The annual deficit (the difference between what the Government receives and what it spends) was £94.4 billion in the financial year 2010-11. In 2009-10 the deficit was 162.7 billion.

Revenue was £31 billion greater in 2010-11, mainly due to increased tax receipts but The largest reduction in the annual deficit was due to government changing the measure of inflation used to set payments to members of the public sector pension schemes.

Causes of the annual deficit reduction

Putting together the Whole of Government Accounts is a mammoth task for the Government. The Government plans to become more efficient at producing WGA, but it will always be restricted as currently the WGA can only be prepared after all the significant bodies have produced their individual financial statements. The next audited deficit WGA will be released published by the Treasury by autumn 2013.

In 2010-11, the public sector (including local government) had assets of £1.2 trillion (i.e. £1,200,000,000,000).

In 2010-11, the public sector liability was £2.4 trillion (2009-10: £2.5 trillion). Taking into account its assets of £1.2 trillion, the net liability (or national debt) was £1.2 trillion.

The WGA doesn’t include everything that accounting standards require, and this is a concern voiced by the Comptroller and Auditor General. The figures do not include bodies like Network Rail, further education colleges, some Academies and some local authority school buildings, which the Government has control of. It also doesn’t include the banks which are fully owned by the Treasury (such as RBS). The NAO thinks these bodies should be included.

The 2009-10 WGA did not include the Bank of England and the Bank of England Asset Purchase Facility Fund. The 2010-11 WGA includes these bodies in the 2010-11 figures, and has restated the 2009-10 figures so that they are comparable.

All PFI projects, which are required under accounting standards to be recognised in the account, are included in the WGA.

If the excluded bodies were included, this would have reduced the Government’s net debt by around £144 billion (from £1.19 trillion to £1.05 trillion) at the end of March 2011.

While a company would have to maintain more assets than liabilities there is no such legal requirement for sovereigns who have the ability to meet future obligations through taxation (or further borrowing). The WGA, in accordance with accounting standards, does not include as an asset the Government’s ability to meet its payments through future taxation and borrowing. Currently the cost the Government pays on its gilts is low in comparison to other countries, and by historical standards.

While some Government debts will have to be paid over the next few years, the public sector liability contains long-term costs such as nuclear decommissioning and public sector pension schemes, which will be have to be paid over many years to come.

The Government is able to pay organisations who it owes money to, therefore it is not bankrupt. At the end of March 2011, over £671 billion (49 per cent) of the Government’s debt was not payable until after March 2016 (at March 2010, the figure was £543 billion, 48 per cent). This figure does not include the fact the almost all of the pension liability is payable over many years, after public sector workers have retired.

Maturity profile of the Government’s financial liabilities

Source: 2010-11 WGA, note 35.5.3, figures are in £billion unless stated otherwise.

WGA tries to only show the balances and transactions that the Government has had with non-UK-government organisations. It considers the Government to be a single entity, and as such the intra-government transactions and balances are eliminated. Note 2 of WGA provides an insight into the volume of eliminations that occur.

As a consequence, WGA is the one place where you can see the total value of the public sector pensions and the value of Quantitative Easing to Government after cancelling out the complex relationships between the Government bodies involved (Bank of England, its Asset Purchase Facility Fund, HM Treasury and the National Loans Fund).

Statistics on the Government’s financial position are routinely published in the National Accounts, monthly Public Sector Finances Report, the Public Expenditure Survey Analysis and other sources. The WGAs are designed to complement existing statistical information on public finances by providing an account based on International Financial Reporting Standards that are used in the private sector but adapted for use in the public sector. These standards require including a wider range of assets and liabilities than the standards used to prepare the National Accounts.

The key differences are that the net liability includes pension liabilities, provisions for future spending that will be needed to meet current obligations, PFI liabilities which are not included in the National Accounts, and assets that are reported in the National Accounts but not included in the net debt figure.

Neither WGA nor the National Accounts include as an asset the Government’s future ability to raise taxes or the estimated value of assets or liabilities relating to future events.

WGA is prepared using International Financial Reporting Standards, which is designed to be more accessible.

The Office for Budget Responsibility considers the WGA is more complete that the National Accounts but the additional information included in the WGA is subject to greater uncertainty, such as the use of discount rates, which can vary annually, to value future liabilities.

The Treasury has not yet made significant use of the WGA, in part because the WGA only had one year of audited data, but also because of the delay in producing the WGA. The Treasury is examining how it can use the WGA to inform the next Spending Review. It is considering how spending teams might use WGA data to assess the impact of policy changes on Government’s long term financial position, identify new sources of revenue and improve the management of debt.

To date, the most extensive use of the WGA has been by the Office for Budget Responsibility (OBR). The OBR used the Treasury’s unaudited WGA data to set out the impact of past government activity on the public sector balance sheet, and recognises that the WGA provides additional transparency. The OBR’s projections of future government spending and receipts are not based on the WGA but are created from a bottom-up model which produces figures on the basis of the National Accounts. The Government’s deficit reduction policy targets the measures reported in the National Accounts rather than the WGA, as there is not yet enough historical WGA data to make future projections.

Despite the name, the state pension scheme is more like a social security benefit than a pension scheme. The WGA does not include a liability for the state pension scheme because, unlike public sector workers who have accrued their pension entitlement during the period of employment, citizens are only entitled to a payment under the state pension scheme if they meet certain criteria on the date that payment would be due. The WGA therefore recognises state pension payments as benefit expenditure when it is incurred. In 2010-11 the total state pension payment was £74 billion, the largest component of social security benefits (Note 6 to the WGA).

To collect consolidation information from designated bodies and prepare the consolidated accounts, Treasury uses an internet-based consolidation system.

Departments, NDPBs, pension schemes, devolved administrations, public corporations, trading funds and local government bodies fill in consolidation schedules and deliver the schedules to their sponsoring department. The schedules generate upload files from the information entered which are then loaded into the internet-based consolidation system.

Other countries have published consolidated financial statements that show the overall financial position and performance of central government, but the UK WGA is more ambitious as it also includes local government bodies. Further information is set out in Figure 2 of the C&AG’s Report on the 2009-10 WGA.

For stakeholders to gain greater confidence in using the WGA, it needs to be robust. A key measure of ‘robustness’ of a set of accounts is the opinion provided by the external auditor. Overall, the 2010-11 WGA was a true and fair account of the Government’s financial position and performance but the audit opinion was qualified.

The qualifications are outlined in Part 3 of the C&AG’s Report on the 2010-11 WGA.

In his Report on the 2010-11 WGA, the C&AG concluded:

“I continue to regard the WGA as a key means through which Parliament and other stakeholders might gain greater insight into the wide range of activities that the Government undertakes, scrutinise public finances and hold the Government to account. In time, I hope it will provide Treasury with the means to identify key risks to the Government’s financial position and, with others, act to mitigate these risks. But, although the Treasury made improvements to the 2010-11 WGA, more needs to happen before it reaches this potential. To meets its objectives for the WGA, the Treasury must fix the problems that lead to the qualification of my audit opinion and it must also start to make real use of the WGA.”