Since 2001/02 government departmental budgets have been set and monitored under a resource budgeting framework, which applies Generally Accepted Accounting Practice ("GAAP") to departmental transactions154. Under this framework, Requests for Resources ("RfRs") are presented to Parliament and resources are granted to each department based on an accruals, rather than cash, basis. Three Requests for Resources are typically granted to the MoD every year:
• RfR1: Provision of Defence Capability. Provides for expenditure primarily to meet the costs of the Department's operational, support and logistics services, and providing the equipment capability required by Defence policy;
• RfR2: Operations and Peace-Keeping. Provides for the consumption of resources in support of activity in Afghanistan and Iraq; and
• RfR3: War Pensions and Allowances, etc. Provides for the payment of war disablement and war widows' pensions.
In granting resources, Parliament specifies Departmental Expenditure Limits ("DELs"), which are used to control the amount of money that each Department can spend. These caps determine the budgets for all expenditure on programmes which deliver its Departmental objectives as well as the amount of money available for the associated administrative tasks. Under an accruals-based system, DELs cover both cash items (capital and operational expenditure) and non-cash items (such as depreciation, cost of capital charges, and provisions).
Resources granted by Parliament also cover non-discretionary commitments that are managed by Departments, but over which they have relatively little control. This category of expenditure includes demand-led items such as social security benefits and tax credits. Given the lack of control that Departments can exercise over this type of spend, it would be unreasonable to include these items within their general expenditure limits. But the associated financial commitments do still need to be included in the Government's overall budget planning process. These commitments are therefore identified as Annually Managed Expenditure ("AME"), and are not subject to same controls as DELs.
In the context of the MoD, RfR3 is provided to cover AME for War Pensions and Allowances, whilst grants under RfR1 and RfR2 provide resources which are subject to DELs. Being concerned with controllable expenditure, this report only studies activities that are included in DEL. Furthermore, most acquisition activity undertaken by the MoD is conducted as a part of normal operations. Unless otherwise stated, data in this report therefore relate solely to resources provided under RfR1.
The total DEL for each department is distinguished into three component parts, each of which is subject to its own expenditure limit:
• Capital DEL ("CDEL"). Expenditure which is capitalisable and can subsequently depreciated in line with Departmental policies. For the MoD, this comprises equipment procurement and capital investment in equipment, support, infrastructure and estates;
• Direct Resource DEL ("DRDEL"). Consists of costs incurred in providing the Department's services. For the MoD, this includes items such as pay, non-capitalised equipment support costs, fuel and administrative expenses; and
• Indirect Resource DEL ("IRDEL"). Covers non-cash items, primarily the cost of capital (notionally charged at 3.5% p.a. within MoD) and depreciation.
Together, CDEL and DRDEL comprise the 'near-cash' spend that is generally most closely tracked by departments themselves. Within the MoD, DELs are further broken down into expenditure limits for the constituent parts of the Department. IRDEL, on the other hand, is monitored across the Department as a whole, but is not controlled at a more granular level.
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154 Resource accounting measures expenditure when it accrues rather than when the cash is spent. They do not include, as an in-year cost, prepayments for goods and services not consumed in that year but they will include resources consumed, regardless whether the resources consumed are to be paid for in later years or where they have been pre-financed in earlier periods. It also includes non-cash costs such a movements in provisions and charges for bad debts.