In 2018, we adopted a new strategy to improve the visibility and explanation of methodological changes in public sector finance (PSF) statistics, not only at the point that they are introduced but also before and after implementation. The strategy included publication of a work programme covering potential development areas. The latest version can be found in our article titled Looking ahead - developments in public sector finance statistics: 2019.
In response to government actions during the coronavirus (COVID-19) pandemic, we announced changes to our plans in July 2020. Because the focus of our work shifted to reviewing and recording government interventions, it has not been possible to fully meet the commitments we set out in the 2019 article.
In the longer term, there is still much uncertainty around the state of public finances and the actions that the government might take to facilitate the economic recovery. Whatever these actions are, it is likely that we will need to consider how they should be reflected in fiscal statistics. In these circumstances, we have decided to suspend the announcement of our work programme beyond the next 18 months.
We expect to return to publishing a longer-term work plan later in 2021 and in the meantime, we will be updating this article with the details of any additional areas of methodology we expect to explore.Back to table of contents
3. Other methodological changes
In September 2020, we made major improvements to the public sector finances (PSF) dataset. These improvements included the recording of Pool Reinsurance Company Limited (Pool Re) implemented as part of our wider review of public financial corporations, updates to our data sources for public pension funds, and several smaller changes, such as the classification of Home Office immigration charges as a combination of taxes and fees. A detailed explanation of the changes is available in the September 2020 version of this publication.
Alongside these developments, we continued making routine updates, such as incorporating new data from the UK National Accounts and student loan forecasts into our statistics.
Where these updates give rise to impacts on public sector net borrowing (PSNB), we have included them in Table 2 of the Public sector finances (PSF) bulletin. Alongside the bulletin, Impact of Pool Re and other classification, methodology and data changes introduced in September 2020: Appendix J presents the effect of these changes on all our headline public sector measures: public sector current budget, net investment, net borrowing, net debt and net financial liabilities excluding public sector banks.Back to table of contents
4. Expected future changes
There remains considerable uncertainty about the actions the government might take in response to the economic consequences of the coronavirus (COVID-19) pandemic. We are expecting our focus to remain on reviewing and implementing support programmes provided by the UK government and, for that reason, we have temporarily suspended announcing our medium- and long-term work programme.
Nonetheless, we have made significant progress in some of the areas listed in the 2019 edition of the Looking ahead article. This section describes the changes we are expecting to implement in 2021 and beyond. It will be updated when new work packages are identified.
The Budget 2021 contains various new measures to lead the economic recovery. In addition to the support schemes closely linked with the effects of the coronavirus pandemic (described in Section 3), these include a new UK Infrastructure Bank, a super deduction on companies' investment in new equipment, and a Help to Grow scheme. We will review the statistical treatment of the schemes and will explain their impact on the fiscal aggregates at the earliest possible opportunity.
The Budget 2020 provided for a review of the fiscal framework to ensure it remained “appropriate for the current macroeconomic environment”. While the coronavirus pandemic has had major implications for the review, we are resuming work on improving the quality of the balance sheet data particularly in areas beyond those included in public sector net debt (PNSD). This project will deliver quality improvements to the existing measures by making greater use of administrative sources, such as HM Treasury’s Whole of Government Accounts, and will allow us to extend and improve our supplementary wider balance sheet statistics.
New International Financial Reporting Standards treatment of leases
In 2016, the International Accounting Standards Board issued the International Financial Reporting Standard 16 (IFRS 16), which replaced the earlier International Accounting Standard 17 (IAS 17) and prescribes a different treatment of leases in business accounting.
Under IAS 17, financial statements categorise leases as either finance leases (reported on lessees' balance sheet) or operating leases (off balance sheet). Under IFRS 16, nearly all leases will be reported on balance sheet within lessees' financial statements, leading to increases in lessees' reported debt and non-current assets. However, the guidance under IFRS 16 is not necessarily symmetric between lessees and lessors meaning that the lease may or may not be recorded on the lessors' balance sheet.
The changes resulting from IFRS 16 are a potential issue for the public sector finance (PSF) statistics. Most UK public sector organisations compile accounts in accordance with IFRS, adapted or interpreted for the public sector. At present, the source of leasing data in the public sector finances is the business accounting data compiled in accordance with IAS 17. In effect, this means that we are using IAS 17 data as a proxy for European System of Accounts: ESA 2010. This is necessary because of the very large number of leases (numbering in the tens of thousands) in place across the public sector and the impossibility of individually classifying under European System of Accounts: ESA 2010 each individual lease.
IFRS 16 is conceptually markedly different from both IAS 17 and ESA 2010. Therefore, it is likely that the data sources used for leases in PSF will report step changes when the new standard is adopted. In addition, the lack of symmetry between lessee and lessor recording in IFRS 16 presents challenges for national accounts and public sector finances, which need to fully reconcile between sectors.
Therefore, we have to consider how to continue to compile ESA 2010-compliant leasing data once the underlying source is following the new IFRS 16 standard. We are working closely with HM Treasury to find a resolution to this challenge. As part of this work, we have reviewed a small representative sample of government leases to determine how they would be classified under ESA 2010. We have then compared this with the accounting under IFRS 16 and IAS 17 to investigate which would be a more suitable proxy for ESA 2010.
Through this work, we found that all the public sector property leases reviewed had substantial risk transfer from the lessor to the lessee indicating that a recording as a financial lease would be most appropriate. This was unexpected, as under IAS 17 most property leases would be accounted for as operating leases.
Based on this analysis, we have concluded that:
- in the case of property leases, IFRS 16 is a good proxy for ESA 2010, so we will use IFRS 16 data
- in the case of non-property leases, IFRS 16 is not a good proxy, so we will use IFRS 16 data, which have been adjusted to better align with the concepts applied in ESA 2010
Having come to this conclusion, we have worked with HM Treasury to source appropriate data not only for future public sector leasing, but also to revise the leasing data historically, so that the full data time series is on a consistent methodological basis. We have made considerable progress on estimating the impacts of leases related to central government units. However, more work is needed to establish the correct statistical classification of the more diverse set of local government leases, as well as those related to rolling stock of public train operating companies. We expect to undertake this work over the coming year.
The effect IFRS 16 will have on the UK's fiscal aggregates and other economic statistics is difficult to estimate at this stage, as is the effect it may have on the size and operation of leasing markets. These effects were summarised in the 2018 edition of the Looking Ahead article, and as soon as further analysis on the potential impact has been carried out, we will look to make the relevant estimates available.
National non-domestic rates
In the national accounts and fiscal statistics, tax receipts are generally recorded on an accrual basis rather than on a cash receipt basis. In other words, we record government revenue at the point where the tax liability arose for businesses and individuals, rather than when the tax was actually paid.
Accrued revenues for national non-domestic rates (NNDR), also known as business rates, are presently calculated using a mixture of cash information and assessments of likely receipts.
This method is based on the total number of taxable properties across local authorities, their applicable tax rates and reliefs, and the amount that taxpayers are liable to pay in a financial year, together with relevant adjustments, which vary slightly for different parts of the UK, as NNDR is a devolved tax.
Prompted by changes in business rates retention by local authorities and by the introduction of the option to pay the rates in 12, rather than the default 10 monthly instalments, we began to review our methodology in 2018 to establish whether we could make any main improvements. We have since worked with relevant government departments to ensure that all aspects of NNDR will be reflected in the new accruals process.
We will use data from the Valuation Office Agency (VOA) to help establish new apportionments by sector; and data published by the Ministry of Housing, Communities and Local Government (MHCLG), including data on cash receipts, arrears and refunds from their Quarterly Revenue Collection. Taking into account that over-payments, arrears and refunds of NNDR occur, we will apply the accruals methodology to the analyses of these data.
While our new accruals methodology for NNDR remains under development, we have ensured that wherever possible, our existing statistics reflect the impact of the coronavirus pandemic and government policies. In response to the coronavirus pandemic, qualifying businesses in retail, leisure and hospitality were eligible for business rates relief (alternatively described as a business rates holiday or discount) for the financial year ending (FYE) 2021.
At the end of 2020, some businesses announced their intention to make payments in lieu of the business rates relief.
Considering the voluntary nature of this decision, we treat the associated payments by these businesses in respect of FYE 2021 not as business rates (taxes), but instead as capital transfers to central government from the private non-financial corporations sub-sector, recorded at the point of payment.
McCloud case and other changes to pension data
In 2015, the government introduced changes to most public sector pension schemes. As part of the transitional arrangements, older members of the pension schemes had an opportunity to stay in their original pension schemes, which offered better terms than the new schemes introduced at the time, whereas younger members had to transfer to the new schemes. In December 2018, the Court of Appeal ruled that these arrangements amounted to unlawful age discrimination in a decision that was later upheld by the Supreme Court.
Although the court ruling was related to judges’ and firefighters’ pension schemes, the government confirmed that the difference in treatment needed to be remedied across all relevant public sector pension schemes.
Following a consultation, information about the McCloud remedy was published in February 2021.
Most public sector pension schemes affected by the McCloud remedy are unfunded. The ESA 2010 framework considers obligations under unfunded schemes to be contingent. Such obligations are included in the supplementary statistics, such as the UK National Accounts Table 29: Accrued-to-date pension entitlements in social insurance and datasets compiled in accordance with the International Monetary Fund’s Government Finance Statistics Manual, but are not recorded on the public sector balance sheet in the core UK National Accounts publications such as the Blue Book, nor in the ESA 2010-based public sector finance statistics. Thus, the remedy implemented by the unfunded schemes will have no direct impact on the balance sheet aggregates and will affect public sector net borrowing (PSNB) to the extent that the actual amount of pension benefits payable should change.
Unlike unfunded obligations, liabilities of funded pension schemes are included in the ESA 2010-based statistics. As a result, movements in the gross liability of the funded Local Government Pension Scheme will be transmitted simultaneously to the wide balance sheet aggregate, public sector net financial liabilities (PSNFL), and to the flow measure, PSNB, where a capital transfer will be recorded to reflect a negotiated change in obligations. The McCloud remedy will have no direct effect on public sector net debt (PSND), which excludes all pension obligations.
In addition to these changes, we will be updating our pension estimates to incorporate the new data and revise the discount rate assumption from 5% (nominal) to 4% (nominal) in line with international requirements. More information about this change is available in our publication Pensions in the national accounts, a fuller picture of the UK’s funded and unfunded pension obligations: 2018. For impact on public sector finance statistics, please see our methodological guide.
Sale of railway arches
On 11 September 2018, Network Rail announced it had agreed terms for the sale of its Commercial Estate business in England and Wales. On 4 February 2019, the National Audit Office confirmed that Network Rail had completed a £1.46 billion sale of its commercial property portfolio consisting of approximately 5,200 properties across England and Wales, mainly railway arches.
Public sector net debt at the end of February 2019 and the central government net cash requirement in February 2019 were each reduced by an amount equivalent to the cash received by central government from the sale. We announced on 31 March 2020 that the agreement would mainly be treated as an operating lease with payments for market output being made over a long period of time. Further details are given in the public sector classification guide. This classification is not yet reflected in the statistics and, given the retrospective nature of the change, we expect to include it in the 2021 change package.
Clinical negligence indemnity cover
On 1 April 2019, the government announced the Clinical Negligence Scheme for General Practice (CNSGP), operated by NHS Resolution on behalf of the Secretary of State for Health and Social Care.
The scheme provides comprehensive cover to all general practitioners (GPs) and their wider practice team for clinical negligence relating to NHS services occurring from 1 April 2019. In parallel, the government has agreed commercial terms with the Medical Protection Society covering claims for historical NHS clinical negligence incidents concerning their GP members occurring at any time before 1 April 2019.
We have assessed the CNSGP against the internationally agreed guidance and concluded that claims arising from a ruling of negligence will be recorded as an other miscellaneous current transfer. This expenditure of central government will contribute to an increase in PSNB at the time the compensation is due.Back to table of contents
5. Future developments
Over the coming months, we will be updating this article with new information as it becomes available. It should be noted that we are not seeking to quantify the complete fiscal impact of the coronavirus (COVID-19) in our publications; an increase in the amounts of social benefits paid, for instance, would need to be measured against the amounts that would have otherwise been paid. Such analysis, which involves economic modelling, is produced by the independent Office for Budget Responsibility.
Rather than identifying the extra demands placed on public finances by the coronavirus pandemic, our statistics focus on the total levels of public sector borrowing and debt. To that end, we intend to publish a detailed article describing how we have recorded coronavirus support schemes (the smaller of which are not discussed in this article) and how they affected the fiscal aggregates.Back to table of contents
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