4.37 A strong system of incentives and controls is key to efficiency. However, there is evidence that current incentives are not sufficiently effective.
4.38 The current framework of incentives enables government departments to reinvest the receipts from sales of surplus assets in new capital projects (previously sales of surplus assets were simply returned to central budgets).24 It also includes two charges (depreciation and a cost of capital charge) which measure the opportunity cost of holding capital assets (these changes formed part of the introduction of resource accounting and budgeting).
4.39 Both measures, together with the normal costs of occupying property, have had limited effect at a time when, for many departments, capital budgets have been increasing considerably. Many sectors have been the focus of a deliberate effort to increase capacity and invest in physical infrastructure, partly to address legacies of under-investment, which has meant that there has been less incentive to dispose of surplus property.
4.40 The impact of the two charges has been further weakened because:25
• depreciation and cost of capital charges are non-cash26 ring-fenced costs in departmental budgets, the effect of this ring-fence is that savings may not be re- deployed to other areas of spending without explicit HM Treasury approval;27 and
• although recorded in local authority accounts, in most cases depreciation charges do not directly impact on council tax levels, reducing the incentive effect of these charges.
4.41 As an additional incentive, HM Treasury has introduced asset disposal targets, based on its assessment of the overall level of potential surplus for the public sector.28 These targets have been effective in delivering asset disposals. But they have been of a "top-down" nature, and
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24 For further details see The Economic and Fiscal Strategy Report, 1998 and the Comprehensive Spending Review 1998.
25 For further details see: Alignment (Clear Line of Sight) Project (Cm 7567), HM Treasury, March 2009.
26 Depreciation and cost of capital do not currently score (or do not score in the same way as in departmental budgets, accounts or estimates) in the National Accounts. As a result, these items are ring-fenced within resource budgets in a separate 'non-cash' budget, to protect the overall fiscal position by preventing funds from being switched into other expenditure (termed 'near-cash').
27 Consolidated Budgeting Guidance 2009-10, HM Treasury.
28 The 2004 Spending Review established a target to dispose of £30 billion of assets by 2010, with £24 billion of this to come from local government. now need further refinement in order that they can be tailored to individual departmental circumstances and adequately reward efficient management.