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Since 2003, government departments have improved the management of their finances. But stronger financial management is now more important than ever to ensure that every pound of public money is spent to best effect in an increasingly challenging financial environment.

Central government manages more financial resources than ever before, and these are expected to grow to £678 billion a year by 2010-11 – some £11,000 for every person in the UK. But, many departments have tighter settlements under the 2007 Comprehensive Spending Review than they had under previous spending rounds. Today’s report, a follow-up to the NAO’s 2003 report, looks at how capable departments are at managing their financial resources.

With Treasury guidance and support, Departments are producing better information about their financial performance. It is, for example, helping them to manage their assets better, helping them to dispose of any they no longer need. Their finance functions have seen an increase in the number of professionally qualified staff. Most departments now have a professionally qualified Finance Director on their main Board, and non-executive Directors are providing robust, independent challenge to these Boards. Together, these developments have raised the profile of financial resource management at the very top of departments.

However, six departments, accounting for over £45 billion (eight per cent) of total central government expenditure, still do not have a professionally qualified Finance Director on their main Board, despite the Treasury requirement that they do so by December 2006. Only 40 per cent of departments invariably provide decision-makers with a full analysis of the financial implications of policy proposals. Financial management matters are not automatically included in the performance assessment criteria of Permanent Secretaries and other Senior Civil Servants. And, not a single Permanent Secretary holds a professional finance qualification.

Management of financial resources is the responsibility of everyone in a department, not just the central finance team. The Treasury and other stakeholders have taken steps – such as through their Finance Skills for All training course, to improve the financial skills and awareness of non-finance staff, who are usually the budget holders responsible for the day-to-day management of departments’ financial resources. But take-up remains low. Nearly 70 per cent of departments cited the level of skills of non-finance staff as one of the three most significant barriers to improving financial resource management across government.

Departments have not improved their record of forecasting how much money they need each year, particularly in relation to capital spending such as money spent on building projects. In at least four of the five years between 2002-03 and 2006-07, three departments under-spent their capital budgets by more than ten per cent compared with their final forecasts. Over the same period, the aggregate total of under-spending on capital in excess of 10 per cent was £4.9 billion across the whole of government.

As part of the 2007 Comprehensive Spending Review, Treasury required departments to state the cost of achieving each of their Departmental Strategic Objectives. Although some departments have already made significant progress here, by bringing together financial and service delivery information, more than half of departments have not.

NAO recommendations include that all departments ensure that they have a professionally qualified Finance Director at Board level. They should also include in their appraisals of senior managers how well they have managed their financial resources. And they should bring together information on spending and on performance results so their boards can improve the basis on which they evaluate policy proposals, allocate resources and assess business performance.

Tim Burr, head of the National Audit Office said today:

“Departments’ financial management has improved since 2003. But, tighter financial settlements, the drive for efficiency savings and rising public expectations about the quality of public services mean that there should be no let-up in the government’s efforts to extract maximum value from its use of taxpayers’ money."

Notes for Editors:

1. Six departments do not have a finance director on their board. The largest of these departments are the Ministry of Defence (accounting for over £40 billion of total government expenditure), and the Department for International Development (accounting for nearly £5 billion of total government expenditure); see paragraph 6 of the report. The remaining four departments are the Crown Prosecution Service, the Office of Fair Trading, the Office of Gas and Electricity Markets and the Water Services Regulation Authority (OFWAT).
2. Three departments under-spent their capital budgets by more than ten per cent compared with their final forecasts. These were the Department for Constitutional Affairs (now the Ministry of Justice), the Home Office and the Department for Culture, Media and Sport.
3. Departmental Strategic Objectives are the overarching aims of departments as specified in the 2007 Comprehensive Spending Review.
4. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
5. The Comptroller and Auditor General is the head of the National Audit Office which employs some 850 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.