The Treasury manages public spending within two ‘control totals’ of about equal size:

  • departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
  • annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.

Network Rail is classified as part of central government, but it is not a Ministerial department. Its spending is part of AME, although in our forecasts it is treated in much the same way as we would a departmental expenditure limit (DEL). This is consistent with how Network Rail’s spending is controlled by the Government: Network Rail must operate within the confines of a multi-year borrowing limit, in a similar way to how departmental spending is constrained by budgets that are set over extended periods; however, Network Rail has flexibility to move budgets between years and between current and capital spending.

Network Rail was reclassified as a public sector body by the Office for National Statistics (ONS) in September 2014. We have therefore been forecasting Network Rail spending since our December 2014 forecast. These cover spending on everyday running costs (current spending) as well as spending on largescale infrastructure projects (capital spending). Spending is recorded net of transfers and transactions within the public sector, as these do not affect total managed expenditure (as recorded in the National Accounts). Spending is also recorded as net of asset disposals (these however affect total managed expenditure, as asset sales act as a source of income, reducing Network Rail AME).

In our latest forecast, we expect total Network Rail spending in 2017-18 to total £7.1 billion (with £0.6 billion of current spending and £6.5 billion of capital spending). That would represent 0.9 per cent of total public spending, and is equivalent to £250 per household and 0.3 per cent of national income.

  • Latest forecast

    Our latest fiscal forecast was published in November 2017. Again, Network Rail current spending is small in both cash terms and as a share of GDP. It includes income from, for example, track access charges and property rental, which score as negative spending in the National Accounts and partly offset expenditure on procurement and on wages and salaries. Current spending in this instance is therefore a net concept. The profile of capital spending is uneven due to the volatile nature of capital spending, which can fluctuate from year to year, with the level and timing of such spending being subject to considerable uncertainty. The capital spending forecast also includes the effect of asset sales that can also be volatile from year to year and which can be subject to uncertainty over their treatment in the National Accounts (where proceeds from the sale of tangible assets are treated as negative capital spending, reducing both debt and borrowing, while proceeds from the sale of financial assets such as leases are treated as financial transactions (reducing debt but not borrowing). The dip in capital spending in 2018-19 reflects the proceeds from an expected asset sale, the classification of which is subject to this type of uncertainty. From 2019-20 onwards, Network Rail capital spending reflects the Government’s latest policy assumption for spending in the next Control Period (CP6). This sees capital spending broadly flat as a share of GDP.
    Note: Current spending excludes Network Rail debt interest payments and depreciation, which are included in separate totals shown in the total managed expenditure table in our March 2017 Economic and fiscal outlook.

    More detail on our latest forecast and how it was revised relative to our previous forecast in March was provided in paragraph 4.161 of our November 2017 EFO.

    Expand to read the extract from our March 2017 EFO

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  • Forecast methodology

    Forecast process

    The Network Rail current and capital spending forecasts are produced by Network Rail. The forecasts are appraised by the Department for Transport (DfT) and the Treasury before being submitted to the OBR for further scrutiny. We typically hold one forecast challenge meeting on the Network Rail forecast, at which the Budget Responsibility Committee scrutinise the forecast returns. More meetings are held when issues require further scrutiny.

    Forecasting model

    The Network Rail AME forecast is treated in much the same way as we would a departmental expenditure limit (DEL), as this is consistent with how Network Rail’s spending is controlled by the Government. In particular, Network Rail spending plans over the period 2014-15 to 2018-19 must be consistent with its overall borrowing limit (£30.9bn). Total spending is capped by:

    • A loan facility provided by DfT.
    • The network grant, also provided by DfT.
    • Income from asset sales completed by Network Rail.
    • Other income for Network Rail from both the public and private sector.

    The periods over which borrowing limits are set and expenditure planned are known as Control Periods. The current Control Period (CP) is CP5, which runs from 2014-15 to 2018-19. CP6 begins in 2019-20, with plans to be set in 2018. With CP6 plans not yet set, figures for the final three forecast years – 2019-20 to 2022-23 – reflect the Government’s current policy assumption, which is likely to change when firm plans are laid out in 2018.

    The current expenditure forecast is dictated largely by workforce plans, infrastructure maintenance and RPI inflation (used for uprating relevant variables, such as wages and salaries). The current spending forecast includes income from, for example, track access charges and property rental, which score as negative spending in the National Accounts and partly offset expenditure on procurement and wages and salaries. Current spending in this instance is therefore a net concept.

    The capital expenditure forecast is dictated by the latest plan for the profile of infrastructure investment, which is constrained by Network Rail’s borrowing limit. This plan reflects the conclusions of the Hendy Review, which reported in November 2015.

     

    Main forecast determinants

    The main economic determinants driving the forecast are:

    • RPI inflation, which is used to translate Network Rail’s constant price modelling of, for example, wages and salaries into nominal terms.
    • The GDP deflator, which is used to arrive at the real terms figures for capital spending discussed in the ‘forecasting model’ subsection.

    Main forecast judgements

    The main forecast judgement concerns the profile of capital spending. Experience suggests the timing of largescale capital projects is highly uncertain. We often need to make judgements about whether capital spending plans will be subject to delays in future years, for example in our capital DEL forecasts. This is also the case when we consider Network Rail capital spending plans.

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  • Previous forecasts

    We have been forecasting Network Rail spending since the body was reclassified as part of the public sector by the Office for National Statistics (ONS) in September 2014 (i.e. from our December 2014 forecast).

    The main change to our current spending forecast came in November 2017, when we were informed of a material reduction in Network Rail’s expectations for track access charge income during Control Period 6, which runs from 2019-20. As this income nets off current spending, it led to an upward revision to the profile for current spending.

    The main changes to capital spending over the course of these forecasts have been:

    • The treatment of the capital grants that Network Rail receives from central government. This amounted to between £4.0 billion and £4.5 billion a year, but was neutral for borrowing because it was a transfer within central government. The change was made in our July 2015 forecast, so that actual Network Rail capital spending was recorded (consistent with National Accounts treatment), rather than DEL including the grant and Network Rail capital spending netting it off (more detail is given in paragraph 4.88 of the July 2015 Economic and fiscal outlook).
    • The profile of capital spending over CP5, affecting the profile of spending and thus borrowing over the course of the forecast. The reprofiling did not materially change total capital spending in aggregate across CP5, given Network Rail’s borrowing constraint.
    • The policy assumption for spending in CP6, which increased borrowing by an expected £1.1 billion a year in our November 2016 forecast.

    Note: Current spending excludes Network Rail debt interest payments and depreciation, which are included in separate totals shown in the total managed expenditure table in our March 2017 Economic and fiscal outlook.

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