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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. last weeks report to Parliament by the National Audit Office recommends that these organisations instead use the Exchequer as their main banking provider.

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.

Mr Amyas Morse, head of the National Audit Office, said today:

"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."

Notes for Editors

1. All departments, as well as some other public sector bodies, hold accounts with the Exchequer. We refer in this report to the Exchequer as the set of bodies that manage government funds. They comprise the Treasury, the Debt Management Office, and the Office of HM Paymaster General, which is now part of the Government Banking Service. Money that is received into, or paid out of, these accounts is managed by the Debt Management Office. It builds up a pool of cash through a combination of tax receipts and borrowing, and makes sure this money is available to meet each day’s payments. To do this as cost-effectively as possible, it needs to have enough advanced warning of how large the cash in and out flows are likely to be. For this it relies on the accuracy of organisations’ cash flow forecasts.
2. An NAO survey of 16 sponsored bodies estimates that, in 2008-09, those bodies held £275 million a day outside the Exchequer. If this cash had been in Exchequer accounts, it could have saved the government some £9 million in interest charges on its debt each year, compared with the £7 million in interest earned by the sponsored bodies on their commercial bank balances.
3. The NAO surveyed the following public bodies: One North East Regional Development Agency, South West Regional Development Agency, Nuclear Decommissioning Authority, Becta, Thurrock Development Corporation, National Heritage Memorial Fund, National Museum of Science and Industry, Rural Payments Agency, Central Science Laboratory, Driver and Vehicle Licensing Agency, Vehicle and Operator Services Agency, Pension Protection Fund, Identity and Passport Service, Defence Science and Technology Laboratory, Legal Services Commission and Land Registry. In addition, we interviewed staff in the country offices of the Department for International Development in the Democratic Republic of the Congo and Ethiopia, as well as staff at Warwick University and Monitor.
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, Amyas Morse, is the head of the National Audit Office which employs some 900 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.

Press Notice 49/09

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