Whole of Government Accounts 2018-19

There is an apparent lack of ownership by the Treasury of the analysis and scenario planning activities necessary to manage the impact of COVID-19 on government finances. The scale of the likely increase in government borrowing to fund government’s response to COVID-19 is a significant new challenge to the Treasury’s objective to place the public finances on a sustainable footing. While the Office for Budget Responsibility is responsible for producing economic forecasts and analysis of the public finances, it is a matter for government to determine how that information is used to make policy decisions. The Treasury has not explained how the current and future impact of COVID-19 would affect planned or committed investments, projects and programmes, and how these would be prioritised should decisions be needed on which to delay or cancel. When it comes to future spending decisions, it is important for the Treasury to have a detailed plan in order to make strategic decisions about where planned funding can be cut or re-deployed to meet changing priorities. However, the Treasury has not conducted scenario analysis on how the economic impact of COVID-19 might affect decisions to set aside projects and investments, and plans to only undertake such scenario planning as part of the next spending review. The Treasury has also not undertaken analysis of how increases in the UK’s ratio of debt to GDP as a result of COVID-19 may impact the country’s credit rating or analysed how long the country can continue to borrow at the current rate. 6 Whole of Government Accounts 2018–19 Recommendation: The Treasury should write to the committee setting out what specific analysis it is currently undertaking as it manages the economic impacts of COVID-19.

The WGA does not provide assurance that significant risks to the UK’s financial sustainability are well managed. A key consideration for any organisation is its financial sustainability. There are several government liabilities disclosed in the WGA that, due to their size and nature, represent significant risks to the UK finances. For example, the liabilities related to nuclear decommissioning are complex and costly, being valued at some £152.2 billion at 31 March 2019. The provisions arising from clinical negligence are now valued at £85.3 billion, with a similar level of new cases being reported every year. In future years, the government will be further exposed to liabilities arising from its response to COVID-19 that will require strategic management. Yet the WGA does not explain how the Treasury works with other departments and bodies who manage the activities underlying the liabilities to ensure that the risks to financial sustainability are well managed and that taxpayers are getting value for money. Recommendation: The Treasury should provide meaningful insight through the WGA into how it works with other government bodies to ensure risks to financial sustainability are appropriately managed.

The financial sustainability of some local authorities presents a significant risk to government. While local authorities have autonomy over their spending, the Treasury is the ‘funder of last resort’ should a local authority become insolvent. As COVID-19 has increased the fiscal pressures many government bodies face, we expect that more local authorities will soon be unable to balance their books and will be forced to issue section 114 notices in order to suspend non-essential expenditure. We would expect the Treasury to have oversight of the sector in order to properly manage the wider risk to the public finances and expect it to report on how it is managing this risk in the WGA. The Redmond review has highlighted a lack of oversight of local government and serious issues in the local government sector, including failures in current local audit arrangements. Recommendation: The Treasury should work with the Ministry of Housing, Communities and Local Government to ensure government’s response to the Redmond review is agreed and implemented as soon as possible. It should set out how it knows its oversight of local government fiscal risks is effective in the WGA given government’s exposure as the funder of last resort.

The Treasury has aspirations to standardise financial reporting across government but has not set out how this will make the WGA more useful or accessible. The Treasury faces difficulties when trying to categorise transactions and balances reported by over 9,000 organisations into robust categories that are useful to the user. The Government Finance Function within the Treasury is undertaking work to align finance processes across government such as expense claims. It is also planning to standardise how Departments categorise their balances and transactions, which should reduce the significant manual work required to produce the WGA. We welcome all efforts to enhance the quality of information provided in the WGA and support the Treasury’s work to achieve this aim. We previously recommended Whole of Government Accounts 2018–19 7 that financial reporting within the WGA could be improved by providing more detailed disclosures, in addition to that required by financial reporting standards. We expect the work of the Government Finance Function could result in the WGA including more useful information for users, such as much more detailed analysis of how taxpayers’ money is spent on the purchase of goods and services, the costs across government of EU Exit and the cost of COVID-19. The Treasury’s plans to publish underlying data alongside the WGA is an innovative solution that could further improve transparency and accessibility. Recommendation: The Treasury should report against the progress of the work carried out by the Government Finance Function in the WGA given how key it is to improving both the production of the WGA and the insights it can provide. It should ensure its programme includes and accelerates plans to implement tools and processes to improve the information it gathers on cross-government issues such as EU Exit and COVID-19.

The quality of the next WGA will suffer if the Treasury does not resolve challenges in its accounts production process. In recent years, the WGA has improved in quality and the Treasury has taken steps to address our recommendations, such as improving the breakdown of the purchase of goods and services note. We would like to see these improvements continue at pace. We are, however, concerned that delays in local government audit and the extension of the administrative deadlines for central government accounts will lead to delays in the Treasury receiving returns for the WGA. In the current WGA, the delay in completion of audits of local government bodies has already led to a lower quality picture of the financial performance and position of the UK public sector than in the previous year. In addition, the consolidation module of the new OSCAR II IT system is not yet finalised. These are significant challenges to Treasury’s expectation to publish the WGA 2019–20 in June 2021, one month earlier than was achieved for the WGA 2018–19. Recommendation: The Treasury should set out how it is going to meet the challenging timetable it has set for the WGA 2019–20 without leading to a decline in the quality of the account. 8 Whole of Government Accounts 2018–19 1 Treasury’s role in managing risk

Based on the Whole of Government Accounts (WGA) for the year ended 31 March 2019, we took evidence from HM Treasury (the Treasury) on 19 November 2020.1

The WGA 2018–19 disclosures relating to COVID-19 relied heavily on a summary of a report produced by the National Audit Office.10 The Treasury did not attempt to explain to Parliament or the user of the accounts how it was managing the fiscal risk COVID-19 poses for the economy, nor how it may impact the government’s fiscal position going forwards. In our evidence session the Treasury reiterated its position that it views the WGA as a backward-looking, retrospective document and said that while it wants to set out the risks across government and how these risks were mitigated and controlled, it was not convinced that the WGA was the best place to set out how it was managing forward-looking risk.11 This is despite the fact this is standard practice across public and private sector accounts, and that stakeholders, including this Committee, have given Treasury clear feedback to make the performance report forward looking and requested that it cover issues such as government debt, the burden of paying for COVID-19 and the maturity of liabilities.12 Management of significant risks to financial sustainability

The WGA discloses a number of significant liabilities that due to their size and nature pose unique risks to the UK’s financial sustainability and government’s ability to achieve value for money. At 31 March 2019, the UK’s liability in relation to nuclear decommissioning was some £152 billion.13 Whilst this was a fall from £263 billion in the previous year, nearly all of that decrease was due to the change in the discount rate used to calculate future liabilities, and not related to a change in the underlying nature of the UK’s liability.14 Similarly, new clinical negligence cases remained broadly flat year on year, contributing to a provision for clinical negligence of £85 billion.15

We have recently raised concerns regarding the uncertainty of the estimated costs of decommissioning the civil nuclear estate and highlighted a shortage of skills at the Nuclear Decommissioning Authority (NDA) and a lack of oversight from the Department for Business, Energy and Industrial Strategy (BEIS) under previous models of outsourcing 8 Committee of Public Accounts Seventy-Fourth Report of Session 2017–19, Whole of Government Accounts, HC 464, January 2019, para 7, p 10 9 Letter to Tom Scholar, September 2019 10 WGA 2018–19, pp 3–7 11 Q 29 12 Q 115; The Companies Act 2006, 414C 13 WGA 2018–19, p 133 14 WGA 2018–19, para 1.75, p 38 15 WGA 2018–19, p 138; WGA 2018–19, p 133 10 Whole of Government Accounts 2018–19 decommissioning.16 We therefore asked what control the Treasury was exerting over the whole of the project. The Treasury told us that it is closely involved in the management of the liability, working alongside BEIS, but provided no specific examples of how it does this.17 When we asked what controls it had in place to ensure that the NDA was ensuring that the most cost-effective options were being used during decommissioning, the Treasury said that while its spending team works with BEIS, the parent department, the expertise sits within the NDA and therefore the Treasury was unable to second-guess them.18 The Treasury agreed to consider whether itself and BEIS, in managing the liability with NDA, needed a change in mindset to ensure that the required work is being done in the most cost-effective way.19

Regarding the provision for clinical negligence, the WGA shows a levelling off of new cases and explains that in the second year of its new strategy to tackle clinical negligence laid out in April 2017, NHS Resolution mediated 380 cases, or 110% more than the previous year.20 We asked the Treasury what progress was being made to control the liability. The Treasury responded that clinical negligence had been picked up by the balance sheet review and that the lead for this area was the Department for Health and Social Care, working with a cross-government taskforce that involved the Treasury.21 Analysis and scenario planning

The scale of the likely increase in government borrowing to fund government’s response to COVID-19 is a significant new challenge to the Treasury’s objective to place the public finances on a sustainable footing.22 In its report on Evaluating the government balance sheet: borrowing published in November 2017, the NAO noted that the Treasury had begun to strengthen its approach to analysing the government’s balance sheet and evaluating fiscal risk, but the work at that time was at an early stage and not sufficiently embedded to provide the Treasury with a common view of risk to inform its decision- making.23

We were therefore interested in what analysis the Treasury had now been conducting in order to give assurance that it had a handle on the fiscal risks the pandemic poses to the UK economy and fiscal sustainability. We asked what projections the Treasury had for tax receipts in the short and medium term and whether it had been working with Her Majesty’s Revenue and Customs (HMRC) to produce those projections. The Treasury responded that projection is the job of the OBR.24

With the UK’s debt as a proportion of GDP above 100%, any increases in interest rates would have a significant impact on the economy and government spending. When asked whether it was modelling for interest rate increases, the Treasury confirmed that it did, but deferred to the OBR as the prime place for this information, noting that the 16 Public Accounts Committee, Twenty-Eighth Report of Session 2019–21, The Nuclear Decommissioning Authority’s management of the Magnox contract, HC 653 November 2020 17 Q 77 18 Q 79 19 Q 81 20 WGA 2018–19, p 41 21 Qq 75–76 22 WGA 2018–19, para 1.12, p 3 23 National Audit Office, Evaluating the government balance sheet: borrowing, HC 526, November 2017 24 Q 16 Whole of Government Accounts 2018–19 11 OBR’s fiscal risk report specifically identifies rising interest as one of the big risks for the public finances. When pushed to expand on the impact of rising interest rates on the public finances, the Treasury outlined in general terms how interest rate rises would result in bigger debt interest costs and less for other public spending.25 When asked whether it had conducted any analysis or forecasting on further significant increases in debt to GDP ratios, the Treasury deferred to the OBR.26 The Treasury also confirmed that it had not conducted any analysis on how the increased debt to GDP ratio may impact the UK’s credit rating.27

Although at some points during our evidence session the Treasury stated that it was conducting forecasting and scenario planning, it was not clear what this entailed, how this differed from work by third parties such as the OBR, and whether this was business as usual or additional work specifically to address risks arising from COVID-19.28

If debt payments increase, or tax receipts decrease, there will be a decrease in budget available for other public spending.29 We asked the Treasury whether it had identified what current projects may need to be cancelled, or what potential investments foregone, due to the ongoing impact of COVID-19 on the economy. The Treasury said that due to the huge uncertainty surrounding the pandemic, government had decided to not have an autumn budget and had replaced the planned three-year spending review with a one-year review, and it would be at this full spending review next year where it would consider priorities for the rest of the Parliament.30 Financial sustainability of local authorities

As the UK Government has a devolved structure, local authorities have significant autonomy over their spending and have powers to invest in commercial property. We have, over a number of years, raised concerns over the behaviour of local authorities with regards to commercial property investments, noting as far back as 2016 that the government appeared complacent to the risk that these investments posed to local authority finances.31 In our recent July report into Local authority investment in commercial property, we concluded that the Ministry of Housing, Communities and Local Government (MHCLG) had failed to ensure local authorities adhered to guidance, which led to many taking on excessive and risky debt. We also found that MHCLG did not have the data it needed to carry out its oversight responsibilities.32

In September 2020, Sir Tony Redmond published his report Independent Review into the Oversight of Local Audit and the Transparency of Local Authority Financial Reporting (Redmond Review), noting that the local audit market is very fragile.33 He concluded that current local audit arrangements fail to deliver, in full, policy objectives underpinning the Local Audit and Accountability Act 2014, and reported an overriding concern that 25 Qq 22–24, 48 26 Qq 45–49 27 Qq 52–53 28 Qq 35, 50 29 Q 24; WGA 2018–19, p 16 30 Qq 17, 36–38 31 Public Accounts Committee, Twenty-sixth Report of Session 2016–17, Financial sustainability of local authorities, HC708, November 2016 32 Public Accounts Committee, Eleventh Report of Session 2019–21, Local authority investment in commercial property, HC 312, July 2020, paras 2, 7 33 Sir Tony Redmond, Independent Review into the Oversight, September 2020, page 1 12 Whole of Government Accounts 2018–19 there is a lack of coherence and public accountability within the existing system.34 Local Government statutory accounts are the only information provided by local authorities that are independently verified through external audit and so function as a key assurance mechanism for government.35 The Treasury stated it was working with MHCLG on the Redmond Review and were looking to published a co-ordinated response to the review by the end of 2020.36

The Treasury confirmed to us that it ultimately bears the financial risk for local authorities. We expressed concerns about the level of oversight and control that the Treasury is exercising and whether it has a sufficient handle on this issue. The Treasury responded that it is working very closely with MHCLG to collect real-time data, but these regular data collection exercises have been limited to special-ringfenced funding allocations for COVID-19.37 The Treasury also stated that MHCLG has shared its assessment of the number of councils that are in significant financial difficulty and that its spending teams work closely with MHCLG.38 34 Redmond review, pp 72–74 35 Ministry of Housing, Communities and Local Government, Local authority financial reporting and external audit: government response to the independent review, December 2020 36 Q 103 37 Q 109 38 Q 111 Whole of Government Accounts 2018–19 13 2 Usefulness and Quality of the WGA Standardising financial reporting

We have previously recommended that financial reporting within the WGA should be improved by providing more detailed disclosures to ensure that users of the account have the comprehensive information needed to understand the public finances.39 WGA is increasingly important to ensuring accountability for public spending on key areas of public interest, for example, it has the potential to help the public and Parliament understand the current and likely future impact of EU Exit on the public finances overall.40 While the WGA 2018–19 did include an estimate of the future liability related to the financial settlement with the EU, it did not include granular information on cross- government spend on EU Exit. Instead the performance report section Spending on EU preparations was based on the high-level figures from a NAO report.41

For the WGA to record the impact of COVID-19, government bodies will need to record costs in a manner that allows the increase in spending due to COVID-19 to be identifiable from any other changes in spending.42 The Treasury outlined that it was asking Departments to track and record how they are using the ring-fenced money for COVID and EU spending, however this involved significant judgement and manual intervention. The Treasury also confirmed that it was in the early stages of considering how to identify and report non ring-fenced spend on COVID-19 and EU Exit , but were not actively looking at introducing time recording processes to enable staff costs to be recorded against COVID-19 or EU exit.43 This would be essential to capture both the true cost to the government of undertaking this work, and whether government has the capacity to deliver.

Previously the Treasury has expressed dissatisfaction at the level of expenditure across all types of government spending that is classified as miscellaneous or other by WGA bodies, as it prevents the WGA providing more granular information. The Treasury stated that the implementation of the new OSCAR II IT system should help improve the quality of the information disclosed.44 To further improve the quality of information about what costs Departments have incurred, the Treasury’s Government Finance Function is planning to bring in a standard chart of accounts which it believes will remove manual work in Departments and provide more granular data.45 However, the introduction of a standard chart of accounts is a time-intensive and costly task, which would need to be timed with when Departments were already changing systems and the Treasury also need to consider interactions with shared service centres. This aspiration aligns with other work already undertaken in the Government Finance Function around converging other processes, such as expense claims.46 39 Letter to Sir Tom Scholar, September 2019 40 Public Accounts Committee, Seventy-Fourth Report of Session 2017–19, para 3 41 WGA 2018–19, p 12; National Audit Office, The cost of EU Exit preparations, HC 102, March 2020 42 Q 84 43 Qq 89, 92 44 Public Accounts Committee, Seventy-Fourth Report of Session 2017–19, para 9 45 Q 93 46 Qq 94, 95 14 Whole of Government Accounts 2018–19 Risks to quality

We see WGA as a valuable and important document for both providing transparency and holding the government to account. In recent years, the Treasury has improved the quality of the WGA and has taken steps to address our recommendations, such as working towards improving the breakdown of the purchase of goods and services note, and providing more useful disclosures in the performance report regarding important areas such as provisions, contingent liabilities, and public sector pensions.47

The NAO highlighted in the C&AG Report for the WGA for the year ended 31 March 2019that the failure to complete local government audits in a timely fashion led to both an increasing number of bodies whose financial information is not included in the WGA and an increase in the number of bodies whose financial information included in the WGA has not been audited. This resulted in a lower quality picture of the financial performance and position of the UK public sector and impacts on the ability to conduct trend analysis of the government’s financial performance and position over time .48 The NAO also warned that challenges to sustainability in the local government audit market, an issue also highlighted in the Redmond Review, may continue to affect the quality and timeliness of the WGA in the future.49

We expect the COVID-19 pandemic to exacerbate these challenges to the timely production of the WGA in future. The Treasury accepted that it can only start to produce the account once it receives a critical mass of audited returns from bodies and that COVID-19 and issues in the local audit market will present significant challenges in producing the WGA 2019–20. Returns for WGA are audited and based on bodies’ statutory accounts. At the date of our evidence session in November last year, there were still four major government departments which had not yet published their statutory accounts for 2019–20.50 The Treasury expected that OSCAR II will be able to produce the consolidation much more quickly once data returns have been received, however the OSCAR II consolidation module was not yet operational.51 47 WGA 2018–19, pp 37–47, 60–62 48 WGA 2018–19, p 186 49 WGA 2018–19, p 186; Redmond Review, p 1 50 Qq 99, 108 51 Qq 88, 99 Whole of Government Accounts 2018–19 15