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DEPARTMENT: HM TREASURY, Main Estimate 2012-13

INTRODUCTION and KEY POINTS

The Estimate covers the administration costs of the core Treasury, the , Financial Investments Ltd, , Infrastructure UK and the Department’s non- departmental public bodies (NDPBs). Programme spending on coinage and financial stability is also included. The Estimate is consistent with the Spending Review settlement after taking account of budgetary transfers to other departments which are explained below.

Amounts sought in the 2012-13 Main Estimate

2012-13 Budgets and net cash £m requirement

Voted Non- Total voted Departmental Expenditure Limit (DEL) Resource 179.7 12.0 191.7 Capital 25.5 - 25.5 Annually Managed Expenditure (AME) Resource - 2.9 -1,467.9 1,470.8 Capital 669.2 - 669.2

Net cash requirement - - -2,754.3 2,754.3

Significant differences in provision compared to the Spending Review settlement and the 2011-12 Estimates.

DEL

The spending review settlement provided DEL spending in 2012-13 of £191.2m comprising £155.6m administration budget and £35.6m programme costs. Subsequently there were three budgetary transfers to other government departments as follows:

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£0.9m programme costs to the Department for Communities and Local Government in respect of Ordnance Survey mapping costs (there are further transfers of £0.8m in 2013-14 and £0.7m in 2014-15); and £1.4m administration costs to the Cabinet Office and £0.2m to the Department for Business, Innovation and Skills in respect of Group Shared Services provision attributable to the Office of Government Commerce.

In addition there were two other changes impacting on the DEL budget. The budget was reduced by £1m (administration) in each year from 2012-13 to 2014-15 following the announcement in the Autumn Statement on public sector pay restraint. Following the 2011-12 Supplementary Estimate, £3.9m (administration) was rolled forward into 2012-13 under the Budget Exchange scheme

AME

Resource AME provision in the 2012-13 Main Estimate is lower than the final 2011-12 Estimate provision principally due a reduction in the forecast of income in 2012-13 (around £1bn in 2011-12 compared to less than £50m this year) arising from the Credit Guarantee Scheme which is drawing to a close and the net effect of the fair value adjustment in respect of the Asset Purchase Facility Fund (£-24bn) and the RBS and Lloyds share impairments (£23bn) which was included in the 2011-12 Supplementary Estimate.

DETAILED BREAKDOWN (2011-12 figures are shown in brackets)

DEL

Section A Core Treasury £135.9m (£136.5m) resource and £5.3m (£21.2m) capital – resource funding covers the administrative costs of the Treasury’s core business, formulating and implementing the Government’s financial and economic policies. It also covers core Treasury programme costs including the printing of Budgets and Estimates and conferences. Capital spending is principally on workspace optimisation, Project Oscar and the future of the ORACLE

UNCLASSIFIED UNCLASSIFIED accounting system. The large reduction in capital spending is due to the bulk of the Workspace project spending occurring in 2011-12.

Section B Debt Management Office (DMO) £15.0m (£11.4m) resource and £0 (£0.7m) capital – resource spending covers running costs of the United Kingdom Debt Management Office (DMO). The DMO is an of the Treasury specialising in the delivery of treasury management services and related policy advice to central government. It incorporates the Public Works Loan Board (PWLB) and the Commissioners for the Reduction of the National Debt (CRND). The main objective of the PWLB is to lend capital sums to and collect repayments from local authorities and thereby minimise local authorities’ cost of borrowing. The main objective of the CRND is to provide a fund management service to public sector clients. The net increase in resource spending in 2012-13 is due to a reduction in income compared to the previous year. In 2011-12 DMO received increased income from the PWLB due to increased business with local authorities. The level of business is expected to return to normal levels this year. A capital budget for DMO had not been agreed when the Main Estimate numbers had to be finalised. Since then, £1.24m has been allocated to DMO for IT and will be funded by a transfer from the capital spending in Section A Core Treasury.

Section C United Kingdom Financial Investments Limited (UKFI) £2.7m (£3m) resource – relates to administration costs including salaries and accommodation. UKFI manages the Government’s shareholdings in UK financial institutions, acquired through recapitalisation and other financial stability interventions taken in 2008 and 2009.

Section D Asset Protection Agency (APA) token £1k (£1k) – relates to administration costs including salaries and accommodation in connection with operating the Asset Protection Scheme. Gross spending is offset by recharges to the Royal Bank of Scotland.

Section E Infrastructure Finance Unit Ltd (IFUL) £20.2m (£38.8m) capital. Spending relates to the loan to the Greater Manchester Waste PFI project. In the 2011-12 Estimate this Section also included spending and income related to Infrastructure UK. This spending is now included in Section A.

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Section F UK Coinage manufacturing costs £14.0m (£17.5m) resource– payments to the for the cost of the manufacture and storage of UK coinage. The 2012-13 figure reflects the manufacturing profile for this year’s expected demand for coinage.

Section G Departmental Unallocated Provision (DUP) – £10m (£8m resource administration and £2m programme) has been set aside to cover spending pressures that might arise in the course of the 2012- 13 financial year. Use of the DUP will be assessed at the time of the Supplementary Estimate later in the year.

Section H Office of Tax Simplification (OTS) – £0.3m (£0.5m) the OTS is jointly funded by the Treasury and HMRC and the £0.3m resource spending represents the Treasury’s contribution to the running costs of the Office which was created in July 2010 to provide the Government with independent advice of simplifying the tax system. HMRC’s contribution will be assessed later in the year.

Section I Office for Budget Responsibility (OBR) – £1.7m (£1.7m) resource to cover the costs of salaries and accommodation and is paid as a grant in aid. The OBR was created to provide independent and authoritative analysis of the public finances. This includes producing forecasts for the economy and public finances, judging progress towards the Government’s fiscal targets, assessing the long-term sustainability of the public finances and scrutinising the Treasury’s costing of Budget measures.

Section J Royal Mint Advisory Committee on the design of coins (RMAC) – token amount of £1k (£1k). The RMAC became a Treasury body in January 2010 under arrangements for vesting the Royal Mint. The committee has around a dozen members and usually meets two or three times a year to make recommendations to the Chancellor on the design of new coins. The expenses of the Committee are met by the Royal Mint and no grant-in-aid payment is made by the Treasury.

Non-voted

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Section K Banking and Gilts Registration Services £12m (£13m) resource – relates to payments from the National Loans Fund (NLF) to Computershare Investor Services plc for the management of the gilts register and payments from the Exchange Equalisation Account (EEA) to the Bank of England for managing the EEA.

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Section L UK Coinage metal costs £25m (£24m) resource – payments to the Royal Mint for the cost of the metal element of the production of UK coinage.

Section M Northern Rock £-169m (£-174m) resource and £0m (£- 1,728m) capital – covers resource income from interest and fees and capital receipts from voluntary loan principal repayments. For 2012- 13, capital is lower than in 2011-12 due to Northern Rock Asset Management not forecasting any loan repayments during the year. Any decision to make repayments later in the year will be reflected (time permitting) in a Supplementary Estimate.

Section N Assistance to Financial Institutions £-497m (£-25,743m) resource and £30m (£-1,750m) capital – the resource total arises from income from interest and fees in respect of the Credit Guarantee Scheme (CGS) and interest on loans to financial institutions. The large reduction in 2011-12 arises from the reduction in income from the CGS which is drawing to a close this year. The difference in capital spending arises from voluntary loan repayments. We have no forecasts of voluntary loan repayments from Icesave, Kaupthing, Singer and Friedlander (KSF), Heritable and Dunfermline at this time but in the event that voluntary repayments are to be made in 2012-13, the Estimate will, if necessary, be updated in the Supplementary Estimate.

Section O Provisions £-21.8m (£-25.8m) resource– this mostly represents a further reduction in the provision of £1.5bn included in the 2010-11 Spring Supplementary Estimate for the Equitable Life Payments Scheme (ELPS) to cover the administration of the scheme. The reduction in the provision offsets the forecast cost of administering the scheme in 2011-12 which is shown in Section P below.

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Section P Equitable Life Payments Scheme £20m (£24m) resource – as noted in the text for Section O above, this represents a forecast of the cost of administering the ELPS in 2012-13 and will involve issuing payments in the order of £315m and dealing with the consequences of these payments. The payments of £315m are shown in ‘Part II: Resource to cash reconciliation’ as ‘Use of provisions’

Section Q Royal Mint dividend £-4m (£-4m) – HM Treasury wholly owns the Public Dividend Capital of the Royal Mint Trading Fund and is eligible for a dividend on its investment each year.

Section R Money Advice Service (formerly known as the Consumer Financial Education Body) – token £1k (£950k) resource. MAS is an independent body offering free unbiased advice to the public to improve their understanding and knowledge of financial matters and their ability to manage their own financial affairs. The running costs of the CFEB are met by a levy on the financial services industry, raised through the Financial Services Authority (FSA) and no grant in aid payment is made by the Treasury. The 2011-12 figure is higher than this year’s as it included a one-off £950k grant from the Department for Business, Innovation and Skills (BIS) for research into debt advice.

Section S Financial Services Compensation Scheme (FSCS) – £-395m (£-372m) resource. The FSCS was set up under the Financial Services and Markets Act 2000, becoming operational on 1 December 2001. The FSCS is the UK’s compensation fund of last resort for customers of authorised financial services firms that are likely to be unable to pay claims against it. The FSCS is funded by the financial services industry. Every firm authorised by the FSA is obliged to pay an annual levy to cover the running costs and compensation payments made by the FSCS and no grant in aid payment is made by the Treasury. The figure included in the Estimate is a payment from FSCS representing interest on loans made to the FSCS by HM Treasury.

Section T Credit easing - £106m (£0m) resources and £150m (£0m) capital relates to the implementation of the National Loan Guarantee Scheme and Business Finance Fund. These schemes are due to be self- funding with fee and investment income covering operating costs.

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Under the National Loan Guarantee Scheme, Government guarantees funding issued by banks allowing them to borrow at a lower rate. Banks are contractually obliged to pass through the benefit of this lower rate to SME borrowers. The inclusion of a net expenditure figure in the Main Estimate reflects an accounting charge for the provision of government guarantees to banks participating in the National Loan Guarantee Scheme. These guarantees are not expected to result in any outflow of funds in the median case scenario as payment would only be made in the event of a bank default.

The capital investment of £150m relates to the Business Finance Partnership (BFP). Under the BFP, Government co-invests in a number of funds (by buying equity in the funds) which provide loan funding to mid-size businesses (up to £500m turnover). Government receives a dividend from the funds and pays the funds a fee for administrative management costs. Government’s principal is repaid once the loans expire.

Section U Sovereign Grant funding of the Royal Household - £34m (£32.8m) resources and £0.8m (£0.7m) capital. From 1 April 2012 the Sovereign Grant replaces other sources of funding for the monarch’s official duties. These were the Civil List from the Exchequer, grant for royal travel from the Department for Transport and grant for the maintenance of occupied royal palaces and for communications and information from the Department for Culture, Media and Sport, all of which have now ended. The Sovereign Grant is paid to the Royal Household and finances the net spending of the Royal Household, which is consolidated within HM Treasury’s supply Estimate. From 2013-14 onwards the amount of grant will be equal to a prescribed percentage - initially 15% - of the ’s surplus revenue in the financial year two years prior.

Section V Investment in the Bank of England (BoE) £-30m (£-30m) resources– covers income from the department’s investment in the BoE. HM Treasury wholly owns the capital stock in the BoE. BoE is required to pay HM Treasury in lieu of a dividend a sum equal to 50 per cent of its net profit for its previous financial year, or other such sum as HM Treasury and the BoE may agree.

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Section W Bradford & Bingley (B&B) £-469m (£-439m) resources and £-1,125m (£350.0m) capital – the resource figure represents income from interest on loans and fees for guarantees and the capital figure represents partial repayment of the working capital facility. The working capital facility allows B&B to borrow a total of £11.5bn and at 31 March 2012 B&B had utilised £7.9bn of the total.

Section X Loans to Ireland £-70m (£-3.1m) resources and £1,613.4m (£1,210.1m) capital – the resources represent interest income based on the loan instalments forecast to made by the year end under the Loans to Ireland Act 2010. The loan instalments of £403m are made quarterly, provided the terms of the loan have been met.

Non- voted

Section Y Royal Household Pensions £2.9m (£2.9m) resources– the scheme is analogous to the Principal Civil Service Pension Scheme and covers pension payments to employees paid from the Civil List prior to 1 April 2001. The gross cost of the payments is partly offset by employers and employees contributions.

SUPPLEMENTARY INFORMATION

Accruals to cash adjustments

The accruals to cash adjustment figures include a change in debtors of £-2.27bn. This is a cash payment in lieu of dividend from the Bank of England and represents the Special Liquidity Scheme surplus following the closure of the scheme on 31 January 2012. The budgetary (Resource AME) benefit of the surplus was therefore accrued in 2011- 12 whilst the cash payment was made on 5 April 2012 and falls in 2012-13.

Budgetary Tables

The tables below show outturn and plans by budget category from 2008-09 up to the end of the Spending Review period.

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Resource DEL £m Year Voted Non- Total DEL Outturn Variance voted 2008-09 174.6 12.3 186.9 164.9 -22 (-11.7%) 2009-10 203.0 12.5 215.5 180.5 -35 (-16.2%) 2010-11 179.3 12.6 191.9 173.8 -18.1 (-9.4%) 2011-12 170.7 13.0 183.7 2012-13 179.7 12.0 191.7 2013-14 157.4 12.0 169.4 2014-15 137.7 12.0 149.7

Administration Budget within Resource DEL £m Year Voted Non- Total DEL Outturn Variance voted 2008-09 144.5 - 144.5 128.2 -16.3 (-11.2%) 2009-10 171.9 - 171.9 150.4 -21.5 (-12.5%) 2010-11 150.3 - 150.3 139.3 -11 (-7.3%) 2011-12 146.8 - 146.8 2012-13 156.9 - 156.9 2013-14 137.3 - 137.3 2014-15 120.5 - 120.5

Capital DEL £m Year Voted Non- Total DEL Outturn Variance voted 2008-09 7.0 - 7.0 2.8 -4.2 (-60%) 2009-10 156.9 - 156.9 56.2 -100.7 (- 64.1%) 2010-11 48.5 - 48.5 42.9 -5.6 (-11.5%) 2011-12 60.7 - 60.7 2012-13 25.5 - 25.5 2013-14 14.1 - 14.1 2014-15 5.2 - 5.2

Resource AME (1) £m Year Voted Non- Total AME Outturn Variance voted 2008-09 2,039.3 10.2 20,403.6 41,179.1 20,775.5 (101.8%) 2009-10 -7,279.8 10.2 -7,290.0 - -23,587.3 (- UNCLASSIFIED UNCLASSIFIED

30,877.3 323.5%) 2010-11 2,372.4 10.2 2,382.6 - -15,516.3 (- 13,133.7 651.2%) 2011-12 -3,096.1 11.1 -3,084.9 2012-13 -1,470.7 2.9 -1,467.8 2013-14 -116.1 2.9 -113.2 2014-15 -125.1 2.9 -122.2

Capital AME (1) £m Year Voted Non- Total AME Outturn Variance voted 2008-09 86,444.2 - 86,444.2 85,525.5 -918.7 (1.0%) 2009-10 49,047.4 - 49,047.4 41,480.7 -7,566.7 (-15.4%) 2010-11 3,311.9 - 3,311.9 -3,015.4 -6,327.3 (-191%) 2011-12 -3,105.8 - -3,105.8 2012-13 669.2 - 669.2 2013-14 804.1 - 804.1 2014-15 351.2 - 351.2

(1)AME forecasts beyond 2012-13 exclude some financial stability related spending and income that is commercially sensitive.

Provisions

The table below shows the balance of provisions in 2012-13 and their expected use. £m Provisions for Early Equitable Financial Other Total liabilities and departure Life stability charges s Payments Scheme

Estimated 1.0 1,288.0 1.0 0.4 1,290.4 balance at 1 April 2012 Provided in 0 -20.0 0 0 -20.0 year at Main Estimate UNCLASSIFIED UNCLASSIFIED

Provision -0.4 -315.0 -1.0 -0.4 -316.8 expected to be used in year

Estimated 0.6 953.0 0 0 953.6 balance at 31 March 2013

Changes to contingent liabilities

The following changes have been made to the contingent liabilities note included in the 2011-12 Spring Supplementary Estimate.

• The liability relating to the guarantee arrangements in respect of retail deposits and wholesale liabilities of Northern Rock plc has reduced by £860m to £540m; • The liability relating to the guarantee arrangements to safeguard certain borrowings and derivative transactions of, and certain wholesale deposits held in Accounts with Northern Rock (Asset Management) plc (NRAM) has reduced by £3.040bn to £11.26bn; • The liability relating to the guarantee arrangements in respect of certain wholesale borrowings and deposits of Bradford and Bingley has reduced by £2.040bn to £3.260bn; • The Special Liquidity Scheme liability has been removed following its closure on 31 January 2012; • The Asset Protection Scheme liability has been reduced by £21.620bn to £64.6bn; • Revised text for the guaranteed indemnities provided by NRAM for its new directors against liabilities and losses in the course of their actions whilst in public ownership. Following the sale of Northern Rock, the indemnity for its new directors has been lifted; • The maximum liability in respect of the Credit Guarantee Scheme has fallen by £67.9bn to £47.1bn; • The liability relating to VAT on investment gold products has been removed;

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• The liability in respect of the warranties and tax indemnity given to Virgin Money following the sale of Northern Rock has fallen by £7m to £307m; • The text of the liabilities relating to the Northern Rock and Bradford and Bingley compensation orders has been updated to show the latest appeals position; and • A new liability of £20bn has been added following the launch of the National Loan Guarantee Scheme.

Approval of Memorandum This memorandum has been prepared with reference to guidance in the Estimates Manual provided by HM Treasury. The information in this memorandum has been approved by the Department’s Accounting Officer.

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