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.

To join the conservation visit https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-542059546.

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.

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-71709483.

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?

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1336743052.

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.

To join the conversation: https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1246452697

ICAEW Chart of the week – UK Budget 2018

The Chancellor was in a positive mood yesterday as he presented a budget to deliver the commitment to increase NHS spending without large tax increases.

The reason was an improvement in the OBR’s fiscal forecasts. As illustrated by our chart of the week on the 2018 budget, forecast receipts have been revised up by around 1%, and previously planned spending revised down by 0.6%, to give an additional £13bn a year in this and the next two years, rising to £16bn and £19bn in the two years after that. 

This is not due to significant changes in the economy. Lower unemployment and some additional revenues from higher oil prices have delivered an extra £1bn. A long period of very low interest rates and court wins on tax rules has also helped, but much of the improvement is from things not turning out as badly as forecast back in 2016. 

This has let him sprinkle a little extra cash to ease some of the pressure on public services, not to mention spending a penny or two on improving public conveniences. 

With the mantra of government changing from ‘austerity’ to ‘fiscal discipline’ it is clear that we are not out of the woods yet, especially with £1.8tn in net debt and £4.3tn in total liabilities weighing on the public finances for a long time to come.

ICAEW chart of the week – NATO

With the budget less than a week away our two chapters in this year’s IFS Green Budget are proving highly relevant. 

While the Chancellor will benefit from prudence in previous forecasts, the underlying position remains extremely challenging. Total public liabilities are £4.3tn or 214% of GDP, while an increasingly long-lived population places ever greater demands on the state. 

One area where spending pressure may be unavoidable is Defence where a higher level of perceived threat, may result in higher spending. The Defence Select Committee has even suggested an extra £20bn a year may be needed. 

The burden would be less if all NATO members met the 2% defence and security spending commitment. This would lead to an extra £83bn of spending across NATO. The UK meets this threshold: spending £43bn, or 2.1% of GDP. Persuading our allies to meet this target would boost our collective defence with no extra funding by the UK taxpayer. 

Less likely to gain traction is President Trump’s suggestion that NATO members spend 4% of GDP. This implies a £38bn increase in defence spending by the UK and proportionately much greater increases by most NATO members. 

Watch this space and stay in touch with the Budget with ICAEW at https://www.icaew.com/technical/economy/uk-budget-2018.

IFS Green Budget 2018 – ICAEW: Defence

Ross Cambell of ICAEW and Martin Wheatcroft have co-authored a chapter on defence resources and spending in this year’ IFS Green Budget.

Go to www.icaew.com/technical/economy/ifs-green-budget-2018 to find out more.

In 2017–18, the UK spent £43 billion on defence and security, just meeting the target among NATO members to spend 2% of national income on defence. However, there are growing questions as to whether this level of spending is sufficient to provide for the defence of the UK, with calls from the Defence Committee of the House of Commons and the Secretary of State for Defence to increase spending. These questions reflect the UK’s changing strategic position amid greater international tensions, together with significant cost pressures on the defence budget that could mean cutting existing defence capabilities if not addressed.

This chapter considers how the evolving defence and security position may affect defence resources and spending, and the pressure that this could put on the public finances. We provide an overview of the UK’s defence arrangements in light of the ongoing update to the 2015 National Security Strategy and Strategic Defence and Security Review (the 2015 SDSR) and explore what that might mean for defence spending and for the public finances. We also analyse the finances and financial management of the Ministry of Defence. We highlight several risks going forward, including the management of multi-year complex programmes to procure new equipment and the currency and other risks of multi-year capital programmes.

Key findings

  • The UK has enjoyed a substantial post-Cold-War peace dividend that has effectively been used to fund the growing welfare state. The proportion of UK public spending going on defence and security has decreased from 15% fifty years ago to just over 5% today. Over the same period, spending on social security and health has increased from around a quarter to over half of the total.
  • Further cuts to the defence budget to fund other spending priorities are no longer possible if the UK is to meet its commitment as a member of NATO to spend 2% of national income on defence. Defence and security spending in 2017–18 of 2.1% of GDP only marginally exceeded the 2% NATO threshold.
  • Changing perceptions of potential threats could lead to higher defence spending over the next few years, adding to the pressure on the public finances. The UK’s national security strategy is under review in response to increasing international tensions. The Defence Committee of the House of Commons believes the Armed Forces need to be larger and better equipped for the UK to maintain its leading position within NATO and has called for defence spending to rise by £20 billion a year, or an extra 1% of national income.
  • The UK needs to match its aspirations for a global military role to the amount it is willing to spend on defence. UK defence spending of £36 billion in 2017–18 was higher as a fraction of national income than that of most G7 countries, though a smaller share than the US. And, in cash terms, it was less than 8% of the £470 billion spent by the US in 2017 and around a fifth of the amount spent by China.
  • There is a significant potential for cost overruns in the procurement budget. The National Audit Office has identified risks that could lead to additional costs of between £5 billion and £21 billion in the 2017 to 2027 Equipment Plan.
  • The 10-year Equipment Plan would cost an extra £4.6billion at an exchange rate of $1.25 to £1 instead of the $1.55 to £1 rate originally forecast. This could adversely affect defence capabilities if additional funding is not found. Denominating a proportion of parliamentary funding for defence in dollars would reduce the risk of having to make cuts to personnel or equipment if sterling weakens, or the incentive to spend currency gains if sterling strengthens.

Figure. UK defence and security spending over time

UK defence and security spending over time

Source: NATO; Office for Budget Responsibility.

IFS Green Budget 2018 – ICAEW: Public sector assets

Ross Campbell and Martin Wheatcroft have co-authored a chapter in this year’s IFS Green Budget on public sector assets.

To find out more go to https://www.icaew.com/technical/economy/ifs-green-budget-2018.

Public assets are integral to both the government’s balance sheet and the functioning of the UK. Some of these assets, such as schools and hospitals, are essential in delivering public services. Others, such as the road network, are part of the economic, social and legal infrastructure that supports economic activity and hence the tax revenues needed to pay for public services.

The government is undertaking a Balance Sheet Review, considering how it can use public assets in the most effective way to advance its policy priorities, and how it manages its liabilities and other financial commitments. In advance of the progress report expected with the 2018 Autumn Budget, this chapter provides an overview of the assets owned by the UK public sector and discusses how the Balance Sheet Review can be used to improve the utilisation of public assets and the prospects for a comprehensive investment and asset management strategy.

Key findings

  • HM Treasury is conducting a Balance Sheet Review that is due to report alongside the 2018 Autumn Budget. This provides an opportunity to develop a comprehensive investment and asset management strategy, going beyond ad hoc initiatives such as the recent establishment of the Government Property Agency to improve the management of offices and other general-purpose central government property.
  • Public sector assets are less than half the size of public sector liabilities. At 31 March 2017, the government reported assets of £1.9 trillion (94% of national income), compared with total liabilities of £4.3 trillion (214% of national income). Most public sector assets are not readily saleable and could not easily be used to settle liabilities, although the public sector’s most significant resource – the ability to levy taxes – is excluded.
  • Capital investment is a relatively small component of public spending and has declined since 2009–10, although the government plans to increase investment next year and the year after. Capital expenditure in 2016–17 of £55 billion (2.8% of national income) was less than 7% of non-capital expenditure of £819 billion (41.2% of national income) and 9% lower in real terms than in 2009–10. Net additions to fixed assets after depreciation and disposals were just £18 billion (0.9% of national income).
  • The government is reliant on future tax revenues to fund its financial commitments, with public debt currently standing at close to £2 trillion. There are no social security or social care funds. No money has been set aside for £1.9 trillion in unfunded public service pensions, nuclear decommissioning or clinical negligence liabilities.
  • Labour party proposals for nationalisation would add to public sector assets, but the borrowing required would add considerably to liabilities. Higher revenues would follow, but there is a risk of underinvestment in the future without a change in capital allocation approach. Nationalising utilities, train operations, the Royal Mail and PFI contracts could potentially increase public debt by more than £200 billion.

Figure. Total assets, March 2010 to March 2017 (£ billion and % of GDP)

Total assets, March 2010 to March 2017 (£ billion and % of GDP)

Source: HM Treasury, Whole of Government Accounts 2016–17 and earlier years.

ICAEW chart of the week – UK Armed Forces

Our #ICAEW #chartoftheweek is about defence this week – the subject of our second chapter in this year’s #IFSGreenBudget. This examines how the evolving defence and security position might affect defence resources and spending, and the pressure this could put on the public finances.

Our chart reflects the ‘peace dividend’ following the end of the Cold War, with the UK’s regular forces falling by more than half from 320,700 in 1980 to 146,560 in 2018.

The savings were used to fund a growing welfare state – with defence falling from 15% to 5% of total public spending over the last fifty years just as health and welfare spending has increased from around 25% to over half. Defence and security spending now stands at 2.1% of GDP.

This long-term decline will have to end if the UK is to meet its commitment as a member of NATO to spend at least 2% of GDP on defence and security. Indeed, changing perceptions of potential threats may lead to defence spending starting to increase. To read all about defence – and public sector assets (our first chapter), go to www.icaew.com/technical/economy/ifs-green-budget-2018. See the launch presentation online, read the full report or find out more at our follow up webinar on 25 October at 1pm – to register go to events.icaew.com/pd/11508.