HM Treasury

Spending Review

Public Expenditure Planning and Control in the UK

This page provides background information on the framework for the planning and control of public expenditure in the UK which has been operating since the 1998 Comprehensive Spending Review (CSR). It sets out 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.

Principles of the framework

The UK's public spending framework is based on several key principles:

Over the last economic cycle, these fiscal policy objectives were implemented through two fiscal rules, against which the performance of fiscal policy could be judged:

Following major economic shocks, the 2008 Pre-Budget Report set out the temporary operating rule. The rule was designed to allow significant flexibility in the operation of fiscal policy during the recession.

With economic conditions beginning to normalise and the economy forecast to emerge from recession by the end of 2009, the Government announced its intention to strengthen the fiscal framework at the 2009 Pre-Budget Report. As a result, the Government has introduced a Fiscal Responsibility Bill to Parliament.

Fiscal Responsibility Act

The Act requires the Government to set out at all times a legislative fiscal plan for delivering sound public finances, to be approved by Parliament, placing a binding duty on the Government to meet that plan. The Government's first legislative fiscal plan is the Fiscal Consolidation Plan (FCP). It extends from 2009-10 to 2015-16, requiring that the Government:

The FCP is measured with reference to two aggregates:

Finance leases and on balance sheet PFI, lending under financial transactions made for policy reasons, such as lending to students, increase PSND.  Placing surplus money on deposit creates a liquid asset, which offsets gross debt.

For both of these statistics, the Government will use the ONS measures of PSNB and PSND that exclude the temporary effects of financial interventions but account for any permanent cost to the taxpayer.

Total Managed Expenditure

Total Managed Expenditure (TME) is a measure drawn from national accounts representing the current and capital spending of the public sector. The public sector is made up of central government, local government and public corporations.

Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME)

The framework for public expenditure is divided between

More information about DEL and AME is set out below.

Departmental Expenditure Limits (DEL)

In Spending Reviews, firm DEL plans are set for departments for three years. Departments are set separate resource (current) and capital budgets.

To encourage departments to plan over the medium term, departments may carry forward unspent DEL provision from one year into the next and, subject to the normal tests for affordability and value for money, may be drawn down in future years. This end-year flexibility also removes any incentive for departments to use up their provision as the year end approaches with less regard to value for money. For the full benefits of this flexibility and of three year plans to feed through into improved public service delivery, end-year flexibility and three year budgets should be 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. Further, the system means that departments cannot seek to bid up funds each year (before 1997, three year plans were set and reviewed in annual Public Expenditure Surveys). So the credibility of medium-term plans has been enhanced at both central and departmental level.

Departments have certainty over the budgetary allocation over the medium term and 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. So the DEL system provides a strong incentive to control costs and maximise value for money.

There is a small centrally held DEL Reserve. Support from the Reserve is available only for genuinely unforeseeable contingencies which departments cannot be expected to manage within their DEL.

Annually Managed Expenditure (AME)

AME typically consists of programmes which are large, volatile and demand-led, and which therefore cannot reasonably be subject to firm multi-year limits. The biggest single element is social security spending. Other items include tax credits, Local Authority Self Financed Expenditure, Scottish Executive spending financed by non-domestic rates, and spending financed from the proceeds of the National Lottery.
 
AME is reviewed twice a year as part of the Budget and Pre-Budget Report process reflecting the close integration of the tax and benefit system, which was enhanced by the introduction of tax credits.

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 therefore an essential factor taken into account when policy decisions affecting AME are made. Given that the Government sets and manages resources within an overall envelope for public spending, forecasts of AME affect the level of resources available for DEL spending. Cautious estimates and the AME margin are built in to these AME forecasts and reduce the risk of overspending on AME.

Resource Accounting and Budgeting (RAB)

Resource and Capital Budgets are set in terms of accruals information. Accruals information measures resources as they are consumed rather than when the cash is paid. So for example the Resource Budget includes a charge for depreciation, a measure of the consumption or wearing out of capital assets.

Within the Resource Budget DEL, departments have separate controls on:

Administration Budgets

The amount of their Resource Budget DEL that departments may spend on running themselves (e.g. paying most civil servants’ salaries) is limited by Administration Budgets, which are set in Spending Reviews. Administration Budgets are used to ensure that as much money as practicable is available for front line services and programmes. These budgets also help to drive efficiency improvements in departments’ own activities. Administration Budgets exclude the costs of frontline services delivered directly by departments.

Spending Reviews

In the Spending Review, Government sets out its plans for departmental spending. The Budget AME forecast for year one of the Spending Review period is updated, and AME forecasts are made for the later years of the Spending Review period.

In 1998 and 2007 the Government 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. Both CSRs allocated substantial additional resources to the Government's key priorities, particularly education and health.
 
Delivering better public services does not just depend on how much money the Government spends, but also on how well it spends it. Therefore the 1998 CSR introduced Public Service Agreements (PSAs) which set out clear objectives for achievement in terms of public service improvements.

This document was updated on 22 March 2010.

Internal links

Spending Reviews

Public Finance and Spending Statistics