COMMONS

Staggering £22billion in debt owed to central government

15 July 2014

Public Accounts Committee publishes its report into debt owed to central government as Seventh Report of Session 2014-15, HC 555.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"Last year the Government was owed a staggering £22 billion, it is estimated.

Just put that into perspective. That’s equivalent to a fifth of the total public funding that goes into healthcare in the UK. You could buy 1,500 new schools with that money.

HM Revenue & Customs was owed the majority of this debt (£15.1 billion), while the Department for Work & Pensions and the Ministry of Justice account for nearly all of the remainder. Debts can include tax owed, overpaid tax credits or fines unpaid, for example.

The Government is owed this massive amount of money but it has failed to take a strategic, cross-government approach to managing that debt and getting more money paid to the Exchequer.

Instead its treatment of debt has been characterised by neglect and periodic large write-offs. Large volumes of old debts have been allowed to build up in departments, with 61% of HMRC’s debt and 88% of DWP’s debt over 180 days old at 31 March 2013. The older the debt the more difficult it becomes to collect.

Some debt has sat in arms-length bodies like the Student Loans Company or Child Maintenance Enforcement Commission and is regarded simply as "terribly difficult". Failure to minimise debt has resulted in the Government’s debt balances and losses being higher than necessary, and in Government borrowing more as a consequence.

Government is making increasing use of debt collection agencies to collect unpaid debts, with some £1.2 billion of debt passed to private debt collectors on a payment by results basis in 2012-13.  However, neither departments nor the Centre were able to demonstrate that they properly understood the benefits and risks of using these agencies. We are particularly concerned about the risks of vulnerable debtors being pursued inappropriately.

Debt owed to the Government has reduced by around £5.5 billion in the last four years. However, this is a result of reductions in HMRC’s balance – a chunk of which was from writing off or deciding not to pursue £3.5 billion of tax credits debts and other debts it considers "uncollectable". Debt has been increasing over the past six years in all departments except for HMRC.

In the current climate of tight public finances, that’s just not good enough, and urgent action is required. Government must get better at preventing, managing and recovering debt. The Treasury and key Government departments have a job to do to get on top of this and get money owed flowing into the coffers.

When it comes to using debt collection agencies, they must be vigilant in monitoring companies’ performance and behaviour."

Margaret Hodge was speaking as the Committee published its 7th Report of this Session which, on the basis of evidence from: Stephen Kelly, Chief Operating Officer for Government, Cabinet Office; Sharon White, Second Permanent Secretary, HM Treasury; Lin Homer, Chief Executive and Permanent Secretary, HM Revenue and Customs and Mike Driver, Director General Finance, Department for Work and Pensions, examined the issue of managing debt owed to central government.

Government is owed a massive amount of money but it has failed to take a strategic cross-government approach to managing that debt and getting more money paid to the Exchequer. Failure to minimise debt impacts directly on Government borrowing. Government inaction has led to large volumes of old debts building up in departments which are unlikely to be collected. While the Treasury and the Cabinet Office say they are belatedly developing a cross-government strategy for debt, we are concerned that the centre has taken so long to drive improvements in debt collection, given that this should be a basic business activity, and given the huge volume of bad debts that are written off each year. The current climate of tight public finances must be an opportune time to make the lasting change to debt management that is needed across government. This will require prompt action to obtain repayments earlier, real co-operation across departments, better data for a more detailed understanding of debtors and their circumstances, and a more strategic approach to the use of debt collection agencies. In this way Government could ensure a more effective approach to preventing, managing and recovering debt.

Conclusions and recommendations

Individuals and businesses are in debt to government for overdue tax liabilities, benefits or tax credits overpayments and for other reasons, including outstanding fines and court confiscation orders. There is no official figure for the total amount owed to central government that is overdue. However, the National Audit Office estimated that overdue debt (money owed that is in arrears and legally collectable) was at least £22 billion at 31 March 2013. HM Revenue & Customs (HMRC) was owed the majority of this debt (£15.1 billion), while the Department for Work & Pensions (DWP) and the Ministry of Justice (MOJ) account for nearly all of the remainder. Debt owed to government has reduced by around £5.5 billion in the last four years. However this is a result of reductions in HMRC’s balance and it disguises increases in all other major debt holding departments, and most of the debt owed is old. Responsibility for debt management lies in departments, while at the centre of government HM Treasury (the Treasury) and the Cabinet Office are expected to provide strategic oversight. Since 2011, the Fraud, Error and Debt Taskforce, an expert panel chaired by the Minister for the Cabinet Office, has been developing a cross-government view of debt management. The Cabinet Office’s Efficiency and Reform Group has set out an ambition for government to save £10 billion by 2014-15 from initiatives on fraud, error and debt combined.

Despite the enormous sums involved there is no central strategy for managing debt owed to government. While the ministerial taskforce included debt in its remit in 2011 there is still no published strategy or objectives for debt management across government. Strategic management of debt is hampered by the centre not collecting figures for debt across all departments and quangos, and by the Treasury not monitoring departmental debt forecasts, effectiveness of debt collection agencies, or reviewing the risks of debt when considering new policies. This lack of attention has resulted in government’s debt balances and losses being higher than necessary, and in government borrowing more as a consequence. We feel frustrated by the delay and inaction over recent years but welcome the Treasury’s commitment to produce central guidance on managing debt that will encompass the recommendations made by the National Audit Office, including the suggested key performance indicators.

Recommendation: The Treasury must ensure that it produces a comprehensive and effective strategy for managing debt, and related guidance, without further delay.

The Cabinet Office struggled to explain what savings it is seeking to achieve through better debt management. The Cabinet Office set out an ambition for government to save £10 billion by 2014-15 through initiatives on fraud, error and debt combined. In the evidence session the Cabinet Office accepted that the wording of the target was confusing, but confirmed in response to detailed questioning that the debt element of the £10 billion target was to save £700 million in 2014-15 from managing debt better compared to a baseline of 2009-10. However, in subsequent written evidence the Cabinet Office stated that the £10 billion figure actually refers to "improvements between 2010-11 and the end of 2013-14 through efforts to reduce levels of fraud, error and debt, as well as improved tax compliance". We are concerned, given the different answers we have received, that this target is unlikely to be clearly understood by those charged with delivering the savings required and will therefore fail to drive the changes needed.

Recommendation: The Cabinet Office should set out clearly what savings it expects both government as a whole, and individual departments and agencies, to achieve over a defined period from managing debt better.

Departments have not focused sufficiently on debt management, allowing overdue debt to accumulate and age unnecessarily, so that it becomes much more difficult to collect. Debt has been increasing over the past six years in all departments except for HMRC. Some of this came from improvements in the amount of debt recovered, but a significant proportion was secured by writing off or deciding not to pursue £3.5 billion of tax credits debts and other debts it considers "uncollectable". A large proportion of government debt is old, with 61% of HMRC’s debt and 88% of DWP’s debt over 180 days old at 31 March 2013. The older the debt the more difficult it becomes to collect. Departments have different definitions of debt, the level of which is not always reported to their boards and is not set out clearly in their accounts. Some debt has sat in arms-length bodies like the Student Loans Company or Child Maintenance Enforcement Commission and is regarded simply as "terribly difficult". As a result, the treatment of debt has been characterised by neglect and periodic large write-offs or remissions. This creates unfairness and injustice in the system which damages Government’s ability to collect monies due. The Treasury recognises the need for a tighter financial focus on debt, for a set of standard key performance indicators on debt management, and for more transparent reporting on debt. DWP has moved its debt operations from shared services to a core part of finance, and committed to reporting debt more transparently in its annual report and accounts.

Recommendation: The Treasury should ensure appropriate key performance indicators for debt management are applied across government. Departments and agencies should be required to report performance in this area to their Boards and in their annual reports and accounts.

Departments lack the information needed to target their debt collection activities and resources appropriately. The completeness, timeliness and accessibility of data on debtors and their circumstances is generally poor across government, limiting departments’ ability to tailor collection activities to individual debtors. For example, the National Audit Office reported that data on 97% of HM Courts and Tribunal Service debtors were missing one or more key fields. HMRC noted that the introduction of new "Real Time Information" systems provided accurate monthly information on people’s incomes, which had resulted in more cash being collected. However, departments still do not have a 'single view' of the total amount each individual debtor owes them, let alone a single view of what an individual debtor owes to government as a whole, partly because of the barriers that remain to sharing data across central government and with local authorities. A comprehensive view of what individuals owe across government is needed to ensure debtors are treated fairly and consistently and to prevent the possibility of one department’s pursuit of a debtor creating greater costs elsewhere.

Recommendation: Departments should implement systems that collect the data they need to manage and target their debt recovery resources effectively and reflect debtors’ circumstances and ability to repay. The centre should ensure that departments share information and coordinate their debt management activities with a view to developing a single view of what each debtor owes to government as a whole.

Departments and the centre were not able to demonstrate that they had sufficient understanding of the benefits and risks of using debt collection agencies. Departments use debt collection agencies to collect unpaid debts when they lack the capacity or specialist skills to pursue the debts. Some £1.2 billion of debt was passed to debt collection agencies on a payment by results basis in 2012-13. Debt collection agencies have collected approximately 22% of the amounts sent to them, with considerable variation according to the type of debt. They typically have retained 7% of the debt they collect as their fee. The use of debt collection agencies is set to expand significantly with the introduction of a "debt market integrator", intended to provide a single route for all government departments to access private sector debt services. The Cabinet Office and HMRC acknowledged that they were still learning how and where to make use of debt collection agencies’ resources and expertise and how to ensure debt collection agencies perform effectively across the board. We were concerned about the risks of vulnerable debtors being pursued inappropriately and government transacting unwittingly with unsuitable companies. HMRC told us that debt collection agencies must comply with departmental standards, and that they would take action against any that did not meet their obligations. HMRC subsequently provided more details on the quality monitoring and compliance checks that are applied.

Recommendation: Departments need to be intelligent customers of debt collection agencies, and must be vigilant in monitoring agencies’ performance and ensuring appropriate standards are followed in their interactions with debtors. The Cabinet Office should ensure departments are aware of the benefits and risks attached to using debt collection agencies and monitor the risk of the market being captured by a small number of suppliers.

Further information

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