A difficult winter ahead for the public finances

23 December 2020: The UK public sector incurred a £31.6bn deficit in November, bringing the total shortfall over eight months to £240.9bn. Debt reached an all-time high of £2.1tn.

Commenting on the latest public sector finances for November 2020, published on Tuesday 22 December 2020 by the Office for National Statistics (ONS), Alison Ring sector director at ICAEW, said: 

“A slightly more optimistic forecast for GDP from the Office for Budget Responsibility last month resulted in the UK’s debt to GDP ratio being revised downwards, despite public sector debt having reached an all-time high of £2.1tn in November. However, this optimism may prove to have been premature, with reports suggesting another national lockdown in the new year and disruption in international trade foretelling a potentially difficult winter ahead for the economy and the public finances. 

Prospects for the spring will depend on how quickly the vaccine can be rolled out, whether testing and tracing can deliver rapid and reliable results, and the extent to which disruption at borders now and after 1 January can be minimised.”

Public sector finances for November

The latest public sector finances reported a deficit of £31.6bn in November 2020, a cumulative total of £240.9bn for the first eight months of the financial year. This is £188.6bn more than the £52.3bn recorded for the same period last year.

Falls in VAT, corporation tax and income tax drove lower receipts, while large-scale fiscal interventions resulted in much higher levels of expenditure. Net investment is greater than last year, as planned, while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,099.8bn or 99.5% of GDP, an increase of £301.6bn from the start of the financial year and £303.0bn higher than in November 2019. This reflects £60.7bn of additional borrowing over and above the deficit, most of which has been used to fund coronavirus loans to business and tax deferral measures.

Table of results for the month of November and for the 8 months then ended, together with variances against the prior year. Click on the link at end of post to visit the original ICAEW article for a readable version.

The combination of receipts down 8%, expenditure up 29% and net investment up 26% has resulted in a deficit for the eight months to November 2020 that is over four times the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 26%. The cumulative deficit is approaching five times as much as for the same eight-month period last year.

Cash funding (the ‘public sector net cash requirement’) for the month was £20.7bn, bringing the cumulative total this financial year to £295.8bn, compared with £14.9bn for the same eight-month period in 2019. 

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

The deficit remains on track to approach the £393.5bn forecast for the financial year to March 2021 by the Office for Budget Responsibility in the Spending Review once bad debts not yet recognised on coronavirus loans are included.

Upwards revisions to GDP based on the latest Office for Budget Responsibility forecasts have reduced the debt to GDP ratio for this and previous months to below 100% of GDP. However, the likelihood of a further national lockdown in the new year and for disruption in international trade with the end of the EU transition period could depress prospects for GDP growth in 2021.

Table of results each of the 8 months to November 2020. Click on the link at end of post to visit the original ICAEW article for a readable version.
Table of results each of the 8 months to November 2019 and of the 12 months ended 31 March 2020. Click on the link at end of post to visit the original ICAEW article for a readable version

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first seven months from the £214.9bn reported last time to £209.3bn and increasing the reported deficit for 2019-20 from £56.1bn to £57.4bn.

This article was originally published by ICAEW.

ICAEW chart of the week: Half year public spending and receipts

23 October 2020: The gap between spending and receipts widened to £208bn in the half-year to September 2020, significantly greater than the £80bn in the first half of 2009-10 at the height of the financial crisis.

Line chart showing half-yearly spending and receipts with a shaded gap between them highlighting the deficit. A huge widening occurs in the most recent half year.

The #icaewchartoftheweek is on UK public spending and receipts in the light of the September 2020 public finance release that reported a fiscal deficit of £208bn for the six months ended 30 September 2020, comprising public spending of £567bn less receipts of £359bn.

The chart illustrates how the shortfall in receipts and public spending of £26bn (public spending £289bn – receipts £263bn) and £14bn (£303bn – £289bn) in the first and second halves of 2006-07 increased to £80bn (£347bn – £267bn) and £78bn (£375bn – £297bn) in 2009-10 before gradually declining to £31bn (£421bn – £390bn) and £8bn (£433bn – £425bn) in the first and second halves of 2018-19 respectively.

The chart highlights how deficits added up over a decade (a cumulative £1.1tn between 1 April 2008 and 31 March 2018) even as the gap between spending and receipts narrowed as well as how much the shortfall has widened in the first half of 2020-21. With a further £140bn or so shortfall expected in the second of the financial year, it will take a strong economic rebound to prevent another trillion of deficits accumulating over the coming decade.

Although the Spending Review in November will now only cover the 2021-22 financial year for current expenditure, it is expected to set capital expenditure budgets for 2022-23 as well. This will be important in giving departments confidence to get infrastructure spending projects underway as quickly as possible next year if there is to be an investment-led economic recovery.

Read more about the September 2020 public finances: Half-year deficit reaches £208bn as COVID costs continue to accumulate.

This chart was originally published on the ICAEW website.

Half-year deficit reaches £208bn as COVID costs accumulate

22 October 2020: Public finances remain on track for the worst peace-time deficit ever, thanks to lower receipts and large-scale coronavirus interventions.

The latest public sector finances reported a deficit of £36.1bn in September 2020, a cumulative total of £208.5bn for the first six months of the financial year.

Falls in VAT, corporation tax and income tax drove lower receipts, while large-scale fiscal interventions resulted in much higher levels of expenditure. Net investment is greater than last year, as planned, while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,059.7bn or 103.5% of GDP, an increase of £259.2bn from the start of the financial year and £274.0bn higher than in September 2019. This reflects £50.7bn of additional borrowing over and above the deficit, most of which has been used to fund coronavirus loans to business and tax deferral measures.

Commenting on the figures Alison Ring, ICAEW Director for Public Sector, said: “The deficit of £208bn is already more than the full-year deficit at the height of the financial crisis a decade ago and remains on track to be the largest ever outside the two world wars. 

“The economic damage caused by the pandemic in the first half of the fiscal year was not as bad as originally feared, thanks in part to the extraordinary level of financial support provided by the Chancellor. However, the second wave is putting further strain on the public finances as new regional restrictions are placed on economic activity.

To help the recovery the Chancellor must take the opportunity at the Autumn Statement and Spending Round to invest in preparing infrastructure projects to start as soon as possible.”

Image of table showing public finances for month of September and six months to September together with variances from last year. Click on link to the article on the ICAEW website for a readable version.

The combination of receipts down 11%, expenditure up 34% and net investment up 37% has resulted in a deficit for the six months to September 2020 that is approaching four times the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March. This is despite interest charges being lower by 24%. The cumulative deficit is more than six times as much as for the same six-month period last year.

Cash funding (the ‘public sector net cash requirement’) for the six months was £257.8bn, compared with £7.1bn for the same period in 2019.

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

The Institute for Fiscal Studies’ recent IFS Green Budget 2020 annual pre-Budget report indicated that the deficit for the full year to March 2021 could reach £350bn or 17% of GDP.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. In particular, the OBR points out that the ONS has yet to record any allowance for losses that might arise on the more than £100bn of tax deferrals, loans and guarantees provided to support businesses through the pandemic.

Image of table showing public finances for each month to September 2020 and for each month to September 2019. 

Click on link to the article on the ICAEW website for a readable version.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first five months from the £173.7bn reported last time to £172.4bn and reducing the reported deficit for 2019-20 from £55.8bn to £54.5bn.

For further information, read the public sector finances release for September 2020.

This article was originally published on the ICAEW website.

Public sector debt hits £2tn for the first time

21 August 2020: The fiscal deficit of £150.5bn for the four months to July 2020 is almost triple the £55bn budgeted for the entire financial year.

The latest public sector finances for July 2020 published by the Office for National Statistics (ONS) on Friday 21 August 2020 reported a deficit of £26.7bn in July 2020, following on from £123.8bn for the three months to June 2020 (revised from £127.9bn reported last time).

Public sector net debt increased to £2,004.0bn or 100.5% of GDP, an increase of £198.3bn from the start of the financial year and £227.6bn higher than in July 2019. This is the first time this measure has exceeded £2tn, a major milestone that has arrived several years earlier than anticipated as a consequence of the pandemic.

Image of table showing variances against prior year. Go to the ICAEW website at the end for the table itself.

The combination of lower tax receipts and much higher levels of public spending has resulted in a deficit for the four months to July 2020 that is almost triple the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, and almost seven times as much as the same period last year.

Cash funding (the ‘public sector net cash requirement’) for the four months was £199.1bn, compared with £5.4bn for the same period in 2019.

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. In particular, the OBR points out that the ONS has yet to record any allowance for losses that might arise on the more than £100bn of tax deferrals, loans and guarantees provided to support businesses through the pandemic.

Commenting on the latest figures Alison Ring FCA, director for public sector at ICAEW, said:

“The positive news for the Government is that despite debt reaching £2tn, low interest rates have reduced its cost, and its growth is slowing as the exceptional support measures to deal with the pandemic are withdrawn and furloughed employees return to work.

“The big question is how much permanent damage is being done to the economy, with accelerating job losses a concerning sign as we approach the autumn. How quickly debt continues to grow will also depend on any additional support that the Government might provide to sectors that are still struggling.”

Image of tables showing monthly breakdown for April through July 2020 and 2019. Go to the ICAEW website at the end for the tables themselves.

For further information, read the public sector finances release for July 2020.

This article was originally published on the ICAEW website.

ICAEW chart of the week: Fiscal interventions

10 July 2020: Fiscal interventions reach £190bn as the Chancellor Rishi Sunak pours even more money into the economy in an attempt to keep it from stalling.

Components of £190bn in fiscal interventions - as set out in text below.

The Chancellor’s summer statement is the subject of this week’s #icaewchartoftheweek, with the £30bn ‘plan for jobs’ being the latest in a series of fiscal interventions in response to the coronavirus pandemic.
 
The measures announced included £9bn for a £1,000 job retention bonus for furloughed workers, £4bn for work placements and boosting work searching, skills training and apprenticeships, a £5bn boost for the hospitality and leisure industries in the form of a cut in VAT and discounts on eating out, and £12bn in economic stimulus. The latter includes over £5bn on infrastructure projects (as announced by the Prime Minister last week), £3bn to make homes energy-efficient and £4bn for a temporary cut in SDLT on housing sales under £500,000.
 
This brings the total amount of fiscal interventions to £190bn or around 9% of GDP, once an extra £33bn in spending on health and other public services is incorporated. This was also ‘announced’ yesterday, albeit by means of a small footnote buried inside one of the accompanying documents!
 
As a consequence, the fiscal interventions can be broadly split between £77bn being spent on supporting household incomes (£54bn on the furlough scheme, £15bn on the self-employed income support scheme and £8bn on universal credit), £30bn to support businesses (£13bn in business rates and other tax reliefs and £17bn in grants and other support), £53bn for public services and other (£39bn on health and social care and £14bn on public services and other spending), and £30bn in economic stimulus through the ‘plan for jobs’.
 
Businesses have also benefited from support with their cashflows through the deferral of £50bn in tax payments and £73bn of loans and guarantees.
 
This is not the end of the story for fiscal interventions. Not only are there are a number of sectors such as local government, universities, and manufacturing where rescue packages may be needed, but the Chancellor made clear that this announcement only covered the second of a three-phase response.
 
The third phase – rebuilding the economy – will be set out later in the year. How much additional money will be involved is anyone’s guess.

This article was originally published by ICAEW.

Further fiscal interventions focused on post-furlough future

9 July 2020: Chancellor announces £30bn in new measures to support, protect and create jobs, bringing total fiscal interventions to £190bn.

The Chancellor used his summer statement speech to set out a phased approach to the UK Government’s response to the coronavirus pandemic.

The first phase – the existing measures already taken during the pandemic – was about the protection of the economy during lockdown, while the second phase – the subject of yesterday’s announcement – is about jobs. The third phase – to be announced later in the year – will be about rebuilding the economy and investing for the future.

As anticipated, the summer statement promised substantial sums to support the economy as it emerges from lockdown, with the Plan for Jobs including £30bn in additional funding measures to support, protect and create jobs through economic stimulus.

  • £9.4bn – Job Retention Bonus: £1,000 for keeping furloughed staff on until January
  • £2.1bn – Kickstart work placements for those aged 16-24
  • £1.6bn – boosting work searching, skills and apprenticeships
  • £4.1bn – temporary cut in VAT on hospitality, accommodation and attractions
  • £0.5bn – discounts on eating out
  • £5.6bn – infrastructure investment announced by the Prime Minister last week
  • £1.1bn – public sector and social housing decarbonisation
  • £2.0bn – grants to make private homes more energy-efficient
  • £3.8bn – six-month cut in stamp duty to stimulate the housing market

This takes total fiscal interventions announced by the government to around £190bn, including the £1.3bn for cultural institutions announced a few days ago.

When combined with lower tax revenues, this is expected to result in a fiscal deficit in 2020-21 in excess of £300bn. A better estimate should be available next week from the Office for Budget Responsibility when it updates its short and long-term forecasts.

The amounts above do not include tax deferrals and business loans and guarantees, which have now reached a total of £123bn.

It is as yet unclear whether there will be any statements about the planned third phase on rebuilding the economy before the Budget and spending review later in the autumn when plans for 2021-22 and beyond will be set out in more detail. 

There was significant disappointment in some quarters that the National Infrastructure Strategy, originally scheduled to be published in March, has still not been published.

For those trying to track the fiscal position this year, this is unlikely to be the last fiscal announcement that will move the dial. The government has indicated that further funding is likely to be made available later in the year to local government on top of the £2bn package announced last week. Rescue packages may also be needed for vulnerable sectors such as universities.

This article was originally published by ICAEW.

Public debt exceeds 100% of GDP for first time since 1963

22 June 2020: The fiscal deficit of £103.7bn for April and May 2020 is over six times as large as the £16.7bn reported for the same period last year.

The latest public sector finances for May 2020 published by the Office for National Statistics (ONS) on Friday 19 June 2020 reported a revised deficit of £48.5bn for April and a deficit of £55.2bn for May 2020.

Public sector net debt increased to £1,950.1bn or 100.9% of GDP, an increase of £173.2bn (up 20.5 percentage points) compared with April 2019. This is the first time the headline debt number has exceeded 100% of GDP since 1963, although the ONS cautions that the numbers for the deficit and for GDP are both subject to potentially significant revisions.

Table showing receipts, expenditure, net investment, deficit and public sector net debt.  Details available on ICAEW article - click link at end of this post.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues as a consequence of the lockdown.

The deficit of £103.7bn for the two months to May is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March.

Cash funding (aka the ‘public sector net cash requirement’) for the two months was £143.5bn, compared with £1.8bn for the same period in 2019.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be revised as estimates are refined and gaps in the underlying data are filled.

Alison Ring, director of public sector for ICAEW, commented:

“Significant borrowing over recent months means that this is the first time in more than 50 years that debt has been larger than GDP. And though the furlough scheme to date has cost less than originally estimated, cash funding in April and May was more than in the previous three financial years combined.

These are major milestones for the public finances and demonstrate the unparalleled impact of coronavirus, even if this is not surprising given the huge amounts of financial support the government is providing to keep the economy going through lockdown.”

This article was originally published by ICAEW.

ICAEW chart of the week: deficit and debt

17 April 2020: The #icaewchartoftheweek is on the ‘coronavirus reference scenario’ put together by the Office for Budget Responsibility (OBR).

Fiscal deficit 2020-21: £55bn Budget 2020 + £130bn lower receipts +£88bn higher spending = £273bn. Net debt: £1,819bn Budget 2020 +£384bn more borrowing = £2,203bn.

It suggests that the deficit for the current fiscal year could end up somewhere in the region of £273bn, around five times as much as the official Spring Budget forecast of £55bn, while public sector net debt could exceed £2.2tn by 31 March 2021, £384bn more than previously expected.
 
This scenario, which the OBR stresses is not a forecast, is based on a three-month lockdown followed by restrictions for a further three months, resulting in a 35% contraction in the economy in the second quarter of 2020, before bouncing back relatively quickly to leave the economy 13% smaller in 2020 than in 2019.
 
Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.
 
This is only of one many potential scenarios, but what is clear is that whatever actually happens, the damage to the public finances from the coronavirus pandemic will be extremely severe.
 
We can (and will) worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.

This chart was originally published by ICAEW.

Spending Review suspension sensible, but avoid more delays

2 April 2020: ICAEW has called the delay to the UK Government’s 2020 Spending Review a ‘sensible move’ in the current climate, but warned that any further delays pose a major risk to infrastructure projects and economic recovery.

The 2020 Spending Review, scheduled to be completed by July this year, has been delayed to enable the government to remain focused on responding to the ongoing coronavirus outbreak. It is likely that the 2020 Spending Review will now be moved to November to coincide with the Autumn Budget, adding a further delay of at least four months to the process.
 
The last three-year Spending Review was in 2015, covering the financial years 2016-17, 2017-18 and 2018-19. The anticipated 2018 Spending Review never took place and departmental budgets were instead ‘rolled over’ into 2019-20, while the Spending Review in 2019 was also cancelled and replaced by an interim Spending Round that set out current spending by departments for one financial year (2020-21) and capital investment plans for two financial years (2020-21 and 2021-22).
 
Based on the overall spending envelope set out in the Spring Budget 2020, the Spending Review this year is expected to set out detailed financial budgets for each government department for a three-year period (from 2021-22 to 2023-24) and four years for capital investment (to 2024-25), enabling public bodies to plan ahead and get the best value for money for the taxpayer.
 
Alison Ring, Director, Public Sector for ICAEW said: “The latest delay is completely understandable given the huge ramifications for the economy and the public finances of the coronavirus emergency. It makes sense for the Chancellor and the Treasury to redeploy resources to deal with the coronavirus now and to re-evaluate spending plans later when there is a clearer view on the financial impact.
 
One concern is the risk this further delay poses to infrastructure projects, given how important they will be to a successful economic recovery. The need to plan and design infrastructure well in advance means that delays in authorising funding could have a significant knock-on effect to when projects are eventually delivered, and to the boost they can give to the economy. 
 
The Chancellor should give some thought to providing assurances to departments about capital funding in 2021-22 and 2022-23 so that they have sufficient certainty to green-light projects sooner rather than later.
 
The Chancellor should also consider the Government’s approach to Spending Reviews. There are many arguments in favour of holding five-year Spending Reviews every three years, rather than three-year Spending Reviews every five years.”
 
For more information:

This article was originally published by ICAEW.

IFS: deficit to triple as budget contingency increases

30 March 2020: the Institute for Fiscal Studies (IFS) has suggested that the budgeted fiscal deficit for the financial year starting 1 April 2020 of £55bn could more than triple to £177bn due to the coronavirus pandemic.

In a new publication, the economic research institute also stated that there is a chance the 2020-21 deficit could end up exceeding £200bn.

The Chancellor has already stopped reporting financial estimates for a series of emergency measures, such as the funding of 80% of pay for furloughed workers and support for self-employed workers, incurring tens of billions of public money to keep an economy going whilst in lockdown.

The Contingencies Fund Act 2020 (passed by Parliament on 25 March 2020 alongside the Coronavirus Act 2020), increases the amount available for contingencies from a limit of 2% of spending authorised by Parliament in the preceding financial year to a limit of 50%. In effect, this gives the Chancellor the power to spend an additional £266bn in 2020-21 over and above spending plans already announced, a substantial increase from the £11bn that would have been available otherwise.

The IFS’s estimate assumes that a 5% contraction in the economy would reduce tax revenues by somewhere in the region of £80bn in 2020-21, albeit this would be offset by savings in interest costs following the reduction in the base rate to 0.1% and quantitative easing operations by the Bank of England.

Fiscal measures include the £12bn emergency package announced on the day of the Budget and the £20bn announced on 17 March, together with an estimate by the IFS of £18bn for further measures announced up until 25 March 2020.

The effect on the public finances estimated by the IFS is summarised in the table below.

Estimate of coronavirus revisions to the Spring Budget 2020

Financial year 2020-21Spring Budget
£bn
Economic contraction
£bn
Fiscal measures
£bn

Revised
£bn
Taxes and other income873(80)(22)771
Total managed expenditure(928)8(28)(948)
Fiscal deficit(55)(72)(50)(177)
% of GDP2.4%+3.4%+2.3%8.1%

Source: HM Treasury, Spring Budget 2020; IFS, estimates of economic contraction and fiscal measures to date, 26 March 2020; ICAEW, rough estimate of the split of fiscal measures between waiving tax and additional spending.

The IFS analysis of fiscal measures includes £10bn for the 80% job retention credit for employed workers (for which the IFS have assumed a 10% take-up), but it was prepared for the announcement of support for the self-employed. This could add another £9bn to the deficit for 2020-21.

The IFS has not included the risk of bad debts on the Government’s £330bn programme of financial guarantees and business loans or on the £30bn of second quarter deferred VAT payments. There is also no cost provision for the exposure to additional bank financing and corporate bond purchases by the Bank of England that is being guaranteed by HM Treasury.

Altogether, this would increase the deficit to £177bn, or 8.1% of GDP based on a 5% smaller economy, before taking account of the support package announced for the self-employed. The prospect of further fiscal measures in the weeks and months to come, combined with the risks from loans and guarantees, means that the prospect of a deficit in excess of £200bn is looking increasingly likely.

For more information

  • For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.