Whitehall departments are managing to maintain the quality and quantity of public services despite underspending to the tune of £6.7bn in the last financial year
Today HM Treasury published Public Spending Statistics that contain, for the first time, estimated spending outturns by Whitehall departments for 2011-12. The figures show that, in total, departmental spending was £6.7bn lower than was planned this time a year ago. Had departments spent all their planned budgets in 2011-12, departmental spending would have fallen in cash terms by £4.4bn between 2010-11 and 2011-12 − a real-terms fall of 3.5%. As a result of the underspends, cash departmental spending actually fell by £11.0bn, which equates to a 5.2% real-terms fall.
The £6.7bn underspend comprises a £5.3bn underspend by Whitehall departments, and £1.4bn of funding held in reserve by HM Treasury this time last year that subsequently did not need to be allocated to departments. The £5.3bn underspend is equivalent to 1.4% of departments’ budgets. In other words, on average, departments spent 98.6% of the money they were allocated in 2011-12; although there was considerable variation in the relative size of underspends across departments.
One obvious reason why departments underspend is that they might have been given permission by the Treasury to move funds into the next financial year under the new ‘Budget Exchange System’. Under this, departments that surrender any underspend (up to a ‘reasonable limit’) in advance of the end of the financial year can get an equivalent increase in their budget in the following year.
However, of the £5.3bn underspent by departments in 2011-12, only £0.9bn was successfully surrendered by departments through the Budget Exchange, and will now be available to be spent in 2012-13. This means that over 2011-12 and 2012-13 the total government deficit is on course to be £4.4bn lower (i.e. £5.3bn less £0.9bn) as a direct result of these underspends.
The majority of individual Whitehall departments underspent on their 2011-12 budgets.. The department that underspent the largest proportion of its budget was the Department for Energy and Climate Change whose £0.4bn underspend was 13.9% of their 2011-12 budget. In absolute terms, the largest underspender was the NHS – the biggest Whitehall department – which underspent by £1.7 billion (of which only £0.3bn was surrendered through Budget Exchange), which is equivalent to 1.6% of its 2011-12 budget.
The use of Budget Exchange varied across departments, even amongst those that ended up underspending on their budgets. For example, the Department for Transport underspent by £0.7bn (or 5.1% of its budget), of which none was transferred through Budget Exchange, while the Department for Culture, Media and Sport underspent by £0.1bn (or 5% of its budget), of which around half was transferred to 2012-13 through Budget Exchange.
Small underspends would not be surprising – indeed it would be amazing if every department managed to spend its allocation exactly. But relatively large underspends that are not qualifying for Budget Exchange might seem strange, and particularly so in an era where most departments are facing cuts. One possible explanation is that departments have been trying hard to ensure that they do not end up with an overspend, which might be particularly unfavourably looked on by the Treasury in the current era of austerity.
Another is that Whitehall departments have looked ahead to the cuts they face in 2012-13, 2013-14 and 2014-15 and decided that over-delivering on the cuts to date would leave them better placed to keep within these tight budgets going forwards. Departmental spending plans for 2012-13 now currently imply an average cut of 0.8% in real terms from their 2011-12 level, which would have been a 2.6% average real cut if departments had spent their planned budgets in 2011-12.
Whatever the motivation behind the underspends, to the extent that departments are underspending while still maintaining the quality and quantity of public services being provided, this is good news.
Rowena Crawford is senior research economist and Carl Emmerson is deputy director at the Institute for Fiscal Studies. This post was first published as an IFS Observation