Under-recovered costs of key government services lead to £340m shortfall in income
Some government bodies have not recovered the costs of providing key services including issuing passports and running the court and tribunal services through the fees they charge to citizens and businesses. This contributed to a revenue shortfall of £340m in 2023-24, according to a new National Audit Office (NAO) report.
Government usually sets fees and charges to recover the costs of providing a service to avoid the need for taxpayer funding.
All seven of the services reviewed by the NAO have a cost recovery target for their services, but they have not consistently achieved this across the past five years.
Some of the services reviewed have persistently under-recovered costs, leading to large deficits which are more difficult to recover. For example, HM Passport Office reported a £223m shortfall in 2023-24 and a total deficit for the last five years of £916m. The report identified concerns about future fee increases and disparity between past and future fee payers for periodically used services as departments raise fees significantly to recoup these large losses. HM Treasury recently clarified its rules to say principles of fairness will be considered before recovery of historical deficits.
As the data used to set fees is often estimated, fees may not reflect the true costs of providing services, causing bodies to over- or under-charge.
None of the bodies fully disclosed in their annual report and accounts information related to the fees and charges the NAO reviewed, as required by HM Treasury. Limited governance oversight and central monitoring has allowed large deficits to build up without corrective action being taken.
Among the services reviewed, the legislative process of updating and correcting fees also took over a year on average, delaying opportunities to make up the gap between service costs and revenue and creating funding uncertainty within government bodies as they wait for approval.
Departments and public bodies are keen to set charges correctly but do not believe they have sufficient support. The report recommends HM Treasury should find ways to better help government bodies, like improving its guidance and making arrangements to share useful tools and advice.
Services which are online and automated can be cheaper to run, with HMPO, DVLA and HMCTS already improving operations by adopting a digital approach. However, some bodies use outdated IT systems which can be challenging, drive up costs and are expensive to update, and limit the opportunity for process improvement and efficiencies.
The report also highlights that persistent surpluses, as well as deficits, require closer scrutiny to ensure fairness in fee setting. To address cost recovery issues, the NAO recommends that government takes action on persistent surpluses or deficits accrued in charged services.
HM Treasury should determine how incentives can be used to drive efficiencies or improvements; standardise the process of proposing or amending fees and charges; and assess legislative options to streamline the fee amendments.
Gareth Davies, head of the NAO, said: “government bodies provide important services for the public and businesses, including issuing passports and driving licences, and filing company information.
“But many are not consistently recovering their costs – posing risks to the financial resilience of these services and fairness between users.
“HM Treasury should strengthen how it oversees cost recovery processes and provide more comprehensive guidance to charging bodies.”