The Treasury manages public spending within two ‘control totals’ of about equal size:
- departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
- annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.
Depreciation is a measure of the reduction in the value of an asset over time, due in particular to wear and tear. For example, in the absence of maintenance spending, the value of the roads network would decline over time as the weather and traffic cause potholes to emerge. In the National Accounts, depreciation is measured by assuming different assets have different lifespans and that their value depreciates smoothly over that lifespan.
We forecast depreciation by sub-sector: central government, local authority and public corporations. It has a complicated impact on the public finances, as illustrated by the table below:
Only general government depreciation (central government and local authority) affects total managed expenditure (TME). It increases AME spending, but is directly offset in current receipts, where it increases (GOS) by an equal amount. These effects all net off in terms of public sector net borrowing, but depreciation does increase the current budget deficit. In the past, governments have used the current budget balance as the main fiscal target (for example, the Labour Government’s ‘golden rule’ from 1997 to 2008 and the Coalition Government’s ‘fiscal mandate’ from 2010 to 2015).
In our latest forecast, we expect general government depreciation in 2017-18 to amount to £30.6 billion (with £18.6 billion of central government depreciation and £11.9 billion of local government depreciation). That would represent 3.8 per cent of total public spending, and is equivalent to £1,100 per household and 1.5 per cent of national income. Public corporations’ depreciation amounted to £10.5 billion in our latest forecast (£370 per household and 0.5 per cent of national income).