Scaling Everest: A brief introduction to UK Public Finance and navigating its unique and complex nature

Public finance is a vital part of a nation's economic structure, shaping how governments collect and spend money. It not only influences economic stability and growth but also affects nearly every aspect of public service and infrastructure. I recently began working in the field of Public Finance and I have noticed a number of unique differences with Finance in private enterprise and this is the basis for this piece. My piece today will take the largely unstructured form of broadly explaining public finance, defining the key terms in public finance in the United Kingdom and finally a brief musing of how this field of finance compares to traditional areas of finance.

What Is Public Finance?

Public finance is simply all about how governments manage their money, including revenues, expenditures, and debt. It examines how government actions influence the economy and tackles important issues like:

• Taxation: Governments collect money through various tax systems. For instance, countries like the U.S. had a total tax revenue of approximately 31% of GDP in 2020.

• Public Expenditure: This involves government spending on services such as education, healthcare, and infrastructure. In 2021, public expenditure accounted for about 37% of GDP across OECD countries.

• Public Debt: This touches on how governments borrow money and the long-term effects of that borrowing on economic health, with global public debt reaching about $88 trillion in 2021.

  
  

At its heart, public finance seeks to align government operations with broader social and economic goals. It is an ever evolving field that changes perpetually in tandem with the nature of the politics which govern its application.

Key terms in UK Public Finance

I believe as a high level introduction piece, it would be useful to provide a glossary of terms for the most important topics in UK Public Finance, so that the lay reader can develop a baseline understanding of the field itself.

Broader Government Finance

AME- annually managed expenditure. Categories of expenditure which are less amenable to multi-year planning. Often these are demand led like social welfare payments and debt interest. 

Budget- This sets out all the financing agreed for the next year in the U.K. 

Deficit- When total spending in a year is higher than total receipts.  

Surplus- When receipts are higher than spending.  

Structural budget deficit- is an estimate of how large the deficit would be if the economy was operating at a normal, sustainable level of employment and activity. 

Headline deficit- is the difference between total receipts and total spending. 

Public sector net debt- subtracts the relatively small amount of assets that the Government could readily turn into cash if required (for example, foreign exchange reserves) from the gross total. 

Fiscal policy- Fiscal policy is the use of government spending and taxation to influence the economy e.g. taxation and spending.  

Contrasted with  

Monetary policy which focuses on a set of actions to control a nation's overall money supply and achieve economic growth e.g. interest rates. 

Spending Review- A Spending Review is the process the government uses to set all departments’ budgets for future years. This covers both the services the public uses every day, like the NHS, schools, and transport, and how the government will invest in research, energy security and infrastructure to drive economic growth across the country. It is generally held every 2-4 years. 

Office for Budget Responsibility (OBR)- The independent Office for Budget Responsibility was established in 2010 to monitor the public sector’s finances. Twice a year – usually alongside each Budget and Spring or Autumn Statement – we produce detailed forecasts for the coming five years, assessing the likely impact of any policy decisions and expected developments in the economy 

Settlement- The local government finance settlement is the annual determination of funding to local government. It needs to be approved by the House of Commons. The Settlement covers England only: local government funding is devolved to Scotland, Wales, and Northern Ireland.  

Local Government Finance 

Local Government Finance Settlement- The local government finance settlement is the annual determination of funding to local government. It needs to be approved by the House of Commons. The Settlement covers England only: local government funding is devolved to Scotland, Wales, and Northern Ireland.  

RDEL- resource departmental expenditure limit. This is a multi-year limit on departmental day to day spending set by the Treasury. 

CDEL- capital departmental expenditure limits. This is a multi-year limit on departmental capital/investment spending set by the Treasury. 

Urban infrastructure is a key element in understanding public finance.

Final thoughts and comparison with traditional finance

The world of public finance is a unique fusion of a vast array of dynamic components, and governments need to be constantly prepared to make tough financial decisions to maintain order in the nation. Given the colossal quantum of funding at stake, each decision made in public finance can leave an indelible mark on the communities and areas that are subject to these decisions.

A risk conscious approach is always paramount in both public private enterprise, but a profound need for an inclusive and wide ranging mindset is in my view, a necessary ingredient to guide all decisions in this domain.

Above all else, I realise that a sound baseline understanding of public finance gives you the ability to better understand the landscape of decisions made in the political sphere as a whole.

The primary insight I have garnered around successfully governing public finance decisions is to adopt a holistic viewpoint in your decision making. Thinking about all the component parts is central to advice, discourse and ultimately decision making in public finance.

I relish the coming months where I can expand and develop upon my understanding of Public Finance and I look forward to the challenge of navigating this complex field.