Today HM Treasury published Public Spending Statistics which contain, for the first time, estimated spending outturns by Whitehall departments for 2011-12. The figures show that, in total, departmental spending was £6.7 billion lower than was planned this time a year ago. Had departments spent all their planned budgets in 2011–12, departmental spending would have fallen in cash terms by £4.4 billion between 2010-11 and 2011-12 - a real terms fall of 3.5%. As a result of the underspends, cash departmental spending actually fell by £11.0 billion, which equates to a 5.2% real terms fall.

The £6.7 billion underspend is comprised of a £5.3 billion underspend by Whitehall departments, and £1.4 billion of funding held in reserve by HM Treasury this time last year that subsequently did not need to be allocated to departments. The £5.3 billion underspend is equivalent to 1.4% of departments’ budgets. In other words, on average departments spent 98.6% of the money they were allocated in 2011–12; although – as we shall show – there was considerable variation in the relative size of underspends across departments.

One obvious reason why departments might underspend is that they might have been given permission by the Treasury to move funds into the next financial year under the new ‘Budget Exchange System’. Under this system departments who surrender any underspend (up to a 'reasonable limit') in advance of the end of the financial year can get an equivalent increase in their budget in the following year. However, of the £5.3 billion underspent by departments in 2011-12, only £0.9 billion was successfully surrendered by departments through the Budget Exchange, and will now be available to be spent in 2012-13. This means that over 2011–12 and 2012–13 the total government deficit is on course to be £4.4 billion lower (i.e. £5.3 billion less £0.9 billion) as a direct result of these underspends.

The majority of individual Whitehall departments underspent on their 2011-12 budgets. The figure below shows, for departments who underspent by more than £0.1 billion, the proportion of their budgets that were surrendered through Budget Exchange (and will therefore be available to spend in 2012-13) and the proportion of their budgets that were underspent and will not be transferred into future years. The department that underspent the largest proportion of their budget was the Department for Energy and Climate Change whose £0.4 billion underspend was 13.9% of their 2011–12 budget. In absolute terms, the largest underspender was the NHS – the biggest Whitehall department – who underspent by £1.7 billion (of which only £0.3 billion was surrendered through Budget Exchange), which is equivalent to 1.6% of its 2011–12 budget.

The use of Budget Exchange varied across departments, even amongst those who ended up underspending on their budgets. For example, the Department for Transport underspent by £0.7 billion (or 5.1% of its budget), of which none was transferred through Budget Exchange, while the Department for Culture, Media and Sport underspent by £0.1 billion (or 5% of its budget), of which around half was transferred to 2012-13 through Budget Exchange.

Figure: Underspends by departments (departments who underspent by more than £0.1 billion)

Note: Chancellor’s Departments includes HM Treasury, National Savings and Investments, Government Actuary’s Department, HM Revenue and Customs, National Investment and Loans Office, Royal Mint and Crown Estate Office.

Small underspends would not be surprising – indeed it would be amazing if every department managed to spend its allocation exactly. But relatively large underspends that are not qualifying for Budget Exchange might seem strange, and particularly so in an era where most departments are facing cuts. One possible explanation is that departments have been trying hard to ensure that they do not end up with an overspend, which might be particularly unfavourably looked on by the Treasury in the current era of austerity. Another is that Whitehall departments have looked ahead to the cuts they face in 2012–13, 2013–14 and 2014–15 and decided that over-delivering on the cuts to date would leave them better placed to keep within these tight budgets going forwards. Departmental spending plans for 2012-13 now currently imply an average real cut of 0.8% in real terms from their 2011-12 level, which would have been a 2.6% average real cut if departments had spent their planned budgets in 2011-12. Whatever the motivation behind the underspends, to the extent that departments are underspending while still maintaining the quality and quantity of public services being provided, this is good news.

IFS public finance observations are generously supported by the Economic and Social Research Council (ESRC).