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specific act, supported by a financial resolution. Although no law establishes this principle, the PAC and H.M. Treasury endeavour to uphold it. Nonetheless, at times, the government makes exceptions to “good constitutional practice” and may use the annual appropriation bill as the formal way of introducing new expenditure policies. Prior to this, new expenditures are decided in the context of biennial spending reviews, for which departments prepare cost estimates, including the expenditure implications of other bills.

4.3. Budget execution

Since the adoption of the Exchequer and Audit Departments Act 1866 (parts of which are still in force), budget execution has been put on a statutory basis. However, H.M. Treasury is accorded considerable discretionary powers to control expenditures, with some of these powers preceding the 1866 Act. “Treasury control” is implemented largely by administrative means.

4.3.1. Apportionment of expenditure authority

The appropriation act formally grants supply to the Crown. The Queen then makes it available to the government by signing a royal order, authorising H.M. Treasury to issue funds to departments from the Consolidated Fund. This procedure is laid out in s. 14 of the E&AD Act 1866. The appropriation act does not, by itself, authorise spending by individual departments. Such authorisation is a matter determined under the executive’s internal arrangements. This is one of several prerogative powers of H.M. Treasury, which apportions its control aggregates and monitors budget implementation at regular intervals.

4.3.2. Cancellation of budget authority and other in-year expenditure controls

The E&AD Act 1866 permits H.M. Treasury “to restrict the sum to be issued or transferred from time to time to the credit of accounts of principal accountants”. This is an administrative measure which effectively means that the accounts do not necessarily need to be fully funded at all times: they merely have to contain sufficient funds to meet immediate requirements. Control over spending is exercised by H.M. Treasury, which controls various subtotals of the annual appropriations approved by Parliament. Cash limits were introduced in 1976, when the previous volume-based limits were found to be inappropriate in times of high inflation. Further changes were made in the control aggregates during the 1980s and 1990s. H.M. Treasury’s current expenditure control system is based on DEL and AME and works in parallel with the aggregates “controlled” by Parliament. In exercising control, H.M. Treasury may set limits below those of the totals embodied in appropriation acts. In practice, the Treasury operates limits on DEL and AME flexibility, with an eye

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on the overall fiscal rules. Since the Treasury control system acts on more detailed aggregates than those approved by Parliament, H.M. Treasury generally does not need to cancel parliamentary budget authority in order to achieve the government’s fiscal rules.

4.3.3. Emergency spending, excess spending and contingency funds

Unexpected demands upon resources are brought before Parliament. A “Vote of Credit” is a demand for a lump sum for which the objects of the proposed expenditure in the financial year can only be stated in general terms.

Expenditure in advance of appropriation approval may be made from a Contingencies Fund. First established in 1862, this fund was given statutory authority in the Contingencies Fund Act 1974, which permits the government to make temporary and urgent expenditures that have not yet been voted by Parliament. The act establishes the capital of the fund at 2% of the authorised supply expenditure of the previous financial year. The act does not lay down rules for regulating any temporary advances from the fund, for which the government has discretion. Treasury rules, set out in Government Accounting, govern the use of repayable advances from the Contingencies Fund, for which accounts are presented annually to the House of Commons.

Reserves in the estimates should be distinguished from Contingencies Fund advances. Whereas the latter are for financing expenditure that exceeds parliamentary limits, reserves are included in annual estimates (and appropriations) at the discretion of H.M. Treasury. When the new expenditure control system was introduced in 1998, DEL had a small “reserve” and AME had a “margin”. The DEL reserve is deliberately kept small, so as to avoid financing increases in the costs of existing policies, although small new policy decisions may be allowed. Treasury rules for using reserves are strict: usually offsets are required and use of the reserve usually entails loss of end-year carryover flexibility (Daintith and Page, 1999, p. 187). Decisions on the use of the reserve are usually made by the Chief Secretary to H.M. Treasury.29

4.3.4. Transfer and virement of appropriations within the year

One of the prerogatives of H.M. Treasury is to control transfers of budgetary authority. Under the present resource accounting framework, the rules are described in Table 2.

H.M. Treasury uses its discretion in approving transfers. If the proposed reallocation is thought to be of so great a departure from the original estimate, then it will be brought before Parliament by means of a supplementary estimate.

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Table 2. United Kingdom: Transfers of budgetary authority

4.3.5. Cash planning and management of government assets and debt

The principle of responsibility in the CFS “means that the government shall operate fiscal policy in a prudent way, and manage public assets, liabilities and fiscal risks with a view to ensuring that the fiscal position is sustainable over the long term”. H.M. Treasury has been delegated by law, notably the revisions to the National Loans Act 1968 in 1998, to manage government debt, cash and assets.

In May 1997, the Chancellor of the Exchequer announced that the Bank of England’s role as the government’s agent for debt and cash management would be transferred to H.M. Treasury. In April 1998, a new executive agency, the Debt Management Office, was established as the Treasury’s operational agency for debt, cash and asset management. The Debt Management Office undertook debt management immediately, whereas cash management was transferred to the Debt Management Office in 2000. The Office’s main objective, set out in the Treasury’s Debt Management Office remit, is “to offset, through its market operations, the expected cash flow into or out of the National Loans Fund on every business day, in a cost-effective manner with due regard for credit risk management”.

4.3.6. Internal audit

The law does not specify that internal audit units need to be established in spending units. Traditionally, internal control and audit have been treated as a departmental, rather than a central function. In letters to new accounting officers, which contain a standard memorandum issued by H.M. Treasury, one of the roles of an AO is “to ensure that [your department/agency/NDPB] has in place sound systems for financial management...”. H.M. Treasury sets standards – these are laid out in the Government Internal Audit Manual.