Chapter 3

The Fiscal Framework: Prudence and Prosperity

This Chapter discusses the framework for fiscal policy and explains how this strategy will help build the platform of stability needed to achieve high and stable levels of growth and employment.

The key points made in this Chapter are that:

the Code for Fiscal Stability sets out the broad fiscal framework, within which the Government's approach is defined by two strict fiscal rules;

a coherent strategy for managing the public finances is one which makes a clear distinction between current and capital budgets, as in the fiscal rules;
the fiscal rules are consistent with the primary role of fiscal policy-to ensure economic stability through prudent management of the public finances; they are also consistent with the requirements of the Stability and Growth Pact; and
the regime for planning and controlling public spending is being reformed to improve spending control and promote longer-term planning. Departments will be given firm multi-year limits within which they must manage and plan ahead to deliver modern public services. This represents a significant step towards Resource Accounting and Budgeting, which will further reinforce delivery of the fiscal framework.

The previous Chapter set out the broad framework underpinning the Government's approach to economic policy. This chapter focuses on the role that fiscal policy plays within that approach.

The fiscal strategy will ensure that the Government's strict fiscal rules are met through a tough new regime of public expenditure planning, which breaks decisively from the past. The annual public spending round dominated by a cycle of year-on-year incremental bids by departments has been a feature of British economic life since the early sixties. This approach, however, has produced inefficient outcomes as settlements were made on the basis of bargaining over inputs rather than an analysis of outputs and efficiency. Furthermore, it has resulted in excessive departmentalism, a split between public and private provision, and a bias towards consumption today rather than investment in our future.

As a result of this piecemeal approach, fiscal policy did not contribute fully to the UK's long-term interests:

over the previous economic cycle, current spending exceeded current receipts by an average of over 1½ per cent of GDP, equivalent to £12 billion at today's prices, imposing a burden on future generations; and
public investment fell to low levels, even allowing for factors such as the effects of privatisation, and maintenance backlogs developed.

In addition, the previous fiscal framework:

attached insufficient importance to the distinction between current and capital spending so that decisions did not show accurately how future generations would have to pay for today's public spending; and
was widely seen as creating a bias against capital spending which led to cuts in investment to accommodate short term pressures on current spending.

The new regime tackles these deficiencies. It will embody:

multi-year plans rather than an annual cycle;
a clear distinction between capital and current spending;
a greater focus on effectiveness and outputs rather than bargaining over inputs; and
the coordination and integration of services rather than departmentalism and a piecemeal approach to spending.

The new system will also be based on a proper understanding of the role and limits of government. In particular, it will recognise the state as not just owner, manager and employer but also as facilitator and partner. The desired outcome is the public and private sectors working together in the place of the discrete public-private split.

3.1 THE CODE FOR FISCAL STABILITY

The framework within which the Government will formulate and implement fiscal (including debt management) policy is set out in The Code for Fiscal Stability, published in March 1998.

The Code, which will shortly be given the force of law in the 1998 Finance Bill, ensures that the framework for fiscal policy is characterised by openness, transparency and accountability, mirroring the reform of the monetary policy framework introduced last May.

The Code requires fiscal and debt management policy to be formulated and implemented in accordance with a set of five key principles that are fundamental to a commonsense approach to fiscal management:

transparency in the setting of fiscal policy objectives, the implementation of fiscal policy and the publication of the public accounts;
stability in the fiscal policy-making process and in the way fiscal policy impacts on the economy;
responsibility in the management of the public finances;
fairness, including between generations; and
efficiency in the design and implementation of fiscal policy and in managing both sides of the public sector balance sheet.

A number of other commitments follow from this. For example, governments must state explicitly their short and long-term fiscal policy objectives, and must ensure these objectives are consistent with the fiscal principles embodied in the Code.

A further important requirement of the Code is that governments report regularly on progress in meeting their fiscal objectives. From now on, the familiar Financial Statement and Budget Report will be supplemented each year by an Economic and Fiscal Strategy Report, setting out the Government's long-term strategy and objectives. The present document is the first of this series. The Code also requires a Pre-Budget Report to be published, reflecting the Government's desire to draw upon the skills and experience of others when forming policy. Together, these reports will ensure that Parliament (in particular, the Treasury Select Committee) and the public, can scrutinise fully the Government's fiscal plans.

3.2 THE FISCAL RULES

3.2.1 Distinguishing between current and capital spending

The Government's first two Budgets have made clear that a key component of the new approach to fiscal policy is to distinguish between current and capital spending. Current spending provides benefits mainly to the current generation and reflects continuing programmes that are financed each year. Fairness and prudence dictate that this spending should be covered by current revenue. In contrast, spending on capital (ie investment) creates assets which support services and benefit taxpayers in future years as well as now. This does not imply that one type of spending is necessarily better than the other: both must be worthwhile and offer good value for taxpayers' money.

Reflecting the important distinction between current and capital spending, the Government has set two strict fiscal rules to govern policy over the course of this Parliament:

the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
the sustainable investment rule: net public debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.

The golden rule recognises explicitly the different economic nature of current and capital spending. In the past, governments set limits for total spending without distinguishing between current and capital spending. This led to bias against investment, which often constituted an easier (though short-term) target for spending cuts. Net capital spending by the public sector has fallen from 3 per cent of GDP in 1978-79 to ¾ per cent of GDP in the spending plans for 1998-99. This is explained only partly by privatisations and the growth of public-private partnerships. Many services have suffered-and growth too-as a result of inadequate levels of investment. At the same time, the sustainable investment rule recognises that borrowing for public investment must be constrained by the need to ensure a prudent debt ratio.

In accordance with this distinction, the public finances are being presented in a new way, one which is more consistent with the underlying economic realities, as reflected by the move to Resource Accounting and Budgeting, national accounts concepts and international practice (see Chapter 4). In addition, the new spending control regime is based on the distinction between current and capital spending.

3.2.2 Assessing the fiscal rules

The Government's fiscal framework reflects a careful application of the principles of fiscal management which are embedded in the Code for Fiscal Stability. Transparency lies at the heart of this framework. It leads to greater certainty for decision makers and makes it possible for Parliament and the public to scrutinise policy decisions. Publishing this Report and setting out unambiguously the role and objectives of fiscal policy-in particular, the fiscal rules and their application-provides a clear demonstration of the Government's commitment to transparency in fiscal policy.

By design, the fiscal rules will lead to greater economic and fiscal stability. As suggested above, this strategy allows decision makers to plan and invest for the long term, confident in the knowledge that the public finances will not be managed in a profligate fashion that might necessitate a sudden adjustment at some point in the future.

The fiscal rules also represent a responsible approach to fiscal policy. The Government's commitment to keep debt at prudent levels recognises that excessive borrowing has detrimental economic effects. Borrowing will be used only to fund value for money investment, and the overall level of borrowing will be prudent and not excessive.

Furthermore, these rules are consistent with the principle of fairness. By funding current spending from current revenue over the economic cycle, today's taxpayers bear the full cost of the public sector current spending from which they benefit.

The Government also places considerable emphasis on ensuring that it raises revenue and uses taxpayers' resources in an efficient manner. The top-down approach, and firm plans for overall spending, derived from the fiscal rules, require the Government to prioritise its spending plans following a bottom-up review of spending priorities. The Comprehensive Spending Review (CSR) is the means of doing so. Moreover, by making a proper distinction between capital and current spending, the fiscal rules ensure that the planning and control processes no longer discriminate against capital spending. This will help ensure value for money in the provision of public services.

3.2.3 The golden rule: fairness between generations

As noted above, fairness is one of the five principles of fiscal management embedded within the Code for Fiscal Stability. This principle implies that those generations that benefit from public spending should also meet the cost.

The golden rule helps to match the costs and benefits of public spending across generations. It draws a clear distinction between current and capital spending, recognising that worthwhile capital spending by the Government provides benefits in the year of investment and over the life of the assets. It also recognises that current consumption must be controlled tightly and should not be financed by borrowing. However, the Government acknowledges that any such approach will be, to some extent, an approximation. Some aspects of current expenditure may also transfer the fiscal burden in ways that can not easily be quantified.

It is clearly important to be aware of potential pressures on spending which arise over the longer term from demographic change. Development of long-term public finance projections is one way of approaching this issue. The Code for Fiscal Stability requires governments to publish illustrative long-term projections for the public finances, covering a period of at least 10 years. These projections are currently under development. Once completed, they will give an indication of how fiscal aggregates might evolve over time if policies remain unchanged.

A further approach that has been used in several countries is to calculate what are known as 'generational accounts'. These accounts attempt to estimate each generation's net tax and benefit position over their respective remaining lifetimes, conditional on a given policy approach. The Treasury is currently collaborating with the National Institute for Economic and Social Research and the Bank of England to produce a set of generational accounts for the UK.

3.2.4 Defining a prudent level of public debt

Over the economic cycle, the Government is committed to holding public debt as a proportion of GDP at a stable and prudent level.

At a basic level, fiscal policy settings can be said to be sustainable if, on the basis of reasonable assumptions, the government can maintain its current spending and taxation policies indefinitely while continuing to meet its debt interest obligations. The costs to the British economy if fiscal policy were to become unsustainable would be substantial. Therefore, a more disciplined or prudent approach is justified-one that ensures fiscal policy is sustainable even in the face of adverse shocks.

The prudence of the level of Britain's public debt needs to be judged in relation to the size and frequency of the economic shocks to which Britain is exposed. The prudent level of debt also depends on the size of the economy since it becomes possible to sustain a higher money level of public debt as national income grows. This is why the Government's fiscal rule is specified in terms of the ratio of public debt to GDP.

Because countries are not all alike, a level of public debt that is prudent for one country at a particular point in time may not be prudent for another. Indeed, over time, as economies develop, the level of public debt that is prudent for an individual country will change. Simple comparisons of international and historical data may be used as a broad guide, but it is important to look beyond these figures.

Over the past decade or so, Britain has been subject to greater volatility in growth and inflation than any other major industrial economy. The Government's reforms to monetary and fiscal policy will act to reduce the volatility stemming from errors in macroeconomic policy settings. However, unexpected shocks due to other influences, such as developments in the world economy, will continue to impact on the British economy. The Government believes that, other things equal, it is desirable that net public debt be reduced to below 40 per cent of GDP over the economic cycle. As discussed in Chapter 4, the fiscal projections suggest that this will be achieved over the remainder of this Parliament, while still allowing the Government to meet its key spending priorities. The only previous time during the past 30 years that net public debt fell to this level was during the unsustainable boom in the late 1980s.

By way of international comparison, as Chart 3.1 shows, Britain's public debt (measured here using general government net financial liabilities as a proportion of GDP) is low by international standards. As a result of the deficit reduction plan, the level of public debt, and hence debt interest payments, are projected to remain well under control.

Media links

Chart 3.1 G7 General government net financial liabilities, 1997 per cent of GDP

Debt performs a valuable function-it helps to spread the cost of public investment fairly across generations. Thus, the optimal level of debt is one that balances the need to undertake worthwhile public investment and fund this in a fair way, against the requirement that debt remains prudent and at levels that do not impose a burden on the economy, or future generations.

Looking at the scope for worthwhile (value for money) spending on public investment is one of the tasks of the CSR. At present, the marginal benefits of public investment are likely to be relatively high reflecting under-investment in public infrastructure over recent years. The national interest will therefore be enhanced by spending on public investment rather than substantially reducing the public debt ratio beyond that projected in this Report. It is important to note, however, that the optimal debt level is likely to change over time as the stock of prospective worthwhile projects changes.

3.2.5 The public sector balance sheet

Over time, the Government intends to pay more attention to movements in the public sector balance sheet, which includes tangible assets as well as net financial liabilities. Public sector net wealth is the balance between total assets and liabilities. The balance sheet approach complements the golden rule because the surplus on the current budget should correspond reasonably closely to the change in public sector net wealth. The Government will also explore whether the balance sheet approach can lead to more effective management of the stock of debt.

There are, however, data and conceptual difficulties that need to be addressed before the balance sheet can be given a more formal role in the fiscal framework. The introduction of Resource Accounting and Budgeting (RAB) offers a good opportunity to improve the balance sheet data, as well as further underpinning the golden rule. Subject to the outcome of a feasibility study currently under way, RAB could be further enhanced by the development of a whole of government account for the UK.

The EU Stability and Growth Pact

The Government is committed in principle to joining a successful single currency, provided the economic benefits are clear and unambiguous. Regardless of whether we join the single currency, fiscal policy in the UK will remain the responsibility of the British Government. At the same time Britain respects the Stability and Growth Pact and the excessive deficits provisions of the Maastricht Treaty.

The Pact clarifies how the excessive deficit procedure will be implemented and strengthens the multilateral surveillance procedure set out in the Treaty. Only members of the single currency can be fined-by up to 0.5 per cent of GDP-if their general government financial deficit exceeds the Treaty reference value of 3 per cent of GDP.

Under the Pact, Member States are required to publish Stability Programmes if they participate in EMU, and Convergence Programmes if they do not. The Stability and Growth Pact specifies a variety of information that must be produced in these Programmes, including the expected path of the general government financial deficit and the key economic assumptions that underpin the fiscal projections, such as the extent to which public borrowing is financing capital rather than current spending.

The fiscal prospects outlined in this Report (see Chapter 4) are consistent with the terms of the Stability and Growth Pact.

3.3 SETTING THE STANCE OF FISCAL POLICY

Sound management of the public finances is an essential building block for long-term prosperity. In particular, when setting the overall stance of fiscal policy, the Government must promote the long-term economic stability that is vital if Britain is to achieve high and stable levels of growth and employment.

The Government's fiscal rules have been formulated to deliver economic stability. A key priority for the Government is to operate fiscal policy in a way that meets these rules with a high degree of certainty. It would be a serious mistake to divert fiscal policy away from this end in an attempt to manage short-term demand and inflationary pressures in the economy. Monetary policy is better suited to this task.

Nonetheless, fiscal policy can provide a useful support for monetary policy in the short-term regulation of the economy so long as the fiscal stance remains demonstrably consistent with meeting the Government's fiscal rules over the economic cycle. For example, the significant tightening of the fiscal stance that has occurred over the past year, where public sector net borrowing (PSNB) has been reduced by around £19 billion or 2¾ per cent of GDP (the largest fiscal tightening in any one year since 1981) undoubtedly helped restrain demand, supporting monetary policy at a time when the Bank of England has also been raising interest rates. At the same time, the fiscal tightening has put Britain on course to meet the fiscal rules over the present cycle.

Apart from any discretionary adjustments to the fiscal stance, the automatic stabilisers, which operate through avenues such as unemployment benefits and the progressive tax scale, will also continue to have a stabilising impact on demand. For example, payment of unemployment benefits reduces the extent to which incomes fall in a recession, thereby limiting reductions in demand. The 'over the cycle' formulation of the fiscal rules reflects, and allows for, the impact of the economic cycle on the public finances.

Stability in fiscal policy does not imply that the Government will no longer exercise discretion where it is sensible to do so, for example in response to clear and explicitly identified shocks. If a major economic or natural disaster were to occur, it is self-evident that the Government might need to deviate from its fiscal rules for a short period of time. Under the Code for Fiscal Stability, the Government would be legally obliged to be open about the reasons for the deviation, the alternative rules that would operate, and when and how it planned to return to its original rules and objectives.

3.4 PLANNING AND CONTROLLING SPENDING

The public sector is spending over £330 billion this year, around 40 per cent of national income.

Government uses this huge sum-equivalent to over £5,000 for every man, woman and child in Britain-to purchase a wide range of public services on behalf of the nation as a whole, including education (£37 billion in 1997-98), health (£43 billion), law and order (£17 billion) and defence (£21 billion). In addition, government transfers amount to very large sums; for example the Government spent £96 billion on social security in 1997-98.

Given the sums involved, it is crucial that the Government obtains value for money. The quality of spending in the public sector has a large impact on the overall performance of the economy. Improving the effectiveness and efficiency of public spending is therefore a key objective of the CSR (discussed further in Chapter 4). Alongside this Review, the Government is making a major reform to the regime for planning and control of expenditure, to improve control of this spending and to promote longer-term planning.

In order to make more efficient and effective use of public resources, departments will be given firm multi-year spending limits, within which they can prioritise resources and plan ahead, providing a more stable foundation for managing public services. Consistent with the fiscal rules, there will also be a clear distinction between capital and current expenditure to ensure that worthwhile capital investment is not squeezed out by short-term pressures in the way it has been in the past.

This will pave the way for, and as far as possible anticipate, the planned introduction of RAB in 2000. RAB will also reinforce the planning and controlling of spending through providing a clearer distinction between capital and current spending and enhanced incentives for managing existing and new capital assets.

There are four main features to the reformed planning and control regime.

Overall spending plans will be based on sound economic principles, with a new distinction between current and capital spending.

Decisions on spending will be based on the prudent and sound fiscal rules, rather than on an arbitrary target for expenditure as a proportion of GDP. The plans will cover all spending by the public sector, to be known as Total Managed Expenditure (TME). Within that, capital and current expenditure will be planned and managed separately to ensure that the fiscal rules are met, and to prevent capital investment being cut back to meet short-term pressures on current expenditure. Departments will be able to channel funds earmarked for capital expenditure into current spending only within an agreed margin which allows for some managerial flexibility or to finance private-public partnerships. This is consistent with the objectives of the Investing in Britain Fund discussed further in Section 4.2.2.
Firm three-year plans will provide certainty and flexibility for long-term planning and management.

Within these overall plans, the Government will set firm and realistic multi-year limits for departments' expenditure, wherever possible, with similar agreements for their running costs. Multi-year limits will cover a three-year period, but will be rolled forward for a further three years in 2000 when the Government plans to move to RAB. The limits will be set in cash to provide a clear incentive for departments to control their own costs and will be reviewed only if inflation varies substantially from forecast. This change will make it possible to have a more stable funding regime for local authorities. In addition, departments and local authorities will have greater end-year flexibility, to carry forward unspent provision.

These multi-year plans will be drawn together in a new aggregate, Departmental Expenditure Limits (DEL). There will be a small Reserve to deal with emergencies and genuine contingencies, but there will not be an annual Public Expenditure Survey, as in the past, in which departments can bid for extra funds. Equally, the Treasury will not be able to use the annual survey to impose incremental cuts. This will give departments a solid base for planning. DEL will include spending funded by the Capital Receipts Initiative and spending on Welfare to Work, which will continue to be administered through an inter-departmental budget, subject to special control arrangements.

Annual review of spending outside the DEL.

Other expenditure, which cannot reasonably be subject to firm multi-year limits, will be known as Annually Managed Expenditure (AME). This will include social security benefits, local authority self-financed expenditure (LASFE); Scottish expenditure financed by the Scottish variable rate of income tax and non-domestic rates; payments under the Common Agricultural Policy; debt interest; and net payments to EU institutions. This will bring the UK closer to the control regimes of other countries. Tables 3A.1 and 3A.2 in Annex 3A provide details of the composition of the DEL and AME.
Annually Managed Expenditure will be subject to constraints.

AME will be based on cautious estimates and tough annual scrutiny both as part of the annual Budget process and when setting DEL for a further three years in 2000. The Government will not 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 these decisions can be accommodated prudently within the Government's fiscal rules and can be financed by a fair and efficient tax system that promotes incentives to work, save and invest.

Treating LASFE in this way is consistent with the relaxation of capping and the greater emphasis on local accountability. However, the Government will also retain strong reserve powers over local authorities. If other safeguards fail and spending financed by local taxes becomes excessive, it may also be necessary to cut back grants to local authorities when plans are reviewed in 2000.

There are three further significant changes:

Additional flexibility for large public corporations, which are not dependent on government grants, to put them on a more commercial footing.

As the Government made clear in its 1997 Pre-Budget Report, it will continue to apply its fiscal rules to the public sector, including public corporations. Within the new regime, it has decided to give certain, largely self-funding, public corporations more flexibility to manage their spending between years, within agreed limits on external finance. This should lead to better management. These limits will be outside departmental expenditure limits and will be separately managed. This regime will apply to the main nationalised industries and a number of other smaller bodies. Additional flexibilities may be available for some of these bodies in the light of the conclusions of reviews currently under way. Following consultation on the details of implementation, financially sound and profitable local authority airport companies will also be allowed greater commercial flexibility.

Resource Accounting and Budgeting

Resource Accounting and Budgeting (RAB) applies to central government the financial reporting practices of both the private sector and much of the rest of the public sector. It is being developed to fit within and support the new fiscal framework and to increase the efficiency and value for money of public spending.

Based on accruals accounting, RAB will underpin the golden rule by making a clear structural distinction between current and capital spending. It will also align more closely the control framework to that of fiscal policy by capturing the full costs of resources consumed, including the current cost of capital use (depreciation and interest), in delivering government priorities. This will improve the incentive to ensure assets are used as productively as possible, and to the best effect, when delivering public services.

Departments are on course to produce the first full set of published resource accounts for the financial year 1999-2000. These will be accruals based accounts similar to those prepared for private sector companies but with two additional features: a statement showing use of resources approved by Parliament, and a statement analysing spending by objective.

Resource accounts will provide the basis for a new system of public expenditure planning ('resource budgeting'). Timing of full implementation will be consistent with the Government's reformed planning regime, including the detailed arrangements for the overall control framework. However, in broad terms it is at present envisaged that there will be two key policy aggregates, reflecting the distinction between current and capital expenditure central to both RAB and the fiscal framework.

New arrangements for student loans and loan sales to improve decision-making and the management of longer-term liabilities.

The accounting treatment which will apply under RAB will be brought forward to make it easier to compare the real costs of loans and grants and to provide better incentives for managing the costs of loans. The cost of bad debt and loan subsidy will be recorded in the DEL. The treatment will be extended over time to other loans to the UK private sector.
Departments to keep more of their receipts in order to improve efficiency and effectiveness.

Departments will in future be allowed to keep and spend a number of receipts that are at present surrendered as revenue, not treated as negative public expenditure. Departments will be able to keep some levies and similar taxes, netting them off the DEL where this would further the government's economic objectives, improve efficiency, and not prejudice spending plans and priorities. Subject to safeguards, some income from fines may also be netted off the DEL where that would help fight crime. In order to improve incentives to manage assets well, departments will be able to keep rent off land, most dividends (including from joint ventures under the wider markets initiative), and receipts from NHS Trust debt remuneration to match provision.

3.5 DEBT MANAGEMENT POLICY

The primary objective of debt management policy is to minimise the long-term cost of meeting the Government's financing needs, taking into account risk, whilst ensuring that debt management policy is consistent with the objectives of monetary policy.

The Government will meet this objective by:

- determining the maturity and nature of the government debt portfolio, through managing the maturity and composition of debt issuance;
- pursuing debt management policies that are open, predictable and transparent;
- developing a liquid and efficient gilts market; and
- offering retail savings instruments through National Savings which provide cost effective funding.

The Government's debt management policy is now implemented by the UK Debt Management Office (DMO) and National Savings. The aims and objectives of these Agencies are set so as to deliver the objectives set out above.

Debt management is also covered by the Code for Fiscal Stability. In this context, the principle of transparency requires the Government to publish sufficient information to allow market participants to plan their investment strategies and for the public and Parliament to scrutinise the conduct of debt management policy.

The principle of predictability requires the Government and its agents to give as much notice as possible of its debt management plans, particularly gilts issuance, and to refrain from surprising the market, even if this may lead to improved cash flows in the short term. The emphasis on minimising costs over the long term means that the Government will refrain from operations which store up refinancing problems for the future or which unduly transfer costs of debt management to future generations.

In line with these principles, the Code for Fiscal Stability requires governments to publish an annual Debt Management Report which reports on the structure of its borrowing and the cost of government debt, sets remits for the DMO and National Savings, and sets out detailed plans for gilts issuance over the following year. The DMO and National Savings will also publish more detailed information on the implementation of Debt Management Policy in their own annual reports and accounts.

ANNEX 3A: The new spending aggregates

The new control regime described in Section 3.4 sets out how the Government intends to plan, control and monitor public expenditure in order to deliver its objectives. The tables below illustrate the new spending aggregates on which the new control regime will be based. The tables contain an illustrative presentation of the spending plans for 1998-99, restated in terms of the main elements of the new system. The new arrangements will take effect for the CSR and for in-year control from 1999-2000.

Table 3A.1 shows Total Managed Expenditure (TME). This concept is equivalent to the sum of public sector current expenditure--the key aggregate for meeting the golden rule--and public sector net investment.

Table 3A.1: Total Managed Expenditure 1998-99(1)(2)

	£ billion 1998-99
Departmental Expenditure Limits	168.8
Annually Managed Expenditure
Social Security Benefits¹	95.8
Common Agricultural Policy	2.6
Export Credits Guarantee Department	0.1
Net Payments to EC Institutions	2.4
Self Financing Public Corporations	-0.2
Locally Financed Expenditure³	15.4
National Lottery	1.6
Central Government Gross Debt Interest	28.1
Accounting and other adjustments	13.5
AME Margin4	1.7
Annually Managed Expenditure	164.7
Total Managed Expenditure² of which:	333.5
Public Sector Current Expenditure	326.9
Public Sector Net Investment	6.6
Memo: General Government Expenditure	33.3

1 Figures are consistent with the March 1998 Financial Statement and Budget Report (HC620) except for (a) the effects on the Reserve of a transfer of £750 million unspent in 1997-98 and a rephasing of the sale of student loans (now £1 billion in 1998-99), (b) updated forecasts for Cyclical Social Security and some accounting and other adjustments.

2 Total Managed Expenditure is equal to the sum of the Departmental Expenditure Limits and Annually Managed Expenditure, and equal to the sum of public sector current expenditure and net investment.

3 Includes local authority self-financed expenditures and Scottish non-domestic rate payments.

4 The Reserve for the old Control Total has been split between a Reserve in DEL, shown in Table 3A.2, and a Margin on AME, shown here.

About one half of TME is made up of Annually Managed Expenditure (AME). This aggregate covers programmes for which multi-year limits are not appropriate or possible, but which are taken into account in public expenditure planning. AME also includes a margin. The remaining half of TME is within Departmental Expenditure Limits (DEL).

Table 3A.2 shows the DEL set out by departmental groupings. In addition, the DEL contains separate pan-departmental provision for Welfare to Work, and a Reserve. A memo item shows the DEL split into capital, current and financial transactions. Further memo items show total UK expenditure on education, including expenditure outside DEL, and on the Capital Receipts Initiative.

Table 3A.2: Departmental Expenditure Limits 1998-99¹

	£ billion 1998-99
Defence	22.2
Foreign Office	1.0
Department for International Development	2.3
Ministry of Agriculture, Fisheries and Food	1.4
Forestry Commission	0.0
DETR-Transport	5.0
DETR-Other	4.4
DETR-Local Government	32.8
Department of Trade and Industry	3.1
Home Office	6.9
Lord Chancellor's Departments	2.7
Department for Education and Employment	14.2
Department for Culture, Media and Sport	0.9
Department of Health	37.2
of which: NHS	36.5
Social Security (administration)	3.0
Scottish Office	13.0
Welsh Office	6.7
Northern Ireland Departments	5.7
Chancellor's Departments	2.9
Cabinet Office	1.3
Welfare to Work	1.1
Reserve²	1.0
Departmental Expenditure Limits of which:	168.8
Current Spending	156.5
Capital Spending	11.2
Financial Transactions	1.1
Memo: Total Education	39.5
Memo: Total Capital Receipts Initiative	0.7

1 Figures are consistent with the March 1998 Financial Statement and Budget Report (HC620) except for the effects on the Reserve of the transfer of £750 million unspent in 1997-98 and a rephasing of sales of student loans (now £1 billion in 1998-99).
2 Reserve on DEL. See footnote 4 to Table 3A.1.

Prepared 11 June 1998

Economic and Fiscal Strategy Report 1998 index page