45

Planning and Controlling UK

Public Expenditure on a Resource
Basis
Andrew Likierman
The UK Government has, from 2003/04, completed the transition from planning
and controlling public expenditure in cash to the full implementation of resource
budgeting. Accounting had already switched to the resource basis, with effect from
2001/02. The 2002 Spending Review was the first biennial review of future
spending levels and priorities to be conducted entirely on a resource basis. This
article clarifies what was involved in this transition, paying attention to how it
made the 2002 Spending Review different from its predecessors. Changes in both
the fiscal framework and the accounting and budgeting systems have been
designed to improve decision making at departmental level, and to improve
information flows to Parliament and the public.
As the 2001 Pre-Budget Report (HM Treasury,
2001a, p. 1) put it, Resource Budgeting is a
central part of the governments drive to
provide world class public services. The 2002
Spending Review (SR2002) set the UK
Governments spending plans for the three
years from April 2003 (HM Treasury, 2002b).
It was not only the first Spending Review using
full resource budgetingin which central
government departments spending plans
reflected the full economic cost of their
activitiesbut also the final major stage of the
implementation of Resource Accounting and
Budgeting (RAB). Before going into the details
of what was new in 2002, this section provides
the context of these important changes.
The intention behind RAB was to provide
better information on the management of public
spending, not only to government departments
and government as a whole, but also to
Parliament and the public. For departments,
the benefits allow for the better management of
resourcesassets and liabilities as well as costs
and help switch the focus from inputs to outputs
and outcomes. For central government as a
whole, these features are also evident at an
aggregate level. As well as allowing for a more
strategic approach to planning, the accruals
basis helps to reduce the perverse effects of
annuality and provides new incentives for the
better management of public capital. For
Parliament, and especially its select committees,
the benefit is more, better-quality information
for scrutiny and monitoring purposes.
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The process of implementing RAB was set

out several years ago, in Green (HM Treasury,
1994) and White (HM Treasury, 1995) Papers.
An extended timescale was seen as necessary to
contain the costs involved in making accrualbased accounting information available.
Advantage could then be taken of the
replacement cycle for accounting systems. The
accounting policies are set out in the Resource
Accounting Manual (HM Treasury, 2001b) and
follow, as far as practicable, accounting
standards used in the private sectora principle
interpreted since 1996 by the independent
Financial Reporting Advisory Board (FRAB).
From 2000, the FRAB was placed on a statutory
footing and now reports to Parliament annually,
highlighting any departures from UK Generally
Accepted Accounting Practice (GAAP, see for
example the last report, HM Treasury, 2002c).
Resource accounts differ from the
traditional cash accounts, both in their format
and in the way they measure spending. Rather
than being a simple statement of cash spent
and received, they take broadly the same form
as commercial accounts, with a balance sheet,
the equivalent of a profit and loss statement,
and information on cash flow, along with some
additional information specific to the public
sector.
In terms of measurement, resource
accounts measure spending when it is
consumed, or accrued, rather than when cash
is spent. And resource accounts capture noncash costs of economic consumption such as:

Sir Andrew
Likierman is Chief
Accountancy Adviser
to HM Treasury and
Head of the
Government
Accountancy Service.
Appointed to this post
in December 1993,
he has been
responsible for the
development and
implementation of
Resource Accounting
and Budgeting.

PUBLIC MONEY & MANAGEMENT JANUARY 2003

46

Depreciation (the consumption of capital assets

over their useful economic life).
A cost of capital charge (the opportunity and
financing costs of holding capital): together,
depreciation and the cost of capital charge are
sometimes known as capital charges.
Provisions for future payments, such as
compensation or early retirement liabilities.
Resource budgeting uses this information as the
basis for planning and controlling public
spending. Under the new system, these new
costs are included in budgets.
As a result of the changes to systems, accounts
using the new information were produced from
1999/2000, following a pilot in 1998/99. These
have become the only form of departmental
reporting to Parliament, fully replacing cashbased appropriation accounts from 2001/02, the
same year for which requests to finance
government expenditure were first made to
Parliament on the new basis.
The government budgeting framework onto
which these changes have been grafted was put
in place in 1998 (HM Treasury, 1998a). This
new framework aimed to foster long-term
planning, focus on outcomes, and place a new
emphasis on high-quality capital investment.
Since the Comprehensive Spending Review of
1998, spending plans have been set every two
years in Spending Reviews. Each plan covers
three years, with the final year of one Spending
Review becoming the first year of the next. Most
departmental spending is subject to a three-year
Departmental Expenditure Limit (DEL).
Expenditure which cannot be managed on a
three-year basis, such as social security
expenditure and debt interest, is managed as
part of Annually Managed Expenditure (AME).
In order to protect essential long-term
investment, there is a separate capital budget
(capital DEL) for each department, as well as the
main current budget (resource DEL). So as to
reduce wasteful end-year surges in spending,
departments are also now permitted to carry
forward unspent DEL into future years.
Following a Spending Review, departments
are required to publish Departmental Investment
Strategies, outlining their plans for using their
capital budgets. Departments also publish Public
Service Agreements (PSAs): key high-level targets
showing the measurable improvements in
services that departments are expected to deliver
in return for their resources.
Improved information on the management
of the existing fixed capital base, as well as of new
investment, is one of the most obvious results of
the change. From SR2002 onwards,
PUBLIC MONEY & MANAGEMENT JANUARY 2003

departmental plans have to justify the continued

funding of asset holdings and relate them to the
delivery of key government objectives. The
transparency of capital charges provides both
the signal and the incentive to manage the capital
stockimproving the quality of maintenance,
extending useful life where that is cost effective
and disposing of those assets no longer needed.
The fixed asset information compiled by each
department was brought together in the 2001
National Asset Register (HM Treasury, 2001c).
The first register was published in 1997 (HM
Treasury, 1997), but the 2001 version gave asset
valuations for the first time, as well as changes
since 1997.
The change to an accruals basis does not
affect the key expenditure aggregates, which the
Government uses for the purposes of fiscal policy
and which are also used for international
comparisons. The main aggregate is Total
Managed Expenditure, which consists of public
sector current expenditure and public sector
investment (which, for the purposes of fiscal
policy, is usually shown net of depreciation).
There are, however, some differences
between resource-based information and
national accounts classification of expenditure.
This is due to the fact that resource-based
information reflects accounting policies based
on private sector practice, while national accounts
adhere to EU and other international accounting
frameworks (for example Eurostat, 1996).
Differences arise because of the different purposes
served by the different accountsresource-based
information is derived largely from commercial
accounts, which usually look at the position of a
single entity, while national accounts measure
the whole economy.
In terms of accounting policies, the main
differences between the two frameworks are:
Resource accounts include a cost of capital
charge for each department. In part, this
reflects the fact that total government debt is
not attributable by department and so the
charge is a proxy for debt interest. However,
the national accounts include the actual debt
interest paid by government as a whole.
Resource accounting includes provisions for
future expenditure, while national accounts
do not.
Resource accounting identifies capital
expenditure with the creation of government
assets, while national accounts include grantfunded investment in the rest of the economy.
Resource accounts treat most military
equipment as investment, whereas national
accounts do not.
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47

There is nothing new in having a difference

between budgetary controls and national
accounts figuresthere were also differences
under the previous cash system. For example,
for the purposes of better control over the
governments cash flow, lending by departments
has always been subject to budgetary control.
However, government lending is not included
in the national accounts.
The 2000 Spending Review (SR2000)
The original RAB project timetable committed
the Government to moving to a resource-based
budgeting system in 2000. In preparation for
SR2000 (the second of the present Governments
multi-year spending reviews), a dry run
conversion to resource budgeting was organized
in 1999. This showed that the process of
converting to resource budgeting was feasible,
but there was concern among departments about
the difficulties of forecasting some of the new
figures, particularly provisions and depreciation,
in DELs over a three-year period.
Consequently, resource budgeting was
introduced in two stages. In SR2000, the main
budgeting structures set out in the 1998
Comprehensive Spending Review (HM
Treasury, 1998b) were retained, but spending
was measured on an accruals basis for the first
time. Forecast information on depreciation, cost
of capital charges and provisions was derived
from the accounts. However, to allow
departments more time to get used to dealing
with these new costs, for the period covered by
SR2000, these costs were counted as part of AME
and not as part of DEL, the main budgetary
control for departments. These transitional
arrangements were designed to build up
experience of these figures and to allow for a
smooth move to full resource budgeting in
SR2002 (HM Treasury, 2000).
As DEL is the main measure of spending for
most programmes, the impact of the changes to
the numbers arising from the first stage of the
conversion to resource budgeting was minimal.
They were mostly confined to minor timing
differences between when spending was
committed and when it was paid for.
In practice, what this meant was that, from
2001/02, the first year of SR2000, departments
could make use of the better information available
from resource-based data. However, the full
incentives framework was not yet in place, because
major new costs were outside their budgets. A
department might identify savings on capital
consumption through better maintenance, but
as these costs were in AME the savings were not
available for redeployment elsewhere.
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The 2002 Spending Review (SR2002)

In 2001, Ministers decided to proceed as planned
with the implementation of full resource
budgeting in SR2002, covering the years 2003/
04 to 2005/06. In essence, this meant bringing
depreciation, cost of capital charges and
provisions across the line from AME to DEL.
There were other changes. To reflect the
resource accounting definition of investment
(spending which creates an asset on the relevant
bodys balance sheet), rather than the national
accounts definition (investment funded by
government anywhere in the economy), capital
grants outside the public sector (for example to
universities) were moved from the capital DEL
to the resource DEL. And, to reflect the
commercial relationships between public
corporations and departments, self-financed
capital spending by public corporations was
moved from capital DEL to capital AME. Figure
1 gives the matrix of resource and capital for
AME and DEL, and shows the changes from
SR2000 to SR2002.
The new numbers in the calculation of public
spending on the new basis were certainly not
trivial. For 2003/04, the first of the years covered
by SR2002, depreciation amounted to 11 billion,
the cost of capital charge to nearly 9 billion and
provisions (net) to nearly 1 billion. The changes
to the treatment of capital grants amounted to a
further 7.5 billion. Including some other
changes, the total effect was an addition to the
resource DEL of over 30 billion.
However, this did not mean that public
spending was increased by 30 billion. If one
were to look at the main national accounts
expenditure aggregates published on the old
basis in the April 2002 Budget (HM Treasury,
2002a), which set the limits for public spending
in SR2002, one would see that these are exactly
the same as the totals published on the new basis
in the Spending Review (HM Treasury, 2002b)
three months later. The costs were already there,
but, because they were then in AME, they were
not apportioned to departments.
Those who want to use the figures need also
to be aware of the danger of double counting in
the new presentation. With cash figures, current
and capital expenditure were added together to
give the total cash expenditure. With the new
figures, depreciation is part of the resource (i.e.
current) budget. To add the capital would
therefore be counting both the writing down of
the existing capital stock and the cash outlay on
new assets.
In order to give a single measure of spending
on public services under full resource budgeting,
the total budget is presented as the resource and
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Figure 1. Changes in budgeting control in the 2002 Spending Review.

RESOURCE

CAPITAL

Main current programme costs of

department and NDPBs

New capital spending by department

Administration costs

Capital grants to local authorities

New capital spending by NDPBs

DEL
Capital grants, excluding local authorities
Self financed capital spending by public
corporations
Social security

Depreciation

Capital spending in AME

Debt interest
EU payments
AME

Public pensions

Cost of capital
charge

Lottery
Other AME

Provisions

capital budgets together, net of depreciation and

impairments. This reflects the resources required,
plus the net investment in them. Control is, of
course, exercised separately on gross capital and
resource DEL.
The SR2002 documents also allow
comparisons with previous numbers. Because of
the data supplied by departments, it is possible to
work out how a departments budget would
have looked under the old system. This works
mainly by removing the forecast non-cash costs
in budgets. The result is a number that is very
close to the actual cash requirement one would
forecast for that department, and this is referred
to as near cash.

While the move to full resource budgeting

has no impact on public expenditure aggregates,
by attributing costs previously shown only at
whole of government level to departments, it
does change the measure of spending on
individual services.
DEL is normally the main measure of
spending on services. Table 1 shows the
reconciliation of the figures for overall DEL
across departments from a near-cash basis to the
full resource basis. The difference for 2003/04 is
an increase of 10.5 billion from 252.9 billion to
263.4 billion. Within these overall totals, the
resource budgets for all major departments were
more than 100 million higher than would have

Table 1. 2003/04 Departmental Expenditure Limits (DELs): Reconciling full resource to

near cash basis ( billion).
Total DELsfull resource basis

263.4

Adjustments to reconcile with previous budgeting system*

Adjustments for total depreciation and impairments
Aggregate changes to the resource budget
Aggregate changes to the capital budget
Sum of all adjustments

11.1
-30.4
8.9
-10.5

Total DELsnear cash basis

252.9

*Net of depreciation and impairments.

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Table 2. 2003/04 Departmental Expenditure Limits (DELs): Major changes ( billion).

Near cash basis

Adjustments for
full resource budgeting

Full resource basis

Department of Health
Ministry of Defence
All others

61.6
25.6
165.7

2.3
5.3
2.9

63.9
30.9
168.6

Total

252.9

10.5

263.4

been shown under cash accounting.

As table 2 shows, the two biggest changes
were for defence, at over 5 billion (because of
the costs associated with the 90 billion defence
estate), and health, at more than 2 billion,
reflecting not only the costs associated with the
huge health estate but also a more accurate
assessment of clinical negligence costs.
Finally, table 3 contrasts the changes to the
growth rates for UK health, education and
transport with defence. It can be seen that defence
is once again affected most by the changes,
because of the higher base from which the growth
rate is calculated. The reason that there is no
effect on the growth rate for education is that the
capital base for schools falls outside the scope of
resource budgeting.
The control framework has also been
modified to take account of the budgeting
changes. There are two ways in which it is
designed to cope with potential uncertainties,
such as large unforeseen changes in provisions.
One is the possibility, subject to specified
circumstances and the permission of the Chief
Secretary to the Treasury, of scoring provisions
in AME. Such changes will be reported in the
biannual macroeconomic reports, the autumn
Pre-Budget Report and the spring Budget. The
second is the DEL reserve: 100 million a year
has been allocated for each of the three years
covered by SR2002, to meet unforeseen pressures
in DEL.
The Future
SR2002 almost completes the major changes of
an eight-year programme. It provides planning
information in depth and detail never previously
available. The last stage in changing the
framework will mean that, from April 2003,
public expenditure control will be exercised fully
on the basis of the new figures.
However, this will not be the end of the story,
since there will be the continuation of the work
to produce Whole of Government Accounts
(WGA), using the new framework to provide
new information for macroeconomic
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management and the development of fiscal policy,

as well as better information for the national
accounts produced by the Office for National
Statistics. WGA will be a single, consolidated set
of audited financial statements for the whole of
the public sector.
As it will be some time until full GAAP-based
WGA can be produced, the plan is, as an interim
step, for statistically-based WGA, based on
national accounts data and adjusted for key
accounting policy differences with GAAP, to be
produced for 2001/02. Then, following dry runs
for 2001/02 and 2002/03, GAAP-based central
government accounts will be published for 2003/
04. Finally, with the dates subject to confirmation,
the intention is to publish WGA on a GAAP basis
for 2005/06. As with the departmental accounts,
WGA will use private sector accounting standards,
adapted as necessary for central government.
Meanwhile, there are already many instances
of where the new accrual-based framework has
made a difference, including:
Asset management. The Foreign &
Commonwealth Office has reported how it
is improving the management of its
significant fixed asset base in the period up
to 2005/06, allocating proceeds of any disposals
on the basis of a clear plan.
Cash and working capital management. The
requirement for the Department for Work
and Pensions to report its debtor and creditor
balances (1.75 billion and 2.55 billion

Table 3. Changes to growth rates as a result

of the Spending Review, average 2002/03 to
2005/06 (%).

UK health
UK education
UK transport
Defence

Near cash

Resources

5.8
7.4
8.4
1.7

5.8
7.3
8.4
1.2

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50

respectively in April 2001) has meant both

more accurate recording and the provision to
Parliament of better information.
Costing. The resource accounting treatment of
student loans has enabled decisions on loan
expenditure by the Department for Education
and Skills to be made on the basis of the full
long-term cost, rather than the cash cost in the
early years.
Performance monitoring. The Ministry of Defence
has adopted a balanced-scorecard approach,
using the new information as part of an outputfocused approach.
Planning. The Department of Culture, Media
and Sport has increased the degree to which
budgets are delegated and allowed increased
flexibility to allocate resources to meet business
planning needs.
Training. The Department of Trade and
Industry has introduced courses for specialists
and non-specialists to make the most of
resource-based financial information.
These are only a small number of examples of
the continuing work to make the most of the
information now available. To help departments,
the Treasury has published a series of guides: the
Managing Resources series. These guideswith
colours for ease of identificationcover
descriptions of the full implementation of RAB
(blue); means of analysing the new resource
accounts (red); case studies of the difference the
changes have made in departments (green
from which the above examples have been taken);
the effect of transactions on public spending
(orange); training (pink); and how departments
can make the most of the changes (purple).
The new booklets complement focused
training throughout the civil service to raise the
level of financial management more generally.
These are indications of the way that the changes
to the financial framework are intended to be
carried through to better decision taking at
departmental level, to justify the description in
SR2002 (HM Treasury, 2002b, p. 175) of RAB as
the most significant overhaul of the public
finances for well over a century.

References
Eurostat (1996), European System of Accounts: ESA
1995 (Office for Publications of the European
Communities, Luxembourg).
HM Treasury (1994), Better Accounting for the
Taxpayers Money: The Governments Proposals, Cm
2626 (HMSO, London).
HM Treasury (1995), Better Accounting for the
Taxpayers Money: The Governments Proposals, Cm
2929 (HMSO, London).
HM Treasury (1997), The National Asset Register
(HM Treasury, London).
HM Treasury (1998a), Stability and Investment for the
Long Term: Economic and Fiscal Strategy Report
1998, Cm 3978 (The Stationery Office, London).
HM Treasury (1998b), Modern Public Services for
Britain: Investing in Reform, Cm 4011 (The
Stationery Office, London).
HM Treasury (2000), Prudent for a Purpose: Building
Opportunity and Security for All2000 Spending
Review: New Public Spending Plans 20012004,
Cm 4807 (The Stationery Office, London).
HM Treasury (2001a), Better Management of Public
Services: Resource Budgeting and the 2002 Spending
Review (HM Treasury. London).
HM Treasury (2001b), Resource Accounting Manual
(HM Treasury, London) (available at
www.resource-accounting.gov.uk)
HM Treasury (2001c), The National Asset Register,
Cm 5221 (The Stationery Office, London).
HM Treasury (2002a), Budget 2002The Strength to
Make Long-Term Decisions: Investing in an
Enterprising, Fairer BritainEconomic and Fiscal
Strategy Report and Financial Statement and Budget
Report, April 2002, House of Commons Paper
592, Session 2001/02 (The Stationery Office,
London).
HM Treasury (2002b), Opportunity and Security for
AllInvesting in an Enterprising, Fairer Britain:
New Public Spending Plans 2003-2006, Cm 5570
(The Stationery Office, London).
HM Treasury (2002c), Report for the Period April
2001 to March 2002: Financial Reporting Advisory
Board, House of Commons Paper 896, Session
2001/02; Scottish Executive Paper 103/1 (2002);
Northern Ireland Assembly Paper 93/01, Session
1 (2001/02) (The Stationery Office, London).

Managing Resources
Booklets in the Managing Resources series are available on the Treasury website (http://
www.hm-treasury.gov.uk). These include Full Implementation of Resource Accounting and
Budgeting (the Blue Guide); Analysing Resource Accounts (the Red Guide); Case Studies (the
Orange Guide); Better Decision-taking in Departments (the Green Guide); A Strategic
Approach to Finance Training (the Pink Guide) and Maximizing the Benefits for Departments
(the Purple Guide).

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