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ICAEW: Cuts to public sector finance teams are “false economies”

Author: ICAEW Insights

Published: 22 Nov 2022

ICAEW describes investment in strong finance functions as “critical” to spending public money effectively amidst tight spending settlements for public bodies

When the then Chancellor and now Prime Minister, Rishi Sunak, announced the Spending Review settlement in October 2021, he heralded a “real terms rise in overall spending for every single department”. Resource budgets – excluding depreciation and annually managed expenditure that covers unpredictable and difficult to forecast costs such as provisions – were set to increase by 3.3% each year in real terms over the three-year period.

At the time of the Spending Review, prior to Russia’s invasion of Ukraine and the Omicron outbreak, the Office for Budget Responsibility (OBR) forecast inflation according to the Consumer Price Index (CPI) measure at 3.7%  for 2022/23 and 2.3% for 2023/24. The OBR now forecasts average CPI at 10.1% for 2022/23 and 5.5%  for 2023/24.

Chancellor Jeremy Hunt announced in the Autumn Statement that the government “will protect the increases in departmental budgets we have already set out in cash terms” for the remaining two years of the Spending Review period. High inflation means this results in real terms spending cuts for many government departments.

The government has allocated additional funding for the next two years to priority areas, with an additional £6.3bn for the National Health Service in England and an extra £4bn for schools compared to the plans announced in October last year.

However, there is no additional funding for most other public services, including the Ministry of Justice despite a recent CIPFA / Institute for Government public service Performance Tracker that identified the criminal courts and prisons as among the most struggling public services with large backlogs caused by COVID-19 restrictions and significant workforce challenges. 

As well as rising costs, other announcements in the Autumn Statement will face further pressure on the Ministry of Justice’s budget. The 9.7% increase in the National Living Wage will increase the payroll costs for both the Ministry and its suppliers. The Energy Bills Relief Scheme supports the Ministry’s agencies with paying energy bills for prisons and courts up until March 2023 but the terms of reference for its review states that public sector bodies will not be eligible for support from April 2023 onwards, implying that departments will need to find further savings next year to cover higher energy bills.

In addition, the government has pencilled in significant spending cuts from 2025/26 onwards. The OBR forecasts that government decisions taken since March 2022 will reduce public resource spending compared with previous plans by £5.1bn in 2025/26 and £12.2bn in 2026/27, as well as cutting planned capital spending by £3.7bn and £7.3bn respectively.

Faced with such significant budget pressures, public bodies like the Ministry of Justice could understandably be tempted to look at back-office functions such as finance as places to make savings in the hope of protecting frontline services. Alison Ring, ICAEW’s Director for Public Sector and Taxation, however, warns of “false economies”.

“The Autumn Statement will mean difficult spending decisions for many public bodies,” Ring says, “but it is important that they do not make false economies by cutting back on important back-office functions such as financial and risk management, procurement, financial reporting, internal and external audit and – importantly – fraud prevention.”

The Chancellor announced an additional £280m investment in tackling fraud and error in the welfare system between now and 2024/25. However, there was no mention of additional investment in tackling fraud and error in the Department for Business, Energy and Industrial Strategy (BEIS). BEIS’s 2021/22 annual report and accounts reported an estimated £13.2bn of losses due to fraud and error in the Bounce Back Loans Scheme and £1.04bn of fraud and error in the COVID-19 business grant support schemes. There was also no mention of the newly created Public Sector Fraud Authority, which is tasked with tackling fraud across central government outside the Department of Work and Pensions and HM Revenue and Customs.

The consequences of under-investment in essential back-office functions following years of austerity were highlighted by how some public bodies struggled to cope with the impact of the pandemic. 

The Department of Health and Social Care’s 2020/21 annual report and accounts reports that the department wrote off £8.7bn of the £12.1bn personal protective equipment it purchased that year and that it did not maintain adequate records of £3.6bn of inventory. In a critical report on the accounts, Gareth Davies, the Comptroller and Auditor General and head of the National Audit Office, said the demands that COVID-19 placed on finance teams have “exposed weaknesses in the underlying financial systems and controls which pre-date the pandemic”.

ICAEW’s submission to a Public Accounts Committee inquiry in to the 2019/20 Whole of Government Accounts stated that public sector finance teams are “under pressure” and “need support”, pointing to delays in financial reporting which “hamper the ability” of public bodies to deliver savings. Many public bodies, including the Ministry of Justice and Department of Health and Social Care, have still not published audited 2021/22 accounts meaning that many figures included as 2021/22 departmental outturn in the Autumn Statement document have not been subject to external verification. 

Ring concludes: “Investing in strong finance functions and in high quality financial reporting to aid decision-making will be critical to ensuring that public money is spent effectively at a time of tight spending settlements.”

One of the themes of ICAEW’s virtual Public Sector Conference 2022 on 9 December will be the importance of investing in good governance and risk management. Attendance is free.

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