NAO sounds alarm over surging fraud levels in government spending

Watchdog says losses hit £21bn in 2020-22 and warns public confidence in the integrity of services is at risk

By Jim Dunton

30 Mar 2023

The level of fraud in government spending has almost quadrupled to £21bn over the past two years and most public bodies cannot demonstrate they have appropriate resources to deal with the risks they face, the National Audit Office has warned.

A new report from the public-spending watchdog says the accounts of government bodies it audited in 2018-2019 and 2019-2020 contained fraud figures totalling £5.5bn. In 2020-2021 and 2021-2022 the figure had risen to a combined £21m – of which £7.3bn related to temporary schemes launched in response to the Covid-19 pandemic.

The NAO said the recently-created Public Sector Fraud Authority had estimated that in 2020-2021 there was between £33.2bn and £58.8bn of fraud and error in government spending and income unrelated to the pandemic across the whole of the public sector.

The watchdog said that despite the creation of the PSFA and the establishment of the Government Counter Fraud Function and the Government Counter Fraud Profession, most departments and public bodies lacked robust assessments of their fraud risks and could not demonstrate that their counter-fraud resources were appropriately matched to the risk.

HM Revenue and Customs and the Department for Work and Pensions are the biggest exceptions and host the majority of government’s counter-fraud capability because of the known risks related to taxation and welfare spending.  According to the NAO report, 84% of government counter-fraud staff work for either HMRC or DWP.

The NAO said the PSFA had assessed counter-fraud understanding, resourcing and the outcomes achieved from counter-fraud resources at 70 government organisations. It found that just 14% understood and measured the fraud-and-error risks they face and only 6% could demonstrate a strong return on their counter-fraud investment.

The report acknowledged it was inevitable that the government’s vulnerability to fraud would rise as a result of the response to Covid-19 and the need to set up new programmes quickly.

But it said public bodies could have done a better job of managing the potential for fraud without hampering the emergency response. It added that there was danger higher levels of fraud against taxpayers could be viewed as “normal and tolerated”.

“There is also a risk that the UK is becoming perceived as more corrupt than it was before the pandemic,” the report said. “Such perceptions could affect public confidence in the integrity of public services.”

Faster transparency, better management of conflicts of interest, addressing known vulnerabilities more quickly, and timely financial reporting would have been part of a more robust approach to Covid-time fraud, the report said.

The NAO said the creation of the PSFA was an opportunity for a renewed focus on fraud and corruption, but that it would need cross-government clout to achieve the required changes in culture, preventative approach, and robust assessment of risks.

It said departments would need to work together to fight fraud; demonstrate best practice controls and transparency; set a counter-fraud culture; adopt prevention techniques; and use investigative powers as a deterrent.

It added that PSFA could also help departments by developing a better methodology to assess and measure fraud; developing the counter-fraud profession; helping departments harness and use data to prevent fraud and corruption; and by bringing counter-fraud expertise into the design of new programmes and systems.

NAO head Gareth Davies said public confidence in the integrity of public services would be in jeopardy if the “substantial increase” in the level of fraud in government was not tackled.

“Government has more to do to understand the scale of the problem it faces and cannot yet demonstrate that it is tackling fraud effectively,” he said.

“The creation of the Public Sector Fraud Authority creates a real opportunity to address this.”

A government spokesperson said ministers were overhauling the way public-sector fraud is tackled to “chase down” every pound “stolen from British taxpayers”.

“Since 2021, we have invested more than £900m in taking action on fraud and, as the report acknowledges, we have made progress by establishing the Public Sector Fraud Authority, which is stepping up the government’s efforts to protect taxpayers' money,” the spokesperson said.

“The government has recovered more than £3.1bn of fraud losses in the last two years, including within Covid-19 schemes, but we know there is more we can do.

“That is why we are expanding the government’s Counter Fraud Profession, developing new technologies and boosting skills and training to further protect the public purse.”

The NAO report said the £21bn fraud figure came on top of £10bn of tax revenue lost to evasion and crime every year.

It said HMRC had recovered just £762m of an estimated £4.5bn lost to fraud and error in relation to its Covid-19 support schemes, as of March last year – and that the tax department only expected to recover £1.1bn by the time its Taxpayer Protection Taskforce was wound down.

The NAO said DWP had generated fraud and error savings of £500m through its retrospective review of Universal Credit claims made over the height of the pandemic. But it said that at least £1.5bn of fraudulent claims that started during that period were still being paid in 2021-2022.

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