Government is poor at forecasting

Inadequate forecasting is an entrenched problem for government departments, leading to poor value for money and increased costs for the taxpayer according to a report from the National Audit Office (NAO) report Harris & Co accountants Northampton.

The NAO has also urged the Treasury to do more to support informed scrutiny of departments’ forecasts.

The audit watchdog says since 2010 more than 70 of its reports have identified forecasting weaknesses. As an example, the Department for Education initially underestimated the scale of demand for its academies programme and did not develop robust cost estimates. To remain within spending limits without restricting the pace or scale of the expansion, it used additional contingency funding of £105m and reassigned £244m from other budgets.

The NAO says government departments do not take forecasting sufficiently seriously, with the process often hampered by poor quality data and ‘optimism bias’. It reports analysts’ concerns that they are under pressure to provide supportive rather than realistic forecasts; and say over half the analysts it surveyed identified a lack of good-quality data. The NAO noted, for example, that the Department for Transport was using 10-year-old data to calculate the benefits of High Speed 2 for business travellers.

An NAO survey found most finance directors considered that the spending control framework incentivised them to over-budget and underspend. In 2012-13, underspending increased to £11.5bn, nearly three times the recent average. The NAO said it is concerned that the Treasury’s flexing of the budget exchange rules (allowing departments to carry forward a forecast underspend from one year to the next) was not clearly related to the quality of individual departments’ financial management.

Amyas Morse, NAO head, said: ‘Departments generally treat forecasting of future spending as little more than a technical activity, of limited relevance to financial management. In fact, high quality forecasting is an indispensable element of project planning and implementation. We have seen many examples over recent years of government projects where weaknesses in forecasting have led to poor value for money. A first step towards improving the quality of forecasting would be increased transparency and scrutiny of forecasting and more concerted action at the centre of government.’