UNCLASSIFIED DEPARTMENT: HM TREASURY, Supplementary Estimate 2012-13 INTRODUCTION and KEY POINTS The Estimate covers the administration costs of the core Treasury, the Debt Management Office (DMO), United Kingdom Financial Investments Ltd (UKFI), Asset Protection Agency (APA), Infrastructure UK (IUK), Office of Tax Administration (OTS) and the Department’s non-departmental public bodies (NDPBs) the Office for Budget Responsibility (OBR), the Royal Mint Advisory Committee (RMAC), the Financial Services Compensation Scheme (FSCS), Money Advice Service (MAS – formerly the Consumer Financial Education Body).and the Sovereign Grant to the Royal Household. Programme spending on coinage and financial stability is also included. Changes sought in the 2012-13 Supplementary Estimate 2012-13 Budgets £’000 and net cash requirement Current Change New limit limit Voted Non- voted Departmental Expenditure Limit (DEL) Resource 191,702 -236,899 - -45,197 Of which 156,955 -16,899 - 140,056 Administration Capital 25,540 1,935 - 27,47 Annually Managed Expenditure (AME) Resource - - 359 - 1,467,899 14,248,250 15,715,790 Capital 669,242 -2,956,105 - -2,286,863 Net cash requirement -2,754.3 -3,407,218 - -6,161,530 UNCLASSIFIED UNCLASSIFIED Significant differences in provision compared to the 2012-13 Main Estimate. DEL The Main Estimate provided a resource DEL of £191.7m which included an administration budget of £156.9m and a capital DEL of £25.5m. Resource DEL administration outturn is forecast to be at least £17m lower than the current limit. It has been agreed that of that underspend, the maximum amount (2%) will be carried forward under the Budget Exchange (BX) scheme reducing Resource DEL by £3.8m. As part of the BX scheme, departments are required to surrender any BX rolled forward that remains unused at the end of the year. We are therefore obliged to surrender a further £3.9m, the amount we carried forward into 2012-13. In addition, we are surrendering a further £9.2m of the forecast underspend as a benefit to the DEL Reserve. Within DEL programme spending there is a reduction of £220m as a result of an increase in income arising from the surrender of fines income by the Financial Services Authority. AME Resource AME provision in the 2012-13 Main Estimate was -£1.468bn. The Supplementary Estimate reduces the total by £14.248bn. The bulk of this change relates to increases in the fair value of the assets within the Bank of England Asset Purchase Facility Fund (BEAPFF) and the Asset Protection Scheme (APS) which have increased in value by £14.0bn. DETAILED BREAKDOWN (Section lettering reflects the Supplementary Estimate changes) DEL Section A Core Treasury - reductions of £8.808m administration and £226.5m programme and an increase of £0.6m capital. UNCLASSIFIED UNCLASSIFIED The administration reduction is the net effect of an increase in gross spending of £13.9m which is more than offset by an increase in income of £22.7m arising from rental income from letting of accommodation. The department has almost completed a project to increase the number of public sector occupants, in addition to the Treasury, working in 1 Horse Guards Road (HGR). The change to release additional lettable space has been delivered in two phases. The first phase more than doubled the number of desks in the building by standardising the layout and using smaller desks. The second phase has seen the Treasury move to desk sharing at an aggregate ratio of 8 desks per 10 people (8:10) in its areas of the building. The Treasury has successfully let all the space created by the project to five other departments, the largest of which is the Cabinet Office whose staff have moved into over 1/3rd of the office space in1HGR. Increasing the number of public sector occupants working in 1HGR enables the Treasury to share the costs of the building to meet the Chancellor’s target of a 50% reduction in estate costs and ensures better value for money for the Exchequer. It also helps to realise the wider potential for the exchequer to release or re-use less prime property for other purposes and assists in meeting government property targets. There are also transfers of £0.4m to the Cabinet Office for accommodation recharges and a transfer in of £0.176m from HM Revenue and Customs as a contribution towards the administration costs of the OTS. Of the administration budget decrease, £7.7m relates to the Budget Exchange (BX) scheme. The Chief Secretary has agreed that HM Treasury can carry forward £3.8m of its 2012-13 underspend into 2013-14. In addition, the BX scheme rules require departments to return any funding that has been rolled forward but remains unused. We are therefore returning £3.9m that was rolled forward into 2012- 13 from 2011-12. The decrease in programme spending of £226.5m is the net effect of income of £220m from the Financial Services Authority relating to UNCLASSIFIED UNCLASSIFIED fines levied on financial institutions, income of £4m arising from fees and interest on loans made by Infrastructure Finance Unit Ltd, a transfer of £1m to Section B DMO and a transfer of £5.5m to Section F Coinage manufacturing. The DEL ambit has been amended to specifically cover payments to the House of Commons to fund the Parliamentary Commission on Banking Standards. This spending rests on the sole authority of the Supply and Appropriation Act. Section B Debt Management Office – a net reduction in administration spending of £0.343m, an increase in programme spending of £1.0m and an increase in capital DEL of £1.335m. The reduction in administration spending is the net effect of an increase in fee income of £0.510m, partially offset by an increase in gross spending of £0.167m to reflect the latest forecast of spending. The increase in programme spending of £1.0m arises from increased financial transactions activity and is funded by a transfer from Section A. The increase in capital expenditure of £1.335m relates to IT hardware and software spending. Section D Asset Protection Agency no net change but gross spending and income figures have been revised to reflect the final level of activity following the closure of the APA on 31 October 2012. Section F Coinage Manufacturing costs - increase of £7.50m arising from the replacement of old cupronickel 5p and 10p coins with nickel- plated steel coins. This programme will produce a net benefit for the Exchequer since the value of the metal in the old coins is greater than the cost of producing a new NPS coins. The increase in this section is financed by a transfer from Section A and from the programme Departmental Unallocated Provision. Section G Office of Tax Simplification – increased by a transfer from Section A of £0.052m to reflect the full year budget. HMRC contributes of 50% of the cost of running the OTS and their contribution for this year has been included in Section A Core Treasury. UNCLASSIFIED UNCLASSIFIED Departmental Unallocated Provision (DUP) – the administration DUP has been reduced by £8m to zero. The latest forecast of spending requirements indicates that the administration DUP will not be required and it is therefore being reduced to zero and returned to the DEL Reserve. The programme DUP of £2m is being transferred to Section F. AME Section L Northern Rock. The increase in income of £125m arises from an increase in the interest rate on NR’s working capital loan Section M Assistance to Financial Institutions. The large reduction in provision arises from an increase in fair value of derivatives – Asset Protection Scheme (APS) £25m and Bank of England Asset Purchase Facility Fund (BEAPFF) £14,006m non-cash. The fair value of the BEAPFF derivative represents the best estimate of the amount due to HM Treasury from the Bank of England on settlement of the scheme. It is arrived at by calculating the difference between the fair value of the assets as at the reporting date and their purchase price in the quantitative easing, less administration and interest charges. In the same Section there is also an increase in income of £61.0mn on loans arranged through the FSCS and from Dunfermline Building Society and a transfer of interest income in respect of FSCS from Section R. Section Q Money Advice Service increase of £2.75m (funded from MAS reserves so no cash implications for the Estimate) due to slippage of a restructuring project from 2011-12. Section R Financial Services Compensation Scheme movement of income of £395m to Section M. Section S Credit easing a reduction in net resource spending of £56m reflecting the latest forecast of guarantees and fees for this financial year. Capital spending has reduced by £50m due to the timing of the start of the Business Finance Partnership. UNCLASSIFIED UNCLASSIFIED Section T Sovereign Grant funding of the Royal Household reduction of £3m resources due to the Main Estimate grant figure incorrectly including spending on Royal Household Pensions which is already included in non-voted Section X Royal Household Pensions. Capital spending has increased by £0.375m for the acquisition of intangible assets. Section V Bradford & Bingley (B&B) increase of £13m resources and £125m capital – the resource increase arises from a reduction in interest due to the loan balance being lower than forecast. The capital increase of £125m reflects B&B’s forecast of loan repayments being lower than originally anticipated. Section R Loans to Ireland. The forecast of interest on the loan to Ireland included in the Main Estimate was based on the standard loan drawdown timetable of £403m per quarter. However, loan drawdown has been slower than anticipated resulting in the interest being £26m lower and capital £403m lower.