1. Summary and structure of this guide

This methodological guide provides comprehensive contextual and methodological information concerning the monthly Public sector finances (PSF) statistical bulletin, which is jointly produced by Office for National Statistics (ONS) and HM Treasury (HMT). The guide sets out the conceptual and fiscal policy context for the bulletin, identifies the main fiscal measures and details how these are derived and inter-related. Additionally, it details the data sources used to compile the monthly estimates of the fiscal position.

This guide updates and summarises the content of a range of published articles, including the previous version of the PSF methodology guide (PDF, 361KB) published in August 2012.

Section 2 introduces the bulletin and the main fiscal aggregates that it provides. It also provides summary information on a range of users and uses of PSF statistics and related data.

Section 3 explains how PSF statistics are compiled according to national accounting rules, which determine the composition and the boundaries of the public sector and the categorisation of transactions undertaken by public sector bodies. It also refers to several alternative accounting and expenditure monitoring systems that are applied to underlying data sources, such as government departments’ annual financial statements.

Section 4 introduces the fiscal policy context around PSF statistics. It describes the various fiscal frameworks and targets that the current and previous governments have adopted. It also outlines the UK’s European deficit and debt reporting requirements under the Maastricht Treaty and their relationship to the data published in the PSF bulletin.

Subsequent sections are structured as follows:

  • Section 5 outlines the main fiscal aggregates reported in the PSF bulletin and their inter-relationships

  • Section 6 documents the sources of the data brought together to produce the main aggregates and discusses certain data quality issues

  • Section 7 outlines the relationship between the public sector finances and the UK National Accounts

  • Section 8 lists the main acronyms and abbreviations used in this guide

  • Section 9 provides contact details for anyone seeking further information or to provide comments

  • Several annexes provide supplementary information

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2. Introduction to public sector finances statistics

2.1 About the public sector finances

Public sector finance (PSF) statistics for the UK are compiled and published monthly in the Public sector finances statistical bulletin, which aims to provide users with an indication of the current state of the UK’s fiscal position.

PSF statistics are published jointly by Office for National Statistics (ONS) and HM Treasury (HMT). Details of each organisation’s responsibilities and accountabilities (PDF, 154KB) are available.

The statistics in the PSF bulletin are designated as UK National Statistics, which signifies that they are produced, managed and disseminated in accordance with the Code of Practice for Statistics.

The UK Statistics Authority has a statutory duty to assess (and periodically reassess) all designated National Statistics against its Code of Practice. The Authority published an assessment report for the PSF bulletin in October 2015.

2.2 Main measures of the state of the public sector finances

While the Public sector finances (PSF) bulletin presents a wealth of data on the public finances, prominence is given to a set of main aggregate measures.

All statistical aggregates published in the bulletin are defined using national accounts concepts and rules. Office for National Statistics (ONS) produces the UK National Accounts on an internationally comparable basis, in accordance with the System of National Accounts 2008: SNA 2008 and the European System of Accounts 2010: ESA 2010. The SNA and ESA guidelines are updated periodically and since 2014 we have compiled PSF data with reference to the most recent guidance, ESA 2010, which is supplemented by the Manual on Government Deficit and Debt. These European texts are consistent with the United Nations System of National Accounts: SNA 2008.

The main fiscal measures reported each month in the bulletin are summarised in this section and discussed further in Section 5 of this guide.

The first four measures or aggregates detailed in this section have figured prominently in the bulletin for several years and can be regarded as headline aggregates. It should be noted that these four main aggregates are all "ex-measures", which signifies that the impact or contribution of any public sector banks has been excluded from the relevant calculations. There is currently just one banking group within the public sector, the Royal Bank of Scotland Group, although several other banks were formerly classified to the public sector in the wake of the financial crisis that began in 2007. More details of the effects and impact of the crisis are provided in Section 4.

Public sector current budget deficit (PSCB ex)

The public sector current budget deficit (PSCB ex) is the amount by which current expenditure and depreciation on capital assets together exceed current receipts. For months or other periods in which receipts exceed current expenditure and depreciation combined, there is a PSCB surplus rather than a deficit. The deficit or surplus is calculated on an accruals basis in accordance with ESA 2010. Accrual accounting is described in more detail in Section 3.

Public sector net borrowing (PSNB ex)

Public sector net borrowing (PSNB ex) is the amount by which total spending (current expenditure plus net investment) exceeds total receipts (including net capital transfers). Many commentators refer to the level of PSNB as “the deficit”. As with PSCB, measurement of PSNB is on an accruals basis consistent with ESA 2010.

Public sector net debt (PSND ex)

Public sector net debt (PSND ex) comprises the excess of the public sector’s financial liabilities (in the form of loans, debt securities, deposit holdings and currency) over its liquid financial assets (mainly foreign exchange reserves and cash deposits), with both measured at face or nominal value. It is often presented as a percentage of gross domestic product (GDP), which makes comparisons over time and with different countries more meaningful and is derived in accordance with ESA 2010 principles.

Public sector net cash requirement (PSNCR ex)

The public sector net cash requirement (PSNCR ex) is a cash measure closely related to PSNB (an accrued measure). It measures the public sector’s need to raise cash by, for example, issuing gilts or running down liquid assets.

Until 1998, there was a broadly equivalent cash-based measure known as the public sector borrowing requirement (PSBR). The PSNCR name was introduced in 1998 to avoid possible confusion with PSNB. Although the PSNCR ex provides information on the cash demands of the public sector, most users of the public sector finances who are interested in cash data focus attention on the central government net cash requirement (CGNCR). This is because the CGNCR provides a better metric of the amount of gilts and Treasury Bills that the UK government needs to issue. In contrast, PSNCR ex includes cash transactions that have no direct impact on the government’s financing needs.

While the ex-measures are the government’s preferred measures of the fiscal position and are used to set fiscal policy, the PSF bulletin also provides versions of each of the aggregates that encompass all public sector entities including public sector banks.

In the 2016 Autumn Statement, the government introduced two new supplementary fiscal aggregates that provide additional information concerning:

  • the fiscal impacts of operations by the Bank of England (BoE) to support the UK economy

  • the public sector balance sheet

These supplementary aggregates, which were published for the first time in the December 2016 PSF bulletin, comprise:

  • public sector net debt excluding the Bank of England (PSND ex BoE) – which removes the liquid assets and liabilities held on the BoE’s balance sheet from PSND

  • public sector net financial liabilities (PSNFL) – a broader fiscal aggregate than PSND, which recognises all public sector financial assets and liabilities recognised by the national accounts

The composition and calculation of the aggregates introduced in this section and their inter-relationships are discussed in more detail in Section 5.

Various additional sources of official data complement the statistics provided in the PSF bulletin. Some provide more detail on components within the underlying data (such as receipts or expenditure), whilst others focus on alternative measures of the state of the public sector finances. These sources are detailed in Annex 1.

2.3 Users and uses of public sector finances statistics and related data

Public sector finances (PSF) statistics and related data on government finances are vital inputs to the policy and forecasting work of HM Treasury (HMT) and the Bank of England (BoE), as well as the official forecasts produced by the Office for Budget Responsibility (OBR). In particular, the main fiscal aggregates introduced in Subsection 2.2 are used by HMT and OBR to monitor progress against fiscal forecasts and provide the baseline for the OBR’s forecast.

The Debt Management Office (DMO) is both a supplier of data inputs and a user of public sector finance’s statistics. Its responsibilities include debt and cash management for the UK government, lending to local authorities and managing certain public sector funds. It monitors main fiscal measures presented in the PSF bulletin, principally CGNCR, to inform its decisions relating to debt and cash management.

The public sector finances also provide related deficit and debt statistics (which are discussed in Section 4.3 of this guide) to the European Commission to monitor UK fiscal performance against EU targets.

Through research and feedback, we have also been able to identify a broad range of additional users and uses of public sector finances statistics. Examples include:

  • UK-based research and analytical organisations such as: the Institute for Fiscal Studies (IFS) and the National Institute for Economic and Social Research (NIESR), which use the data as input into their assessments of economic performance and sustainability; and the House of Commons Library, which provides impartial information and research services for Members of Parliament and their staff in support of their parliamentary duties

  • international bodies such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), which assess the performance of national economies and make policy recommendations to foster global growth and economic stability

  • members of the general public, who may use the (headline) statistics to assess UK fiscal performance and the implications for their own well-being and investment decisions

  • commercial analysis and research bodies, such as CEIC Data Co. Limited, FactSet and Timetric, who analyse data on behalf of their clients

  • news-focused media organisations, such as Thomson Reuters, Bloomberg, the Economist and the national newspapers, which use the statistics and associated commentary to deliver headlines and underlying narratives

  • rating agencies such as Standard and Poor’s, Moody’s and Fitch, which issue credit ratings for the debt of governments and both private and public corporations; additionally, they utilise public sector finances statistics in risk analysis to provide investment advice to clients

  • academics, who use data primarily for economic and financial analyses, which typically underpin articles for academic journals or other publications

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3. Concepts

3.1 What is the public sector?

A prerequisite for compiling statistics for the public sector is to determine the composition and boundary of the public sector.

Office for National Statistics (ONS) has documented procedures to determine which entities should be classified within the public sector. We make classification decisions in accordance with the legally-binding European System of Accounts: ESA 2010 and supplementary guidance, in particular the Manual on Government Deficit and Debt (MGDD). These documents set out the rules by which member states of the European Union are required to produce national accounts and provide statistics on government finances.

The broad sectoral breakdown of the UK public sector published in the Public sector finances (PSF) bulletin is:

  • central government

  • local government

  • public corporations

The central government and local government sectors are, from an ESA 2010 perspective, subsectors of the general government sector. For analytical purposes and to produce main fiscal aggregates the public corporations sector is further split into the following components:

  • Bank of England

  • public sector banking groups

  • other public corporations (mainly non-financial corporations)

Further information on these subsectors follows.

The central government (CG) subsector

The CG subsector includes all administrative departments of the state and other central agencies whose competence extends over the whole country. This subsector includes, amongst others, public sector entities dealing with taxation, defence, health and other main functions of government.

NHS Trusts and Academy Schools are part of central government, as are Network Rail and UK Asset Resolution Ltd. ESA 2010 specifies separate subsectors for state government and social security funds, but after due consideration it has been concluded that the UK does not have any entities that meet the criteria for inclusion in these subsectors. Hence bodies such as the devolved administrations are included within the central government subsector.

The local government (LG) subsector

The LG subsector comprises administrative bodies, such as local authorities, whose competence extends only to particular localities within the economic territory of the UK. This includes non-profit institutions that are under the control of a local authority or other local government body. The local authority Housing Revenue Account, which is the account that relates to most local authority-controlled housing, is excluded from the LG sector as it is treated as a public corporation.

The public corporations (PC) subsector

Public corporations are publicly-controlled enterprises. They include both non-financial and financial corporations. Historically, the former have been more significant in terms of numbers and their impact on the public finances but this declined following the privatisations of the 1980s and early 1990s.

The financial crisis of 2007 prompted the UK government to take control of several commercial banks. As of March 2014, the Royal Bank of Scotland Group is the sole remaining government-controlled bank within the PC subsector. The Bank of England (BoE), which fulfils the functions of a central bank, is also necessarily classified to the public corporation sector. Data for the BoE have been presented separately within the PSF bulletin since January 2011 and comprise ONS estimates derived from the BoE’s published accounts. Prior to January 2011, in the PSF bulletin data for the BoE were incorporated within time series for the entire public corporation subsector.

The composition of the UK public sector is illustrated in Table 1 in Section 3.2.

3.2 Sector classification

The Public sector finances (PSF) bulletin relies on a clear, transparent definition of the public sector. Office for National Statistics (ONS) decides which entities are to be allocated to the public sector and the relevant subsector. We have a published classification process and a forward work plan.

It is important to have clearly defined boundaries between the public and private sectors, and between subsectors. In conjunction with the Statistical Office of the European Union (Eurostat), we have developed comprehensive criteria for making classification decisions. While the demarcation between private sector and public sector entities is fundamental, allocation to the appropriate subsector is also important. Eurostat is particularly interested in statistics relating to the general government (GG) sector, which comprises the combined central government (CG) and local government (LG) subsectors, as the European Union fiscal rules relate to the GG sector and not the wider public sector.

International statistical manuals, namely ESA 2010, System of National Accounts: SNA 2008, and MGDD, provide the broad framework and principles for making classification decisions. HM Treasury (HMT) has published guidance agreed with ONS to assist government departments in classifying their activities and the activities of their subsidiary bodies for the purposes of compiling national accounts and PSF statistics.

Where there are issues in interpreting guidance and when new entities are being or have been created, policy departments provide details to HMT’s Classification Branch or the equivalent team in the relevant devolved administration (DA). In instances where a classification decision is relatively straightforward, HMT or the DA can advise departments accordingly. For more complex cases, HMT or the DA invites ONS to make the appropriate classification decision.

A 2016 methodology article explains how classification and methodological decisions that impact on the PSF are made. Decisions are made in accordance with expert advice provided by the Economic Statistics Classification Committee and/or the Public Sector Finances Technical Advisory Group (PSFTAG).

For entities (as opposed to transactions which are discussed later), the classification process essentially comprises two main stages. That is:

  • determining whether the entity is within the public sector or the private sector

  • deciding whether the entity is a market, or non-market, producer

The allocation of an entity to the public or private sectors is determined by identifying who ultimately exercises control over its operations. Ownership and provision of finance are secondary considerations. International guidance defines control as the ability to determine general corporate policy, via the appointment of directors, possessing over 50% of voting rights, or via special legislation, decree or regulation. If such control is exercised by one or more public sector bodies, the entity is classified to the public sector.

The market versus non-market dichotomy is important insofar as it establishes whether public sector entities are public corporations (market) or part of general government (non-market). Both qualitative and quantitative criteria are considered when deciding whether a body is a market producer.

From a qualitative perspective, market producers are defined by charging “economically significant prices” (that is, prices that have a substantial influence on the amounts of products that producers are willing to supply and on the amounts of products that purchasers wish to acquire) for all or most of the goods and services they produce. By contrast, some units provide all or most of their output to others free of charge or at prices that are not economically significant – these are non-market producers.

If the qualitative criteria are met, the broad quantitative guideline for classifying a body as a market producer is that more than half of its production costs should be covered by revenue from sales (rather than grants, taxes, or other similar forms of income). This is generally known as the quantitative market test.

For financial corporations, applying the market test can be challenging. Identifying and accurately measuring their output is rarely straightforward. Taking the example of financial intermediaries, such as banks and building societies, their principal function is to serve two sets of customers: depositors, who provide funds in exchange for interest on those deposits; and borrowers, who pay a higher rate of interest to access funds via loans, overdrafts or other means. The value of the service provided by the financial intermediaries to depositors and borrowers is known as a financial intermediation service charge indirectly measured (FISIM). This article details issues around measuring FISIM for UK financial institutions.

ONS is the final arbiter of national accounts classification decisions in the UK and we may examine cases on our own initiative at any time. In instances where there is significant doubt about the correct interpretation of the international statistical rules, we also consult with the Statistical Office of the European Union (Eurostat).

On occasion the national accounts rules and classification process are insufficient to provide full clarity as to how to record a unit or transaction in the PSF. In such cases the Public Sector Finances Technical Advisory Group (PSFTAG) is consulted. PSFTAG comprises a group of experts who advise on classification issues that arise when defining how organisations, transactions and balance sheet levels should be recorded specifically in the public sector finances. Further details on the role and membership of PSFTAG can be found in the methodology article.

Deciding whether a particular asset is a liquid asset, and so should be netted off in public sector net debt, is an example of a decision which would be made by PSFTAG as the concept of liquid assets is not defined within the international national accounts guidance.

3.3 Alternative accounting systems – financial reporting versus statistical reporting

The national accounts summarise economic activity within the UK economy over a given period and enable the generation of economic indicators, such as gross domestic product (GDP). They also present information on lending and borrowing by different sectors (including households and the private sector, in addition to the public sector) in the capital account and the financial account; and the balance between assets and liabilities, termed net worth, for sectors and the UK overall, in the balance sheets account.

National accounts must be compiled in accordance with the global statistical framework of the UN, described in the System of National Accounts 2008: SNA 2008. Although, as a member of the European Union (EU), Office for National Statistics (ONS) is legally obliged to adhere to the European System of Accounts 2010: ESA 2010, the European version of the SNA 2008, to produce the UK National Accounts. The principles underlying ESA 2010 are also applied to the production of public sector finance (PSF) statistics, as successive UK governments have chosen to frame fiscal policy on ESA concepts, as outlined in Section 4.

ESA 2010 was adopted in the UK in 2014, replacing its predecessor, the European System of Accounts 1995: ESA 95. SNA 2008 and ESA 2010 (as well as ESA 95) are founded on the accruals approach to accounting, as are most modern business accounting standards. This means that transactions and associated claims and obligations are recorded in the period that they are agreed via formal contracts or otherwise, regardless of when payments are made.

Unlike most business-oriented accounting systems, statistical accounting frameworks, such as ESA 2010, do not generally recognise accounting provisions (apart from standardised guarantees), nor contingent assets or liabilities. Nevertheless, EU Council Directive 2011/85/EU includes statistical requirements for the publication of specific contingent liabilities and other potential liabilities.

Eurostat’s Manual on Government Deficit and Debt (MGDD) gives supplementary guidance concerning the application and interpretation of ESA 2010 with regard to the public sector, although its primary focus is on general government. MGDD is especially relevant to the transmission of government excessive deficit and debt (EDP) data, which EU member states must provide to the European Commission, in accordance with the Maastricht Treaty.

MGDD and ESA 2010, like most modern accounting frameworks, focus primarily on economic substance rather than merely on legal form. Often, such an approach requires an analysis of which party bears the risks and rewards associated with an asset, liability, or transaction.

Although the production of PSF statistics is consistent with ESA 2010, some of the underlying source data are derived from reported data on cash flows and from business-oriented accounting systems, which are discussed in this section.

Given that some accounting systems, such as ESA, are designed for statistical purposes while others focus on financial reporting, issues of non-alignment and inconsistency may arise if data produced for the latter purpose are required as inputs to statistical products. In the preparation of PSF statistics, care is taken to ensure that the source data derived from public sector accounting systems are, where necessary, transformed to achieve consistency with the statistical rules prescribed by ESA. PSF data sources and the adjustments made to transform input data into an ESA-consistent form, are discussed in Section 6.

3.3.1 Cash management systems

The concept of cash is widely understood and accepted. Cash comprises notes and coins, together with holdings in accounts with banks or other financial institutions and can be readily accessed or transferred by electronic or other means. Cash is the quintessential liquid asset and can be used to settle any financial obligations. Other assets, be they financial or non-financial, can only be deemed to be liquid if they can easily and speedily be converted to cash with negligible impact on their value.

Tax authorities in many countries, including HM Revenue and Customs in the UK, allow small businesses to report their finances on a cash basis, as this is generally easier and less time-consuming. Cash payments are recorded when they are made or received, regardless of when the associated transactions or economic activities are undertaken. However, corporations are obliged to use accruals-based accounting systems, which are acknowledged as providing a better guide to the financial performance and position of a business than cash-based recording. Nevertheless, it is important for companies to carefully monitor cash flows to ensure that they can meet short-term financial obligations. The same is true for government.

HM Treasury (HMT) has a cash management and forecasting system, which is the primary source of monthly cash data that feed into the public sector finances and underlie some of the main statistics presented in the PSF bulletin (in particular the net cash requirement aggregates).

Another source is the Debt Management Office (DMO), which is an executive agency of HMT and is responsible for government (Exchequer) debt management and cash management. It conducts auctions of gilts to raise funds on a long-term basis and of Treasury Bills, which are a form of short-term funding (with maturities ranging from 1 to 12 months).

The DMO’s debt management remit is published annually by HMT as part of the Debt Management Report. The debt management objective is “to minimise, over the long-term, the costs of meeting the government’s financing needs, taking into account risk, while ensuring that debt management policy is consistent with the aims of monetary policy.” Its cash management objective is to ensure that sufficient funds are always available to meet any net daily central government cash shortfall and minimise the cost of offsetting the government’s net cash flows over time, within a risk framework approved by ministers. The DMO carries out market operations in light of forecasts of daily net cash flows into or out of the National Loans Fund (NLF), provided by HMT.

While the Exchequer's cash flow has a regular seasonal and monthly pattern, it is also subject to uncertainty with regards to the timing of some tax and expenditure flows. DMO achieves these net cash flow requirements for the government through a combination of bilateral dealing with market counterparties and Treasury Bill issuance. The range of instruments and operations that the DMO may use for cash management purposes is set out in its published Operational Notice.

The DMO also has operational responsibility for the Public Works Loan Board (PWLB), which is responsible for lending money from the National Loans Fund to local authorities and collecting the repayments. However, the policy framework is set by the Treasury.

In addition to its role in conducting monetary policy, the Bank of England (BoE) provides banking services for government and other financial institutions within and beyond the UK. It provides government with foreign currency accounts and payment services, securities custody and settlement services. It also acts as the DMO’s settlement agent and as HMT’s agent in the day-to-day management of the Exchange Equalisation Account, which holds the UK’s official reserves (consisting of reserves of gold, foreign currency assets and International Monetary Fund Special Drawing Rights). Consequently, BoE is also an important supplier of monthly cash data, which relate primarily to earnings and flows.

While HMT, the DMO and BoE are the primary sources of cash data, there are various additional sources. The most significant of these are National Savings and Investments (NS&I) and UK Asset Resolution Limited (UKAR). NS&I is a government department that provides financing to government by issuing and selling retail savings and investment products to the public. UKAR is the holding company for Bradford and Bingley plc (B&B) and NRAM Limited, and is responsible for the orderly management of the closed mortgage books of both B&B and NRAM.

3.3.2 Financial reporting and business accounting

While cash data are essential to the production of monthly PSF statistics, comprehensive statistics on the state of the public finances also require the extraction of relevant data from financial reports (typically produced annually or bi-annually). For published PSF statistics, much of the required basic data is sourced from the financial reporting systems of public sector bodies, such as central government departments, local authorities, health trusts and public corporations.

These bodies maintain accounting systems for two main purposes: internal reporting (budgeting and performance measurement) and external financial reporting. For external reporting, data must conform to, or be converted into, a form that is compatible with the legally required accounting framework. For internal reporting, data may be held in more flexible forms that satisfy alternative categorisations and accounting rules.

Government departments have prepared annual accounts since 1866. Until financial year ending (FYE) 2000, the accounts were reported on a cash basis. By the late 1990s, it had become evident that the perceived advantages of cash accounting (namely the availability of timely and accurate estimates) were outweighed by some serious drawbacks. As cash measures reflect the timing of payments rather than underlying transactions, they are more prone to erratic and volatile movements. Hence, on balance, accruals-based reporting offers a better guide to the performance of individual entities and to the underlying fiscal position of the public sector than an exclusively or primarily cash-based approach.

Accruals-based accounting standards have been developed primarily as guidelines for financial reporting by private sector corporations. Consequently, when the public sector utilises such accounting standards, issues of compatibility and practical applicability may arise. Hence, financial reporting standards sometimes need to be adapted or interpreted in novel ways for use by public sector bodies.

3.3.3 The Financial Reporting Advisory Board (FRAB), and resource accounting and budgeting (RAB)

The role of ensuring that public sector financial reporting is as consistent as possible with that of the private sector is undertaken by the independent Financial Reporting Advisory Board (FRAB).

The FRAB, which was established in 1996, aims “to promote the highest possible standards in government reporting”. It advises on reporting across government departments and on the implementation of public sector accounting policies. Each year the FRAB updates the Government financial reporting manual (FReM), which is the technical accounting guide for the preparation of financial statements of central government entities. The FRAB also oversees the financial reporting rules applied within the local government and health sectors. ONS and HMT are represented on the FRAB.

The financial year ending (FYE) 1998 saw the start of major changes in public sector financial reporting in the UK with the adoption of resource accounting and budgeting (RAB), which aimed to align accounts and budgets more closely with government policy priorities and facilitate the shift to an accruals basis. Implementation was finally completed in FYE 2000.

The implementation of RAB in 1998 coincided with the adoption of the ESA 95 statistical framework for national accounts. These developments were reflected in a new-style PSF bulletin, which gave greater prominence to accrued fiscal measures than traditional cash measures. Since 1998, governments’ fiscal targets and rules have also been framed in terms of accrued measures.

3.3.4 IFRS

International Financial Reporting Standards (IFRS) are financial reporting standards developed by the International Accounting Standards Board (IASB), whose purpose is to develop and maintain a set of consistent global accounting standards. The Council of the European Union has adopted certain IASB standards. As such, EU-listed corporate groups, including banks and insurance companies, have been obliged to prepare their consolidated accounts in accordance with IFRS since 1 January 2005. IFRS was implemented and adopted for the UK private corporate sector from 1 January 2005, in accordance with EU Regulation 1606/2002 (PDF, 112KB).

FRAB has interpreted and adapted IFRS for use in the FReM and associated public sector financial reporting manuals. Central government departments adopted IFRS (via the FReM) from FYE 2010 and local government from FYE 2011. The first set of audited IFRS-based Whole of Government Accounts (WGA) was published in December 2011, for FYE 2010.

3.3.5 UK generally accepted accounting practice

UK generally accepted accounting practice (PDF, 1.6MB) (UK GAAP) represents the collected body of UK accounting standards (as issued by the UK Financial Reporting Council), supplemented by guidance published by acknowledged accounting experts. These standards were used by government departments as the basis of reporting their financial accounts on an accruals basis between FYE 2000 and FYE 2009.

3.4 Public expenditure frameworks

Over time, multiple accounting frameworks have developed to measure UK government spending. Each has been tailored to meet the requirements of one or more of the following diverse financial management purposes:

  • budgeting – used by HM Treasury (HMT) to control government spending and overall public expenditure

  • producing estimates, which are the means via which Parliamentary approval is obtained for departmental spending

  • monitoring the overall fiscal position by tracking the main aggregates presented in the PSF bulletin

  • preparing resource accounts (the annual financial accounts and reports of public sector bodies) in accordance with commercial accounting principles (IFRS) adapted for use in the public sector

  • producing the Whole of Government Accounts (WGA), a consolidated set of commercial accounts prepared by HMT for the whole of the public sector

HMT’s budgeting system aims to control public expenditure to support the government’s fiscal framework. It also seeks to provide incentives for departments to manage spending, deliver high-quality public services and offer value for money to taxpayers. Underpinning this is a measurement framework, defined by HMT and explained in detail in the consolidated budgeting guidance. The framework is in some areas aligned more closely with national accounts concepts and principles than underlying departmental resource accounts.

Government departments have separate “resource” budgets (encompassing current expenditure such as pay or procurement) and “capital” budgets (covering new investment and net policy lending). Each budget is then sub-divided into spending that scores either as departmental expenditure limits (DEL), or as annually managed expenditure (AME). DEL spending encompasses items that HMT expects departments to manage and predict quite accurately (for example, staff costs, consultancy services and most grant payments). AME comprises spending that HMT recognises is more difficult to forecast. Typically, this comprises elements that are demand-led and can be volatile, such as benefit payments and tax credits.

Each department’s budget (that is, the amount available to spend) is set for a period of multiple years during the Spending Review process, in accordance with government priorities. For example, in autumn 2015, HMT carried out a Spending Review for the period from financial year ending (FYE) 2016 to FYE 2020 (and, for some departments, up to FYE 2021).

DEL totals are fixed at the review and departments may not exceed them. AME totals are necessarily more challenging to manage, so departments are expected to monitor them closely and inform HMT if spending rises significantly above forecast levels.

Government needs Parliamentary approval for departments’ annual budgets. Estimates are the Parliamentary means of granting this authority. The main estimates, normally published around the start of the financial year, are the starting point of the supply procedure. In approving the estimates, Parliament grants statutory authority for the consumption of resources and capital by government, and for cash to be drawn from the Consolidated Fund (PDF, 310KB) (the government’s main current account held at the Bank of England). Around January or February, new or revised estimates are presented to Parliament, updating the earlier requests for supply. These estimates are generally referred to as supplementary estimates. Once approved by Parliament, the estimates become firm expenditure limits that cannot be exceeded by departments. Extensive guidance on the production of estimates is available on the HMT website.

In the late 2000s, it became clear that the use of multiple spending frameworks was unnecessarily complex, hindering scrutiny and accountability, whilst increasing burdens and reducing efficiency. The Clear Line of Sight Project was set up to address these weaknesses through:

  • aligning the budgets, estimates and accounts frameworks as closely as possible

  • reducing the number of spending publications

  • bringing forward the publication of departmental financial reports and accounts by one month to June

Consequently, from FYE 2012 estimates have been produced on essentially the same basis as HMT’s budgeting framework.

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4. The UK fiscal framework

4.1 Fiscal policy and the public sector finances statistics

While it is intended to assist a diverse range of users, the primary function of the Public sector finances (PSF) bulletin is to provide statistics that enable government and bodies such as the Office for Budget Responsibility (OBR) to monitor and analyse the UK fiscal position (that is, the state of the public finances). These analyses may in turn inform fiscal policy decisions, such as how much government should spend and how this expenditure should be financed (by taxation, by borrowing, or a combination of these). This section of the guide describes the policy context around the bulletin and the various rules and targets that have been set by successive governments in recent decades.

Fiscal policy and monetary policy are the main tools available to steer the UK economy at a macro level.

Currently, the primary goal of UK monetary policy is to maintain stable prices. This involves controlling inflation by adjusting short-term interest rates. Responsibility for overseeing monetary policy was assigned to the Monetary Policy Committee (MPC) of the Bank of England (BoE) in May 1997. The MPC is operationally independent of government and each month it convenes to decide whether to adjust the Bank Rate, an important short-term interest rate, which influences interest rates charged by commercial banks and other financial institutions. Successive governments have set an inflation target for the annual increase in the Consumer Prices Index (CPI) not to exceed 2%. If this target is consistently exceeded the MPC is likely to raise the Bank Rate. The BoE’s secondary monetary policy goal is to support government’s other economic objectives, including those for growth and employment.

Fiscal policy is typically complex. The same overall fiscal position could be reached using numerous and diverse policy interventions. For example, government could fund additional public spending either via increases in taxes or extra borrowing, or a combination of both. Moreover, there is typically no single, clear target to focus exclusively upon. Nevertheless, recent governments have aimed to be more transparent and stable in their conduct of fiscal policy, often working within a published framework with a specified set of overall targets. In earlier periods, fiscal objectives were typically less well-defined and more prone to radical revisions.

4.2 Former fiscal frameworks

4.2.1 Fiscal targets prior to 1997

For around 30 years prior to 1997, fiscal targets were generally expressed in relation to the public sector borrowing requirement (PSBR). A balanced budget had a nil PSBR. As noted in Section 2, the current equivalent of the PSBR is the public sector net cash requirement (PSNCR).

Over the course of the 1980s, governments frequently adjusted their targets for the PSBR, often aiming to reduce it over the medium-term or maintain it at modest levels. The surplus in financial year ending (FYE) 1988 (the first for nearly 20 years) prompted tax cuts and the adoption of a balanced budget as a medium-term objective.

By the early 1990s, the budget surplus had disappeared, although budget balance remained the medium-term objective. The eventual return to balance followed a period of persistent budget deficits. From a peak deficit in FYE 1994, the PSBR was reduced to around 1% of gross domestic product (GDP) in 1997 through strict fiscal control of public expenditure.

4.2.2 The golden rule and framework for fiscal policy (1997 to 2008)

In 1997, as part of its wider macroeconomic reforms, government laid out a new framework for fiscal policy (PDF, 516KB) that included delegating responsibility for monetary policy to the Bank of England (BoE) and for debt and cash management to the Debt Management Office (DMO).

The reforms were intended to alleviate the greater macroeconomic instability of the UK economy compared with other G7 countries, which had become apparent over several decades. Frequent changes to the conduct of fiscal and monetary policy had contributed to this problem.

The new framework was formally introduced at Budget 1998 with a legislated Code for Fiscal Stability, which set out main principles for fiscal management and enhanced reporting requirements. It also prescribed a new role for the National Audit Office (NAO) to audit the assumptions underpinning the public finance projections. It provided for flexibility in responding to unforeseen developments by reformulating fiscal rules and objectives.

In 1997, the government established two fiscal policy objectives with different time horizons:

  • over the medium-term, public finances had to be sound, and spending and taxation had to impact fairly within and between generations

  • over the short-term, automatic stabilisers (see Annex 2) were to be used to help smooth the path of the economy and to complement monetary policy

In 1998, the government established two fiscal rules:

  • the golden rule stated that over the economic cycle the government would borrow only to invest and not to fund current spending

  • the sustainable investment rule stated that public sector net debt (PSND) as a proportion of GDP would be held at a stable and prudent level over the economic cycle; other things being equal, net debt would not exceed 40% of GDP over the course of the economic cycle

In practice, conformance to the golden rule requires a public sector current budget (PSCB) balance or surplus over the duration of the economic cycle. The sustainable investment rule, when applied in conjunction with the golden rule, imposes constraints on levels of capital expenditure by the public sector.

An assessment by HMT in 2008 judged that the government had met its fiscal rules over the economic cycle that had begun in FYE 1998 and had concluded in FYE 2007.

4.2.3 The financial crisis and the introduction, and subsequent modification, of PSF measures excluding financial interventions (2008 onwards)

The onset of the financial crisis and associated shocks that began to hit the UK economy in financial year ending (FYE) 2008 led the government to make exceptional interventions in the financial sector. This included taking control of several commercial banks. The Chancellor, in a lecture delivered in November 2008 (PDF, 2.1MB), signalled that the government would temporarily depart from the fiscal rules, asserting that “to apply these rules rigidly in today's changed conditions would be perverse.”

New concepts and aggregates for measuring the fiscal position were introduced in the PSF bulletin around this time. These comprised measures of public sector net debt (PSND) and public sector net borrowing (PSNB) that excluded the temporary impacts of financial interventions. These so-called ex-measures were typically abbreviated to PSND ex and PSNB ex respectively.

The rationale for this change in focus was that the conventional measures would be distorted by the impacts of these interventions and would not reflect the true, underlying position of the public finances (given that government’s intention was to eventually return control of the banks to the private sector and terminate other special schemes supporting the financial system). Since August 2008 in the case of PSND ex and since December 2009 for PSNB ex, the ex-measures have been reported alongside their longer-established and fully inclusive counterparts in the PSF bulletin.

The 2010 article, Public sector finances excluding financial interventions (PDF, 167KB), explained the underlying rationale and policy context for the ex-measures and how they were derived. Since 2009, the aggregates used for setting fiscal targets have been ex-measures. However, as explained in this section, the definitions of PSNB ex and PSND ex were modified in 2014.

The initial intervention in financial markets that prompted the introduction of the ex-measures was the taking into temporary public ownership of Northern Rock in October 2007. This was triggered by Northern Rock’s precarious financial state, which had obliged it to seek emergency funding from the BoE, precipitating the first run on a British bank in more than a century. The ONS Classification Committee ruled that the public sector had the power to control Northern Rock’s corporate policy and consequently it was classified as a public financial corporation for national accounts and PSF purposes.

Northern Rock’s gross liabilities (net of liquid assets) increased PSND from the point of its entry into the public sector. As the government’s stated intention was to return Northern Rock to private ownership, Northern Rock’s finances were excluded from the public sector, for the purposes of calculating the ex-measures. This meant that Northern Rock’s debt was excluded from PSND ex and its transactions with the private sector were excluded from PSNB ex. Furthermore, it implied that government’s transactions with Northern Rock would affect PSNB ex.

The same rationale and methodology was applied to subsequent interventions relating to other public sector banks, including Bradford and Bingley, Lloyds Banking Group and the Royal Bank of Scotland, each of which was taken under government control. The impacts of certain additional interventions were also initially excluded from the ex-measures.

These interventions principally comprised the establishment of the Asset Purchase Facility (APF) and the Special Liquidity Scheme (PDF, 89KB) (SLS). These schemes were designed to underpin the financial sector, improving liquidity and strengthening banks’ balance sheets, and were operated by the BoE. The SLS allowed banks to swap illiquid mortgage-backed and other securities for specially issued Treasury Bills. The APF was the body set up to carry out the BoE’s quantitative easing scheme, mainly by purchasing gilts financed by a loan from the BoE, created by increasing reserves. They were not intended to have extended lifespans and hence they could be regarded as temporary. The SLS was established in 2008 and terminated in 2012, but the APF which was set up in January 2009 is still functioning.

The APF was established as a wholly-owned subsidiary of the BoE. It is fully indemnified by HM Treasury (HMT): any financial losses resulting from the asset purchases are borne by HMT and any gains are owed to HMT.

Originally, it was envisaged that payments due to or from HMT would be settled when the scheme ended. But the scale and likely duration of the scheme were extended and, in November 2012, HMT announced changes to the cash management arrangements for the APF. This provided for cash surpluses held in the APF to be transferred to HMT on a quarterly basis. Initially these changes did not impact on the treatment of the APF in the ex-measures. However following a UK Statistics Authority review (PDF, 473KB) of the treatment of the transactions, and an Office for National Statistics (ONS) consultation exercise (PDF, 192KB) and review (PDF, 129KB) of the ex-measures, ONS decided in 2014 that only public sector banks would be excluded from the ex-measures.

As part of the consultation and review, ONS developed the following principles to inform the composition of the current (and any future) ex-measures. ONS concluded that they should:

  1. Be as inclusive as possible, whilst avoiding manifest distortions (such as, for example, those from public sector banks) so that they:

    • ensure that the full range of public sector liabilities (on a national accounts basis) are reported as transparently as possible
    • do not intrinsically create one-off factors in their design without justification; the previous method of excluding some indemnified schemes until they came to an end when there was a balancing transaction intrinsically creates one-off transactions, these can then cause further issues for users in assessing underlying trends; for example, when the Special Liquidity Scheme ended there was a one-off impact on net borrowing of £2.3 billion
    • allow transactions or classifications to be excluded if they create distortions that clearly impair the understanding of public sector finances due to their size and their lack of correlation with their effects on the government’s need to issue gilts
  2. Be consistent in their effect on debt and borrowing.

  3. Respect the building block for national accounts: the institutional unit (institutional units have autonomy of decision-making and file their accounts); this means that any ex-measures should not sub-divide institutional units.

  4. Apply the European System of Accounts (ESA) boundary rules for central, local and general government:

    • this ensures that the government net borrowing and gross debt measures in the public sector finances are aligned with the Maastricht definitions of government deficit and debt
    • it means that no ex-measure should exclude any bodies that are categorised in the government sector and so ex-measures should only look to sub-divide the public corporations sector
  5. Be wholly consistent with the ESA guidance on transactions and stocks:

    • this ensures that measures in the public sector finances are calculated in the same way as in international measures and prevents ex-measures being developed that are not consistent with national accounts and Maastricht debt and deficit
    • it further ensures that any ex-measures exclude public sector bodies and then record their transactions and stocks in accordance with national accounts principles, preventing inconsistent treatment in ex-measures of individual transactions and stocks
    • in this way we are ensuring that the measures are based on sound internationally-agreed concepts and definitions
  6. Be created alongside a publication strategy that maximises the transparency of factors that impact on the public sector finances with details published below institutional unit level described fully in terms of the framework outlined previously.

4.2.4 Relaxation of fiscal rules in response to the financial crisis (2008 to 2010)

In its Pre-Budget November 2008 report, Facing global challenges: supporting people through difficult times (PDF, 1.2MB), the government formally announced that in light of the ongoing financial crisis it would temporarily depart from the fiscal rules. This relaxation was intended to allow fiscal policy to shore-up aggregate demand in the economy and reduce the likelihood of a deep recession. Adherence to the golden rule requirement to balance the current budget over the cycle would have required a huge amount of fiscal tightening, which would have exacerbated the economic slowdown.

The government indicated that it was content to allow public sector debt to rise to absorb the immediate shocks, with fiscal policy set to support both the financial sector and the broader economy. The Pre-Budget report detailed a temporary fiscal stimulus package, worth 1% of GDP in financial year ending (FYE) March 2010. This included an immediate, temporary reduction in the rate of VAT to 15% until the end of the 2009 calendar year and the bringing forward of £3 billion of capital spending from the following financial year. The fiscal relaxation was reflected in sharp rises in current budget deficit, net borrowing and net debt for central government and the public sector for FYE 2010.

At the Budget March 2010, preceding the dissolution of Parliament in May, a consolidation plan was presented with the following targets for borrowing and debt:

  • PSNB ex to more than halve from a projected level of 11.8% of gross domestic product (GDP) to 5.5% of GDP or less by FYE 2014

  • PSNB ex to be reduced as a share of GDP in each year from FYE 2010 to FYE 2016

  • PSND ex to be falling as a share of GDP in FYE 2016

4.2.5 The coalition government’s fiscal framework and mandate (2010 to 2015) and the role of the Office for Budget Responsibility

A reformed fiscal framework was established following the formation of the coalition government in May 2010. The new framework was written into legislation via the Budget Responsibility and National Audit Act 2011.

The Act requires governments to lay a Charter for Budget Responsibility (PDF, 259KB) (the Charter) before Parliament. The Charter sets out the government’s fiscal policy framework, which includes HM Treasury (HMT) objectives for fiscal policy, as set by government and HMT’s fiscal mandate (the government’s main fiscal targets). The Charter was initially published in April 2011 but has since been revised and updated on several occasions to reflect modifications made to the framework.

The fiscal policy objectives detailed in the initial 2011 version of the Charter were to:

  • ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness and ensure the effectiveness of wider government policy

  • support and improve the effectiveness of monetary policy in stabilising economic fluctuations

The Charter also presented HMT’s mandate for fiscal policy over the 2010 to 2015 Parliament, which was:

  • a forward-looking target to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period

The mandate was supplemented by:

  • a target for public sector net debt as a percentage of GDP to be falling by a fixed date of FYE 2016, ensuring the public finances were restored to a sustainable path

The Charter also set out HMT’s objective in relation to debt management policy, which was:

  • to minimise, over the long-term, the costs of meeting the government’s financing needs; this was to be done whilst considering risk and ensuring that debt management policy was consistent with the aims of monetary policy

This mandate deliberately focused on current spending, as reflected in the targeting of the current balance. The exclusion of capital expenditure can be viewed as a means of safeguarding public investment, which is generally considered to be the most economically productive element within public spending. A cyclically-adjusted aggregate (see Annex 2) was targeted, such that the automatic stabilisers could operate fully in support of the economy. The mandate was to lapse at the 2015 dissolution of Parliament.

The major innovation detailed in the new framework was the creation of an independent Office for Budget Responsibility (OBR) in May 2010. The rationale was that this would increase transparency and openness in official forecasting and assessments of fiscal policy. It was intended to allay concerns that a Chancellor or ministerial colleagues might otherwise exert pressure on HMT to produce unduly optimistic economic and financial forecasts.

OBR’s principal remit is to examine and report on the sustainability of the public finances. The Charter for Budget Responsibility (PDF, 311KB) states that the remit provides for OBR to investigate the impact of trends and policies on the public finances from a multitude of angles, including through forecasting, long-term projections and balance sheet analysis. It performs this duty completely independently of government.

Prior to the establishment of the OBR, responsibility for producing official forecasts for economic indicators and fiscal aggregates, and for assessing fiscal policy sat with HMT. The Charter specified that, following the transfer of responsibilities to OBR, HMT would “continue to maintain the necessary analytical and macroeconomic expertise to provide ongoing advice to the government.”

The Charter indicated that the Chancellor would commission the OBR to produce fiscal and economic forecasts on specified dates at least twice a year, one of which would coincide with Budget day. The forecast horizon was to be consistent with that set by the Chancellor and would always be for a period of at least five financial years. In practice, since its inception, the OBR has published five-year horizon forecasts for the UK economy and public finances biannually in its Economic and Fiscal Outlook (EFO) publications. In addition, it publishes three other publications:

  • an annual Forecast Evaluation Report (FER) each autumn, examining how the forecasts have compared with subsequent outturns, drawing lessons for improving future forecasts

  • a biannual Fiscal Sustainability Report (FSR), which presents long-term projections for public spending and tax revenue, describes the public sector balance sheet and sets out summary indicators of the long-term sustainability of the public finances

  • a biannual Fiscal Risks Report (FRR), which reviews risks from the economy and financial system, to tax revenues, public spending and the balance sheet

The OBR’s economic forecast includes projections for GDP, inflation, labour market indicators, and the balance of payments current account. The Charter specified that in its forecasts the OBR was to include projections of a number of PSF aggregates, including:

  • public sector current expenditure
  • public sector gross investment
  • public sector net investment
  • public sector current receipts
  • the current balance
  • public sector net borrowing
  • general government net borrowing
  • the central government net cash requirement
  • public sector net debt
  • general government gross debt
  • any other aggregate or indicator as is required to judge progress or achievement against the government’s mandate for fiscal policy, or is required for the purposes of the government’s European commitments, in particular the Stability and Growth Pact

The Charter also required the OBR to assess progress towards meeting fiscal targets. In practice, this has involved assessing whether the government’s fiscal policy is consistent with a greater than 50% chance of meeting the fiscal mandate.

4.2.6 Adjustments to the fiscal framework and mandate: introduction of the welfare cap (2014 to 2016)

As a means of exerting stricter control of spending in an area that can be difficult for government to control, the coalition government decided to introduce a welfare cap. The cap is a cash limit on the amount that government can spend on certain social security benefits and tax credits. The cap excludes expenditure on pensions, Jobseekers’ Allowance and Housing Benefit. Tax Credits, Child Benefit and Disability Benefit are examples of benefits that are in scope. Unlike the other fiscal targets, the welfare cap is not based on national accounts concepts or principles and no data directly relating to the welfare cap is published in the public sector finances.

The introduction of the cap at the Budget 2014 was reflected in an updated Charter (PDF, 192KB) with a revised mandate. The revised mandate included a restating of the target for public sector net debt (PSND) as:

  • an aim for PSND as a percentage of GDP to be falling by 2016 to 2017

Following the general election in May 2015, the Charter (PDF, 428KB) was further updated with a revised mandate for fiscal policy, but no changes in the objectives for fiscal policy or role of the OBR. The updated Charter was approved by Parliament in October 2015 and the revised mandate was expressed as:

  • in normal times, once a headline surplus has been achieved, the Treasury’s mandate for fiscal policy is a target for a surplus on public sector net borrowing in each subsequent year

  • for the period outside normal times from 2015 to 2016, the Treasury’s mandate for fiscal policy is a target for a surplus on public sector net borrowing by the end of 2019 to 2020

  • for the period from 2015 to 2016 until 2019 to 2020, the Treasury’s mandate for fiscal policy is supplemented by a target for public sector net debt as a percentage of GDP to be falling in each year

  • after 2019 to 2020, the normal times target will apply unless and until the OBR assess, as part of their economic and fiscal forecast, that there is a significant negative shock to the UK

  • a significant negative shock is defined as real GDP growth of less than 1% on a rolling four-quarter-on-four-quarter basis.

The expression, “normal times”, can be construed as periods when the economy is growing steadily, in the absence of significant negative shocks as defined in the previous final bullet point.

4.2.7 Current fiscal framework with the introduction of new supplementary fiscal aggregates (2016 onward)

The autumn 2016 update to the Charter stated that, in order to provide for sustainable public finances, HMT’s objective for fiscal policy was to:

  • return the public finances to balance at the earliest possible date in the next Parliament

HMT’s mandate for fiscal policy in Parliament was:

  • a target to reduce cyclically-adjusted public sector net borrowing to below 2% of GDP by 2020 to 2021

The 2016 Autumn Statement included an announcement by the Chancellor that two new supplementary fiscal aggregates had been defined, which would provide additional commentary on the state of the public sector balance sheet and context for the main fiscal metric of public sector net debt. These supplementary aggregates, public sector net debt excluding the Bank of England (PSND ex BoE), and public sector net financial liabilities (PSNFL), are described in Section 5.

The Chancellor also announced that the government intended to move to a single major fiscal event each year. Traditionally, UK governments had tended to reveal their plans for taxation in a spring budget and announce planned government expenditure in an autumn report or statement. However, over time the distinction had become less clear cut, such that planned tax changes might be presented to Parliament either in spring or in autumn.

The Chancellor signalled that the spring 2017 Budget would be the last springtime fiscal event that would include taxation plans. Thereafter, budgets were to be delivered in the autumn, with the first one taking place in autumn 2017. The move to a single fiscal event meant that businesses and individuals would face less frequent changes to the tax system, helping to promote certainty and stability. From winter 2017, Finance Bills were to be introduced following the Budget, affording Parliament more time to scrutinise tax changes before the tax year in which most of them take effect.

4.3 UK fiscal policy since the Maastricht Treaty

In preparation for monetary union, various safeguards against fiscal profligacy were enshrined in the Treaty on the Functioning of the European Union (commonly known as the Maastricht Treaty), which came into force in 1993. The Stability and Growth Pact requires all member states to avoid excessive budget deficits and levels of government debt.

The reference values set out in the Pact, which member states should endeavour not to exceed, comprise a general government (GG) deficit (or net borrowing) of 3% and GG gross debt of 60% of gross domestic product (GDP). Failure to meet these targets and more especially the deficit target, may result in the Commission initiating excessive deficit procedure (EDP) actions, as discussed in this section.

EU member governments are obliged to report their actual and planned deficits, along with their levels of debt, in detailed data tabulations to the Statistical Office of the European Union (Eurostat) in accordance with fixed deadlines. The tables are commonly known as EDP (excessive deficit procedure) tables.

Office for National Statistics (ONS) supplies EDP tables for the UK to Eurostat each April and October, and publishes them in the UK government debt and deficit statistical bulletin (hereafter referred to in this guide as the EDP bulletin). The tables published include data for both calendar and financial years, together with some quarterly data.

ONS compiles outturn data, while forecasts, which are also required for EDP reporting, are supplied by HM Treasury (HMT) in accordance with Office for Budget Responsibility (OBR) forecasts. Calendar year data enable comparisons to be made with data for other member states. Financial year data are scrutinised by the Commission in relation to potential implementation of the excessive deficit procedure. Updates and revisions to the EDP data provided in April and October bulletins are published in additional releases of the bulletin in July and the following January. Hence the bulletin is a quarterly publication.

The EDP aggregates (that is, GG deficit and debt levels) are compiled on the same European System of Accounts: ESA 2010 basis as the public sector finances (PSF) aggregates. However, an important difference is that the Treaty aggregates relate only to the GG sector, whereas the headline aggregates in the PSF bulletin generally cover the entire public sector, apart from the public sector banks (the so-called ex-measures).

The other main difference concerns the treatment of liquid assets when measuring debt. The EDP bulletin reports gross debt, whereas for the PSF the focus is on net debt. Gross debt represents only aggregated financial liabilities (debt securities, loans and deposits), while measures of net debt involve deducting any liquid assets (mainly official reserve assets and other cash or assets that can quickly and easily be converted into cash) from the financial liabilities to arrive at a net figure.

While the headline aggregates differ, the underlying data presented in the EDP and PSF bulletins are consistent for all periods from 1997 (when the ESA framework was first adopted for the compilation of data in the UK) onwards. The data sources that underpin the PSF, which are described in some detail in Section 6 of this guide, are broadly the same as those that underpin the quarterly estimates provided in the EDP bulletin. However, there are some differences. It is important to achieve coherence in the estimates provided in both bulletins. Therefore, each quarter (more specifically in March, June, September and December) PSF data are aligned to the data reported in the EDP statistical bulletin to take advantage of the more detailed quarterly data underpinning the latter.

For the latest month and financial year-to-date, outturn data in the PSF bulletin has to reflect the latest available information, while ensuring coherence with the EDP bulletin. Therefore, the following approach is adopted:

  • the latest reported month reflects the most up-to-date PSF data available

  • the quarterly data in the periods common to both EDP and PSF bulletins are aligned

  • the estimates for the month immediately prior to the latest month, but after the period of aligned quarterly data, are calculated by taking the latest cumulative estimates for the financial year-to-date and subtracting both the cumulative totals for those aligned quarters in the financial year and the latest month estimates

For example, in the PSF published in September:

  • the August estimates use the latest reported data

  • the PSF data in the period April to June are aligned to the estimates in the EDP bulletin

  • the July figures are derived from the financial year-to-date (April to August) less the sum of the aligned period (April to June) and less the estimates for August

This alignment process results in a temporary adjustment to the published monthly profiles. This adjustment will unwind in the dataset reported in the bulletin published in the following month, when the PSF estimates are de-coupled from the EDP bulletin to reflect the latest available data.

In this example, the estimate originally derived for July may subsequently be revised to reflect the latest source data. This phenomenon is discussed further in the Public sector finances revisions policy.

In common with many other member states, the UK was generally compliant with the Maastricht deficit and debt targets (the reference values detailed previously). However, as noted earlier in this guide, the economic and financial shocks that began around 2007 led to sharp rises in borrowing and debt, such that the reference values were consistently breached. Not until the financial year ending March 2017 was UK general government borrowing brought below the 3% of GDP reference value. Gross debt as a percentage of GDP has stabilised in recent years at around 87% to 88%, but remains well above the reference value of 60%.

Member states that are in breach of the reference values (in particular the 3% deficit target) are potentially subject to punitive EDP actions by the European Commission. The Commission is empowered to impose fines and economic sanctions on governments that fail to agree and implement measures aimed at reducing unacceptably high deficits. In practice, the Commission adopts a softer approach, seeking to agree fiscal and spending measures that will bring deficits in line. By 2011, the Commission had cited 24 member states (including the UK) as being in clear breach of the Treaty and, therefore, subject to EDP procedures.

On 22 November 2017, the European Commission announced that it would be removing the UK from the group of countries identified as having excessive deficits. The commission stated that their “forecast confirms the timely and durable nature of the correction by the United Kingdom of its excessive deficit during the fiscal year 2016 to 2017.”

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5. Fiscal aggregates included in the public sector finances statistics

This section amplifies the descriptions, provided in Section 2 of this guide, of the main fiscal metrics published in the Public sector finances (PSF) bulletin. These comprise a set of aggregates, designed primarily by HM Treasury (HMT) to monitor progress towards government fiscal goals (discussed in Section 4). The PSF statistics are designed to provide reliable, timely and appropriate information to enable users, including HMT and Office for Budget Responsibility (OBR), to gauge progress towards the government’s fiscal goals.

5.1 Composition and reconciliation of the PSF aggregates

Three of the main fiscal aggregates, the public sector current budget deficit (PSCB), public sector net borrowing (PSNB) and the public sector net cash requirement (PSNCR), relate to economic activity and associated transactions that occur within a defined, limited period (such as a month, quarter, or year). They can be categorised as “flow” measures. Conversely, public sector net debt (PSND) and public sector net financial liabilities (PSNFL) both record the cumulative net value of liabilities that have accumulated at a given point in time and can be categorised as “stock” measures.

5.1.1 Public sector current budget deficit (PSCB)

In Section 2.2 we noted that PSCB represents the balance of receipts over current expenditure, after providing for depreciation on capital assets. Hence, depreciation is treated as an expense for the period concerned, as in commercial accounts. So we can measure the deficit (or surplus if receipts exceed the two other components) as:

current budget deficit equals (current expenditure minus current receipts) plus depreciation

An illustration is provided in the upper section of the middle column of Figure 1, where data for current revenue, expenditure and depreciation for the period April to November 2017 are provided. One can see that over that eight-month period:

current budget deficit equals (£476.8 billion minus £478.1 billion) plus £27.4 billion equals £26.2 billion

So, over that eight-month period there was a current budget deficit of around £26.2 billion.1

The main components of current receipts are:

  • taxes on income and wealth, most of which are made up of personal Income Tax, Corporation Tax and Petroleum Revenue Tax

  • taxes on production, of which the largest contributor is Value Added Tax (VAT); other components include oil, alcohol, tobacco and various gambling levies, Stamp Duties, National Non-domestic Rates (also known as business rates), rail franchise premia, and other levies on industries

  • other current taxes, which include Vehicle Excise Duty, the Bank Levy, TV Licences and other licence fees

  • taxes on capital, comprising primarily Inheritance Tax; some European System of Accounts: ESA 2010 capital taxes are recorded within net investment

  • compulsory social contributions, which are National Insurance contributions

  • gross operating surplus, which, by convention for central and local government, is assumed to be equal in value to the figure recorded for the depreciation of capital assets

  • interest and dividend receipts

  • rent and other current transfers, which includes receipts of fines

and the main components of current expenditure are:

  • current expenditure on goods and services, comprising expenditure on wages and salaries, and on the purchase of consumable goods and services

  • subsidies

  • net social benefits, which includes welfare payments and public sector pension payments

  • net current grants abroad, made up of overseas aid and other grants paid to non-UK residents

  • other current grants, which comprise grants to UK non-public sector bodies, and interest and dividends payments

5.1.2 Public sector net borrowing (PSNB)

PSNB covers both the current and capital elements of income and expenditure. As such, it is equal to the current budget deficit plus net investment (adjusted for depreciation). As noted earlier in this guide, the principal focus for monitoring purposes is the measure PSNB ex, which excludes borrowing and lending for public sector banks:

public sector net borrowing equals current budget deficit plus net investment

Referring again to the middle column of Figure 1, we can see that for the financial year-to-date, up to and including November 2017:

public sector net borrowing equals current budget deficit (£26.2 billion) plus net investment (£21.9 billion)

Net investment comprises the following components:

  • gross fixed capital formation, which comprises acquisitions less disposals of capital assets

  • (minus) depreciation of capital assets

  • increase in inventories and valuables (typically a minor component)

  • capital grants to and from the private sector

So PSNB ex for the period from April to November 2017 was around £48.1 billion.

In some periods, public sector revenue exceeds overall expenditure, which results in public sector net lending. January is a month that typically sees public sector net lending because it is characterised by higher than average levels of tax receipts, especially those arising from self-assessment.

Moving from a situation of annual net borrowing to a balance or net lending position is commonly referred to as eliminating the “deficit.”

5.1.3 Reconciliation of public sector net borrowing and public sector net cash requirement (PSNCR)

Public sector net borrowing is the difference between payables (payments accrued to time of economic activity) and receivables (receipts accrued to time of economic activity), over a given period. Conversely, the public sector net cash requirement measures the amount of cash that the public sector needs to meet its commitments during a period, including welfare payments, interest and redemptions on loans, and other payments that must be paid as cash. Conceptually, this means there are two sets of factors accounting for difference between PSNB and PSNCR. These are:

Timing differences

Most transactions are recorded at the point in time when money changes hands in PSNCR, whereas for PSNB, expenditure is generally measured at the point where a liability arises. In the reconciliation of the two aggregates, most of these differences are recorded as accounts receivable or payable. There are particularly large timing differences in debt interest, arising mostly from the uplift on the principal (or capital) value of index-linked gilts. These are recorded as adjustments for interest on gilts.

Financial transactions

When cash is used to purchase a financial asset of equal value, there is no change to overall indebtedness, as the reduction in cash is balanced by the acquisition of an asset of comparable value. Hence there is no expenditure and the transaction has no impact on PSNB. However, there is necessarily a cash payment, which impacts on PSNCR. Many such transactions involve loans to the private sector and to rest of the world. Additional examples of financial transactions include net acquisition of company securities, which encompasses items such as privatisation proceeds that increase government cash reserves, and the purchase of shares in public sector banks, which depletes cash reserves.

The system of national accounts records non-cash transactions that reflect genuine economic activity. Many of these non-cash transactions have no impact on net borrowing. Such transactions include matching imputed tax and subsidies. However, some transactions, such as debt cancellation, do impact on net borrowing. These transactions represent another difference between net cash requirement and net borrowing. In Figure 1 these differences in the treatment of non-cash transactions are included in the “timing differences” box.

As the two aggregates are recorded largely using different systems and sources, there are also statistical discrepancies.

Referring to Figure 1, one can see that for the relevant period, the PSNCR on an ex-basis was around £53.4 billion. This comprised the £48.1 billion for PSNB ex, which was augmented by net cash transactions that increased the cash requirement by a further £23.3 billion, but was then reduced by £18.1 billion attributable to timing differences (48.1 plus 23.3 minus 18.1 equals 53.4).

As mentioned previously, the central government net cash requirement (CGNCR) is the aggregate that is closely connected to the amount of gilts issued by the Debt Management Office (DMO). In outturn, the CGNCR is used as a reconciliation item in the DMO’s remit, offsetting the amount of gilts and Treasury Bills issued by the DMO and other liability issuance, for example, through National Savings and Investments (NS&I). The amount of cash held by the DMO is the difference between the remit and the CGNCR.

5.1.4 Public sector net debt (PSND)

PSND is defined as the public sector financial liabilities for currency and deposits, debt securities and loans, minus public sector liquid assets. The main components of liabilities are gilts and Treasury Bills issued and National Savings liabilities. The liabilities of gilts and other government bonds are included in PSND at face value, whose other liabilities are recorded at nominal value. The main liquid assets are bank deposits held with the Bank of England and foreign exchange reserves.

PSND is predominantly a cash-based measure and is therefore a stock value that is equivalent approximately to the cumulative PSNCR flows over earlier periods. However, some factors impact the two measures in different ways. For example:

  • the capital uplift on index-linked gilts is only recorded in the PSNCR when it is paid out at maturity but accrues in PSND over the life of the instruments

  • when gilts are issued at discounts or premia, the level of PSND is deemed to have changed by the nominal value of gilts issued, whereas the impact on PSNCR reflects the actual cash amounts received

  • fluctuations in exchange rates affect the sterling value of the official reserves of foreign currencies that are components of liquid assets that figure in the calculation of PSND; however, they do not impact the calculation of the PSNCR

  • the reclassification of institutional units into and out of the public sector typically changes PSND without necessarily involving any movements in cash, such that there is no impact on PSNCR

The stock equivalent of PSNB is the public sector’s net financial wealth. This differs from PSND as net wealth is measured at market as opposed to nominal values and all financial assets are netted off rather than merely liquid assets.

PSND also differs from gross general government debt (calculated for excessive debt and deficit procedure purposes, as explained in Section 4.3) in that the latter is on a gross basis (without netting off liquid assets) and is restricted to the general government sector (rather than the whole public sector).

5.1.5 The supplementary aggregate, public sector net debt excluding the Bank of England

As noted in Section 2.2, in the 2016 Autumn Statement the Chancellor announced that two new supplementary fiscal aggregates had been defined and these are the subject of a 2016 ONS Methodology paper.

The first supplementary aggregate, public sector net debt excluding public sector banks and the Bank of England (PSND ex BoE), provides a somewhat narrower measure of net debt than PSND ex, by not only excluding the debt of public sector banks, but also the debt of the Bank of England (BoE). The Asset Purchase Facility (APF) accounts for most of the Bank of England’s impacts on PSND ex. The impact reflects the APF’s quantitative easing operations, which commenced in 2009, and were extended in 2016. As explained in Section 4.2.3, the APF was one of several initiatives that aimed to increase liquidity in the banking sector in the wake of the financial crisis. The APF impacts PSND by the difference between the market value of gilts purchased (which has been funded by the creation of reserves) and the nominal value, which is what is recorded in PSND.

Originally, the BoE was only empowered to use the APF to purchase gilts from commercial banks. However, in 2016 the APF was extended to enable the BoE to also purchase corporate bonds on the secondary market and the Term Funding Scheme (TFS) was also introduced.

The APF incurs debt via its purchases of gilts and corporate bonds, and the loans made to banks via the TFS. These purchases and loans are funded through the creation of central bank reserves, which create a BoE liability equal to the value of the central bank reserves created.

The aim of the TFS is to reinforce the transmission of low Bank Rate levels set by the Monetary Policy Committee to the interest rates faced by households and businesses. The TFS seeks to achieve this by providing term funding to eligible banks and building societies at a rate at or close to Bank Rate, with the actual rate paid by banks being based on the volume of their net lending to households and businesses.

Lending under the TFS is supported by collateral, provided by the banks and building societies, in the form of securities and/or loan portfolios. ONS judged that our economic statistics should reflect the TFS in the public sector balance sheet as both a loan asset for the TFS lending to banks and building societies, and a deposit liability relating to the creation of central bank reserves. Since loans, like corporate bonds, are illiquid assets then they too raise PSND ex by the value of the central bank reserves created. When the scheme was announced, the BoE indicated that the value of lending in the TFS could reach around £100 billion, in actual fact the final size of the TFS at its closure to new drawdowns was £127 billion.

5.1.6 The supplementary aggregate, public sector net financial liabilities (PSNFL ex)

In order to provide a more complete picture of the public sector balance sheet, the 2016 Autumn Statement introduced a second supplementary aggregate, public sector net financial liabilities (PSNFL). PSNFL is a more comprehensive measure of the public sector balance sheet, which captures a wider range of financial assets (including, for example, the non-liquid assets held by the TFS) and liabilities than recorded in PSND ex. In common with the headline aggregates and PSND ex BoE, it is an ex-measure that excludes data for public sector banks.

PSNFL corresponds almost precisely to the national accounts concept of public sector financial net worth. The crucial difference is that for PSNFL the deposit, loan, and debt security assets and liabilities are recorded at face or nominal (redemption) value, whereas for financial net worth purposes they are recorded at market value.

In general, differences between market and face value for deposit and loan liabilities are likely to be minor, but there can be significant difference between the market and face value of gilts and other debt securities. ONS estimates suggested that the market value of government debt securities in issuance at the end of March 2016 was almost £300 billion higher than the face value of those securities.

In the context of government debt and fiscal sustainability measures, debt securities are most commonly recorded at face (or nominal) value as this more closely reflects the financing requirements of government. For this reason, PSNFL ex-measures the liabilities associated with debt instruments (such as gilts and loans) at their face (nominal) value. This approach is also consistent with the recommendations of the 2013 Review of PSF statistics and the principles that emerged in regard to the composition of existing and new ex-measures.

The 2016 Methodology paper lists various categories of assets and liabilities included within PSNFL ex, provides examples of their components and indicates whether associated valuations are at market or face value. Certain assets, such as monetary gold and financial derivatives, do not have nominal or face values in themselves and so are necessarily valued at market prices.

The paper identifies liabilities and assets that are common to both PSND and PSNFL, as well as those that are encompassed by PSNFL but excluded from PSND. The latter category includes derivatives and the liabilities of funded public sector pension schemes.

Depending on whether they are funded or unfunded, public sector pension schemes are recorded differently in national accounts, in accordance with guidance in the European System of Accounts: ESA 2010. An article published in September 2017 explains the rationale for the differing treatment of the two types of scheme.

Essentially, in funded schemes, contributions by employers and employees are invested as a pool of ring-fenced assets and the returns generated are used to fund the pension payments. In contrast, an unfunded scheme has no ring-fenced pool of assets and the employer makes the pension payments on a pay-as-you-go basis. For funded schemes, by estimating the gross assets held in the scheme and the gross liabilities (comprising scheme members’ pension entitlements), it is possible to derive an estimate of the net financial liabilities associated with a scheme. To be clear, PSF records only the net financial liabilities of public sector funded pension schemes. Neither wider balance sheet data, nor the transactions of the ringfenced accounts themselves, are explicitly included in the PSF bulletin.

Furthermore, while net financial liabilities associated with public sector pension schemes appear on the public sector balance sheet for national accounting purposes, they are excluded from PSND ex and from the excessive debt (Maastricht) measure of general government debt. However, they are a significant component of PSNFL.

The most important funded scheme in terms of the volume of its assets is the Local Government Pension Scheme (LGPS). The first estimates of PSNFL (published in November 2017) included an initial estimate of the net liabilities of the LGPS. While obtaining valuations of a pension fund’s gross assets is relatively straightforward, estimating the value of gross liabilities (which comprise the accrued-to-date entitlements of scheme members) is more complex and requires the use of actuarial techniques.

We have identified and classified other funded public sector pension schemes and have worked with the Government Actuary’s Department to improve the methodology used to estimate net liabilities. This has enabled us to improve our estimates for the LGPS and produce estimates for net liabilities for other funded schemes.

We are also making incremental improvements to other components of PSNFL with the aim of moving its status from that of an Experimental Statistic to a National Statistic.

5.2 Derivation of the fiscal measures

In practice, there are two methods that can be used to calculate budget deficits:

  • “above the line” – from income and expenditure, with the budget deficit defined as expenditure minus income

  • “below the line” – by summing the transactions that finance the deficits

A combination of the two approaches is used for the estimates in the Public sector finances (PSF) bulletin.

Central government net borrowing and current budget deficit are predominantly measured above the line, whilst the central government net cash requirement (CGNCR) is calculated and cross-checked using both methods.

A breakdown of the income and expenditure determinants of the CGNCR is provided in the PSF bulletin.

The main fiscal flow aggregates (ex-measures of PSNB, PSCB and PSNCR) are formed by combining totals for the relevant individual public sector sub-sectors (that is, central government, local government, public corporations and the Bank of England). Each sub-sector total includes the transactions with other sub-sectors, which exactly net off one another in the combined PSF aggregates. Hence, a grant from a central government (CG) to a local government (LG) body would have increased CG net borrowing but reduced the LG net borrowing, by equal amounts.

To produce overall public sector aggregates, the public sector banking group(s) components are added to the ex-aggregates.

Notes for: Fiscal aggregates included in the public sector finances statistics

  1. Please note that the estimates used in this equation have been rounded to the nearest 100 million, which leads to a £0.1 billion discrepancy between the sum of the components and the total.
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6. Data sources and data quality issues

This section details main sources of data used to produce the published monthly estimates for the central government, local government and public corporations sectors, and provides examples of how the data from these sources evolve over time.

The Public sector finances (PSF) bulletin is compiled predominantly from administrative data. Best practice in the use and treatment of administrative data is set out in the Quality assurance of administrative data (QAAD) (PDF, 299KB) guidelines published by the UK Statistics Authority. More detail on the QAAD guidelines can be found in Sub-section 6.4, along with an assessment of quality assurance issues for data and methods underpinning the production of the PSF.

6.1 Central government (CG)

Central government’s contribution to the public sector borrowing and debt aggregates is largely compiled by HM Treasury (HMT), mainly using a range of administrative data sources (PDF, 103KB).

This is efficient, as the information is collected once and then used for a range of purposes. As explained in Section 3.3, central government data are reported on an accruals basis in almost all instances.

6.1.1 CG expenditure data

The main source of central government expenditure data is HMT’s public spending database, OSCAR (Online System for Central Accounting and Reporting), which collects financial information from central government departments.

Prior to the financial year ending 2013, the HMT database known as COINS (Combined Online Information System) was the repository for the corresponding data. This and the OSCAR database are designed to monitor spending against the frameworks outlined in Section 4. Statisticians in HMT ensure that OSCAR maintains its integrity as a main data source for the PSF bulletin.

As part of its commitment to increased transparency in regard to public spending, HMT has published the quarterly raw data from OSCAR (and COINS) and annual raw data from OSCAR since June 2010.

Central government expenditure data from OSCAR generally go through various stages of refinement during the current financial year and beyond. Typically, this evolution comprises four stages. Adjustments to the data may be made during any stage, resulting in revisions to estimates previously published in the PSF bulletin. The most significant revisions generally occur within stages 1 and 2. Revisions resulting from updates at stages 3 and 4 are often not material.

Stage 1

Each month, departments submit to OSCAR a monthly profile of spending for the current financial year. This includes estimates of actual spend for completed months (outturn) and forecasts for future months. In subsequent data supplies, departments can provide updated estimates for any month, which tends to lead to frequent and sometimes significant revisions to the estimates published in the bulletin.

Some departments are more likely to revise their data than others. This may be due to a department falling into either of the following categories:

  • an arrears reporter: some departments report their expenditure in arrears; the latest data reported in the bulletin through the year are not an estimate of actual spending but rather a forecast

  • subject to non-standard reporting arrangements: some bodies, whose data are amalgamated into departmental OSCAR returns, provide updated data on a quarterly rather than monthly basis; these are typically arms-length bodies associated with departments, such as NHS Trusts and Foundation Trusts (whose data are subsumed within the Department of Health’s return)

Stage 2

Following the completion of the financial year in July, HMT’s annual Public Spending National Statistics are published. These are based on most departments’ audited resource accounts and so departments update their full-year expenditure estimates (but not their monthly profile) for this publication.

Stage 3

The full-year estimates are updated for the autumn update of HMT’s Public Spending National Statistics. Additionally, there may also be revisions due to:

  • departments who missed the July deadline for the initial Public Spending National Statistics publication

  • new data, changes or corrections that weren’t reflected in the July update

  • methodology updates

Stage 4

In the February following the end of the financial year the winter update of HMT’s Public Spending National Statistics is published. Usually, this will incorporate the finalised, audited accounts of the devolved administrations along with those of any outstanding departments, including outturn data for academies.

A number of “national accounts” adjustments are made to the OSCAR data. These adjustments may be made for several possible reasons including the following.

Conceptual framework differences

Although HMT’s budgeting system is designed to align closely with the national accounts/European System of Accounts (ESA) framework for most transactions, there are still some differences between the ESA and International Financial Reporting Standards (IFRS) reporting requirements. Where necessary, conceptual adjustments are applied to bring budgeting data in line with the national accounts framework.

Error corrections

Sometimes errors are identified in the mapping or profiling of data that departments have loaded on to OSCAR. The data held on the database will generally be amended to correct the errors. However, in some cases this may not be possible within the tight publication timetable for the bulletin and ad-hoc adjustments are instead made to the data supplied to Office for National Statistics (ONS).

Different approaches to the estimation of depreciation

As noted in earlier sections, depreciation of capital stock is a significant element in the calculation of the current budget deficit and public sector net investment. Like many other national statistics institutes, ONS uses a perpetual inventory model to estimate depreciation, whereas departments’ own estimates are likely to reflect commercial accounting approaches.

Use of sources other than OSCAR

A limited number of central government expenditure items come from sources other than OSCAR. The largest of these is expenditure on debt interest, which is derived from a variety of sources – mostly the Debt Management Office (DMO) and HMT finance systems but also from other sources including National Savings and Investments (NS&I) and UK Asset Resolution (UKAR). Other data come from sources such as HM Revenue and Customs (HMRC), Treasury cash systems and the Bank of England (BoE).

As explained previously, the data reported monthly to HMT on OSCAR is on an accrued basis, as required for published departmental resource accounts. However, the calculation of accrued debt interest expenditure is more complicated. Debt interest expenditure comprises the sum of four separate components.

Coupon payments

Most interest payments on UK gilts (generally referred to as coupon payments) are scheduled at six-month intervals from the National Loans Fund (NLF). The NLF is a government bank account held with the BoE. Information on coupon payments comes from HMT’s financial management systems. An adjustment is applied to distribute the coupon payments to the months when they accrued. This spreads monthly payments evenly for conventional gilts (that is, those with a fixed interest rate). The adjustment is more complicated for index-linked gilts, with the accrued monthly interest payments varying with movements in the Retail Prices Index (RPI).

Uplift on index-linked gilts

The principal of an index-linked gilt is also adjusted in line with RPI. Rather than scoring this capital uplift at the date the gilt is redeemed, the uplift is accrued over the life of the gilt, mirroring movements in RPI.

Amortisation of discounts and premia of issue

Often, gilts are not issued at their face or nominal value. They may have been sold at a discount (or premium), such that the debt issued is less than (or greater than) the nominal value. As we noted in Section 5, the impact on public sector net debt (PSND) reflects only the nominal increase in government liability from the issuance of the gilts. The discounts or premia are arguably part of the financing cost and under ESA 2010 are treated as interest accruing. In practice, information on the profit or loss made at gilt auctions is supplied by the DMO and these amounts are then distributed evenly over the lifetime of the gilt until it is redeemed.

Other

Other relatively small amounts of interest that government pays out are scored to public sector net borrowing (PSNB) as they accrue. These include interest on Treasury Bills and National Savings certificates.

6.1.2 Central government income data

Central government income largely comprises tax receipts, the bulk of which are collected by HMRC. Therefore, the majority of PSF receipts are collated and quality-assured by HMRC analysts prior to their delivery to HMT and ONS.

While quality assurance processes are mainly the responsibility of the authorities collecting the receipts (in most cases HMRC), additional checks are applied by HMT (including cross-referencing with HMT’s financial systems) and by ONS.

HMRC publishes taxation data as National Statistics series. Hence, its data collection and quality assurance procedures are subject to the scrutiny of the UK Statistics Authority. The requirements of the PSF bulletin and national accounts are fully embedded into all the receipts monitoring systems.

The principle underlying HMRC’s recording of tax receipts on an accruals basis is to record them against the period in which the tax liability arises (which may, or may not, correspond to the period when the underlying economic activity took place). For most tax receipts this means that, in practice, a simple time lag is applied to the cash series. For example, Pay As You Earn (PAYE) cash receipts are lagged by one month as, for the most part, the government receives PAYE taxes one month after salaries are paid.

Similarly, Value Added Tax (VAT) is accrued over the quarter preceding the cash receipt. In some cases, an appropriate accrual time is not available in a timely manner and so unaltered cash data are used instead, for example, for self-assessed income taxes. This was formerly the case for Corporation Tax. However, commencing with the Public sector finances bulletin released on 21 February 2017, ONS has utilised an improved methodology for the time of recording of receipts related to Corporation Tax, Bank Corporation Tax Surcharge, and the Bank Levy.

The improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place, which can be up to 21 months before the cash has been received. The changes were in line with the accrual principles prescribed in the ESA 2010 and the System of National Accounts 2008, which require that taxes should be recorded “when the activities, transactions or other events occur that create the liabilities to pay taxes.”

As most tax data are time-lagged, the published estimates for the latest periods include significant elements that have been forecast. This is also true for expenditure estimates some of which are reported in arrears. For periods older than one quarter, estimates of tax receipts apart from Corporation Tax are largely data driven (that is, they reflect outturn data). However, revisions can still occur as a result of the auditing process, particularly after the year-end.

In addition to the accruals adjustments, other adjustments to tax data are required in some cases to move to a national accounts-consistent basis. Most notable are the inclusion of “imputed” tax and spend items, such as Renewable Obligation Certificates and VAT refunds to public sector bodies:

  • the Renewable Obligation Certificates (ROCs) scheme is an incentive mechanism to ensure that an increasing proportion of electricity in the UK is generated using renewable methods; the transactions between electricity generators and suppliers are imputed as a tax and a subsidy

  • producers pay VAT on materials that they use in the course of production, but are able to claim those VAT payments back from HMRC; government is a “producer”, however, it does not pay VAT accrued on materials used in the production of public services, nor does it receive the repayment for such expenditure, therefore, these transactions have to be imputed

Additional receipts are obtained from non-HMRC sources, which include:

  • non-HMRC tax or levy raising bodies that supply data directly to ONS; this includes the Driver and Vehicle Licensing Agency (DVLA), which provides data on Vehicle Excise Duty

  • HMT sources, including OSCAR, which cover the majority of dividend and interest receipts as well as the TV Licence fee and various relatively low-value receipts items (including, for example, passport fees)

  • ONS modelling to estimate gross operating surplus; by convention, the government gross operating surplus is assumed to be equal to depreciation, which is derived from ONS PIM models

6.1.3 Cash data

Most cash data come from HMT’s cash management systems, supplemented with data from the DMO, BoE and other sources, such as National Savings and Investments.

Estimates of the central government net cash requirement are produced via a system of balancing various central government accounts, for which complete balances are produced each month. The most significant of these are the Consolidated Fund, National Loans Fund and the Debt Management Account.

Within each account, transactions are divided into “determinants” of the cash requirement and financing items. Determinants are the income and expenditure associated with government business, while financing items are those activities required to fund government business. As the accounts are fully balanced, the sum of the determinants (that is, the net cash requirement) equals the sum of the financing items.

6.2 Local government

Most local government data are annual, relating to financial years (April to March). Detailed annual returns of expenditure and income are compiled by local government bodies and collected by the Ministry of Housing, Communities and Local Government (MHCLG), Scottish Government and Welsh Government. Summary data are compiled for Northern Ireland.

The most detailed returns are collected from local authorities at two stages for any given financial year: budget and outturn. Revisions to data are expected between these stages because plans and priorities change, and because some items of receipts and spending are unpredictable. Outturn data collected for England and Scotland are released in two phases; provisional and final outturn. This can lead to some minor updates due to changes at the final auditing stage.

For England, Scotland and Wales, data for the current year are based on local government budgets. However, in recent years, planned expenditure initially reported in budgets has systematically been higher than the final outturn expenditure reported in the audited accounts. Office for National Statistics (ONS) therefore includes four adjustments to reduce the amounts reported in budgets: one for England revenue (current) expenditure and one each for England, Scotland and Wales capital expenditure. In the context of the UK totals, Northern Ireland data do not need similar adjustments.

These underspend adjustments are used until the outturn data are published and are based on observed differences between budget and outturn data for previous years. These are then reviewed based upon additional information available within the year, such as from the quarterly MHCLG surveys described in this section. The ONS underspend adjustments for England are in addition to underspend adjustments made by MHCLG to capital expenditure budget data, mainly because of the aforementioned need for ONS to take into account any in-year movements and new information.

Final figures are based on audited resource accounts, which are available between 7 and 11 months after the end of the financial year.

Some data are available within the year, for months or quarters:

  • monthly data relating to central government grants to local government are collected on OSCAR (HM Treasury database)

  • monthly data for local government deposits with banks and building societies are collected by the Bank of England

  • MHCLG collects quarterly data for the whole of the UK on the borrowing and lending of local government; in addition, data are collected monthly from a sample of around one-third of authorities, which covers proportionally more authorities with larger borrowing and lending

  • monthly reports from the DMO of all changes in the levels of Public Works Loan Board lending

  • quarterly MHCLG returns covering England provide quarterly estimates of current and capital expenditure, interest and dividend receipts, and Council Tax receipts

These more recent in-year data are used wherever possible in preference to the local government budget data. The in-year data are available up to three months after the relevant period. In-year monthly or quarterly data are replaced or updated when provisional outturn data and final outturn data are published.

Quarterly data are not currently available for Scotland, Wales, or Northern Ireland. ONS therefore assumes that the quarterly pattern observed for England can also be applied to the rest of the UK. When no monthly data are available, quarterly amounts are divided by three.

The Office for Budget Responsibility (OBR) also makes underspend adjustments when forecasting local authority spending. Their methodology is described on the OBR website. ONS works with OBR to review the underspend adjustments we each apply to the local authority budget data. However, the ONS and OBR underspend assumptions can differ, mainly because they are reviewed at different times, according to the respective publication schedules.

ONS and OBR both adjust their underspend assumptions to reflect the latest available in-year data, but the ONS and OBR figures will differ as the year progresses, depending on the release dates for the latest data and on the ONS revisions policy.

6.3 Public corporations

In the aftermath of the Second World War, many strategically important industries were nationalised; that is, they were taken into public ownership and control. In the 1980s, state ownership of many industries was called into question and many former public corporations have been “privatised”: that is, sold to the private sector. Nevertheless, albeit their scope and role have considerably diminished over several decades, public corporations still play an important role in certain segments within the economy and form their own sub-sector for the purposes of the public sector finances.

Office for National Statistics (ONS) has been collecting quarterly data directly from some of the largest public corporations via survey questionnaires for many years. However, because of privatisations and other developments, the number of public corporations participating in the survey has fallen. At the time of writing, just three organisations are included in the survey and it is likely that the survey will at some stage be discontinued.

Data for financial years for most other public corporations are sourced from HM Treasury’s (HMT) Whole of Government Accounts (WGA) – see Sections 3.3 and 3.4. Data for any public corporations that are not included in WGA are extracted from their annual reports. One example is the Crown Estate, an independent commercial business created by an Act of Parliament, whose legal owner is the Sovereign, but whose net surplus, or profit, is passed to HMT for the benefit of the nation.

A significant part of the public corporations sector relates to the provision of social housing. Until November 2017, housing associations operating in all countries within the UK were classified to the public corporations sub-sector. However, following the passage of the Regulation of Social Housing (Influence of Local Authorities) (England) Regulations 2017, we reviewed the classification of registered providers of social housing in England. We concluded that they are private, market producers. As such, they were reclassified to the private non-financial sub-sector with effect from 16 November 2017, the date the regulations came into force.

Data for housing associations operating within the devolved administrations, which are still classified as public corporations, are derived from forecasts produced by the Office for Budget Responsibility, and updated when audited data become available.

The Housing Revenue Account, which relates to local authority-owned housing stock, is a quasi-corporation and is classified to the public corporations sector. Data for the Housing Revenue Account are supplied by the Ministry for Housing, Communities and Local Government.

Given that, apart from the quarterly survey data, virtually all data for public corporations are extracted from annual accounts or reports it is only possible to produce monthly or quarterly profiles using quite simplistic assumptions. Moreover, like many local government and some central government statistics, estimates relating to public corporations are prone to revision until final, audited accounts.

6.4 Quality assurance of administrative data

While some data inputs to the public sector finances (PSF) production are collected via surveys, most originate in administrative systems, which may not be designed for statistical purposes. Therefore, it is important that the data are scrutinised and subjected to checks that provide assurance regarding their integrity and validity.

The UK Statistics Authority (the Authority) published an assessment report for the PSF bulletin in October 2015. One of the requirements resulting from this assessment concerned the quality assurance of administrative data sources, in relation to which the Authority stated that “there is a clear need for ONS {Office for National Statistics} and HM Treasury to identify and investigate the quality assurance arrangements for the administrative data sources for public sector finances statistics.”

To this end, the ONS PSF team assessed the administrative data sources used in the compilation of the PSF statistics, using the Authority’s Administrative Data Quality Assurance Toolkit.

The Toolkit focuses on four areas of practice associated with data quality:

  • operational context and administrative data collection

  • communication with data supply partners

  • quality assurance (QA) principles, standards and checks by data suppliers and internal or external audit in the data assurance process

  • producers’ QA investigations and documentation

In conjunction with these four practice areas, the Administrative Data Toolkit encourages consideration of potential issues associated with data, which may affect the quality of the statistics, as well as the nature of the public interest served by the statistics.

Through our assessment we identified common quality assurance practices amongst our data suppliers:

  • suppliers generally have quality assurance procedures in place where raw data are taken from administrative systems, during editing and manipulation stages, as well as prior to sending to the PSF team or publication

  • quality assurance procedures include validation checks such as those related to data changes, revisions, growth rates and checking for plausibility

  • data are often signed off by senior management prior to sending to the PSF team or publication

  • where suppliers publish their own data, quality assurance information is generally published alongside

  • revisions policies exist

  • most data suppliers are subject to some form of external auditing, but also have their own internal audit procedures

Quality assurance carried out by the PSF compiler team after receiving data from suppliers fall into the following areas:

  • data are checked for completeness, that is, we have received what we require

  • data are analysed by magnitude of revisions and growth rates in both monetary terms and percentages of the prior value – this is completed over several iterations for supplied data and during processing; any anomalies are queried with suppliers

  • quality-assured data and a draft bulletin are sent to senior staff and main internal (within ONS and HM Treasury) data suppliers for sign-off

The full findings and conclusions of the exercise are documented.

Following this exercise, the team made several changes to quality assurance procedures and introduced methodological improvements, which have enhanced the quality of PSF statistics. Examples are provided in Annex 3.

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7. Relationship with the national accounts and revisions to published data

The statistics reported in the Public sector finances (PSF) bulletin differ from corresponding estimates provided in national accounts (NA) publications, such as The Blue Book; UK Balance of Payments, The Pink Book; and Quarterly national accounts. The differences do not reflect fundamental conceptual differences in the compilation of the outputs. All NA and PSF publications are based on the national accounts framework and are compiled in accordance with the standards set out in the European System of Accounts 2010: ESA 2010 under European law.

Differences and inconsistencies reflect the more flexible revisions policy that applies to PSF statistics. The intention is to incorporate the most up-to-date data for all time periods, in order that the Office for Budget Responsibility (OBR)’s forecasts, and government fiscal and other economic policies are based on the most timely data available. Revisions can be incorporated for any time periods and in any month.

In comparison, the NA revisions policy is much more restrictive. This is attributable to the complex, integrated nature of the accounts, which generally only allow long time-series revisions to be made at a single point in the year. This means that the PSF almost invariably incorporates data and methodological revisions concerning the public finances ahead of the NA. Consequently, data presented in the PSF bulletin are often inconsistent with most recently published national accounts data for the corresponding periods.

Periodically, an alignment process is undertaken to ensure that quarterly data presented in the PSF bulletin and quarterly national accounts estimates published for constituent sectors and sub-sectors (such as central government and local government), are as consistent and coherent as possible.

It has become customary for details of the alignment process and the associated methodological and classification issues to be set out in an annual article. An example of such an article was published in September 2017. It discusses examples of reclassifications, methodological improvements and implementation of new statistical rules that accounted for some of the differences in net borrowing exhibited in NA and PSF publications around that time. These included certain developments that were detailed in earlier sections within this guide, such as improved methodology for the time of recording of receipts related to Corporation Tax (CT), Bank Corporation Tax Surcharge and the Bank Levy (see Section 6.12), as well as the modelling of the accrued-to-date (net) liability for the Local Government Pension Scheme (LGPS).

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8. Acronyms and abbreviations

AME – Annually managed expenditure: Spending in departmental budgets that is difficult to manage precisely. Often it is particularly volatile or demand-led (for example, benefit payments, tax credits)

APF – Asset Purchase Facility: A subsidiary of the Bank of England empowered to improve liquidity and strengthen banks’ balance sheets

BoE – Bank of England

CG – Central government: The central government sub-sector of the public sector or a property of that sub-sector. Public sector non-market bodies with a national remit (which includes the devolved administrations in Northern Ireland, Scotland and Wales)

CGNCR – Central government net cash requirement

COINS – Combined Online Information System: HM Treasury’s public spending database until the financial year ending 2013. It is used to collect financial management data from across the public sector to support fiscal management, Parliamentary estimates, Whole of Government Accounts and statistical requirements such as national accounts and public sector finances

CPI – Consumer Prices Index: A measure of inflation used for targeting purposes by the Monetary Policy Committee

CT – Corporation Tax

DEL – Departmental expenditure limit: Departmental spending total that is set during regular Spending Reviews. DEL includes items that departments have the power to manage such as wages or consultancy spend

DMO – Debt Management Office: An agency of HM Treasury, established in 1997 to conduct the UK’s cash and debt management activities

ex-measure – a public sector finances aggregate that excludes the corresponding data for any public sector banking group: ex-measures are used in fiscal targets

EDP – Excessive deficit procedure: Protocol within the Maastricht Treaty that requires European Union members to report their general government debt and deficit twice a year to the European Commission

EUROSTAT – The Statistical Office of the European Union

EFO – Economic and Fiscal Outlook: The Office for Budget Responsibility’s biannual publication that includes their fiscal and economic forecast for the UK over the next five years and the assessment of the likelihood the government will meet its fiscal mandate

ESA – European System of Accounts: The system of national and regional accounts used by members of the European Union. UK National Accounts and the public sector finances are currently compiled according to ESA 2010

ESCC – Economic Statistics Classification Committee: ONS committee of national accounts experts who approve all national accounts classification decisions

FRAB – Financial Reporting Advisory Board: Advises on reporting across government departments and on the implementation of public sector accounting policies, and updates the Government Financial Reporting Manual (FReM)

FReM – Government Financial Reporting Manual: The technical accounting guide for the preparation of financial statements of central government entities

FSR – The Office for Budget Responsibility’s Fiscal Sustainability Report

GAAP (UK) – Generally accepted accounting principles (or practice): The accounting standards used in UK central government finance until the financial year ending 2009

GDP – Gross domestic product

GG – General government: The government sector of the public sector, that is, central plus local government. The UK reports its GG debt and deficit to the European Union under the Maastricht Treaty

HMRC – Her Majesty’s Revenue and Customs

HMT – Her Majesty’s Treasury

IFRS – International Financial Reporting Standards used in UK central government finance from financial year ending 2010 onwards

LG – Local government: The LG sub-sector of the public sector or a property of that sub- sector. Public sector non-market bodies with a remit that is not larger than a few local authority boundaries at most. Entities (regardless of their remit) that are controlled by other LG bodies are also in this sector

LGPS – Local Government Pension Scheme

MGDD – Manual of Government Debt and Deficit: A Eurostat manual that provides supplementary advice on the application of the European System of Accounts for the purposes of producing excessive deficit procedure statistics

MHCLG – Ministry of Housing, Communities and Local Government

MPC – Monetary Policy Committee of the Bank of England: Since May 1997 the MPC has been responsible for setting UK monetary policy to meet the government’s inflation target

NA – National accounts

NLF – National Loans Fund

NNDR – National Non-domestic Rates, also known as business rates

OBR – Office for Budget Responsibility: Established in May 2010, the OBR is an independent body whose main roles are producing the government’s official economic and fiscal forecasts and assessing the sustainability of the public finances

ONS – Office for National Statistics: The UK’s independent statistical agency

OSCAR – Online System for Central Accounting and Reporting: The database replacement for COINS, in use from financial year ending 2013 onwards, used to collect financial management data from across the public sector to support fiscal management, Parliamentary Estimates, WGA and statistical requirements such as National Accounts and Public sector finances

PAYE – Pay As You Earn

PC – Public corporation: The PC sub-sector of the public sector or an institutional unit classified to that sub- sector

PESA – Public Expenditure Statistical Analyses: A command paper produced by HM Treasury with detailed analysis of public spending outturn and forecasts. Also, the commonly-used name for HM Treasury’s Public Spending National Statistics series, which contain the outturn data used in the command paper

PS – Public sector: Includes central government and local government sectors (together comprising the general government sector) and public corporations

PSF – Public sector finances

PSCB – Public sector current budget deficit

PSNB – Public sector net borrowing

PSNCR – Public sector net cash requirement

PSND – Public sector net debt

PSND ex Bank of England – Public sector net debt excluding the Bank of England: Obtained by deducting the assets and liabilities held on the Bank of England’s balance sheet from public sector net debt and thereby excluding the effects of the Asset Purchase Facility (APF) and Special Liquidity Scheme (SLS)

PSNFL - Public sector net financial liabilities: A broader measure of debt than public sector net debt

RAB – Resource accounting and budgeting

SNA – System of National Accounts: International guidelines from the UN on compiling National Accounts. The 2008 version is the most recent

SLS – Special Liquidity Scheme: A Bank of England scheme to increase liquidity in the banking sector by allowing banks to swap temporarily illiquid securities for Treasury Bills

TFS – Term Funding Scheme: A mechanism by which the Bank of England can purchase corporate bonds via the Asset Purchase Facility

VAT – Value Added Tax

WGA – Whole of Government Accounts

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9. Contact details

As part of our continuous engagement strategy, we welcome feedback on this article. Please email: psa@ons.gov.uk

In addition queries may be directed to the Media Relations Office: media.relations@ons.gov.uk

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10. Annex 1: Additional sources of statistics and complementary information on the public finances

Office for National Statistics (ONS) has published a broad range of articles discussing methodological and other aspects of public finances and we have referenced and provided links to a number of these in this guide. The following sources relate primarily to estimates published at UK level:

  • UK government debt and deficit for Eurostat – a quarterly ONS publication that sets out the UK’s general government debt and deficit position as required under the Maastricht treaty and whose contents are National Statistics

  • Public sector finances analytical tables (PSAT) – a monthly ONS publication that shows transactions related to borrowing by sub-sector; this time series dataset (1946 to present) is published one day after the main public sector finances (PSF) bulletin

HM Treasury (HMT) National Statistics publications include:

  • Public spending statistics, a quarterly publication, provides more detailed breakdowns of public expenditure outturn data including breakdowns by department and function

  • the annual Public Expenditure Statistical Analyses (PESA) provides not only recent outturn data, but also spending plans (budgets) for the remainder of the current spending review period; breakdowns of outturn data are provided by department, sector, function and region

  • HMT transparency data that underlie estimates of accrued spending published in PSF, and are extracted from HMT’s spending database, OSCAR

  • Whole of Government Accounts (WGA), which consolidates the audited accounts of over 6,000 organisations across the public sector to produce a comprehensive, accounts-based picture of the financial position of the UK public sector; the WGA is based on International Financial Reporting Standards (IFRS), a system of accounts discussed in Section 3 of this guide

Statistics or publications produced by other departments include:

  • Office for Budget Responsibility (OBR)’s Public finances databank, which is updated monthly, provides its most recent fiscal aggregate forecasts together with the latest monthly outturn data from ONS

  • OBR’s Economic and fiscal outlook, which is published twice per year alongside Spring and Autumn Statements and Budgets; it presents medium-term projections for the public sector finances and assesses whether the government’s fiscal mandate is likely to be met

  • OBR’s annual Fiscal sustainability report, which examines the fiscal impact of past public sector activity, as reflected in the assets and liabilities that it has accumulated on its balance sheet; the report also examines the sustainability of the public sector finances via long-term projections of how spending and revenues may evolve and the impact this would have on public sector net debt

  • HM Revenue and Customs (HMRC) tax statistics, which include numerous statistics and analyses of tax receipts alongside a more detailed monthly breakdown of the tax receipts data contained in the PSF bulletin

While these sources and publications primarily provide data and statistics at the aggregate UK level, the following publications provide data for subnational geographies:

  • ONS’s annual Country and regional public sector finances provides detail of both public sector expenditure and revenue for each country and region of the UK; overall, UK estimates are consistent with the UK public sector finances, however, country and regional estimates are derived based on various methodologies and assumptions; ONS does not publish sub-regional data on public finances, but a scoping study provides information on alternative sources of such data and associated quality issues

  • HMT’s annual Country and regional analysis (CRA) provides estimates of identifiable expenditure allocated to each of the four constituent UK countries and the nine English regions

  • HMRC’s Disaggregation of tax receipts (PDF, 989KB) allocates overall tax receipts collected by HMRC to each of the four countries (recording reflects a cash basis, in contrast to the accruals approach required by European System of Accounts)

  • Government Expenditure and Revenue Scotland (GERS) is a long-established annual report published by the Scottish Government that provides public sector accounts for Scotland

  • Northern Ireland’s Net Fiscal Balance (NINFBR) provides an analysis of public sector revenue and expenditure in Northern Ireland (discontinued)

  • Ministry of Housing, Communities and Local Government (MHCLG) and the devolved administrations (Welsh Government and Scottish Government) each publish comprehensive annual Local Government Finance Statistics; in addition, certain data are published on a quarterly basis

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11. Annex 2: The economic cycle, output gap, and automatic stabilisers

Over the long-term, output in the UK economy has expanded, as manifested in rising gross domestic product (GDP). However, the economy does not follow a consistently smooth, steady trajectory. The deviation of the actual output from the potential output is known as the “output gap”. The potential output is thought to be consistent with no or low inflation and is related to growth in the productive capacity of the economy. The output gap can be positive, when output is above the potential output level; or negative, if output growth has fallen below the potential output.

A full economic cycle is typically characterised as consecutive time periods, commencing with an initial period of robust growth in output, followed by a downward phase when the economy slows and the output gap turns negative. However, no two economic cycles follow identical trajectories and identifying their start- and end-points and determining the trend rate of growth inevitably involves a degree of judgement.

In practice, HM Treasury (HMT) and others use a range of indicators to identify the start and duration of economic cycles and the trend rate of growth. These indicators include the state of the labour market, inflation and movements in GDP.

Economic cycles affect the public finances, via the operation of so-called automatic stabilisers. Automatic stabilisers are elements of revenue and expenditure that act to dampen fluctuations in the economy without any need for policy intervention. For instance, during an up-phase, tax receipts increase as incomes rise. Disposable incomes are therefore moderated, which in turn dampens the upswing. Conversely, during a downturn, benefit payments increase, moderating the slowdown by supporting household incomes and expenditure.

Typically, the impacts of automatic stabilisers are broadly symmetrical over the course of a cycle. As stabilisers smooth the path of the economy and operate with no time lags, governments have generally tried to avoid constraining the operation and impacts of stabilisers. Hence, fiscal policy has often concentrated on cyclically-adjusted measures, from which the impacts of automatic stabilisers have been removed. What remains after adjustment is an estimate of the structural balance (plus occasional one-off factors, such as the reclassification of Housing Associations as private market producers that took effect from 16 November 2017), which is the balance that would be expected on average over the course of a full economic cycle.

In practice, it is not possible to directly measure the structural balance. However, it can be estimated in various ways. The Office for Budget Responsibility (OBR) has chosen a method that involves initially estimating the output gap. The methodology is explained and contrasted with a range of other possible approaches in a 2012 Working Paper (PDF, 409KB). From 1998 until 2010, HMT published forecasts for various cyclically-adjusted aggregates. However, following the creation of OBR in May 2010, responsibility for forecasting the aggregates shifted to OBR.

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12. Annex 3: Improvements resulting from the UK Statistics Authority’s assessment report and the application of its Data Quality Assurance Toolkit

The improvements introduced as a result of the UK Statistics Authority’s assessment included a monthly quality assurance (QA) checklist to be signed off by senior staff, creation of flow charts providing a high-level overview of QA at each level of production and improvements to processing systems that increase efficiency and mitigate the risks of human error.

The Public sector finances (PSF) Team worked with HM Treasury to improve the reconciliation of central government net cash requirement (CGNCR) and net debt, improving transparency for users and reducing the risk of errors. This resulted in methodological improvements and changes that were first implemented in the August 2016 PSF bulletin. Alongside this, the QA tools used to assure the coherence between cash flow and debt data were improved.

Further methodological improvements were made in relation to measuring the impacts of foreign exchange rate movements on public sector net debt (PSND). The methodological changes meant that where liquid assets have been “hedged” against exchange rate and price movements, the valuations of those assets in PSND are fixed and unaffected by movements in foreign currency and exchange rates.

Additionally, data coverage issues concerning repurchase agreements were identified and corrected. The underlying dataset used for obtaining National Savings and Investments (NS&I) liabilities was refined to ensure liabilities that had not crystallised by the end of the reporting period were excluded from PSND.

Errors in PSF statistics cannot be completely avoided given the large number of data sources and complex production processes. However, to mitigate the risk of errors, the PSF Team reviewed and improved communications with data suppliers and incorporated additional checks into relevant stages of the monthly PSF processing cycle. Steps taken include:

  • building stronger relationships with data suppliers

  • introducing or extending data access agreements and/or service level agreements with data suppliers

  • improving understanding on the parts of Office for National Statistics (ONS), HM Treasury and data suppliers of the strengths and weaknesses of specific data sources

  • identifying additional validation and quality checks to be implemented by ONS, HM Treasury and data suppliers

Given that the data sources for net cash requirement, net debt and net borrowing are largely distinct, the work on reconciling various fiscal aggregates (which has also been extended to include the supplementary fiscal aggregates) is of great importance. Hence, a lot of effort has been put into the process of reconciling the different fiscal measures to enable the consistency and coherence between different data sources to be examined and potential issues identified prior to publication.

The reconciliation between net cash requirement and net debt has been effectively integrated into the quality assurance processes within the monthly production systems. Reconciliations between net borrowing and net cash requirement and/or net debt are in place, but are less developed and work is continuing to improve further the detail available in these reconciliations.

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Contact details for this Methodology

psa@ons.gov.uk
Telephone: +44 (0)1633 456402