Brexit uncertainty a concern for the public sector finances, say ICAEW

Commenting on the public sector finances for December 2018, published today by the ONS, Martin Wheatcroft FCA, advisor to ICAEW on public finances, said:

“As predicted going into 2019, the public finances are continuing on an improving trend. However, with Brexit looming ever closer and a deal yet to be agreed, there are significant downside risks to the forecasts for the 2019-20 financial year, scheduled to start just two days after the UK plans to leave the EU on 29 March 2019.

The gap between government revenue and public spending is currently expected to narrow to less than £3bn a month in 2019-20, assuming a transition period that maintains the UK’s position in the Single Market until the end of 2020. A disruptive break in the UK’s trading relationship with European markets could adversely affect both tax receipts and expenditures. Some tough decisions would be required in the resulting second Budget that the Chancellor indicated in November 2018 would be necessary if the Brexit deal was not accepted by Parliament.

The attitude of debt investors to the developing situation will also be important as the government needs to refinance £200bn of its existing debt over the course of 2019 and 2020, in addition to raising £100bn in new finance. Higher costs for government borrowing are a real possibility.

Until there is greater clarity from Parliament and the EU on a new plan for Brexit, the outlook for the public finances will remain uncertain.”

ICAEW chart of the week – austerity in English local authorities

The news of the proposed appointment of Gareth Davies to be the new Comptroller & Auditor General for the UK prompted us to look at the National Audit Office website. There we saw one of its current highlights – a fascinating set of data visualisations derived from a major report published last year on the financial sustainability of local authorities in England.

This has inspired this week’s ICAEW #chartoftheweek, which illustrates just how significantly local government spending has been cut in recent years. Annual net expenditure by English local authorities has fallen by £7.0bn or 16% from £43.7bn in 2010-11 (in 2016-17 prices) to £36.7bn in 2016-17.

Spending on planning and development is less than half what it was, while spending on housing support has almost halved. Budgets for transport (highways and public transport) and culture (including libraries, open spaces, sport and tourism) have been cut by over a third, while spending on waste collection, environmental regulation and administration have also been cut. While spending on adult social care is ‘only’ down by 6%, this conceal a much more dramatic cutback in services given the significant growth in the number of older people needing care. Only children’s social care has increased by more than inflation, and then only slightly.

With reports that more and more local authorities are struggling financially, there are many questions to ask about this often neglected area of the public finances.

We look forward to hearing what areas Gareth Davies will be exploring in his tenure. We hope that he will build on the legacy of the current C&AG Sir Amyas Morse to drive improvements in the public finances on behalf of the citizens of the UK.

To find out more, visit the NAO website for more data visualisations on the financial sustainability of English local government –

To comment on this, visit ICAEW Talk Accountancy blog at

ICAEW chart of the week – the global economy in 2019

The first ICAEW #chartoftheweek for 2019 is on the subject of the global economy, with GDP forecast to add up to £69tn in 2019 based on data provided by the IMF.

The UK is expected to generate £2.2tn in economic activity in 2019, just over 3% of the world total. This reflects the UK’s position as a relatively rich country given that its 67m people make up less than 1% of the global population of 7.6bn.

Sterling weakness means that the UK is expected to be only the seventh largest economy in 2019, behind the US (£17.7tn), China (£11.3tn), Japan (£4.1tn), Germany (£3.2tn), India (£2.4tn) and France (£2.2tn). However, it should still be significantly ahead of Italy (£1.7tn), Brazil (£1.5tn), South Korea (£1.3tn), Canada (£1.3tn), Russia (£1.2tn), Spain (£1.1tn), Australia (£1.1tn) and Mexico (£1.0tn).

With Brexit scheduled for the end of Q1 and the potential for escalation in the US’s trade wars with China, Japan and the EU, is a world of strong economies possible in 2019? The only certainty is uncertainty.

However, despite the potentially stormy economic conditions ahead, we remain optimistic for the future. Poverty continues to fall around the world, and new innovations continue to improve the lives of billions of people.

And with that more cheery note, we wish you all the best for the coming year.

ONS moves the goalposts with new treatment of student loans

Today’s announcement by the Office for National Statistics that expected losses on student loans will be recorded in the fiscal numbers when the loans are issued is a welcome development.

It more closely aligns with economic reality, reflecting the fact that a large proportion of loans will never be repaid, with many students never expected to earn enough above the (current) earnings threshold of £25,000 to repay the full amount before the balance is written off after 30 years.

The previous fiscal treatment, which allowed the government to defer recognition of these losses 30 years into the future, was misleading as well as diverging from the approach adopted under International Financial Reporting Standards (IFRS) in the Whole of Government Accounts (WGA).

The deficit is expected to increase by £12bn this year as a result of the change, narrowing (although not eliminating) the difference between the fiscal deficit, officially known as ‘public sector net borrowing’, and the actual level of net borrowing by the public sector each year.

The main downside is that this is yet another change in the way the fiscal numbers are reported, resulting in prior years’ numbers needing to be restated. This is an all-too-frequent event, with Network Rail being brought onto the balance sheet in 2014, followed by housing associations in 2015, before being taken off again in 2017 and 2018. This change in student loans will affect the numbers from 2019 onwards, causing further instability in the reported fiscal performance of HMG.

Of course, the important thing to understand is that this is a reporting change – the economic reality has not changed. However, by improving the reporting the government will no longer be able to treat student loans as ‘cost-free’ when in reality many of them will never be repaid.

For further information:

ONS announcement: New treatment of student loans in the public sector finances and national accounts

Institute for Fiscal Studies: Better accounting of student loans to increase headline measure of the government’s deficit by around £12 billion

BBC Reality Check: Could student loans ruling mean the system is redesigned?


ICAEW Chart of the week – Scottish Budget

Yesterday’s Scottish Budget was slightly overshadowed by events in Westminster, but if you live north of the border the £42.5bn that the Scottish government plans to spend next year will possibly be more of interest.

As our #ICAEW #chartoftheweek shows, the largest elements of the budget are £14.3bn for health and £11.9bn for local government, followed by a total of £11.8bn spending on education, transport, justice and other, and £4.5bn on NHS and teacher pensions.

£15.3bn, or just over a third of the total, is funded by devolved taxes – with £11.7bn coming from income tax. The remainder is the block grant of £19.9bn, a share of national insurance and other UK-wide taxes of £2.3bn, £4.5bn in funding for NHS and teacher pensions, plus borrowing of £0.5bn for capital projects.

The big news was the decision to maintain the higher rate threshold at £43,430, diverging from £50,000 in other parts of the UK. A penny less of income tax on earnings up to £14,549 and a penny more on all earnings over £24,944, means that there are now 12 tax bands for employment income, compared with 9 south of the border.

This is partly because Holyrood doesn’t control national insurance in the way that it does income tax, creating extra bands where the thresholds do not line up.

ICAEW Chart of the week – Public order

The constitutional crisis of the last few days has raised the (theoretical) prospect of the Attorney General being imprisoned in the Tower of London for contempt of Parliament, which made us decide to look at crime and punishment.

Our chart of the week looks at how spending on public order and safety – i.e. on the police, courts, prisons and fire services – has changed over the last twenty years.

In cash terms spending has increased by 77% from £18bn in 1998-99 to £32bn in 2017-18, but of course this doesn’t take account of inflation, population increases or economic growth.

We have consequently adjusted for changes in GDP to make the numbers more comparable. On this basis, the 1.8% of GDP spent on public order in 1998-99 would have been £37bn if kept constant as a share of GDP.

The share of national income spent on public order grew by 23% between 1998-99 and 2009-10, before declining by 30% to 2017-18. Overall a drop of 15% from two decades ago.

We await the Spending Review to find out how much will be spent in future however we can only hope that this will start to bring crime levels back down again; an outcome that will no doubt be pleasing to the Attorney General as he stares across the yard at the White Tower.

ICAEW Chart of the week – UK foreign reserves

We thought we might look at one of the UK government’s key risk management tools in our chart this week – the UK’s foreign reserves. 

These principally comprise financial investments in the sovereign debt of other countries, together with foreign central bank deposits, investments in the IMF, gold holdings, and foreign currency loans and deposits with UK and international banks. 

As the chart shows, the UK government’s gross foreign reserves have increased from $52bn (£31bn) ten years ago to $164bn (£129bn), a 316% increase over the last decade. This is not the full story, as the government has a policy of hedging to protect against a proportion of its exposure to currency and interest rate movements. 

As a consequence, derivative and other financial liabilities have also increased, meaning that net reserves have increased at a slower rate – from $24bn (£15bn) to $52bn (£41bn), a 173% increase. This is part of a deliberate strategy by the government to increase its financial firepower and so be better prepared for the next financial crisis, investing £6bn last year for example. 

As the UK sails into potentially choppy economic waters over the next few years, this may prove to be quite important.

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ICAEW Chart of the week – Export credit guarantees

This week’s chart is about export credit guarantees and the associated risk carried on government balance sheet. We compared the exposure of the UK government to guarantees provided by UK Export Finance to the equivalent exposure of the German federal government. 

It is important to stress that businesses can and do access other forms of government support such as loans, as well as commercial insurance, letters of credit and other risk management tools. After all, UK exporters do have access to the most sophisticated insurance market in the world.

What this does show is the relative willingness of the UK and German governments to take on risk in order to achieve a policy objective – support to exports. Of course, some of the difference is down to the relative size of the economies. Germany’s economy is over 40% larger than the UK’s.

A fairer comparison for the £12bn UK’s exposure to export credit guarantees might be to an economy-adjusted £53bn rather than the actual £76bn (€86bn) reported by the Federal Ministry of Finance’s export credit guarantee division. 

However you measure it, it is clear that the German government has assumed a much higher level of risk to support its exporters that the UK government.

Something to think about.

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ICAEW Chart of the week – Budget 2018 spending measures

The recent budget contained 53 announcements on spending and 33 announcements on tax. 

As our chart this week shows, the headline was an extra £7bn for the NHS in 2019-20, rising to £28bn in 2023-24. £84bn over the forecast period and an increase of 1.77% in public spending. 

Only nine other spending announcements exceeded £0.5bn. Additional funds for Universal Credit, social housing, social care, defence, High Streets, City-regions, road maintenance and school buildings added a further 0.33%. Altogether £4.8tn for the period to March 2024. 

The other 40 measures which together added £1.9bn or 0.04% to the total were all below that level. 24 of them were for £25m or less – each a miniscule share of total spending. 

It is unusual to identify such small amounts within the top level of the budgeting process for the government of the sixth biggest economy in the world. They could easily have been covered by existing departmental budgets, or by HM Treasury’s central contingency. 

Except of course the Budget is as much political theatre as it is a fiscal event. Who would want to deprive the Chancellor of the opportunity to announce an increase of total spending by 0.0002% for urban tree planting or 0.0001% for digital skills boot camps?

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ICAEW Chart of the week – Forecast public sector net debt

Our chart this week takes a look at the OBR’s latest forecast for public sector net debt over the next five years.

While the Chancellor said debt is expected to fall, it is important to understand that this does not mean that debt will go down. Reported debt is actually forecast to be 5% higher in 2024, from about £1,810bn at 1st April 2019 to £1,896bn at 31 March 2024.

What will go down is the ratio of debt to GDP, because the economy is expected to grow faster than debt over the period. Inflation alone is expected to add 10% to GDP with 8% from economic growth.

The increase in public sector net debt would be closer to 13% if not for loans provided under the Bank of England’s Term Funding Scheme, with loans of £127bn to high street banks to be repaid in 2020-21 and 2021-22. This will partially offset the extra £213bn the government expects to borrow over the next five years.

This is not the full story. With more than £400bn needed to repay existing debt as it falls due the government has to borrow a total of £623bn over the period

The moral of this story – is that words and numbers are not always what they appear. In the strange world of the public finances, debt can go up – and down – at the same time.

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