Annex B

Resource accounting and budgeting

B1 The 2000 Spending Review is the first Review to be conducted on a resource basis. This introduces significant enhancements to the way government plans and controls public spending. The move to resource accounting and budgeting (RAB) fulfils a long standing Government commitment to move central government accounts, Estimates and budgets from a cash to an accruals basis.

B2 Changes from resource budgeting do not change the fiscal aggregates. Total Managed Expenditure (TME), public sector current expenditure, and net investment will continue to be measured on a basis consistent with the internationally recognised national accounts. The measurement of the fiscal rules will continue to be made against these Office for National Statistics aggregates.

The resource budgeting concept

B3 Under the present system, public spending is generally planned and controlled in cash terms. Cash payments and receipts score in the year they are made or received. Under resource budgeting what counts is when resources are consumed, not when they are paid for. Spending is scored as it is incurred, and income as it is earned. So resource budgets include costs such as stocks consumed (rather than bought and sold), provisions to meet future payments, and the cost of using capital assets (depreciation and a cost of capital charge).

Benefits of Resource Budgeting

B4 Budgeting in resource terms will lead to better measurement of costs, better incentives for departments, and better management of assets. The benefits can be seen at both the macro and microeconomic levels. At a macroeconomic level it should deliver:

greater consistency with the principles of fiscal management through improved transparency and new information that allows the Government to deliver its policies to increase stability, responsibility, fairness and efficiency;
a clearer view of the real cost of providing individual services which takes account of the full cost of holding assets;
a more transparent split of capital and current spending (with public corporations' investment presented more clearly); and
a better measure of the total value of central government assets which can be tracked over time. This reinforces the steps to identify assets through the National Asset Register.

B5 At the microeconomic level resource budgeting offers:

better incentives to manage capital assets and dispose of those no longer needed. Assets will have to be recorded on the department's balance sheet and incur a capital charge. Those written off earlier than expected appear as a cost against the resource budget;
better incentives in planning investment, as new investments will incur a continuing capital charge;
incentives to better manage cash and working capital (debtors and creditors); and
a clearer distinction between loans and grants.

The public spending framework

B6 The move to resource budgeting builds upon the existing public spending framework which remains largely unchanged. Firm, three year plans for departmental spending will continue to be set as Departmental Expenditure Limits - (DELs) - and non-discretionary items will continue to be reviewed each year within Annually Managed Expenditure (AME).

B7 Capital and current budgets continue to be managed separately in accordance with the fiscal rules. The 'current DEL' has been renamed the 'resource DEL', a title which better reflects the fact that it measures total resources consumed by departments in any one year. The resource budget, split into DEL and AME, includes for the first time the annual cost to the department of the assets it uses to deliver its public services. This cost is in the form of charges for capital consumed in that year (depreciation) and the opportunity cost of tying-up resources in these assets (cost of capital). Both these charges are non-cash budgetary control measures. The aggregate resource budget reconciled to public sector current expenditure is set out in Table A5 of Annex A.

B8 While the resource budget includes the cost of consuming capital services over the year it is important to continue to monitor aggregate capital spending and investment in new assets. Hence there is a separate capital budget, also split into DEL and AME components. Capital DELs now include a better measure of the total public spending effect at departmental level by including for the first time all the capital spending of public corporations such as NHS trusts and non-departmental public bodies rather than just the grants paid to these bodies. The aggregate capital budget, reconciled to total net investment, is set out in Table A6 of Annex A.

B9 Resource budgeting will be introduced in two stages. In Stage 1, in the 2000 Spending Review, the big non-cash items of resource budgets - depreciation, cost of capital charges and provisions - will be managed annually in AME rather than in three year DELs. Over the next three years departments will build up experience and expertise in analysing and forecasting these new non-cash items. It is the intention that, in the light of experience, these non-cash items will be moved into DEL in the next Spending Review - Stage 2. This is a sensible approach, allowing many of the benefits of resource budgeting to be gained in this Review while providing for a smooth transition.

Changes

B10 Under resource budgeting new elements are added to budgets for each department. Both resource and capital budgets will include:

timing differences - budgets score costs as they are incurred. They do not include prepayments for goods and services not consumed that year but will include accrued costs for resources consumed but paid for later. Stock consumption scores in the resource budget while spending on adding to stocks does not.

B11 The main changes to the resource budget are:

a charge for depreciation on the assets being used by each department measuring capital consumption in each year. Resource budgeting will measure depreciation more accurately and attribute the cost transparently to individual programmes;
a cost of capital charge calculated at a rate of 6 per cent on the net assets employed by each department measuring the opportunity cost of holding assets. (Depreciation and the cost of capital charge together are referred to as 'capital charges'. Both are non-cash items);
capital charges on civil estate holdings - these are charges on departments' administrative buildings. Unlike other capital charges, these are being applied in DEL as departments already have experience in controlling these as part of running cost controls;
the inclusion of provisions for bad debts and future liabilities;
a better measure of the total public spending effect at departmental level by including in budgets the full resource implications of Non-Departmental Public Bodies (NDPBs), including depreciation and a cost of capital charge (at present we score grants to the NDPB); and the full resource implications of public corporations, including profit, loss and subsidy.

The main changes to capital budgets are:

the inclusion of capital spending of public corporations such as NHS trusts rather than departments' external finance of these bodies. Under cash, capital spending of public corporations is included in the accounting adjustments in AME. This effectively switches this spend into DEL;
some items which score as current spending under national accounts score as capital under resource accounting and budgeting, notably MOD fighting equipment.

How resource budgeting affects the 2000 Spending Review numbers

B12 To allow comparison between departmental spending in the Comprehensive Spending Review (CSR) period (1999-2000 to 2001-02) and the plans set out in the 2000 Spending Review for 2001-02 to 2003-04, the numbers for 1999-2000 to 2001-02 have been converted into resource terms. A full reconciliation is included in Table A7 of Annex A. A reconciliation of changes from numbers published in Budget 2000 are included in Table A8 of Annex A.

B13 The numbers published for public spending in resource terms will differ from those previously set out in cash. However, because the large non-cash items are in AME, the differences between the old and new expenditure limits (DELs) will generally be small. Changes in DEL come about largely through timing adjustments, changes in the split between current and capital spending, and better measurement of the consumption and investment of arms length bodies and public corporations within departments' budgeting boundaries.

B14 Aggregate lines for depreciation, cost of capital charges and provisions are included in Annually Managed Expenditure.

B15 Total Managed Expenditure will continue to be measured on a basis consistent with the internationally recognised national accounts and thus fully consistent with measurement of the fiscal rules. The fiscal rules already incorporate some resource concepts such as the inclusion of depreciation in measuring adherence to the golden rule. The budgeting items of depreciation, cost of capital (including on the civil estate) and provisions do not feed through into TME but are taken out in accounting adjustments in AME.