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.

Capital spending by public corporations (PCs) is included within AME, and reflects PCs’ gross capital expenditure as recorded in the National Accounts. This includes all capital spending by PCs – regardless of whether it is financed by PCs’ own funds (e.g. retained earnings or borrowing), or is financed by grants or loans from central or local government – but is recorded net of asset sales. Our forecasts for central and local government capital spending therefore exclude amounts spent on grants to PCs, in order to avoid double-counting.

This page also details our receipts forecast for PCs’ gross operating surplus (PC GOS) – a National Accounts measure of PCs’ profits before tax, interest payments or depreciation. PC GOS is included within our current receipts forecast as part of the public sector GOS forecast. The general government element of GOS is equal to general government depreciation, consistent with its measurement in the National Accounts.

Our forecasts include spending and receipts (GOS) associated with housing associations (HAs) in the devolved administrations, in line with the current National Accounts classifications. As of our latest forecast, the inclusion of these bodies adds between £1.3 billion and £1.6 billion a year to our capital spending forecast and between £0.7 billion and £0.9 billion a year to our receipts forecast. English HAs have been subject to two reclassifications in recent years. In late 2015, the Office for National Statistics (ONS) reclassified them from the private to public sector, with effect from July 2008 (as described in our November 2015 EFO). In late 2017, the ONS reclassified them back to the private sector with effect from November 2017 (as described in our November 2017 EFO). More detail on the chronology of the reclassifications and their effects on our previous forecasts is provided in the ‘Previous forecasts’ section below.

In our latest forecast, we expect PC capital spending in 2018-19 to amount to £10.5 billion. That would represent 1.3 per cent of total public spending, and is equivalent to £370 per household and 0.5 per cent of national income. We also expect PC GOS in 2018-19 to amount to £11.0 billion. That would represent 1.4 per cent of all receipts, and is equivalent to £390 per household and 0.5 per cent of national income.

  • Latest forecast

    Our latest fiscal forecast was published in March 2018. Capital spending by PCs was £17.2 billion in 2016-17 and is forecast to fall to £10.7 billion by 2022-23, although this fall largely reflects the reclassification of English housing associations (HAs) to the private sector (as detailed in the ‘Previous forecasts’ section below). Capital spending is fairly flat in cash terms from 2018-19 (after the classification has taken effect). As the cash values over the forecast period (from 2018-19 onwards) are fairly flat, capital spending falls slightly as a share of GDP. PC GOS was £17.7 billion in 2016-17 and is forecast to fall to £12.5 billion by 2022-23, again largely reflecting the reclassification of English HAs. As a share of GDP, PC GOS is broadly flat over the forecast period (from 2018-19 onwards, post-reclassification).

    Note: Outturn between 2010-11 and 2016-17 includes English housing associations’ (HAs) capital spending and GOS, consistent with National Accounts classifications over this period. The decline in 2017-18 reflects the fact that English HAs were reclassified to the private sector from November 2017 (i.e. part way through 2017-18), with said reclassification taking effect from this point, rather than being applied retrospectively.

    More detail on our latest forecast for public corporations’ capital expenditure and how it was revised relative to our previous forecast in November was provided in paragraphs 4.131 to 4.133 (included alongside the commentary on locally financed capital spending) of our March 2018 EFO. Paragraph 4.89 of the March 2018 EFO discussed changes to GOS at the whole public sector level. We have included a short note on the PC GOS element below.

    Expand to read the extract from our March 2018 EFO

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  • Forecast methodology

    Forecast process

    We construct our forecast for PCs’ capital spending and gross operating surplus (GOS) based on the latest outturn data, which are provided to us in detail for each individual PC, under a restrictive data access agreement from the Office for National Statistics (ONS). The data for individual PCs are disclosive, which means that we can only publish outturns and forecasts at an aggregate level. The Budget Responsibility Committee scrutinises the forecast.

    The largest elements of the capital spending and GOS forecasts are for the housing revenue account (HRA) and Transport for London (TfL). In the case of the HRA, the Ministry of Housing, Communities and Local Government (MHCLG) produces forecasts for the elements of locally financed capital expenditure (capital LASFE) that are financed from HRA sources. MHCLG also produces forecasts for HRA GOS and HRA asset sales. These MHCLG forecasts are then scrutinised by the OBR, as part of the process for producing our capital LASFE forecast. The TfL forecast is based on its latest published business plan. TfL officials assist us in scrutinising these plans before we produce our own central forecasts for TfL capital spending. For instance, we may include additional timing adjustments on TfL’s capital spending if we feel it would be central to assume some slippage, consistent with the general tendency in spending on large capital projects.

    The remaining, smaller elements of the forecast are produced by us, in-house. For different elements of the forecast, different methodologies are used (discussed in more detail in the main forecast judgements section below). These assumptions are reviewed each year to ensure they remain reasonable, although capital spending by public corporations – as with capital spending more generally – is difficult to forecast given volatility in the year-to-year spending profiles.

    Forecasting models

    A number of elements of this forecast are driven by assumptions or business plans. The largest elements that are model-driven are:

    • HRA spending and the imputed subsidy for equity injection by local authorities into the HRA (which is neutral for the public finances, being offset in GOS and National Accounts adjustments). The HRA spending model is owned and operated by MHCLG and is largely driven by the latest outturn data, our economy forecast and any policy measures determining rents received and future house building programmes. We estimate the imputed subsidy in-house. The forecast is driven by the HRA spending model and a series of simple assumptions about how outturn will evolve for the other items that determine the subsidy.
    • HRA asset sales (which net off HRA gross capital spending). The model is split into proceeds from Right to Buy (RtB) and other asset sales. The model for RtB is again provided by MHCLG, with the forecast driven by similar factors to the HRA model. The non-RtB forecast is driven by outturn and a slightly narrower set of determinants.
    • Capital spending and GOS associated with housing associations in the devolved administrations. The model forecasts the finances of housing associations in aggregate. It is driven by the latest outturn data and our assumptions over the behaviour of housing associations and elements of our economy forecast.

    Main forecast determinants

    For the HRA forecast, the main economic determinants are GDP growthhouse prices and rental values, which affect HRA income and spending via demand for social housing and the levels of rental income received by the operating local authorities. (The HRA is regarded as a public corporation, meaning this is where the final receipts and spending score in the National Accounts). The main components making up the HRA forecast – and the economic determinants driving them – are as follows:

    • HRA GOS: this forecast is driven by the growth in the council rented housing stock, nominal GDP and social sector rents (with these rents being driven by CPI inflation from 2020).
    • Major repairs reserve (MRR): this forecast is driven by the growth in the council rented housing stock and nominal GDP.
    • HRA capital expenditure from revenue account (CERA): this forecast is driven by past trends, which are used in adjusting the jumping-off point. The forecast rises in line with our forecast for HRA GOS.

    For the asset sales forecast, the main economic determinants are those that affect the demand for housing purchases via the price of the property and the purchasing power of the eligible population. They are:

    Also reflected is the effective level of discount offered on the purchase of social properties by existing tenants.

    Meanwhile, the non-RtB elements are driven by outturns and our forecasts for property transactions and house prices.

    The most common assumptions used in other forecasts for PCs are to start from the latest outturn data to generate an in-year estimate and then grow the forecast in line with:

    We utilise quarterly in-year information to test whether these assumptions seem to be producing a sensible view for the current year, and whether they therefore constitute reasonable assumptions for later forecast years. (These data are however subject to limitations and potentially subject to significant revision by the time quarterly outturns are finalised.)

    Main forecast judgements

    Capital spending can be subject to significant year-to-year fluctuations. Since we typically do not know in advance whether such fluctuations are likely to be upward or downward, our forecasts tend to assume the year-to-year pattern is fairly smooth (albeit with occasional step changes when the timing and size of one-off events can be predicted with sufficient confidence). Other year-to-year fluctuations that materialise but were not forecast often reflect unforeseen, and sometimes unforeseeable, events or timing effects. Our central forecasts are largely built on simple judgements about the evolution of certain spending and GOS items, in the knowledge that outturns will typically show much greater year-to-year volatility – in both directions – than our forecasts. (At the latest forecast, around 40 per cent of total PC capital spending and PC GOS in 2018-19 came from forecast elements that are solely based on simple assumptions.)

    The main forms of assumption we use include:

    • grow in line with recent trends;
    • grow in line with related items (for example, some HRA spending items increasing in line with projected HRA GOS and the council rented housing stock);
    • grow in line with latest business plans;
    • remain flat in cash terms;
    • grow in line with nominal GDP; or
    • grow in line with CPI inflation (thereby remaining flat in real terms).

    A judgement is taken using recent data on which of the above methods seems most appropriate for each individual public corporation capital spending or GOS line that is forecast in this manner. These are reviewed ahead of each forecast.

    Our asset sales forecast assumes recent trends in housing sales serve as a reasonable proxy for future years, although allowance is made for the effect of future interest rates, house price inflation and the general state of the economy (all of which contribute to demand).

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  • Previous forecasts

    The charts below show large differences between forecasts. These largely relate to successive Office for National Statistics (ONS) classification decisions in respect of housing associations (HAs) in recent years:

    • Up to July 2015, our forecasts did not include any HAs spending or income, as the ONS classified them as private sector entities.
    • Our November 2015 and March 2016 forecasts included English HAs, after the ONS reclassified them to the public sector (with effect from July 2008). This reflected policy decisions taken in the July 2015 Budget that revealed a greater extent of central government control over English HAs under existing legislation than had previously been apparent. We explained the effect of this reclassification in Annex B to our November 2015 EFO.
    • Our November 2016 and March 2017 forecasts included all UK HAs, after the ONS reclassified those in Scotland, Wales and Northern Ireland to the public sector too.
    • Our November 2017 and March 2018 forecasts included all UK HAs in outturn, but excluded English HAs from November 2017 onwards in line with the ONS decision to reclassify them back to the private sector with effect from then. This followed the passage of regulations in the UK Parliament that reduced the extent of central government control over English HAs, with the express goal of having them reclassified back to the private sector. We discussed this reclassification and its effect on our forecast in paragraphs 4.170 to 4.177 of our November 2017 EFO.

    HAs in Scotland, Wales and Northern Ireland remain classified in the public sector, although legislation has been laid in both Scotland and Wales that might see HAs in these countries reclassified to the private sector in due course (more detail is available in paragraph 4.178 of our November 2017 EFO).

    The effects of these classification changes on our forecasts are dominated by those related to English HAs. To give a sense of the order of magnitude, capital spending by English HAs was expected to be between £7.0 billion and £9.6 billion a year in the last forecast in which the bodies were wholly classified to the public sector (the March 2017 forecast), with the equivalent GOS figures being £6.1 billion and £6.9 billion. HAs in the other countries of the UK are smaller. As of our March 2018 forecast, they added between £1.3 billion and £1.6 billion a year to our capital spending forecast and between £0.7 billion and £0.9 billion a year to our receipts forecast.

    Abstracting from these classification changes, the most significant source of forecast-to-forecast revision to public corporations’ (PC) capital expenditure is outturn data, which is used as the jump-off point for forecast years. For example, in the chart below, spending was revised up between our November 2010 and March 2011 forecasts, but then revised down again in November 2011. Some of these revisions come from other non-HA changes in the composition of the PC sector – for instance, when the ONS reclassified British Energy and Royal Mail to the private sector (in 2002 and 2013 respectively), following the Government’s sales of shares in those entities. Such changes are explained the relevant EFO. Forecast-to-forecast revisions have generally been smaller between more recent forecasts – but the level and timing of capital spending remains subject to significant uncertainty. Final outturn financial year data are not available until some time after the year’s end. This means potentially significant revisions between forecasts can occur, as outturn data are revised well after the financial year’s end. Most forecasts exhibit a fairly consistent trend across forecast years: the projections being fairly flat in cash terms.

    For PCs’ gross operating surplus (PC GOS), also abstracting from HA reclassifications, the most significant source of revision is again outturn data – the most notable example was in our December 2013 forecast, where revisions reflected the latest ONS Blue Book (2013) estimates. All forecasts exhibit a fairly consistent trend across forecast years: the projections rising steadily in cash terms. This upward trend is generally driven by profits being expected to rise in cash terms due to inflation. Further, some forecast elements are solely assumption-driven and assumed to grow in line with either GDP or remain flat in real terms (growing in line with CPI inflation).

    Note: Reflects the inclusion of English housing associations (HAs) in our forecasts from November 2015 to March 2017 inclusive. Thereafter, they were classified as private sector bodies from part way through November 2017, meaning they still affected our 2017-18 forecasts in November 2017 and March 2018, but did not affect the years from 2018-19 onwards. HAs in the other countries of the UK are included in all forecasts from November 2016 onwards.

     

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 21 policy measures affecting our forecast for public corporations’ capital spending and three affecting our forecast for public corporations’ gross operating surplus. (Some of these policy changes, at least in part, also cut across our forecasts for housing associations, and would therefore have affected public spending by housing associations in the devolved administrations, as well as those in England in the forecasts in which they were treated as public sector bodies.) The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    For capital expenditure, key themes have included policy changes in respect of public corporations’ capital spending financed by:

    • the Housing Revenue Account (HRA);
    • social sector rents; and
    • asset sales (including Right to Buy).

    Changes in any of the above affect the ability of public corporations to self-finance capital expenditure. Other sources of income – i.e. grants from central and local government – are not self-financed elements of spending, but changes in these grants also affect the spending power of public corporations.

    For gross operating surplus, the changes have all been small, with no single-year estimate for the impact of any of the three policies exceeding £0.1 billion. The policy changes all pertain to estimated income from either asset sales or social sector rents.

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