LONDON, Nov. 27 -- The government of the United Kingdom issued the following news:
Alongside Budget 2025 HM Treasury has published guidance for managing government's implicit liabilities, supported by the £15m Implicit Liability Management Fund. It will be allocated to departments to facilitate work to identify and mitigate plausible or potentially costly implicit liabilities.
GAD will be able to provide support to departments, through our expertise in financial modelling, which will help them manage their implicit liability risk.
What is an implicit liability?
Implicit liabilities are uncertain future costs which government may decide to meet despite no prior formal commitment to do so to ensure continued function of the economy and delivery of critical services. This can include intervention following a critical firm failure, a sector-specific shock, or natural disaster.
High profile past examples include the capitalisation of banks following the 2008 to 2009 financial crisis. Often government's action has been driven by the absence of sufficient private sector protection or resilience.
What does the guidance cover?
This guidance covers implicit liabilities where government may undertake obligations normally held by the private sector or third sector. The guidance helps departments and public bodies to act in advance, to reduce government's fiscal exposure.
This would involve identifying where risks could result in private sector liabilities falling to government in a contingency scenario and putting in place mitigation strategies that reduce costs.
As set out in the guidance, examples of previously employed mitigation strategies include:
* releasing a public statement committing not to meet certain costs in the future, or only covering costs that can be credibly recovered within a defined time-frame
* requiring independent financial monitoring or other regulatory activity
* providing regulations to allow firms to fail safely or provide a temporary corporate shelter for vital public services
* providing or facilitating insurance across the affected industry
* mandating firms to ringfence capital
* establishing the capability to support private sector 'bail-ins'
All mitigations require some trade-off between government and the affected sector, so thoughtful analysis of the likelihood and impact of risks is needed to select the most effective strategy.
What do departments need to do?
As set out in Chapter 5 of the guidance, departments will be responsible for the identification and proactive management of risks associated with implicit liabilities, with the Treasury providing oversight.
An initial multi-year programme will be undertaken to identify and mitigate implicit liabilities, with funding for priority projects available from the £15m Implicit Liability Management Fund from 2026 to 2027, and 2028 to 2029 inclusive.
All departments are expected to:
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Stage 1 - initiate a scoping process to identify all relevant implicit liability risks they hold by the start of the 2026 to 2027 financial year - this should include an indicative assessment of the likelihood of each of these risks materialising
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Stage 2 - undertake a series of policy deep dives during the 2026 to 2027 and 2027 to 2028 financial years - this should include the quantification of fiscal exposure and wider economic costs to inform emerging policy options
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Stage 3 - agree a plan to implement identified policy reforms before the end of Parliament wherever possible
How can GAD help?
As recommended in the guidance, GAD is available to provide support directly to departments, from the initial scoping process as well as the more rigorous financial modelling likely required as part of the deep dives.
Understanding the likelihood and impact of negative events is critical to understanding the risk that exists for implicit liabilities and any mitigation strategies.
GAD exists to provide strategic advice to departments on complex financial risks and liabilities. We are well placed to support departments in proactively managing their implicit liabilities.
We have extensive experience in modelling unique and novel risks. For example, we have conducted modelling to determine the full range of outcomes that may arise when considering multiple firm insolvencies within a market.
Disclaimer: Curated by HT Syndication.
