## _cr16351 — PREFACE

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### Mission and scope and team
- A Fiscal Transparency Evaluation mission visited London, United Kingdom twice between July and September 2016 in response to a request from the then Prime Minister, Mr. Cameron.
- Mission team: Brian Olden (Head), Miguel Alves, Jason Harris, Alpa Shah, Peter Mullins (Fiscal Affairs Department), and experts Tim Irwin, Sami Yläoutinen, Mathew Brine (FAD fiscal expert roster). Mr. Phil Gerson (EUR Deputy Director) joined the concluding visit in September 2016.
- Principal UK counterparts and interlocutors included senior officials of Her Majesty’s Treasury and officials from Departments of Energy and Climate Change, Business, Innovation and Skills, Communities and Local Government, and Environment, Food and Rural Affairs.
- Other public entities and stakeholders consulted included Bank of England; Scottish Government’s Department of Finance; Greater London Authority; House of Commons Treasury and Public Accounts Select Committee; Her Majesty’s Revenue & Customs; Infrastructure and Projects Authority; National Audit Office; Office of Budget Responsibility; Office of National Statistics; Oil and Gas Authority; UK Debt Management Office; UK Government Investments; Institute of Fiscal Studies; representatives of the petroleum industry; academia; UK Extractive Industry Transparency Initiative.
- Evaluation completed in September 2016; findings and recommendations reflect IMF mission team views. Unless otherwise specified, data are IMF mission team estimates and not official UK government estimates.
- Acknowledgements: Particular thanks to Richard Hughes, Vincent Tang, Harry Lee, and Lorraine Best for mission support.

### Structure of the report
- Chapter I: Coverage, timeliness, quality, and integrity of fiscal reporting.
- Chapter II: Comprehensiveness, orderliness, policy orientation, and credibility of fiscal forecasting and budgeting.
- Chapter III: Disclosure and management of fiscal risks.
- Chapter IV: Management of revenues from natural resources using a draft of the new Fourth Pillar of the Fiscal Transparency Code (FTC) released in April 2016 for public consultation.

### High-level assessment
- Of the 48 principles in the IMF Fiscal Transparency Code:
  - Meets basic level: 9 principles.
  - Meets good level: 10 principles.
  - Meets advanced level: 23 principles.
  - Two Natural Resource Revenue Management principles do not apply because the UK does not have a Sovereign Wealth Fund.
  - In four principles, the UK’s transparency practices do not currently meet basic practice.

---

### Executive summary — overall evaluation and priorities

### Overall standing and strengths
- The UK scores very highly across all FTC pillars relative to other countries assessed to date.
- Strongest areas: fiscal reporting and resource revenue management.
- Fiscal risks reporting is a relative strength.

### Key areas to address (priorities)
- Reduce the lag between the end of the financial year and publication of Whole of Government Accounts (WGA).
- Concentrate all major tax and spending decisions into a single fiscal event held at least three months prior to the start of the fiscal year to allow greater legislative scrutiny.
- Introduce a new and transparent fiscal objective to better shape medium-term fiscal policy.
- Introduce a comprehensive and quantified fiscal risk statement covering all major fiscal risks.
- Publish an asset and liability management report discussing developments, forecasts, and risks to the government’s balance sheet.

---

### Fiscal reporting (Chapter I) — coverage, timeliness, quality, integrity

### Major reports and timeliness (frequency and lags preserved)
- Monthly fiscal statistics (PSF, ONS/HMT): Monthly, lag: 20d.
- OBR commentary on each PSF release: Monthly, lag: 20d.
- Monthly Tax Receipts and National Insurance Contributions (HMRC): Monthly, lag: 20d.
- DMO Quarterly Review: Quarterly, lag: 6w.
- Quarterly and annual fiscal statistics (ONS, ESA TP/EDP): Quarterly, lag: 3m.
- Annual tax relief reports (HMRC): Annual, lag: 9m.
- Annual Public Expenditure Statistical Analyses (HMT): Annual, lag: 4m.
- Whole of Government Accounts (WGA, HMT): Annual, lag: 14m.
- UK National Sectoral Accounts (The Blue Book, ONS): Annual, lag: 21m.

### Coverage of institutions and expenditures (FY 2014/15)
- Public Sector: 38,241 entities; Share 100.0.
- General government: 36,529 entities; Share 92.8.
- Central government: 7,858 entities; Share 69.78.
- Local governments: 28,671 entities; Share 23.1.
- Nonfinancial public corporations: 1,705 entities; Share 3.7.
- Central Bank: 1 entity; Share 0.0.
- Other financial public corporations: 6 entities; Share 3.5.
- Public sector expenditure: around GBP 894.0 billion (48.8 percent of GDP).
- General government expenditure: GBP 829.9 billion (45.3 percent of GDP); 75 percent through central government and 25 percent through local governments.
- Public corporations expenditure: GBP 64.0 billion (3.5 percent of GDP); 16 percent by nonfinancial corporations and 84 percent by financial corporations.

### Coverage of stocks — WGA (public sector balance sheet, primarily FY 2014/15 WGA)
- Nonfinancial assets: GBP 982.6 billion (53.6 percent of GDP), including 50.5 percent of GDP in fixed assets.
- Financial assets: GBP 1,591.4 billion (86.9 percent of GDP), including 8.4 percent of GDP in currency and deposits and 36.4 percent of GDP in loans to the private sector.
- Liabilities: GBP 4,736.6 billion (258.6 percent of GDP), including 77.6 percent of GDP in debt securities, 84.9 percent of GDP in pension entitlements of civil servants, and 5.4 percent of GDP in accounts payable.
- Net worth: -118.1 percent of GDP.
- Net financial worth: -171.7 percent of GDP.
- PSF disclosures exclude several material stock categories (nonfinancial assets, non-liquid financial assets, civil servants’ defined benefits pension entitlements, other accounts payable); PSF liabilities are disclosed at face value.

### Treatment of pension entitlements and implications
- Social Security pension entitlements (State Pension PAYG) liabilities are not included in public sector liabilities; social security financial assets are included.
- If State Pension entitlements for private sector employees were included, public sector net worth would decrease to around -328 percent of GDP.
- The asymmetric treatment follows international statistical standards (ESA/MGDD) but presents a more favorable fiscal position.

### Reconciliation and consolidation boundaries
- WGA excludes some small entities on materiality or non-executive responsibility grounds; at WGA FY 2014/15 compilation, housing associations were excluded pending ONS classification.
- Royal Bank of Scotland (RBS) was not consolidated in WGA and instead recorded as a financial investment; consolidation would materially affect gross revenue, expense, assets, and liabilities, but have a relatively small impact on net borrowing or net worth.
- ONS classification decisions determine PSF institutional coverage; assessments are published monthly with a quarterly forward work plan and applied retroactively as practical.

### Reporting on natural resource stocks and flows (oil and gas)
- OGA publishes annual cumulative production and estimated remaining recoverable oil and gas reserves with explanations of changes.
- ONS publishes annual reserve volumes and a stock-flow reconciliation attributing changes to production or reserve estimate changes.
- ONS has estimated monetary valuation for UK Continental Shelf (UKCS) oil and gas as part of Environmental Accounts; valuation reached a zero value by end-2014.

### Coverage of flows: WGA vs PSF (impacts on deficit)
- WGA follows IFRS: statement of revenue and expenditure (accrual basis), cash-flow statement, and statement of comprehensive expenditure.
- Recognizing all accrued revenues and expenses would increase public sector deficit (net borrowing) as currently reported in the PSF to 7.7 percent of GDP.
- PSF does not disclose comprehensive cash flows and is substantially less comprehensive in accrual flow coverage than WGA.
- Missing flows include unreported net accrual of pension entitlements of public employees of GBP 56.0 billion (3.1 percent of GDP).

### Tax expenditures and their disclosure (HMRC)
- HMRC lists active tax relief schemes: December 2015 count was 401 active schemes.
- Publication shows estimated revenue loss for previous fiscal year (t-1), budget year (t), and t+1, t+2 where estimable.
- HMRC does not aggregate costs of separate schemes due to interactions between schemes.
- No control on size of tax expenditures.
- UK revenue foregone from tax expenditures increased to 6.3 percent of GDP in FY 14/15.
- If structural relief schemes and schemes with both tax expenditure and structural components were added, total revenue foregone would increase to around 20 percent of GDP.
- Reporting lacks breakdowns by function (COFOG), type of tax expenditure, industry sector beneficiary, and geographical area.

### Frequency and timeliness of WGA (audit publication lags)
- Audited WGA timeliness: consistently released more than a year after fiscal year end (timeliness: Not Met).
- WGA publication time lags (financial year / date of submission to NAO / date of publication / time lag):
  - 2009/10 / Dec 17, 2010 / Nov 24, 2011 / 19m
  - 2010/11 / Feb 29, 2012 / Oct 31, 2012 / 18m
  - 2011/12 / Feb 1, 2013 / July 17, 2013 / 16m
  - 2012/13 / Jan 22, 2014 / Jun 10, 2014 / 15m
  - 2013/14 / Dec 19, 2014 / Mar 26, 2015 / 12m
  - 2014/15 / Jan 18, 2016 / May 26, 2016* / 14m
  - Note: * Publication delayed due to late financial statements transmission by academies.
- Causes of delay: local government accounts published up to six months after fiscal year end; material inconsistencies in intra-public sector transactions requiring resolution before audit.
- HMT measures to improve timeliness starting fiscal year 2017/18: require local government audited financial statements by end-July; implement latest accounting standards; increase accountancy skills in policy teams.

### Quality and integrity highlights
- Classification: administrative, economic, and functional classifications consistent with international standards; functional classification follows COFOG; some exceptions (Health function level 2 disclosure in England and Wales).
- Internal consistency: monthly PSF bulletin includes reconciliation checks; integrated securities database ensures debt issuance/holding consistency.
- Historical revisions: ONS open revision policy; rolling 60-month revisions analysis; average revision between first vintage and vintage one year later close to zero.
- Audit: NAO audits WGA; audit qualifications have declined but remain on several matters (definition and boundary, inconsistent accounting policies, audit qualifications on consolidated bodies, incomplete elimination of intra-government transactions).
- Notable disclosure gaps: material impact of RBS on public sector balance sheet (increase in gross liabilities by 50 percent of GDP) is not disclosed in any fiscal report; WGA and PSF could be made more consistent for user relevance.

### Recommendations on fiscal reporting (selected)
- Recommendation 1.1: Enhance consistency between WGA and PSF by:
  - Disclosing a trial, simplified consolidation of the financial statements of WGA and RBS in the annual report section of the WGA;
  - Expanding coverage of stocks and flows in the PSF;
  - Adding PSF summary statements produced under statistical standards closer to IFRS.
- Recommendation 1.2: Control tax expenditures by subjecting them to numerical limits and enhance reporting through addition of sectoral and functional breakdown in cost publications.
- Recommendation 1.3: Bring forward publication of the WGA to nine months after the end of the reference period.

---

### Fiscal forecasting and budgeting (Chapter II) — comprehensiveness, orderliness, policy orientation, credibility

### Macroeconomic forecasting (OBR and EFO)
- EFO includes detailed six-year forecasts, assumptions, sectoral analysis, drivers, and risk discussion.
- GDP forecasts:
  - "GDP forecasts are relatively accurate and unbiased for the budget year, but do indicate some optimistic bias that increases over the forecasting horizon."
  - The UK has the most accurate real GDP forecasting record in Europe and one of the lowest biases.
- Nominal GDP forecasting:
  - Forecasts of nominal GDP have been consistently overoptimistic, particularly following the crisis.
  - Strong correlation between nominal GDP growth forecast accuracy and overall revenues; revenue elasticity to growth estimated at 1–1½.
- Forecast errors:
  - Paired errors consistently falling outside expected elasticity range would indicate microeconomic forecasting model issues.

### Medium-term budget framework (Advanced)
- Structure:
  - Multi-year spending agreements (Comprehensive Spending Reviews) set Departmental Expenditure Limits (DEL) for 25 central government ministries.
  - DEL covers about half of total managed expenditure; the remainder is Annually Managed Expenditure (AME).
- Performance:
  - Strong record delivering on medium-term expenditure commitments; no bias in expenditure forecasts.
  - Persistent revenue forecast downgrades have translated to worse fiscal balance outcomes than projected.
- Horizon limitations:
  - Fixed-year nature shortens effective horizon as agreements near expiry; examples noted for the 2010 CSR and 2013 CSR.

### Investment projects and transparency (Good)
- General government investment around 4 percent of GDP in 2016.
- Planned investment across sectors combined value: GBP 425 billion.
- Major projects include High Speed Rail, airport extension (decision pending), Hinkley Point nuclear power plant.
- IPA formed January 2016 to manage major projects; National Infrastructure Pipeline database provides planned investment information.
- Cost-benefit analyses not consistently published as a matter of course; assessment reduced to Good.

### Orderliness, legislation, and timeliness (Not Met for timeliness)
- Budget system largely convention-based with limited framework legislation.
- Charter of Budget Responsibility sets fiscal objectives and budget content requirements.
- Timeliness:
  - Budget presented two to three weeks prior to start of financial year — does not meet FTC basic practice (one month prior) or advanced practice (three months prior).
  - Detailed spending estimates provided a month after the budget and after financial year start.
  - Parliament often approves the budget in July (three months after April 1 fiscal year start).
- Autumn Statement:
  - Intended as a mid-year update but often contains policies with major fiscal significance, sometimes eclipsing the Budget.

### Budget unity and own-source revenues
- Own-source revenues amount: 3.7 percent of GDP (FY 2016/17) are largely ignored in headline total managed expenditure reporting.
- Reporting gross rather than net would move total managed expenditure from 39.7 percent of GDP in 2016–17 to 43.4 percent of GDP, and current receipts to 40.3 percent of GDP, assuming departmental income is spent within the budget year.

### Policy orientation and fiscal objectives
- Charter objectives (Charter approved October 2015):
  - Fiscal mandate: a surplus on Public Sector Net Borrowing (PSNB) by 2019–20 and maintaining a surplus in normal times thereafter.
  - Supplementary target: debt as a share of GDP to be falling in each year until 2019–20.
  - Welfare cap: a cap on a subset of welfare spending over the rolling five-year forecast period.
- Assessment:
  - If maintained, objectives would be Good practice, but frequent adjustments undermine credibility.
  - During assessment period, objectives were effectively abandoned, leading to "Not Met" under the Code.

### Performance information, outputs and outcomes (limitations)
- Single Departmental Plans (2015–20) present total DEL funding, high-level objectives, and indicators but:
  - No link showing what funding is available for specific outputs.
  - No specification of outputs to be produced.
  - No targets for indicators.
- Ex post reporting: departmental annual reports provide some indicator results but most indicators lack targets and linkage to inputs.

### Independent oversight (Advanced)
- OBR:
  - Prepares all economic and fiscal forecasts since 2010.
  - Performs ex post forecast evaluations and publishes models.
  - Sign-off responsibility for policy costings prepared by Treasury; provides uncertainty ratings.

### Forecast accuracy and errors (selected numeric findings)
- Own source revenues are 15 percent of expenditure, 8 percentage points of which is unreported.
- Macro forecasts: Advanced — real and nominal GDP forecasts are upwardly biased (0.8 percent for T+2).
- Medium-term forecast errors: Deficit outturns are frequently moderately larger than projected (1 percent of GDP in T+2).
- Fiscal position noted: debt and deficit of 83 and 3 percent of GDP.

### Recommendations on forecasting and budgeting (selected)
- Recommendation 2.1: Include own source revenue and related expenditures into fiscal aggregates to bring them to a gross basis.
- Recommendation 2.2: Concentrate all major tax and spending decisions into a single fiscal event held at least three months prior to the fiscal year; present estimates simultaneously; allow Parliament to approve a unified budget at least one month before the fiscal year.
- Recommendation 2.3: Adopt new fiscal objectives as a matter of priority.
- Recommendation 2.4: Improve linkages between budget expenditure and intended policy outputs and outcomes.

---

### Fiscal risks (Chapter III) — disclosure, management, and recommendations

### Macro risk analysis (OBR methods)
- OBR analyzes macro risks via:
  - Fan charts indicating uncertainty about future deficits and debts.
  - Sensitivity analyses showing effects of small changes in key assumptions.
  - Scenario analyses varying several assumptions simultaneously.
- Suggested additions: fiscal stress tests for very steep recessions and Treasury consideration of policy response to such shocks.

### Specific fiscal risks — disclosure gap (Not Met)
- No single comprehensive report summarizes specific risks (guarantees, asset value losses, PPPs, implicit guarantees, financial sector risks).
- Relevant information exists across publications (WGA notes, OBR projections), but comprehensive summary lacking.
- OBR planned to publish a fiscal risks report in 2017.

### Long-term fiscal sustainability (Advanced)
- OBR 2015 estimate: bringing net public-sector debt back to 40 percent of GDP would require a permanent fiscal consolidation beyond plans of 1.9 percent of GDP.
- Without policy changes, OBR forecast government to start running a primary deficit in 2033–34 with debt rising inexorably.
- European Commission Fiscal Sustainability Report 2015: UK faced a “medium sustainability risk” requiring consolidation of 3.2 percent of GDP.

### Risk management — selected metrics and assessments
- Budget-year reserves (Budget 2016):
  - Resource DEL reserve: GBP 3.6 billion.
  - Capital DEL reserve: GBP 1 billion.
  - Combined reserves equal 0.6 percent of budgeted spending.
- Management of assets and liabilities (Basic):
  - Financial assets of general government (end March 2016): 30.4 percent of GDP.
  - Liabilities of general government (end March 2016): 114.5 percent of GDP.
  - Maastricht estimate of debt of general government: 87.7 percent of GDP.
- Guarantees (Basic):
  - Guarantees issued by general government peaked at 28 percent of GDP by 2010, fallen to 8.9 percent of GDP thereafter.
  - Government guarantees to private entities amount to 5.6 percent of GDP.
  - No legal limit on issuance of guarantees; guarantees not counted in Public Sector Net Debt.
- Public-private partnerships (Good):
  - Capital value of off-balance-sheet PPPs: 1.7 percent of GDP.
  - Simple sum of projected payments to PFI companies from 2016–17 to 2043–44: GBP 210 billion (10.9 percent of GDP).
  - Of that, GBP 177 billion (9.2 percent of GDP) is off-balance-sheet in fiscal statistics.
  - Present values at government borrowing costs: 9.8 percent of GDP (total) and 8.3 percent of GDP (off-balance-sheet).
  - Contracts for difference liability on March 31, 2016: GBP 31 billion (1.6 percent of GDP); none counts as debt in ONS headline measure.
  - Cost of proposed contract for difference for Hinkley Point C estimated at GBP 30 billion (1.5 percent of GDP).
  - No limit on total financial obligations over life of PPP contracts; five-year aggregate spending limit beginning 2015–16: GBP 70 billion.
- Financial sector (Advanced):
  - Direct and indirect fiscal risks from banking sector and FSCS obligations.
  - Revenue loss relative to pre-crisis extrapolation between 2008 and 2015: about GBP 700 billion (38 percent of 2015 GDP).
  - Liabilities of financial corporations (2015) total: 892 (percent of GDP) with components: Deposits 265; Debt securities and loans 166; Insurance, pensions, etc. 207; Derivatives 243; Other 8.
- Natural resources (Advanced):
  - North Sea oil and gas now generates little net revenue; negative overall revenues in 2015/16.
  - Decommissioning costs estimated (2015) over next 25 years: approximately GBP 43.7 billion (GBP 23.7 billion for PRT-paying fields; GBP 20 billion for non-PRT paying fields).
  - OBR medium-term estimates suggest a net refund liability of approximately GBP 1bn per year over next five years, amounting to between 40 and 65 percent of decommissioning costs incurred annually.
  - HMRC 2015/16 accounts estimate a net GBP 6.9 billion contingent liability provision for anticipated refunds for PRT fields over 2016–42, of which GBP 1.7 billion is anticipated in the 2016–21 period.

### Fiscal risks assessment summary (Table 3.3 highlights)
- Disclosure frequently Good or Advanced; summary reporting of specific fiscal risks: Not Met.
- Disclosure of risks related to government’s assets: falls short of Good.
- Government control of risks often falls short of Good or Advanced.
- No limits on total financial obligations from guarantees, PPPs, and subnational governments despite good disclosure in some areas.

### Recommendations on fiscal risks
- Recommendation 3.1: In the OBR planned fiscal risks report, combine macro risk analysis with (i) analysis of severe shocks (a fiscal stress test); and (ii) discussion of implications of specific risks (guarantees, PPPs, civil emergencies, financial sector).
- Recommendation 3.2: Develop a policy constraining growth of off-balance-sheet commitments created by guarantees, PPPs, and the like (e.g., set limits when setting fiscal-policy framework under the Charter).
- Recommendation 3.3: Publish an annual report on the evolution and management of risks to the government’s financial assets and liabilities, including how values vary with government revenue and spending.

---

### Natural resource revenue management (Chapter IV — Fourth Pillar draft) — North Sea oil and gas and extractive sector transparency

### Resource rights, ownership, and license transparency
- Government publishes interactive database and map of petroleum licenses with start date, status, coordinates, operator and partners.
- OGA publishes license documents searchable by license number and a list of license relinquishments; suggested enhancement: include history of ownership changes and regular reporting on license transfers.
- “Person with significant control” database requires UK incorporated companies to provide name, country of residence, and nature of control; EITI process encourages beneficial owner disclosure but uptake low (one company reported beneficial ownership in 2014 report).
- Suggested enhancement: require public disclosure of chains of intermediaries between license-holders and ultimate beneficiaries.

### Decommissioning Relief Deeds (DRDs)
- Finance Act 2013 grants HMT ability to enter into stabilization contracts (DRDs); model version available online.
- As of June 2015, HMT had entered into 72 DRDs.
- HMT reports annually to Parliament the number of DRDs signed, but contracts and names of companies with DRDs have not been published due to confidentiality clauses.
- Recommendation 4.1: Publish signed DRDs, or at least a list of companies with whom DRDs have been signed, subject to company consent.

### Revenue assessment, audit, and company reporting
- HMRC publishes an annual report with consolidated accounts and tax gap reporting; web-based Oil Taxation Manual guidance exists; dedicated sector tax team in HMRC.
- EITI report (first published April 2016) reconciled 2014 tax revenue data; six petroleum companies neither reported nor provided waivers leaving 25 percent of total petroleum tax payments and license fees unreconciled.
- Recommendation 4.2: Continue corporate disclosure initiatives and consider expanding reporting to include payments to governments for the sale of commodities.
- EU Accounting Directive and Transparency Directive (transposed 2014): project-level payments to governments worldwide must be reported for financial years beginning on or after January 1, 2015; materiality threshold GBP 86,000.
  - Government estimates: 177 companies fall under Accounting Directive; 80 extractive companies under Transparency Directive, 37 UK registered.
- Recommendation: consider disaggregating RFCT and SC payments where feasible and reduce time lag in EITI reporting.

### Decommissioning and tax refund liabilities (fiscal risks)
- Key risk: loss carryback treatment for decommissioning costs leading to tax refunds or reduced tax receipts.
- Decommissioning cost estimate (2015) over next 25 years: approximately GBP 43.7 billion (GBP 23.7 billion for PRT-paying fields; GBP 20 billion for non-PRT paying fields).
- OBR medium-term estimates suggest net refund liability ~GBP 1bn per year over next five years (40–65 percent of decommissioning costs incurred annually).
- HMRC 2015/16 accounts estimate net GBP 6.9 billion contingent liability provision for anticipated refunds for PRT fields over 2016–42, with GBP 1.7 billion anticipated in 2016–21.
- Recommendation: publish forecasts of future decommissioning-related liabilities and broaden corporate disclosure requirements for extractive sectors.

### Operational, social, and environmental reporting
- Offshore: environmental impact assessments required and summarized by BEIS; assessments available on request; required for decommissioning work programs.
- Onshore: environmental permits, regional agency requirements, planning approval, and publication of environmental impact assessments.
- Operational disclosure: OGA provides field-level production data monthly and UKCS field information portal reports key field data.

### Resource revenue management and budgeting
- Petroleum revenues remitted to national budget with no specific fiscal objectives for utilization.
- Limited earmarking: Northern Ireland license fees GBP 1.9 million in 2014/15; oil and gas levy for OGA GBP 8.2 million in 2015/16; smaller fees retained by OGA GBP 1.1 million in 2015/16.
- Emerging issues: refunds exceeded revenue collections in 2015/16; OBR forecasts negative petroleum revenues over next five years; petroleum revenues were 0.4 percent of total tax revenue in 2014/15; tax refunds resulted in negative revenue of -24m in 2015/16.

---

### Twelve specific executive recommendations (condensed list as presented)
- 1.1 Enhance consistency between WGA and PSF (trial consolidation with RBS; expand PSF coverage; add PSF tables under standards closer to IFRS).
- 1.2 Control tax expenditures with numerical limits and enhanced sectoral/functional reporting breakdowns.
- 1.3 Bring forward WGA publication to nine months after reference period.
- 2.1 Include own source revenue and related expenditures into fiscal aggregates (gross basis).
- 2.2 Concentrate major tax and spending decisions into a single fiscal event held at least three months prior to fiscal year; allow Parliament to approve unified budget at least one month before fiscal year.
- 2.3 Adopt new fiscal objectives as a priority.
- 2.4 Improve linkages between budget expenditure and intended policy outputs and outcomes.
- 3.1 Publish a comprehensive fiscal risk report combining macroeconomic risk analysis, fiscal stress testing, and discussion of specific risks magnitude and likelihood.
- 3.2 Strengthen controls over off-balance-sheet commitments (guarantees, PPPs, similar instruments).
- 3.3 Publish an annual report on evolution and management of risks related to government’s financial assets and liabilities.
- 4.1 Publish signed Decommissioning Relief Deeds (DRDs), or at least list companies with DRDs, subject to company consent.
- 4.2 Continue implementation of corporate disclosure initiatives and consider expanding reporting requirements to include payments to governments for commodity sales.

---

*IMF mission Fiscal Transparency Evaluation of the United Kingdom, completed September 2016.*

### PREFACE _________________________________________________________________________________________ 7

### _cr16351 - PREFACE

### Preface: mission and scope
- A Fiscal Transparency Evaluation mission visited London, United Kingdom twice between July and September 2016 in response to a request from the then Prime Minister, Mr. Cameron.
- Mission team: Brian Olden (Head), Miguel Alves, Jason Harris, Alpa Shah, Peter Mullins (Fiscal Affairs Department), and experts Tim Irwin, Sami Yläoutinen, Mathew Brine (FAD fiscal expert roster). Mr. Phil Gerson (EUR Deputy Director) joined the concluding visit in September 2016.
- Principal UK counterparts and interlocutors included senior officials of Her Majesty’s Treasury: Sir Dave Ramsden; Julian Kelly; James Bowler; Richard Hughes; Jane Cunliffe; Mike Williams; and officials from Departments of Energy and Climate Change, Business, Innovation and Skills, Communities and Local Government, and Environment, Food and Rural Affairs.
- Other public entities and stakeholders consulted: Bank of England; Scottish Government’s Department of Finance; Greater London Authority; House of Commons Treasury and Public Accounts Select Committee; Her Majesty’s Revenue & Customs; Infrastructure and Projects Authority; National Audit Office; Office of Budget Responsibility; Office of National Statistics; Oil and Gas Authority; UK Debt Management Office; UK Government Investments; Institute of Fiscal Studies; representatives of the petroleum industry; academia; UK Extractive Industry Transparency Initiative.
- The evaluation is based on information available at the time it was completed in September 2016. Findings and recommendations represent the views of the IMF mission team and do not necessarily reflect those of the UK government.
- Unless otherwise specified, data in the text, figures, and tables are estimates made by the IMF mission team and not official UK government estimates.
- Acknowledgements: Particular thanks to Richard Hughes, Vincent Tang, Harry Lee, and Lorraine Best for mission support.

### Structure of the report
- Chapter I: Coverage, timeliness, quality, and integrity of fiscal reporting.
- Chapter II: Comprehensiveness, orderliness, policy orientation, and credibility of fiscal forecasting and budgeting.
- Chapter III: Disclosure and management of fiscal risks.
- Chapter IV: Management of revenues from natural resources using a draft of the new Fourth Pillar of the Fiscal Transparency Code (FTC) released in April 2016 for public consultation.

### Glossary (selected acronyms preserved)
- AME, BEIS, CSR, DECC, DEL, DUD, EITI, ESA95, ESA TP, ESS, EFO, FAD, FSCS, FTC, FTE, FSR, FY, GFSM, GSS, HMRC, HMT, IFRS, MGDD, NAO, OBR, OGA, ONS, PC, PESA, PFI, PF2, PPP, PRT, PSF, PSNB, RFCT, SC, UKCS, UKSA, WGA.

### Assessment timing and caveats
- The mission completed its evaluation in September 2016 and used information available at that time.
- The mission thanks UK authorities and participants for collaboration and frank exchanges.

### Findings summary (from Preface and Executive Summary)
- The report assesses UK fiscal transparency against the IMF’s new Fiscal Transparency Code (FTC).
- Of the 48 principles in the Code:
  - The UK meets 9 principles at the basic level.
  - The UK meets 10 principles at the good level.
  - The UK meets 23 principles at the advanced level.
- Two Natural Resource Revenue Management principles do not apply because the UK does not have a Sovereign Wealth Fund.
- In four principles, the UK’s transparency practices do not currently meet basic practice.

---

### Executive summary — overall evaluation
- The UK scores very highly across all pillars evaluated in the FTC relative to other countries assessed to date.
- Strongest areas: fiscal reporting and resource revenue management.
- Fiscal risks are also a relative strength.
- Key areas to address to improve transparency include:
  - Reducing the lag between the end of the financial year and the publication of Whole of Government Accounts (WGA).
  - Concentrating all major tax and spending decisions into a single fiscal event held at least three months prior to the start of the fiscal year to allow time for greater legislative scrutiny.
  - Introducing a new and transparent fiscal objective to better shape fiscal policy over the medium term.
  - Introducing a comprehensive and quantified fiscal risk statement covering all major fiscal risks.
  - Publishing an asset and liability management report discussing developments, forecasts, and risks to the government’s balance sheet.

### Detailed findings by pillar

- Fiscal reporting
  - Coverage: fiscal reporting covers the entire public sector and includes details of all stocks and flows.
  - International standing: places the UK at the forefront of fiscal reporting practices worldwide.
  - Weakness: long delay in publication of end-of-year financial statements (WGA), though efforts are underway to address this.

- Fiscal forecasting and budgeting
  - Quality: macro-fiscal forecasts are credible, comprehensive, and relatively easy to understand.
  - Medium-term framework: credible medium-term budget framework in place, with comprehensive budget documentation.
  - Institutional/process weaknesses:
    - Convention-based budget process is largely uncodified.
    - Budget may be presented just before the start of the financial year; Parliament often approves the budget well into the fiscal year.
    - The Autumn Statement has, in effect, become a mini-budget that sometimes dwarfs the Budget itself in fiscal significance.
    - Frequent changes in fiscal policy objectives hinder public understanding of fiscal design and implementation through the budget.

- Fiscal risks
  - Strengths: Office for Budget Responsibility’s (OBR) reporting of macroeconomic risks and long-term sustainability; Treasury and Bank of England reporting of financial-sector risks.
  - Weaknesses:
    - Absence of summary reporting of specific risks.
    - Need for improved reporting of risks related to government assets.
    - Need for setting limits on stock/flow of government guarantees and contingent liabilities from PPPs and other off-balance-sheet financing.

- Resource revenue management
  - Context: area of diminishing importance as oil and gas reserves near exhaustion.
  - Strengths: strong by international standards; recent moves toward clearer regulatory allocation, taxation simplification, and increased company disclosure.
  - Weaknesses: future tax refund obligations need clear management.
  - Suggested improvements: publish government forecasts of future decommissioning-related liabilities and broaden corporate disclosure requirements for the extractive sectors.

### Executive summary — twelve specific recommendations
- 1.1. Enhance consistency between the Whole of Government Accounts (WGA) and the Public Sector Finances (PSF) by:
  - Disclosing a trial, simplified consolidation of the financial statements of WGA and RBS in the annual report section of the WGA;
  - Expanding the coverage of stocks and flows of the PSF report;
  - Adding to the PSF summary statements produced under statistical standards that are closer to International Financial Reporting Standards (IFRS).
- 1.2. Control tax expenditures by subjecting them to numerical limits and enhance reporting through the addition of a sectoral and functional breakdown in cost publications.
- 1.3. Bring forward the publication of the WGA to nine months after the end of the reference period.
- 2.1. Include own source revenue and related expenditures into the fiscal aggregates to bring them to a gross basis.
- 2.2. Concentrate major tax and spending decisions into a single fiscal event held at least three months prior to the fiscal year, presenting the estimates simultaneously, allowing parliament to approve a unified budget at least one month before the beginning of the fiscal year.
- 2.3. Adopt new fiscal objectives as a matter of priority in order to frame decision making around the upcoming autumn statement.
- 2.4. Improve linkages between budget expenditure and intended policy outcomes.
- 3.1. Publish a comprehensive fiscal risk report combining analysis of macroeconomic risks, modelling of the fiscal impact of severe shocks, and discussion of the magnitude and likelihood of specific fiscal risks.
- 3.2. Strengthen controls over off-balance-sheet commitments created by guarantees, public-private partnerships, and similar instruments.
- 3.3. Publish an annual report on the evolution and management of risks related to the government’s financial assets and liabilities.
- 4.1. Publish signed Decommissioning Relief Deeds (DRDs), or at least a list of companies with whom DRDs have been signed, subject to obtaining each company’s consent.
- 4.2. Continue implementation of current corporate disclosure initiatives, and consider expanding reporting requirements to include payments to governments for the sale of commodities.

### Additional summary points
- The remainder of the report offers a detailed evaluation against the FTC:
  - Chapter I: fiscal reporting;
  - Chapter II: fiscal forecasting and budgeting;
  - Chapter III: fiscal risks; and
  - Chapter IV: natural resource revenue management using the draft Fourth Pillar of the FTC (April 2016).
- Table 0.1: summary of UK performance against the FTC (referenced in the report).
- Table 0.2: preliminary and partial estimate of the UK public sector financial overview for FY 2014/2015 (referenced in the report).

*IMF mission Fiscal Transparency Evaluation of the United Kingdom, completed September 2016.*

### 3.1 Reporting on

### 3.1 Reporting on

### Fiscal reporting overview
- Fiscal reports should provide a comprehensive, timely, reliable, comparable, and accessible summary of the government’s financial performance, financial position, and cash flows.
- This chapter assesses the UK’s fiscal reporting practices against the IMF’s Fiscal Transparency Code for:
  - Coverage of public sector institutions, stocks, and flows;
  - Frequency and timeliness of reporting;
  - Quality, accessibility, and comparability of fiscal reports;
  - Reliability and integrity of reported fiscal data.
- Since 1998 HMT has adopted national accounts standards (first ESA95, and currently ESA 2010) and the MGDD as the basis for the UK’s fiscal framework. Since FY 2009/10 the WGA is compiled in accordance with IFRS.

### Major fiscal reports and frequency
- Monthly fiscal statistics (PSF), jointly compiled by ONS and HMT: accrual information on revenue, expenditure, financing, net borrowing, net cash requirement, and net debt for the public sector and subsectors; publication frequency: Monthly, lag: 20d.
- OBR commentary on each PSF release: Monthly, lag: 20d.
- Monthly Tax Receipts and National Insurance Contributions (HMRC): Monthly, lag: 20d.
- DMO Quarterly Review: Quarterly, lag: 6w.
- Quarterly and annual fiscal statistics (ONS) complying with the ESA Transmission Programme and EDP: Quarterly, lag: 3m.
- Annual tax relief reports (HMRC) on tax expenditures and structural reliefs: Annual, lag: 9m.
- Annual Public Expenditure Statistical Analyses (HMT): Annual, lag: 4m.
- Whole of Government Accounts (WGA, HMT): Annual, lag: 14m.
- UK National Sectoral Accounts (The Blue Book, ONS): Annual, lag: 21m.
- (Note: table of reporting templates, coverage, and lags summarized in Table 1.1.)

### Coverage of institutions (Advanced)
- FY 2014/15: UK public sector comprised 38,241 separate institutional units.
- Subsector breakdown (number of units and FY 2014/15 shares):
  - Public Sector: 38,241 entities; Revenue 41.1; Expenditure 48.8; Net lending/borrowing -7.7; Net expenditure 48.8; Share 100.0 (percent of GDP figures where indicated).
  - General government: 36,529 entities; Revenue 38.6; Expenditure 46.6; Balance -8.0; Intra-PS expenditure 1.3; Net expenditure 45.3; Share 92.8.
  - Central government: 7,858 entities; Revenue 35.2; Expenditure 42.7; Balance -7.4; Intra-PS expenditure 8.6; Net expenditure 34.0; Share 69.78.
  - Local governments: 28,671 entities; Revenue 10.9; Expenditure 11.5; Balance -0.6; Intra-PS expenditure 0.2; Net expenditure 11.3; Share 23.1.
  - Nonfinancial public corporations: 1,705 entities; Revenue 1.6; Expenditure 1.8; Balance -0.2; Intra-PS expenditure 0.0; Net expenditure 1.8; Share 3.7.
  - Central Bank: 1 entity; Revenue 0.7; Expenditure 0.6; Balance 0.1; Intra-PS expenditure 0.6; Net expenditure 0.0; Share 0.0.
  - Other financial public corporations: 6 entities; Revenue 2.2; Expenditure 1.8; Balance 0.5; Intra-PS expenditure 0.1; Net expenditure 1.7; Share 3.5.
- In FY 2014/15 the UK’s public sector expenditure was around GBP 894.0 billion (48.8 percent of GDP).
- Distribution in FY 2014/15:
  - General government: GBP 829.9 billion (45.3 percent of GDP); 75 percent through central government and 25 percent through local governments.
  - Public corporations: GBP 64.0 billion (3.5 percent of GDP); 16 percent by nonfinancial corporations and 84 percent by financial corporations.

### Coverage of stocks (Advanced) — WGA vs PSF vs National Accounts
- WGA includes a complete balance sheet covering financial and nonfinancial assets and liabilities including liabilities from defined benefit pension schemes of public employees.
- Public sector balance sheet (primarily from FY 2014/15 WGA):
  - Nonfinancial assets: GBP 982.6 billion (53.6 percent of GDP), including 50.5 percent of GDP in fixed assets.
  - Financial assets: GBP 1,591.4 billion (86.9 percent of GDP), including 8.4 percent of GDP in currency and deposits and 36.4 percent of GDP in loans to the private sector.
  - Liabilities: GBP 4,736.6 billion (258.6 percent of GDP), including 77.6 percent of GDP in debt securities, 84.9 percent of GDP in pension entitlements of civil servants, and 5.4 percent of GDP in accounts payable.
  - Net worth: -118.1 percent of GDP.
  - Net financial worth: -171.7 percent of GDP.
- PSF disclosures are more limited:
  - PSF do not include several material stock categories: nonfinancial assets, non-liquid financial assets, liabilities arising from civil servants’ defined benefits pension schemes, or other accounts payable.
  - PSF liabilities are disclosed at face value (“nominal value” in EDP) and do not reflect unpaid accrued interest or market price fluctuations.
- ESA sectoral national accounts returns include some stocks missing from PSF (but notably exclude pension entitlements) and include fixed capital estimates except PPP-constructed assets.

### Treatment of pension entitlements and implications
- Current treatment: Social Security pension entitlements (State Pension PAYG) liabilities are not included in public sector liabilities, while any financial assets of the social security scheme are included on the public sector balance sheet.
- If the State Pension system’s pension entitlements for private sector employees were included in public sector liabilities, overall public sector net worth would decrease to around -328 percent of GDP.
- The asymmetric treatment (assets included, liabilities excluded) follows international statistical standards (ESA/MGDD) but presents a more favorable picture of fiscal position than if all pension entitlements were recognized.

### Reconciliation and consolidation boundaries
- ESA and IFRS are not entirely consistent. The UK Financial Reporting Manual requires departmental groups and HMT (for WGA) to reconcile fiscal reports and financial statements annually.
- WGA deviations from full public sector coverage:
  - Small entities excluded on materiality grounds;
  - Small entities not responsible to an executive arm of government (parliamentary and audit bodies, and a few others) excluded;
  - At time of WGA FY 2014/15 compilation, housing associations were excluded because ONS had not yet classified them in the public sector.
  - Royal Bank of Scotland (RBS) was not consolidated in WGA and instead recorded as a financial investment; consolidation would materially affect gross revenue, expense, assets, and liabilities, but have a relatively small impact on net borrowing or net worth.
- ONS classification decisions determine PSF institutional coverage; assessments are published monthly with a quarterly forward work plan and applied retroactively as practical.

*Source: IMF staff estimates, based on data publically available.*

### 11.      Reporting on oil and gas reserves is comprehensive and of high quality, and shows

### _cr16351 - 11.      Reporting on oil and gas reserves is comprehensive and of high quality, and shows

### Reporting on oil and gas reserves
- The Oil and Gas Authority (OGA) publishes annual statements of cumulative production and the estimated remaining recoverable oil and gas reserves, along with an explanation of changes in reserve estimates.
- The ONS publishes annual data on reserve volumes and provides a stock-flow reconciliation, attributing changes in reserve stocks over the year to either production or changes in reserve estimates.
- The ONS has recently started to estimate the monetary valuation for UK Continental Shelf (UKCS) oil and gas as part of the Environmental Accounts compiled in line with the System of Environmental-Economic Accounting.
- This monetary valuation exercise shows that the monetary value of oil and gas reserves has been reducing over time, reaching a zero value by end-2014.

### Coverage of flows (Advanced) — WGA vs PSF
- WGA includes, following IFRS financial disclosure standards:
  - a statement of revenue and expenditure, with information on an accrual basis, including realized gains/losses in assets and liabilities;
  - a cash-flow statement, with cash flows from operating, financing, as well as from capital and financial investment;
  - a statement of comprehensive expenditure, with information on unrealized asset revaluation gains/losses and actuarial gains/losses associated with the pension liability.
- Recognizing all accrued revenues and expenses would increase the public sector deficit (net borrowing) as currently reported in the PSF to 7.7 percent of GDP.
- The PSF does not disclose comprehensive information on cash flows and its coverage of accrual flows is substantially less comprehensive than that of WGA.
- Most missing flows are associated with limitations in coverage of stocks, in particular:
  - unreported net accrual of pension entitlements of public employees of GBP 56.0 billion (3.1 percent of GDP).
- With the exception of foreign exchange effects on gross debt (“Maastricht,” i.e., EDP, definition), no other economic flows are recorded in the PSF.

### Petroleum sector reporting and transparency gaps
- The government reports comprehensively on petroleum sector production, expenditure and tax revenue flows:
  - OGA produces monthly and annual reports on petroleum production at a field level, and an annual Income and Expenditure Statement for the UKCS, disaggregated by major revenue and cost category.
  - HMRC annually produces a detailed breakdown of government petroleum revenues.
  - DECC (now BEIS) has reported on non-tax revenues collected (license fees and levies) in its annual report.
- These publications allow a comprehensive sector-level understanding of the allocation of cash flows from the UKCS.
- Transparency and analytical value would be enhanced by more detailed disclosure of government-related flows:
  - disaggregate reporting on investment allowances granted to petroleum companies;
  - disclosure of the sector’s overall tax loss position;
  - reporting decommissioning expenditure incurred each year, the associated tax losses generated, and any tax refunds paid to industry.
- Note: From 2013–15, revenue has been lower than costs incurred and taxes paid, resulting in an overall negative after-tax cash flow to industry (as illustrated for UKCS cash flows 1993–2015).

### Coverage of tax expenditures (Good)
- HMRC discloses a list of the main tax relief schemes and an estimate of their annual costs, identifying schemes considered tax expenditures.
- The annual “Estimated cost of tax reliefs, expenditure and allowances” lists all active tax relief schemes (in December 2015, there were 401 active schemes), organized by type of tax scheme and by type of tax.
- For schemes with estimable costs, the publication shows estimates of revenue loss for:
  - the previous fiscal year (t-1);
  - the budget year (t);
  - two years following the budget year (t+1, and t+2).
- The publication separates large schemes from minor cost schemes and contains a list of schemes for which estimates were not produced (these are relatively small in size).
- HMRC does not aggregate the costs of separate schemes because it would overstate the amount of taxes that could be collected, due to interactions between schemes.
- There is no control on, or budgetary objectives for, the size of tax expenditures.
- UK’s revenue foregone from tax expenditures increased in recent years to 6.3 percent of GDP in FY 14/15.
- If structural relief schemes and schemes with both tax expenditure and structural components were added, the total revenue foregone would increase to around 20 percent of GDP.
- Current tax expenditure reporting lacks breakdowns by criteria such as:
  - function (COFOG);
  - type of tax expenditure;
  - industry sector of beneficiary;
  - geographical area.
- The absence of disaggregation hinders assessment of redistribution and policy evaluation; specifically, significant allowances granted to petroleum sector companies for Supplementary Charge and Ring Fence Corporation Tax purposes are not separately disaggregated.

### Frequency and timeliness of fiscal reporting
- PSF are published monthly within 15 working days of the reference month.
- ONS also releases quarterly general government data (nonfinancial and financial accounts, including a financial balance sheet) within 90 days of the reference quarter; data are disseminated domestically and to Eurostat and the IMF’s Statistics Department.
- Audited WGA timeliness (Not Met): audited WGA have consistently been released more than a year after the end of the fiscal year, though the time lag has been reducing.
- Table of WGA publication time lags (Financial year / Date of submission to NAO / Date of publication / Time lag):
  - 2009/10 / Dec 17, 2010 / Nov 24, 2011 / 19m
  - 2010/11 / Feb 29, 2012 / Oct 31, 2012 / 18m
  - 2011/12 / Feb 1, 2013 / July 17, 2013 / 16m
  - 2012/13 / Jan 22, 2014 / Jun 10, 2014 / 15m
  - 2013/14 / Dec 19, 2014 / Mar 26, 2015 / 12m
  - 2014/15 / Jan 18, 2016 / May 26, 2016* / 14m
  - Note: * Publication delayed due to late financial statements transmission by academies.
- Causes of delay:
  - local government units are required to publish their accounts only six months after the end of the fiscal year, delaying consolidation;
  - a persistently large number of material inconsistencies in recording intra-public sector transactions and holdings that need resolution before audit.
- Consequences:
  - WGA timeliness limits its use for policy making; policy decisions tend to be based on the timelier PSF despite PSF’s coverage gaps.
  - With the current time lag, WGA can only inform policy decisions two fiscal events after the fiscal year to which it refers.
- HMT measures to improve timeliness starting fiscal year 2017/18:
  - local government units required to release audited financial statements by end-July (within four months of fiscal year end);
  - local authorities required to implement the latest accounting standards to reduce consolidation inconsistencies;
  - HMT increasing the level of accountancy skills in policy teams to facilitate use of financial statements.

### Quality of fiscal reports
- Classification (Good):
  - Fiscal reports include administrative, economic, and functional classifications consistent with international standards.
  - Sector classification follows subsector breakdown of national accounts compiled according to ESA 2010.
  - PESA presents central government expenditure by departmental group; ONS releases include international standard economic and functional classifications.
  - Common chart of accounts for central government units is based on IFRS standards and can be bridged to GFSM 2014 or ESA 2010.
  - Functional classification follows United Nations’ Classification of Functions of Government (COFOG); ONS uses Balance of Payments and IIP Manual (Sixth Edition) residency criteria.
  - Lack of a program classification is offset by widespread COFOG-compliant functional classification; PESA discloses cross-classification of expenditure by administrative and functional classifications.
  - Exception: “Health” function for which England and Wales cannot disclose COFOG level 2 detail and use HMT’s own sub-functional classification.
- Internal consistency (Advanced):
  - Monthly PSF bulletin includes internal consistency checks prescribed by the FTC: reconciliation of net borrowing (fiscal balance) and net cash requirement, reconciliation of central government net cash requirement and changes in net debt, narrative and diagram explaining headline indicators.
  - Integrated securities database ensures full consistency between debt issuances and debt holdings.
  - Discrepancies have been contained in recent years; reconciliations disclosed in EU Excessive Deficit Procedure notifications.
  - The discrepancy between above- and below-the-line calculations has traditionally been small except FY 2007/08–2008/09 due to the financial crisis.
- Historical revisions (Good):
  - Revisions to fiscal statistics are transparently disclosed with explanations for each major revision.
  - ONS open revision policy for PSF: historical series can be revised every month for all time periods.
  - Every monthly bulletin contains a revisions section and a rolling 60-month revisions analysis including every vintage of a monthly observation and a statistical analysis of bias.
  - Analyses show the average revision between the first vintage and that of one year later has consistently been close to zero, although there have been high revision episodes (mostly related to classification of government support to financial institutions during the financial crisis).
  - To date, only changes in methodological frameworks have been accompanied by a bridge table between old and new time series (the change from ESA95 to ESA 2010 was accompanied by two explanatory notes, one qualitative and one quantifying impacts).

### Integrity of fiscal reports
- Statistical integrity (Advanced) — (section begins but source content ends before further detail).

*Source: OGA; ONS; HMRC; UK authorities; IMF Staff.*

### 29.      Most fiscal statistics are compiled solely by the ONS, which is a professional

### _cr16351 - 29.      Most fiscal statistics are compiled solely by the ONS, which is a professional

### Statistical compilation and institutional roles
- Most fiscal statistics are compiled solely by the ONS, the executive body of the UK Statistics Authority (UKSA), an independent agency (non-ministerial department accountable to Parliament) created in 2008 following the 2007 Statistics and Registration Service Act.
- The ONS is bound by both the UK and the European Statistical System (ESS) Codes of Practice and is subject to reviews by the UKSA and Eurostat.
- Collaboration between government agencies on official statistics is coordinated by the Government Statistical Service (GSS), led by the National Statistician; GSS members are bound by the UK and ESS Codes of Practice.
- The Public Sector Finances (PSF) are jointly produced by the ONS and HMT; HMT’s responsibilities are essentially related to provision of good quality source data.
- Under the joint PSF arrangement:
  - The ONS applies National Accounts principles, including sector classification of institutional units and recording of transactions and related stock positions.
  - HMT staff working with the ONS on the PSF are GSS members.
  - The ONS has final responsibility for compiling the statistical measures and ensuring compliance with international statistical standards and the Code of Practice for Official Statistics. This includes: design of data collection systems; ensuring expertise and guidance for government bodies to supply data complying with national accounts principles; collection, aggregation and quality checks; and review of ONS calculations.

### Dissemination standards
- The UK was among the first subscribers to the Special Data Dissemination Standards (SDDS), having formally subscribed on June 5, 1996.
- The UK meets all the SDDS requirements and reports comprehensive and consistent fiscal data to international organizations.

### External audit of Whole of Government Accounts (WGA)
- The NAO is the Supreme Audit Institution in charge of auditing the WGA; the Comptroller and Auditor General (C&AG) and NAO staff are not civil servants and do not report to a minister.
- The NAO independently decides examinations and reporting to Parliament; the Public Accounts Commission oversees NAO work, approves its budget, scrutinizes costs and performance, appoints external auditors, and commissions value-for-money studies.
- The C&AG’s audit opinion on the WGA covers both the “true and fair view” and regularity approaches, consistent with international standards, and provides assurance that transactions are in accordance with Parliamentary or other authority.
- Audits are carried out in accordance with International Standards on Auditing (UK & Ireland), based on standards issued by the International Auditing and Assurance Standards Board.
- Since first release, WGA have consistently been subject to major audit qualifications, though the number and size have been declining:
  - Two major qualifications were removed and the extension of limitation of scope was reduced on the audit of the WGA for financial year 2014/15.
  - Remaining qualifications refer to: definition and application of the accounting boundary (particularly the exclusion of RBS); inconsistent application of accounting policies (some consolidated bodies follow accounting standards that differ from IFRS); audit qualifications on financial statements of consolidated bodies (specifically the Ministry of Defense and the Department of Education); and incomplete elimination of intra-government transactions and balances.

### Comparability of fiscal data and reconciliation
- Budget estimates are comparable with outturn data: departmental groups prepare budgets and track execution following ESA2010 concepts and definitions; institutional coverage of the consolidated public sector budget and the OBR’s EFO is based on national accounts as determined by ONS classification decisions.
- Headline indicators of the Budget, Spending Estimates, and OBR’s forecasts are prepared on the same basis as outturn data published in the monthly PSF.
- WGA are reconciled with fiscal statistics; WGA publication includes a standard chapter comparing to national accounts with:
  - Detailed descriptions of each major difference between accounting and statistical standards.
  - Two reconciliation tables: (i) WGA Net Liabilities vs. PSF’s Public Sector Net Debt; (ii) WGA Net Expenditure vs. PSF’s Current Deficit.
  - Explanatory notes providing additional details on every major reconciliation item.
- Departmental groups reconcile budgeting outturn to resource accounts on an IFRS basis, per the Financial Reporting Manual.

### Assessment summary (key findings and statistics)
- The UK’s fiscal reporting meets advanced practices in most areas: annual financial statements and monthly fiscal statistics compiled in accordance with international statistical standards cover the public sector and recognize the vast majority of stocks and flows (cash and accrual).
- Fiscal statistics are prepared by an independent agency subject to strict Codes of Practice; annual financial statements are audited by an independent supreme audit institution.
- Notable disclosure gaps and issues:
  - The material impact of RBS on the public sector balance sheet (increase in gross liabilities by 50 percent of GDP) is not disclosed in any fiscal report.
  - The WGA and PSF, two presentational variants of the same reality, could be made more consistent for user relevance.
  - Tax expenditures are large by international standards and could be more effectively monitored and managed.
- Specific numeric highlights from Table 1.4 preserved verbatim:
  - Tax expenditures: revenue foregone from tax expenditures and structural reliefs is large (20 percent of GDP). Tax expenditures of 6.3 percent of GDP are high by international standards.
  - Reporting of stocks: nonfinancial assets reported at 54 percent of GDP and civil servant’s pension entitlements at 81 percent of GDP.
  - In-year reporting timeliness: In-year fiscal reports are published 15 working days after the end of the reference month.
  - Discrepancy between fiscal balance and financing of general government is very small (0.7 percent of total expenditure).
  - Frequency/timeliness: WGA have been published always more than a year after the end of the reference period.

### Recommendations to improve fiscal transparency (as stated)
- Recommendation 1.1: Enhance consistency between the WGA and the PSF by:
  - Disclosing a trial, simplified consolidation of the financial statements of WGA and RBS in the annual report section of the WGA to provide a more complete view of public sector activity and attenuate effects of one of NAO’s qualifications.
  - Expanding coverage of data on stock positions of all public sector assets and liabilities in the PSF to allow policymakers to manage assets and consider long-term implications of policy decisions.
  - Adding tables to the PSF compiled under alternative international statistical standards closer to IFRS (e.g., recognition of civil servant’s pension entitlements and PPP arrangements), addressing two of the largest reconciliation items between national accounts and WGA.
- Recommendation 1.2: Control tax expenditures by subjecting them to numerical limits and enhance reporting through addition of sectoral and functional breakdown in cost publications to encourage debate, facilitate review (including for budget setting) of tax expenditures alongside associated spending programs, and enable effective monitoring of fiscal rules.
- Recommendation 1.3: Bring forward the publication of the WGA to target nine months following the reference period to improve usefulness for policy decision making and government accountability.

### Fiscal forecasting and budgeting: overview and key issues
- Fiscal forecasts and budgets should provide clear government budgetary objectives and comprehensive, timely, credible projections; assessed against IMF’s Fiscal Transparency Code across four dimensions: comprehensiveness of the budget and documentation; orderliness and timeliness of the budget process; policy orientation of budget documentation; credibility of fiscal forecasts and proposals.
- Strengths:
  - Rigorous, detailed, transparent macroeconomic and fiscal forecasts prepared since 2010 by the independent OBR.
  - Long-standing medium-term budget framework placing binding multi-year limits on spending of 25 central government ministries.
  - Clear primary budget documentation linking past commitments, detailing new policy measures, and showing budget impacts across income levels.
- Weaknesses and transparency concerns:
  - A convention-based budget system that is largely uncodified, allows the budget to be passed well into the fiscal year, permits changes to tax and spending policies multiple times throughout the year, and enables the government to change rules without stakeholder consultation.
  - Budget documentation linkage to appropriated estimates is difficult; 3.7 percent of GDP (FY 2016/17) of own-source revenues and related expenditures are largely ignored in headline reporting.
  - Headline total managed expenditure excludes expenditure associated with departmental income by each agency; reporting revenues and expenditures on a gross basis increases total managed expenditure from 39.7 percent of GDP in 2016–17 to 43.4 percent of GDP, and current receipts to 40.3 percent of GDP, with no net impact on borrowing—assuming departmental income is spent within the budget year.
  - Main estimates are presented a month after the main budget event and after the start of the financial year; figures in main estimates are presented on a different basis to total managed expenditure, making bridges technically burdensome and comparisons of budgeted expenditure to outturns by department difficult.
  - A track record of changing fiscal rules frequently over seven years, resulting in none in place at present.
  - No clear link in budget documentation between outputs and outcomes intended by budget expenditure.

### Budget unity and own-source revenues
- Budget documentation includes revenues, expenditures, and financing of all public sector bodies, including departments, public sector bodies outside general government, and the Bank of England; only government-owned banks are excluded.
- Own-source revenues:
  - 3.7 percent of GDP (FY 2016/17) of own-source revenues and related expenditures largely ignored in headline total managed expenditure.
  - Reporting gross rather than net would move total managed expenditure from 39.7 percent of GDP in 2016–17 to 43.4 percent of GDP, and current receipts to 40.3 percent of GDP, assuming departmental income is spent within the budget year.
- Information on most departmental own-source revenue is presented in supporting material but presented after the budget and in a way difficult to understand; no reporting on how departmental incomes are to be spent or whether they will be spent.

### Macroeconomic forecasts (EFO) — best practice elements
- The Economic and Fiscal Outlook (EFO) includes detailed six-year forecasts for main macroeconomic variables, components, and underlying assumptions, with detailed discussion of the outlook, developments since the last forecast, drivers of each component, and risks and uncertainties.
- Best practice highlights in the EFO:
  - Explanation of assumptions underlying the budget (oil price, equity prices, exchange and interest rates) and how they evolved over previous forecasts.
  - Detailed discussion of key sectoral outlooks (household, corporate, external), addressing interactions with labor market and balance of payments.
  - Analysis of fundamental drivers of the economic outlook, including potential output, productivity, and the output gap, with a hard-nosed assessment of past forecasts.
  - Assessment of the impact of policy measures on growth, covering fiscal, monetary and macroprudential policy.

*IMF staff assessment as presented in the source content.*

### 48.      GDP forecasts are relatively accurate and unbiased for the budget year, but do

### GDP forecasts are relatively accurate and unbiased for the budget year, but do

### GDP and nominal GDP forecast accuracy and bias
- GDP forecasts:
  - "GDP forecasts are relatively accurate and unbiased for the budget year, but do indicate some optimistic bias that increases over the forecasting horizon."
  - "The UK has the most accurate real GDP forecasting record in Europe, even after accounting for the relatively stability of the economy (Figure 2.2), and one of the lowest biases (Figure 2.3)."
- Nominal GDP forecasts:
  - "One area where macro forecasting has struggled is around nominal GDP—which feeds most directly into the fiscal forecasts, where forecast errors have been consistently overoptimistic, particularly following the crisis (Figure 2.4)."
  - The Office for Budget Responsibility (OBR) has recognized this and "recently steps have been taken to understand what is driving this."
- Relationship between nominal GDP and revenue forecast errors:
  - "There is a strong correlation between the accuracy of the forecasts for growth in nominal GDP and overall revenues (Figure 2.9), with errors largely falling within the expected range with an elasticity of revenue to growth of 1–1½."
  - "Paired errors consistently falling outside of that range would be indicative of microeconomic problems with the forecasting model relationships, rather than macroeconomic errors."

### Medium-Term Budget Framework (Advanced)
- Structure:
  - "The UK has a long established medium-term budget framework based on multi-year spending agreements undertaken during comprehensive spending reviews."
  - Spending agreements detail Departmental Expenditure Limits (DEL) that cover 25 central government ministries and around half of total managed expenditure, and are in place for fixed periods of (usually) three or four years.
  - The remaining half of expenditure, Annually Managed Expenditure (AME), is largely demand based (pensions, unemployment) and allowed to fluctuate.
- Performance:
  - "The UK has a strong record of delivering on its medium-term commitments on the expenditure side, though overoptimistic revenue forecasts have translated to worse fiscal balance outcomes than projected."
  - "The UK is almost unique in Europe, in that there is no bias—either upward or downward—in its expenditure forecasts (Figure 2.5)."
  - Expenditure discipline is underpinned by DEL limits and "the practice of making further policy adjustments to offset unfavorable movements in AME to bring expenditure outturns in line with commitments."
- Revenue and fiscal balance outcomes:
  - "Persistent revenue forecast downgrades (Figure 2.6), particularly, but certainly not limited to the financial crisis, have translated into consistent underperforming against the fiscal balance targets (Figures 2.7 and 2.8)."
- Horizon limitations:
  - "The fixed year nature of the framework means that as the end of the agreement period approaches, the framework horizon becomes shorter and shorter."
  - Example: "By the last year of the 2010 Comprehensive Spending Review (CSR) period, by the time of the 2013 Budget, the spending limits by agency only applied for one year. In addition, the 2013 CSR was only for a one-year period."

### Investment projects (Good)
- Institutional arrangements:
  - "Major government projects are now managed by the Infrastructure and Projects Authority (IPA)."
  - "The IPA was formed in January 2016 through the merger of Infrastructure UK (IUK) and the Major Projects Authority (MPA), and it is responsible for project development, project financing, project assurance, and project support for major government projects."
- Investment levels and pipeline:
  - "General government investment in the UK is relatively low compared to many other countries (Figure 2.10)."
  - "However, public sector investment in UK is much higher, around 4 percent of GDP in 2016."
  - "Planned investment in UK economic infrastructure across different sectors has a combined value of GBP 425 billion (see Table 2.1)."
  - Large projects cited include High Speed Rail, an extension of airport capacity (decision pending) and the Hinkley Point nuclear power plant.
- Transparency and appraisal:
  - "Investment projects are transparently reported. The WGA, which provides information on all multi annual obligation, including investment projects, and budgets accompanying spending reviews provide details on planned investments."
  - "The new National Infrastructure Pipeline database includes information on the planned investment in all UK economic infrastructure across both the public and private sectors. The IPA also produces detailed reports on major projects."
  - Appraisal requirements: "All major investment projects go out for competitive tender and require cost-benefit analysis" using the Treasury five case model or cost effectiveness analysis as appropriate; the Green Book presents the frameworks, processes and techniques to be used.
  - Publication practice: "While some cost benefit analyses are released publicly due to Freedom of Information requests, they are not all published as a matter of course, bringing down the assessment to a good level."

### Orderliness: fiscal legislation and timeliness
- Fiscal legislation:
  - "The bulk of the UK budget process is understood through convention, precedent and procedures that have been adopted over time, with relatively little provided in framework legislation."
  - The Charter of Budget Responsibility sets out the government’s fiscal objectives and provides the budget content requirements.
  - The convention-based system is well understood by budget actors, and "the legislature makes almost no amendments—though this is more a reflection on the limits of parliamentary power."
  - Weaknesses: the convention-based system is "very difficult for outsiders to understand" and has allowed the government to change core budget features when convenient (examples: medium-term framework effectively abandoned in 2015; performance targets dropped in 2010; carryovers ceased in 2010).
- Timeliness of budget documents (assessment: Not Met):
  - "The UK’s budget process is completed very late in the fiscal year, with the budget presented to parliament only two to three weeks prior to the beginning of the new financial year."
  - This does not meet the FTC basic practice of presenting the budget one month prior to the beginning of the financial year, nor the three-month requirement for the advanced level.
  - "The detailed spending estimates are provided a month after the budget is presented, and after the financial year has begun."
  - "The budget is not approved by Parliament until July, three months after the April 1 beginning of the financial year."
  - Spending authority for the new financial year is derived from the passage of the previous year’s supplementary budget, introduced a month prior to the budget; the Vote on Account provides legal authority for spending equivalent to 45 percent of the previous year’s budget.
  - "The authority to collect revenues for the first seven months of the financial year is provided through the Budget Resolution Bill, that is provided to parliament four days after the main budget event in mid-March."
- Role of the Autumn Statement:
  - "The Autumn Statement is intended to operate as a mid-year update, but in recent years has taken on increasing importance, in some instances eclipsing the budget itself."
  - "There are typically large-scale policies announced in the autumn, such as the results of the 2015 spending review, and a major savings exercise in 2014, which are often taken to bring fiscal policy in line with announced targets following changes in the outlook."

### Policy orientation and fiscal objectives
- Charter for Budget Responsibility objectives:
  - "Ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness, and ensure the effectiveness of wider government policy; and"
  - "Support and improve the effectiveness of monetary policy in stabilizing economic fluctuations."
- Specific fiscal objectives (Charter approved October 2015):
  - Fiscal mandate: "a surplus on the headline measure of Public Sector Net Borrowing (PSNB) by 2019–20, maintaining a surplus in normal times thereafter ('fiscal mandate');"
  - Supplementary target: "a target for debt as a share of GDP to be falling in each year until 2019–20, after which it would continue to do so if the fiscal mandate is met ('supplementary target');"
  - Welfare cap: "a cap on a subset of welfare spending, at cash levels set out by the Treasury in the most recently published Budget report, over the rolling five-year forecast period, to ensure that expenditure on welfare is contained within a predetermined ceiling ('the welfare cap')."
- Assessment and credibility:
  - "If these fiscal policy objectives had been maintained, they would have been assessed at a good level of practice, albeit hindered by their frequent adjustments."
  - Frequent changes undermine credibility: "the most recent budget surplus and net debt targets had only been in place for a year before being abandoned, with the previous targets introduced only seven months prior to that (Table 2.3)."
  - Although formally in place, "they have been publicly abandoned by both the current and previous Chancellors, leaving effectively no fiscal objectives in place during the assessment period." Result: assessment of "not met" under the code, with anticipation that new objectives may be adopted alongside the 2016 Autumn Statement.
- Oversight:
  - "The OBR performs regular assessments on fiscal performance against the Government’s fiscal targets."
  - The Charter requires the OBR to judge whether the Government has a greater than 50 percent chance of hitting its fiscal targets under current policy; these are published in each OBR EFO.

### Performance information
- "The budget provides information on the spending provided under each of the government’s main policy areas."
- "The main supply estimates provide spending information by agency, what the agencies main objectives are, and provides a broad breakdown of where the overall funding will be directed, though this is more on an administrative basis."

*Source: IMF staff text excerpt (selected sections)._cr16351 - 48. GDP forecasts are relatively accurate and unbiased for the budget year, but do*

### 69.      However, the details provided on outputs and outcomes are less clear, and are not

### _cr16351 - 69.      However, the details provided on outputs and outcomes are less clear, and are not

### Performance framework and linkage to budget
- Current Single Departmental Plans (2015–20) lay out:
  - total DEL funding,
  - high level objectives,
  - indicators underlying objectives.
- Limitations of current plans:
  - No link showing what funding is available for specific outputs.
  - No specification of what outputs will be produced.
  - No targets for the indicators.
  - Plans include specific commitments related to the government’s pre-election manifesto.
- Historical approaches:
  - 2011–14 business plans: objectives and specific actions to meet them.
  - Public Service Agreements (1998–2010): provided objectives and targets.
- Ex post reporting:
  - Departmental annual reports describe policy actions and provide results for a number of indicators.
  - Most indicators have no targets and no link back to how inputs were used to meet them.

### Coverage of Departmental Expenditure Limits (DEL)
- DEL accounts for only half of total expenditure.
- CSR agreements cover funding under DEL only, and are not updated during subsequent budgets.

### Public participation (Basic)
- Strengths:
  - Provision of clear, easily understood budget materials.
  - Easily understood descriptions of the budget and major policy measures.
  - Some information about distributional impacts of spending and tax across different segments of the population.
- Limitations:
  - Distributional analysis has been scaled back, is relatively high level, and difficult to link to particular policy decisions.
  - Citizens have no formal voice in budget deliberations.
- Options to meet advanced practice:
  - Introduce a formal call for budget submissions from the public (as in Australia).
  - Introduce a public participation component in the estimates committee hearings (as in Canada).

### Independent evaluation and fiscal credibility (Advanced)
- Office for Budget Responsibility (OBR):
  - Prepares all economic and fiscal forecasts for the UK Budget.
  - Provides an assessment of whether fiscal targets are being met.
  - Set up in 2010 to increase credibility due to perceived political influence on government forecasts and frequent tinkering with budget classifications.
- OBR responsibilities and interactions:
  - Completely responsible for all economic forecasts.
  - Responsible for fiscal forecasts, and prepares revenue and AME forecasts.
  - Accepts Treasury DELs as determined by the Treasury, making some adjustments for over- or under-spending.
  - Sign-off responsibility for policy costings prepared by the Treasury; endorses or not and provides an uncertainty rating. If disagrees, it would put its own referred costing in the forecast.
- Forecasting record:
  - OBR’s forecasting record indicates a lower degree of bias than under the Treasury forecasting regime.
  - Revenue forecasts have proven to be less optimistic than when the Treasury was responsible.
  - Degree of expenditure overspends has been broadly similar, resulting in a lower bias on fiscal balance projections.
  - OBR provides all of its models to the public and performs rigorous ex post forecast evaluations.

### Supplementary budget (Advanced)
- Any changes to the total or composition of the budget require a supplementary budget before funds can be spent.
- Contingency fund access:
  - Available in exceptional circumstances with very strict conditions and must be fully repaid.
- Timing and appropriation:
  - Supplementary budget usually announced in the autumn statement.
  - Appropriated through the supplementary estimates in February (one-and-a-half months prior to the end of the financial year).
- Overspending and excess votes:
  - Agencies can overspend relative to their appropriations, but this is subject to an excess vote procedure, making such cases relatively rare.
- Historical performance:
  - Over the past decade, total managed expenditure averaged 0.2 percent lower than the announced figure.
  - Legal appropriations have shown larger variability; only two cases where spending exceeded legal authority (2009 and 2013).
- Policy timing challenge:
  - Autumn Statement often announces medium-term policy changes to meet fiscal targets.
  - Quantum of policy decisions announced in the Autumn Statement exceed those announced in the Budget, particularly on the tax side, posing a challenge to budget universality and calls for a single fiscal event.

### Forecast reconciliation (Advanced)
- OBR produces an ex post evaluation of its forecast performance annually, analyzing differences between outturn and fiscal forecast.
- OBR classifies forecast revisions into three categories:
  - Classification changes: decisions by the ONS since the previous forecast.
  - Underlying forecast changes: OBR’s judgements about how forecasts—primarily economic—should change in light of new information.
  - Policy changes: results of Government decisions announced in each Budget and Autumn Statement, or in the period since the previous fiscal event.
- Average revisions since 2010:
  - Forecast deficit has been revised up by 0.2 percent of GDP over the medium term in each of the updates.
  - Driven by continual downward revisions to economic parameters, leading to a deterioration of 0.3 percentage points to the deficit.
  - Policy decisions have tended to offset this, except in 2015 when policy decisions cost the budget.
  - Two large instances of accounting and classification changes reduced the forecast deficit in March and December 2012.

### Recommendations (as presented)
- Recommendation 2.1: Include own source revenue and related expenditures into the fiscal aggregates to bring them to a gross basis.
- Recommendation 2.2: Concentrate all major tax and spending decisions into a single fiscal event held at least three months prior to the fiscal year, presenting the estimates simultaneously, allowing parliament to approve a unified budget at least one month before the beginning of the fiscal year.
- Recommendation 2.3: Adopt new fiscal objectives as a matter of priority in order to frame decision making around the upcoming autumn statement.
- Recommendation 2.4: Improve linkages between budget expenditure and intended policy outputs and outcomes.

### Summary evaluation highlights (selected numerical and categorical findings)
- Own source revenues are 15 percent of expenditure, 8 percentage points of which is unreported.
- Macro forecasts: Advanced — real and nominal GDP forecasts are upwardly biased (0.8 percent for T+2).
- Medium-term forecast errors: Deficit outturns are frequently moderately larger than projected (1 percent of GDP in T+2).
- Public investment: High at 4 percent of GDP.
- Fiscal objectives: Not met — absence of comprehensive objectives following abandonment of prior target of surplus in 2019/20.
- Fiscal position noted: debt and deficit of 83 and 3 percent of GDP.

### Fiscal risks — disclosure and macroeconomic risks (Advanced)
- Fiscal risk reporting: multiple government reports provide information on fiscal risks, including:
  - Economic and Fiscal Outlook, March 2016 (OBR) — Macroeconomic risks, budgetary contingencies.
  - Fiscal Sustainability Report, June 2015 (OBR) — Long-term risks.
  - Whole of Government Accounts, 2014–15 (HM Treasury) — Guarantees and other contingent liabilities, PPPs.
  - Public Sector Finances, report and Appendix tables 1-10, June 2016 (ONS) — Debt, subnational government, public corporations.
  - Debt Management Report 2016–17 (HM Treasury) — Debt.
  - Contingent Liabilities and Other Potential Liabilities (spreadsheet) (ONS) — Off-balance-sheet PPPs, guarantees.
  - Private Finance Initiative and Private Finance Projects, 2015 (HM Treasury) — PPPs.
  - Financial Stability Review, July 2016 (Bank of England) — Financial sector.
  - National Risk Register of Civil Emergencies, 2015 edition (Cabinet Office) — Environmental risks.
  - Local Government Finance Statistics England, July 2015 (Department for Communities and Local Government) — Subnational governments.
  - Annual Review of the Shareholder Executive, 2014–15 (Shareholder Executive) — Public corporations.
  - UK Financial Investments Annual Report and Accounts 2015/16 (UK Financial Investments) — Public corporations.
- Macroeconomic risks:
  - Identified as among the most important fiscal risks; modest shortfalls in growth relative to forecasts can lead to losses much larger than many other risks.
  - Changes in growth mostly affect government tax revenue and spending on unemployment benefits.
  - The UK economy and tax revenue are more stable than those of many countries; volatility measured as standard deviation of annual growth rate for 2000–15 shows relative stability.
  - Stability, combined with policy of borrowing in local currency at long maturities, strengthens the government’s position to manage fiscal risks.

*Source: Excerpt from IMF staff report content provided in the content unit.*

### 87.      The OBR’s Economic and Fiscal Outlooks analyze macro risks in three ways. Fan

### _cr16351 - 87.      The OBR’s Economic and Fiscal Outlooks analyze macro risks in three ways. Fan

### Macro risk analysis: methods and uses
- The OBR analyzes macro risks in three ways:
  - Fan charts indicate the extent of uncertainty about future deficits and debts, on the assumption that current forecasts are no more accurate than past forecasts.
  - Sensitivity analyses show how forecast outcomes could change with small changes in important forecast assumptions, taken one by one.
  - Scenario analyses show how outcomes could change if several assumptions were varied simultaneously in plausible ways.
- These analyses are used to assess whether the government is likely to meet its fiscal targets.
- Suggested additional analyses:
  - Investigate the likely effects of a very steep recession on public finances (a fiscal stress test).
  - The Treasury could consider how it would respond to such a shock.

### Specific fiscal risks (Not Met)
- Definition: Specific fiscal risks are those not easily analyzed in typical macroeconomic models, including risks that explicit and implicit guarantees will be called and the risk that the government’s assets will lose value.
- Disclosure and gaps:
  - No single report summarizes specific risks, though relevant information is disclosed across publications.
  - The OBR’s medium- and long-term fiscal projections discuss some specific fiscal risks.
  - Notes to the WGA disclose a lot of information on an overlapping set of risks.
  - Important sources of risk, including the possible direct and indirect fiscal costs of another financial crisis, are not discussed in a comprehensive summary.
  - The report notes this is likely to change when the OBR publishes its planned report on fiscal risks in 2017.

### Long-term sustainability of public finances (Advanced)
- Aging-related pressures:
  - The OBR estimated in 2015 that bringing net public-sector debt back to 40 percent of GDP would require a permanent fiscal consolidation beyond that already planned of 1.9 percent of GDP.
  - Without policy changes, the OBR forecast that the government would start to run a primary deficit in 2033–34, and that public debt would start to rise inexorably.
  - These estimates are described as highly uncertain; e.g., slower-than-forecast productivity growth would cause debt to rise more quickly.
- Comparative assessment:
  - The European Commission’s Fiscal Sustainability Report 2015 judged the UK faced a “medium sustainability risk in the long-term” and that sustainability would require consolidation of 3.2 percent of GDP.
- OBR projections practice:
  - The OBR regularly publishes long-term projections with a term of about 40 years, covering all spending and showing debt and deficit evolution under baseline and alternative scenarios (pension rules, interest rates, demography, etc.).
  - Fiscal Sustainability Reports were published every year until 2015; with new work from the referendum on the EU and the planned biannual fiscal risks report, the OBR plans to publish the Fiscal Sustainability Report only in years when the risk report is not published.
  - Recommendation: publish short, updated summaries of each report in the “off” years.

### Risk Management

#### Budgetary contingencies (Good)
- Budget-year reserves in Budget 2016:
  - Budget-year reserve for expenses (resource DEL): GBP 3.6 billion.
  - Budget-year reserve for capital expenditure (capital DEL): GBP 1 billion.
  - Combined reserves equal 0.6 percent of budgeted spending.
- Institutional arrangements:
  - Each department has departmental unallocated provisions (DUP).
  - Reserves intended for unforeseen and unmanageable needs within departmental budgets.
  - No restrictions on types of spending funded from the reserves; departments are expected to manage pressures down and use DUP before calling reserves.
  - Transfers from the reserve to appropriations typically made in the supplementary budget.
  - If needs are urgent, spending can temporarily be funded from a contingencies fund if certain criteria are met and the Treasury’s approval is given.
  - There is no in-year reporting of the use of reserves.

#### Management of assets and liabilities (Basic)
- Government balance-sheet magnitudes (end of March 2016):
  - Financial assets of general government: 30.4 percent of GDP.
  - Liabilities of general government: 114.5 percent of GDP.
  - Maastricht estimate of debt of general government: 87.7 percent of GDP.
- Reasons for valuation differences:
  - Headline debt measures exclude certain liabilities (derivatives and accounts payable) amounting to about 7 percent of GDP.
  - Maastricht debt is recorded at face value; market values differ due to changes in interest rates and quantitative easing.
- Disclosure and policy:
  - The Treasury’s annual Debt Management Report describes debt-related risks and shows a probabilistic forecast of debt-service costs.
  - Debt-management policy: borrow in pounds, mostly at fixed rates, for long-average maturities, without use of derivatives.
  - Public documents have relatively little discussion of risks surrounding other liabilities (pensions) or government assets.

#### Guarantees (Basic)
- Historical and current magnitudes:
  - By 2010, guarantees issued by general government to others amounted to 28 percent of GDP.
  - Since then, guarantees have fallen to 8.9 percent of GDP.
  - Government guarantees given to private entities amount to 5.6 percent of GDP.
- Disclosure and limits:
  - Information on total level of guarantees is available from ONS; WGA and Treasury departmental accounts disclose and explain guarantees.
  - Some guarantees are recognized on the face of the WGA balance sheet and a smaller range on the statistical balance sheet; most remain off-balance-sheet in statistics.
  - No legal limit on issuance of guarantees.
  - No guarantee liabilities are counted in the key measure Public Sector Net Debt.

#### Public-private partnerships (Good)
- Off-balance-sheet PPPs:
  - Capital value of off-balance-sheet PPPs (as defined by Eurostat) in the UK: 1.7 percent of GDP.
  - Simple sum of projected payments to PFI companies from 2016–17 to 2043–44: GBP 210 billion (10.9 percent of GDP).
  - Of that, GBP 177 billion (9.2 percent of GDP) is off-balance-sheet in fiscal statistics.
  - Present values at government borrowing costs: 9.8 percent of GDP (total) and 8.3 percent of GDP (off-balance-sheet).
- New PPP types and specific liabilities:
  - Contracts for difference liability on March 31, 2016: GBP 31 billion (1.6 percent of GDP); none of which counts as debt in the headline measure published by the ONS.
  - Cost of proposed contract for difference for the Hinckley Point C project estimated at GBP 30 billion (1.5 percent of GDP).
- Disclosure and controls:
  - Most PPPs are off-balance-sheet in fiscal statistics but most are on-balance-sheet in the WGA.
  - ONS publishes an estimate of the value of PPPs off-balance-sheet in the statistics.
  - Treasury publishes projected government payments in PFI and PF2 projects by project for every year of each project’s life.
  - No limit on the total financial obligations the government can incur over the life of PPP contracts.
  - Aggregate spending on PFI and PF2 projects over the five years beginning in 2015–16 has been subject to a limit of GBP 70 billion.

#### Financial sector (Advanced)
- Fiscal risks and magnitudes:
  - Direct risks: government may be required or choose to bail out failing banks; legal obligation to support the Financial Services Compensation Scheme (FSCS).
  - Indirect risks: financial crises depress the wider economy and thus government revenues.
  - Revenue loss relative to pre-crisis extrapolation between 2008 and 2015: about GBP 700 billion (38 percent of 2015 GDP).
- Reforms and remaining vulnerabilities:
  - Post-crisis reforms aim to increase banks’ capital, reduce funding vulnerabilities, ring-fence core deposit-taking/payment functions, and ensure private creditors bear losses before taxpayers.
  - Evidence suggests the value of implicit government guarantees has declined since the crisis.
  - IMF’s most recent assessment concluded reforms had greatly increased the sector’s resilience.
- Size and composition of the sector (2015 / 2014 data):
  - The sector remains extremely large and highly leveraged.
  - Liabilities of financial corporations (2015): see Table 3.2 breakdown:
    - Deposits: 265 (percent of GDP)
    - Debt securities and loans: 166 (percent of GDP)
    - Insurance, pensions, etc.: 207 (percent of GDP)
    - Derivatives: 243 (percent of GDP)
    - Other: 8 (percent of GDP)
    - Total: 892 (percent of GDP)
  - The sector’s non-equity liabilities fell since the crisis peak but were still larger as a percentage of GDP in 2015 than in 2007.
  - The sector’s liabilities in 2014 were greater in the UK than in any other large European country.
- Notes:
  - Data include the Bank of England and other public financial corporations.
  - Eurostat consolidated financial balance-sheet data and other references underpin the figures.

_ _cr16351 - 87.      The OBR’s Economic and Fiscal Outlooks analyze macro risks in three ways. Fan_

### 103.      Explicit support for the sector is disclosed and financial stability analyzed. The WGA

### _cr16351 - 103.      Explicit support for the sector is disclosed and financial stability analyzed. The WGA

### Financial sector support and financial stability reporting
- The WGA and the Treasury’s departmental accounts report the government’s explicit support for the sector.
- The Bank of England’s twice-yearly Financial Stability Reviews discuss the soundness of the financial sector and report the results of stress tests.
- The OBR reports on the net fiscal effects of the government’s interventions in the financial sector.
- Gaps identified:
  - No reporting on the broader risks that another financial crisis could cause for public finances, either because of possible implicit guarantees or the effect of another financial crisis on economic activity and thus government revenues.
  - The total exposure of the FSCS does not appear to be reported.

### Natural resources (Advanced) — North Sea oil and gas
- North Sea oil and gas is no longer an important source of revenue.
  - Drivers: Low sector profitability, a reduction in tax rates, high levels of investment, increasing decommissioning activity, and the payment of refund liabilities resulting from the carryback of trading losses.
  - Result: Decline in tax revenue over the last three years, culminating in negative overall revenues in 2015/16.
- Government analysis and forecasting:
  - The OBR finds economic factors are the biggest source of forecasting error over the last five years, largely due to difficulty predicting oil and gas prices.
  - The 2015 FSR compared price, production and revenue forecasts and outturns since 2010, and provided price and production sensitivity analysis on long-term forecasts.
  - March 2016 forecast assumptions: a conservative $35.5/barrel price for 2016/7, increasing to $44/barrel over the period 2018–21, generating negative overall revenue projections until 2021 (Figure 4.1 (f)).

### Decommissioning and tax refund liabilities
- Key fiscal risk: loss carryback treatment for decommissioning costs.
  - These tax losses will be absorbed by the general budget through reduced tax revenues or refunds to industry, since there has been no historical saving of revenues to anticipate these liabilities.
- Estimates and uncertainty:
  - In 2015, total decommissioning costs for the UKCS over the next 25 years were estimated at approximately GBP 43.7 billion:
    - GBP23.7 billion for PRT-paying fields
    - GBP20 billion for non-PRT paying fields.
  - There is considerable uncertainty around these figures and their timing and distribution.
- PRT (Petroleum Revenue Tax) specifics:
  - The PRT is the principal source of near-term tax refund liabilities.
  - Following cessation of production, losses can be carried back almost indefinitely (with certain exceptions when carrying back to previous participators before 2004).
  - The amount of the repayment due depends on the company’s tax history, the tax rate applied in the year the loss is carried back to, and any interest due.
  - The principal portion of the repayment is then taxable for ring-fence corporation tax (RCFT) and the supplementary charge (SC).
  - Losses can be carried back against payments of RFCT and SC to 2002, at rates of 30 and up to 20 percent respectively.
  - Because these payments are subject to the company level petroleum ring-fence rather than being paid at a field level, HMRC estimates such losses will be offset against a company’s taxable income resulting in reduced tax payments, rather than a refund.
- Published analysis and figures:
  - Detailed analysis on the potential timing and impact of decommissioning-related tax losses is not published.
  - OBR’s medium-term estimates (Figure 3.11) suggest a net refund liability of approximately GBP 1bn per year over the next five years, which amounts to between 40 and 65 percent of decommissioning costs incurred annually.
  - HMRC’s 2015/16 accounts estimate a net GBP 6.9 billion contingent liability provision for anticipated refunds for PRT fields over the 2016–42 period, of which GBP 1.7 billion is anticipated in the 2016–21 period.
  - Publication of greater detail of the assumptions underlying these figures would increase transparency surrounding anticipated refund liabilities.

### Environmental risks (Basic)
- Natural disasters and environmental problems create fiscal risk.
  - Floods are common and create spending needs not always met within departments’ existing budgets.
  - Example: Floods in the winter of 2013–14 led to “exceptional additional” funding of GBP 180 million (0.01 percent of GDP) in 2014–15, plus smaller amounts in other years.
  - More costly floods, influenza pandemics, or accidents at nuclear power plants are possible; long-term climate change creates major risks.
- National Risk Register:
  - The 2015 edition discusses floods, pandemics, other natural hazards, and risks of various kinds of terrorist attacks.
  - It is based on a more comprehensive classified analysis not published for national security reasons.
  - The National Risk Register does not estimate the possible budgetary consequences of the emergencies it discusses.

### Fiscal coordination — Subnational governments (Basic)
- Centralization and fiscal shares:
  - In 2011, local governments collected 5 percent of all taxes, compared to an OECD average of 15 percent.
  - Local governments’ share of spending was 27 percent, compared to an OECD average of 32 percent.
- Borrowing and debt:
  - Local governments’ borrowing is modest, at 5 percent of GDP.
  - Most local government debt is owed to central government.
  - Local governments can borrow from the central government’s Public Works Loan Board, usually for less than from others.
  - The share of local governments’ debt in total general government debt has fallen sharply since 2001.
  - Local governments’ borrowing from third parties is not generally guaranteed by the government but may benefit from implicit government guarantees.
  - Standard and Poor’s states central government “would be willing to provide timely extraordinary support to the GLA, if required.”
- Devolution and transitional risks:
  - English local governments are being given greater revenue-raising powers and their central grants are declining.
  - Authority for some functions has been transferred to devolved administrations; the Scottish Government is getting further fiscal powers with borrowing limited to GBP 4.7 billion (0.2 percent of 2016 GDP).
  - Transition risks include potential lack of skills, lenders exploiting perceived implicit guarantees, and transferred revenue streams being too small or uncertain.
- Information and controls:
  - ONS includes data on local-government spending, revenue, and debt in monthly Public Sector Finances; Northern Ireland Executive, Scottish Government, and Welsh Government are treated as parts of central government for these statistics.
  - English local governments are required to run a balanced current budget; in aggregate they ran a current surplus in nine of the last ten years.
  - No numerical limit on borrowing for investment, but chief financial officers must ensure borrowing is prudent and all local governments must comply with the Prudential Code produced by the Chartered Institute of Public Finance and Accountancy.

### Public corporations (Basic)
- Size and evolution:
  - Before the financial crisis, the public-corporations sector was small: mid-2007 debt was GBP 18 billion (1.2 percent of that year’s GDP).
  - With the crisis and nationalizations, sector gross debt peaked at the end of 2008 at GBP 2,154 billion (141.7 percent of that year’s GDP).
- Current composition and exposures:
  - RBS now dominates the sector after restructuring and sales of other nationalized banks.
  - On June 30, 2016, RBS liabilities amounted to GBP 848 billion (45.5 percent of 2015 GDP).
  - Next largest: housing associations reclassified in 2015 as public corporations, then London Underground and London Buses.
  - Network Rail owed GBP 30 billion (1.6 percent of 2015 GDP) at end-June 2016.
- RBS-specific issues:
  - Eight years after nationalization, RBS has lost money every year since nationalization with annual losses ranging from GBP 8 billion in 2013 (0.5 percent of GDP) to GBP 1 billion in 2015.
  - Government shares: the bank is 73-percent-government-owned; share price fell from over 400p at end-2014 to 193p as of August 11, 2016.
  - June 2016 assets of GBP 902 billion supported by common equity worth GBP 23 billion at the August 11 share price.
  - Leverage and CET1 ratios: 5.2 and 14.5 percent, respectively.
  - Moody’s cites a “moderate probability of government support” for certain RBS instruments while being more cautious for senior unsecured debt.
- Measurement and reporting issues:
  - Public banks are excluded from headline measures of public finances: Net Public Sector Debt excludes RBS debt although ONS publishes an estimate of gross public debt that includes RBS.
  - Exclusion of RBS has greatly reduced the headline measure of debt and may reduce scrutiny of RBS finances.
  - RBS is not consolidated in the WGA; WGA reflects changes in fair value of the government’s shareholding but excludes RBS for pragmatic and materiality reasons.
  - The Bank of England is treated sui generis and is generally included in headline debt and deficit measures, though some statistical measures exclude “temporary” effects of crisis interventions.
  - Transfers between government and public corporations are disclosed, but there is no annual report on the finances of the public-corporations sector that is sufficient to assess sector risks.
  - The Bank of England presents separate financial statements for its banking and issue departments and does not consolidate its subsidiaries, including the one that carries out quantitative easing.

*Source: _cr16351 - 103.*

### 121.      Table 3.3 summarizes the assessment of the UK’s practices in the area of fiscal risks.

### Table 3.3. Summary Evaluation: Fiscal Risks

### Overall assessment
- The UK’s practices are frequently good or advanced when judged by the standards of the Fiscal Transparency Code.
- Examples of advanced practice include:
  - The OBR’s reporting of risks related to the macro-economy and the long-term sustainability of public finances.
  - The Treasury’s and the Bank of England’s reporting of risks related to the financial sector.
- Disclosure falls short of the standard of basic practice in the Code only in summary reporting of specific fiscal risks.
- Disclosure falls short of the standard of good practice in reporting risks related to the government’s assets.
- Government control of risks often falls short of the Code’s standards of good or advanced practice.
- Although disclosure about risks from guarantees, public-private partnerships (PPPs), and subnational governments is good, there are no limits on the total financial obligations incurred in these areas.

### Recommendations (from the assessment)
- Recommendation 3.1: In the planned report on fiscal risks by the OBR, combine the analysis of macroeconomic risks already presented in the OBR’s Economic and Fiscal Outlooks with (i) an analysis of the effects of severe shocks (a fiscal stress test); and (ii) a discussion of the implications for forecasts of a set of specific risks, including those created by guarantees, PPPs, civil emergencies, and the financial sector.
- Recommendation 3.2: Develop a policy for constraining the growth of off-balance-sheet commitments created by guarantees, public-private partnerships, and the like, for example by having the government set a limit on these obligations when it sets its fiscal-policy framework under the Charter for Budget Responsibility.
- Recommendation 3.3: Publish an annual report on the evolution and management of the risks to the government’s financial assets and liabilities, taking account where appropriate of the ways in which the values of these assets and liabilities are likely to vary with the government’s revenue and spending.

### Principle-by-principle findings (table entries summarized as discrete bullets)
- 3.1.1 Macroeconomic Risks
  - Assessment: Advanced: The OBR’s EFOs report sensitivity, scenario, and stochastic analyses, though with a rather narrow focus on the likelihood of meeting fiscal goals.
  - Importance: High: Although the economy is big and diversified, fluctuations in GDP still create very large uncertainty about tax revenue.
  - Rec: 3.1
- 3.1.2 Specific Fiscal Risks
  - Assessment: Not met: Several specific risks are disclosed in the WGA and other reports, but there is no comprehensive summary report on specific risks.
  - Importance: Medium: Several specific risks are important, especially those from the financial sector (see below).
  - Rec: 3.1
- 3.1.3 Long-Term Fiscal Sustainability
  - Assessment: Advanced: The OBR’s Fiscal Sustainability Reports present 40-year projections of the debt and deficit, and show sensitivity of outcomes to key assumptions.
  - Importance: High: Cutting net public debt to 40 percent of GDP is estimated to require a permanent fiscal consolidation of about 2 percent of GDP.
  - Rec: 3.1
- 3.2.1 Budgetary Contingencies
  - Assessment: Good: The budget contains a reserve to meet unforeseeable, unmanageable spending needs, though there is no in-year reporting on its use.
  - Importance: Low: Variations in spending are moderate.
  - Rec: 3.2
- 3.2.2 Asset-and-Liability Management
  - Assessment: Basic: Borrowing is authorized by law and risks surrounding debt are analyzed in the Debt Management Report, but risks surrounding assets are not reported.
  - Importance: High: The market values of general government’s assets liabilities, excluding pensions, are 30 and 115 percent of GDP, respectively.
  - Rec: 3.2
- 3.2.3 Guarantees
  - Assessment: Basic: Guarantees are disclosed each year, but there are no legal limits on the total stock or issuance of guarantees.
  - Importance: Medium: Explicit guarantees for entities outside general government amount to 9 percent of GDP.
  - Rec: 3.2
- 3.2.4 Public-Private Partnerships
  - Assessment: Good: The government reports on PPPs, including planned payments over the lives of the contracts, but there is no limit on off-balance-sheet PPP obligations.
  - Importance: Medium: Present value of commitments in off-balance-sheet PPPs is 9 percent of GDP.
  - Rec: 3.2
- 3.2.5 Financial Sector
  - Assessment: Advanced: The Treasury reports explicit obligations, and the Bank of England assesses the stability of the sector and publishes the results of stress tests.
  - Importance: High: Banks are less fragile than before the crisis, but their liabilities remain very large, at nearly 900 percent of GDP.
  - Rec: 3.1
- 3.2.6 Natural Resources
  - Assessment: Advanced: Historical oil volumes, values, and tax revenue are disclosed, and different forecasts of revenue are published.
  - Importance: Low: North Sea oil now generates little net revenue, and sometimes even losses.
  - Rec: 3.2
- 3.2.7 Environmental Risks
  - Assessment: Basic: The National Risk Register identifies and discusses natural disasters and other environmental risks, though without quantifying possible fiscal costs.
  - Importance: Low: Floods create uncertain spending. Nuclear decommissioning creates future costs over the very long-term estimated at 5 percent of GDP in nominal terms.
  - Rec: 3.3
- 3.3.1 Subnational Governments
  - Assessment: Basic. Information on the aggregate finances of local governments is published, by region, but there are no limits on borrowing by local governments.
  - Importance: Medium: Local-government debt is moderate, at 5 percent of GDP, but devolution creates additional risks.
  - Rec: 3.3.1
- 3.3.2 Public Corporations
  - Assessment: Basic: Transfers between the government and public corporations are disclosed, but little summary information on the finances of the corporations is published.
  - Importance: Medium: The liabilities of public corporations (mainly RBS) are 50 percent of GDP.
  - Rec: 3.3.2

*Source: Table 3.3 summary evaluation as presented in the content unit.*

### 133.      The government maintains and publishes an interactive database and map of

### _cr16351 - 133.      The government maintains and publishes an interactive database and map of

### Disclosure of Resource Rights and Ownership
- The government publishes an interactive database and map of petroleum licenses showing start date, status, coordinates, operator and partners.
- The OGA publishes license documents searchable by license number and a list of license relinquishments, updated annually.
- Suggested enhancement: include a history of changes of ownership and regular reporting on licenses transferred during a given year.
- The government’s “person with significant control” database requires UK incorporated companies to provide name, country of residence, and nature of control, using five tests to determine significance of beneficiaries.
- The EITI process encourages disclosure of beneficial owners; only one company reported beneficial ownership information in the 2014 report.
- Suggested enhancement: require public disclosure of the chain of any intermediaries between the license-holder and the ultimate beneficiary.

### Decommissioning Relief Deeds (DRDs)
- Finance Act 2013 grants HMT the ability to enter into stabilization contracts (DRDs); a model version is available online.
- As of June 2015, the government had entered into 72 DRDs.
- HMT reports annually to Parliament the number of DRDs signed, but the actual contracts and the names of companies with DRDs have not been published due to confidentiality clauses.
- It is understood that each DRD follows the model document.
- Consistent with good practice under the FTC, the government should consider publishing these contracts, or at least the parties to them, after obtaining each company’s consent.

### Assessment and Collection of Revenues (Advanced)
- HMRC publishes an annual report with consolidated accounts and detailed reporting on the tax gap, reporting against targets and detailing compliance activity; the annual report does not disaggregate by sector though sector-specific details are noted (e.g., revised approach to estimating provision for decommissioning costs in the 2015-16 report).
- HMRC provides web-based Oil Taxation Manual guidance; has a dedicated sector tax team; meets regularly with the UK Oil Industry Taxation Committee.
- HMRC’s Oil and Gas working group is identifying administrative burden reductions, including simplifying filing of returns for the now zero-rated PRT.
- Tax dispute resolution: Tax Dispute Resolution Board hears cases first; Litigation and Settlement Strategy and Code of Governance set out processes; aggregate referral information published in the Tax Assurance Commissioner’s Annual Report. Most petroleum disputes are resolved by mutual agreement; few proceed to litigation.

### Resource Revenue Audit and Verification (Good)
- The UK published its first EITI report in April 2016 reconciling tax revenue data for 2014; project-level payments reported where possible (PRT and license fees); RFCT and SC combined and reported at company level.
- The publication is part of the process to reach EITI compliance, which the UK hopes to achieve upon completion of its next report in 2017.
- Non-disclosure by several companies left reconciliation incomplete: six petroleum companies neither reported nor provided waivers, leaving 25 percent of total petroleum tax payments and license fees unreconciled. The reconciliation gap was most significant for the SC and RFCT category.
- Continued non-disclosure by significant petroleum companies will prevent EITI compliance; addressing this is a priority for the UK EITI multi-stakeholder group.

### Company Reporting
- Domestic payments:
  - Most resource companies voluntarily report material company-level tax payments under EITI; 59 petroleum companies reported on 2014 payments, with six companies within scope not participating.
  - Recommendations: consider publishing underlying company submissions and reduce the time lag in publication; disaggregate payments and repayments of PRT, SC, and RFCT; consider separate reporting of RFCT and SC given different tax bases; aim to publish EITI reports more promptly (reduce typical two-year time lag).
- Worldwide payments:
  - EU Accounting Directive and Transparency Directive transposed into UK law in 2014; companies must report annually on project-level payments to governments worldwide for financial years beginning on or after January 1, 2015, including overseas subsidiaries.
  - Materiality threshold: GBP 86,000 for a single payment or series of related payments.
  - The government estimates 177 companies will fall under the Accounting Directive, and 80 extractive companies will be subject to the Transparency Directive, of which 37 are UK registered.
  - Reports filed in electronic and machine readable format per the UK’s Open Data Charter.
  - Payments to governments for the sale of commodities are excluded from the legislation’s scope; the legislation applies to mining, petroleum, and logging sectors.
  - Recommendation: consider expanding reporting requirements to include payments to governments for the sale of commodities.

### Operational, Social, and Environmental Reporting (Advanced)
- Offshore: EU legislation requires environmental impact assessments submitted to BEIS before activity commences; BEIS publishes list of applications and a summary document for each consent granted; assessments themselves available on request. Environmental impact assessments are required for approval of decommissioning work programs.
- Onshore: onshore oil and gas activity requires an environmental permit, regional environmental agency requirements, planning approval by local authority, and publication of environmental impact assessment for local consultation.
- Operational disclosure: initial work program published as part of license document; field level production data supplied by companies and updated monthly by OGA; UKCS field information portal reports key data on each petroleum field, partners, discovery wells, production history, location, and gas flaring activity.

### Resource Revenue Management and Budgeting (Advanced)
- Petroleum revenues are remitted to the national budget with no specific fiscal objectives for utilization.
- Trading loss and decommissioning-related refund payments are financed by general government revenue.
- Limited earmarking of non-tax revenues:
  - Northern Ireland share of license fees: GBP 1.9 million in 2014/15.
  - Oil and gas levy to finance OGA: GBP 8.2 million in 2015/16.
  - Smaller fees and charges retained by OGA: GBP 1.1 million in 2015/16.
  - Shale gas proposals: GBP 100,000 to local communities by operating companies for each well drilled; 1 percent of future revenue from shale gas activity to be allocated to local communities by operating companies.
  - Business rates for shale gas exploration/extraction retained by relevant local authority.
- Emerging issues:
  - Refunds due to the sector exceeded revenue collections in 2015/16.
  - OBR now forecasts negative revenues from the petroleum sector over the next five years.
  - Significant uncertainty around decommissioning cost estimates and fiscal cost implications; need to monitor, forecast, and manage these liabilities.
  - HMRC’s petroleum revenue outturn should provide annual disaggregation of receipts and refunds.
  - In recent years, petroleum revenues were 0.4 percent of total tax revenue in 2014/15; tax refunds resulted in negative revenue of -24m in 2015/16.

### Key Recommendations (as presented)
- Recommendation 4.1: Publish signed Decommissioning Relief Deeds (DRDs), or at least a list of companies with whom DRDs have been signed, subject to obtaining each company’s consent.
- Recommendation 4.2: Continue with implementation of current corporate disclosure initiatives, and consider expanding reporting requirements to include payments to governments for the sale of commodities.
- Additional suggested actions in text:
  - Include ownership-change histories and regular reporting on license transfers in the licenses database.
  - Require public disclosure of any chain of intermediaries between license-holders and ultimate beneficiaries.
  - Improve timeliness and granularity of EITI and company-level reporting, including separate reporting of RFCT and SC where feasible.

*Fiscal Affairs Department — International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16351.pdf_