSA about improving efficiency or value for money. Service Delivery Agreements and Technical Notes were introduced, setting out lower level input targets and milestones and explaining how performance against each PSA target will be measured.
The 2002 Spending Review was the first Spending Review to be conducted on a full resource budgeting basis. It allocated resources to the Government’s key priorities of raising productivity; extending opportunity; strong and secure communities; and Britain in the world. PSAs were further refined, for example by introducing a new cross-departmental PSA for Sure Start, Childcare and Early Years (from around 160 to 130).
Public Service Agreements (PSAs)
A crucial innovation introduced in the 1998 CSR was the PSAs. Coupled with the three year spending allocations agreed in the CSR were Public Service Agreements (PSAs) – agreed output targets detailing the outcomes departments are expected to deliver with the resources allocated to them. The new spending regime places a strong emphasis on setting outcome targets, for example, better health and higher educational standards or service standards.
The Government monitors progress against PSA targets, and report in detail in annual Departmental Reports, giving Parliament and the public the opportunity to monitor departments’ progress in meeting their targets. Starting in 2002 departments will also publish progress against their PSA targets in an autumn performance report.
Delivering PSAs: Service Delivery Agreements (SDAs) and Technical Notes
Public Service Agreements were first introduced in the 1998 CSR. New PSA targets have been set in subsequent Spending Reviews which seek to focus on a smaller number of key objectives. Service Delivery Agreements (SDAs), introduced in the 2000 Spending Review, set out lower level input targets and milestones underpinning delivery of the headline PSA performance targets. Technical Notes, also introduced in the 2000 Spending Review, explain how performance against each PSA targets will be measured.
Cross-departmental reviews were piloted in the 1998 CSR. The 2000 Spending Review recognised the importance of integrated development of government policy by incorporating fifteen full cross-departmental reviews. These covered a wide range of areas, including the criminal justice system, nuclear safety, crime reduction and conflict prevention in sub-Saharan Africa. These reviews resulted in a wide variety of new working arrangements, including the refocusing of departmental programmes and the creation of pooled budgets and management structures.
A further seven Cross-Cutting Reviews were undertaken during the course of the 2002 Spending Review.
Resource Accounting and Budgeting (RAB)
A key reform to the public expenditure planning and control regime has been the introduction of resource accounting and budgeting (RAB), resource accounting applies the best commercial accounting and reporting practices to central Government, while resource budgeting uses this information as the basis for planning and controlling public spending. RAB addresses the limitations of the previous cash-based regime (which had changed little since the mid-19th century), and builds on the other significant reforms to the public expenditure framework described above.
Resource budgeting supports the Government’s agenda for high quality public services by delivering:
Resource budgeting has been introduced in two stages. In Stage 1, for the plans set in Spending Review 2000, non-cash costs in resource budgets fell outside DEL in AME. In Stage 2, from 2003-04 these non-cash costs will be brought into Departments’ DELs, and departmental expenditure will be planned and controlled on a full resource budgeting basis. The outcome of the 2002 Spending Review was presented on both a near cash and full resource budgeting basis to prevent confusion.
The change in measurement for departmental spending does not have any effect on measurement of the Government’s adherence to its fiscal rules. These will continue to be measured on a different basis.
Departmental Investment Strategies (DISs)
To make the most of both new investment and existing assets, there needs to be a coherent long-term strategy against which investment decisions are taken. Departmental Investment Strategies (DIS) set out each department's plans to deliver the scale and quality of capital stock needed to underpin its objectives. The DIS includes information about the department's existing capital stock and future plans for that stock, as well as plans for new investment. It also sets out the systems that the department has in place to ensure that it delivers its capital programmes effectively. Draft strategies have informed allocations made in the 2002 Spending Review.
DISs were first published by departments in April 1999. Updated versions were published in November 2000. DISs covering 2003-04 to 2005-06 are being published shortly.
In 1997, as part of its drive to improve the management of public assets, the Government published the first National Asset Register (NAR), a comprehensive list of assets owned by every Government department and their sponsored bodies. The NAR is an international landmark in transparency and accountability in Government. An updated version of the NAR was published in 2001. In the interests of openness and accountability, the updated Register includes the value of every asset listed in it, and each department’s entry gives a comprehensive description of all significant changes since 1997.