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Central government could improve its day to day cash management and reduce the amount of interest it pays on debt if its departments and their sponsored bodies held less money in commercial bank accounts. Today’s report to Parliament by the National Audit Office recommends that these organisations instead use the Exchequer as their main banking provider.

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The NAO points out that keeping as much money as possible in the Exchequer is one of the most important elements of good cash management in government, since it not only reduces government borrowing but also minimises risks and allows the government to plan and manage its cash flow more cost-effectively.

But central government departments and their sponsored bodies hold more money in commercial bank accounts than is necessary. The Treasury estimated that at the end of March 2008 such organisations held a total of £4 billion in commercial bank accounts, equivalent to four days of central government spending. The interest paid out by commercial bank accounts on balances held by the study’s sample of 16 public sector bodies was typically lower than the rate at which central government borrows money. The NAO estimates that some £28 million might have been saved in a year if the £4 billion had been held in the Exchequer.

Another important aspect of cash management is forecasting, as inaccurate forecasting of cash flow by government departments can lead to losses for the taxpayer. Although departments have generally become more accurate in their forecasting, some departments recognise that they do not do enough to collect the information they need to forecast accurately. In 2008-09, the government as a whole over or under forecast its cash requirements by an average of £63 million a day, which represents four per cent of the Government’s net spending.

There are also a number of important, but less quantifiable benefits associated with accurate forecasting. For example, with accurate long-term forecasts the government can make better use of opportunities in the financial markets to even out future cash flows by borrowing and lending money at the best rates. It would also reduce the risk of making high value, last minute transactions at poor rates.

"In the light of the current fiscal position, good cash flow management is more important than ever. Departments and the Treasury are working to improve performance, but central government as a whole is not maximising value for money in the way it manages its cash.


"More money needs to be kept in the Exchequer by departments and sponsored bodies, and forecasts of cash flows should be improved. Where organisations do need to use commercial bank accounts, they should use shared knowledge to negotiate arrangements which give the best possible deal for the taxpayer."


Amyas Morse, head of the National Audit Office


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