Tag: #publicfinances

Public finances beat forecast amid tough economic landscape

Year-to-date deficit of £119bn is £5bn lower than latest Office for Budget Responsibility forecast – but is still £11bn worse than this time last year.

Public sector finances for December 2023, released by the Office for National Statistics (ONS) on Tuesday, reported a provisional deficit of £8bn – less than expected – while at the same time revising the year-to-date deficit down by £5bn. This brought the cumulative deficit for the first three-quarters of the financial year to £119bn, £11bn more than in the same nine-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments: “Today’s numbers show a cumulative deficit of £119bn for the first three-quarters of the financial year, the fourth highest on record. This should be close to the total at the end of the tax year, as income from self-assessment tax receipts in January is likely to offset deficits in February and March. At £5bn less than the Office for Budget Responsibility’s latest forecast, the Chancellor will be pleased by this marginal improvement in fiscal headroom just when he needs it most.

“However, the Chancellor will still be concerned by the tough economic landscape, with disappointing retail sales data for the final quarter of 2023 and an unexpected rise in inflation last month, and what that might mean for the fiscal forecasts. He is under significant pressure to cut taxes ahead of the general election, but will be all too aware of the need for greater investment in public services and infrastructure if he is to be able to lay the foundations for economic growth in the next Parliament. The risk of local authorities going bust will also be on his mind as he seeks to generate positive economic vibes going into the general election campaign.”

Month of December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of December 2023 was £8bn, made up of tax and other receipts of £89bn less total managed expenditure of £97bn, up 6% and down 3% respectively compared with December 2022. 

This was the lowest December deficit since 2019, principally because interest on Retail Prices Index-linked debt fell from £14bn in December 2022 to close to zero in December 2023.

Public sector net debt as at 31 December 2023 was £2,686bn or 97.7% of GDP, up £15bn during the month and £146bn higher than at the start of the financial year.

Nine months to December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first three quarters of the financial year to December 2023 was £119bn, £11bn more than the £108bn deficit reported for the first nine months of 2022/23. 

This reflected a year-to-date shortfall between tax and other receipts of £776bn and total managed expenditure of £895bn, both up 6% compared with April to December 2022.

Inflation benefitted tax receipts for the first nine months compared with the same period in the previous year, with income tax up 10% to £178bn and VAT up 7% to £150bn. Corporation tax receipts were up 18% to £76bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £132bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year. 

Council tax receipts were up 6% to £33bn, but stamp duty on properties was down by 27% to £10bn and the total for all other taxes was down by 3% to £112bn as economic activity slowed. Non-tax receipts were up 11% to £84bn, primarily driven by higher investment income and higher interest receivable on student loans.

Total managed expenditure of £895bn in the nine months to December 2023 can be analysed between current expenditure excluding interest of £761bn, interest of £97bn and net investment of £37bn, compared with £841bn in the same period in the previous year, comprising £722bn, £103bn and £16bn respectively.

The increase of £39bn or 5% in current expenditure excluding interest was driven by a £24bn increase in pension and other welfare benefits (including cost-of-living payments), £15bn in higher central government pay and £8bn in additional central government procurement spending, less £6bn in lower subsidy payments (principally relating to energy support schemes) and £2bn in net other changes.

The fall in interest costs for the nine months of £6bn to £97bn comprises an £18bn or 39% fall to £28bn for interest accrued on index-linked debt from a lower rate of inflation, partially offset by a £12bn or 21% increase to £69bn for interest not linked to inflation from higher interest rates.

The £21bn increase in net investment spending to £37bn in the first nine months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £11bn or 42% reflects high construction cost inflation, among other factors, which saw a £14bn or 20% increase in gross investment to £85bn, less a £3bn or 7% increase in depreciation to £48bn.

Public sector finance trends: December 2023

Table showing fiscal numbers for the nine months to Dec 2019, 2020, 2021, 2022 and 2023. Receipts: 597 | 560 | 653 | 733 | 776 Expenditure: (588) | (746) | (686) | (722) | (761) Interest: (44) | (33) | (55) | (103) | (97) Net investment: (26) | (51) | (35) | (16) | (37) [subtotal] Deficit: (61) | (270) | (123) | (108) | (119) Other borrowing: 3 | (67) | (85) | (8) | (27) [total] Debt movement: (58) | (337) | (208) | (116) | (146) Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686 Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £119bn for the first three-quarters of the financial year is £5bn below the Office for Budget Responsibility (OBR)’s November 2023 forecast of £124bn for the nine months to December 2023. The OBR is also forecasting a full year forecast of £124bn as it expects self-assessment tax receipts in January to offset projected deficits in February and March 2024. 

Balance sheet metrics

Public sector net debt was £2,686bn at the end of December 2023, equivalent to 97.7% of GDP.

The debt movement since the start of the financial year is £146bn, comprising borrowing to fund the deficit for the nine months of £119bn plus £27bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £871bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,330bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 31 December 2023, comprising £1,584bn in non-financial assets and £1,049bn in non-liquid financial assets minus £2,686bn of net debt (£296bn liquid financial assets – £2,982bn public sector gross debt) and other liabilities of £662bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

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 latest release saw the ONS revise the reported deficit for the eight months to November 2023 down by £5bn from £116bn to £111bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of November 2023 was revised down by 0.1 percentage points from 97.5% to 97.4%.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £130bn for 2022/23.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and it was originally published by ICAEW.

Martin quoted in ICAEW article on councils at risk of failure

Martin was quoted in an article published on ICAEW Insights titled: One fifth of councils risk financial failure this year.

The section in which Martin was quoted reads as follows:

Martin Wheatcroft FCA, an external adviser on public finances to ICAEW, says it is not just badly run councils – that either speculated and lost or mismanaged funds – that now face the distinct possibility of financial failure: “Many ‘normal’ local authorities are now looking vulnerable too, as they struggle to balance their budgets in the face of rising demand, rising costs and constrained funding.”

In particular, Wheatcroft says adult social care is a significant challenge for many local authorities, as an ageing population sees demand increasing each year as the number of pensioners grows. Meanwhile, the knock-on impact of the minimum wage increase of 9.8% from April will further add to the challenges facing councils in the coming financial year.

“With local authority core funding only going up 6.5% in the coming financial year, local authorities are having to look for further cuts in other already ‘cut to the bone’ public services to try and balance their books,” Wheatcroft adds.

Last month, the Department for Levelling Up, Housing and Communities released a call for views on greater capital flexibilities that would allow councils to either use capital receipts to fund operational expenditure or to treat some operational expenditure as if it were capital, without the requirement to approach the government.

The intention is to encourage local authorities to invest in ways that reduce the cost of service delivery and provide more local levers to manage financial resources. The consultation is open until the end of January.

Under the current rules, councils are restricted from using money received from asset sales or from borrowing to fund operating costs due to capital receipts being considered a ‘one-off‘, while borrowing creates a liability that has to be repaid.

Wheatcroft adds: “The government’s announcement of greater capital flexibilities may help stave off some of the problems for a while but is likely to further weaken local authority balance sheets in doing so.” 

To read the full article, click here.

Gap between public sector income and spending reaches £116bn

Latest public sector finance numbers reveal a challenging fiscal backdrop for both government and opposition ahead of a general election.

The monthly public sector finances for November 2023 released by the Office for National Statistics (ONS) on Thursday 21 December 2023 reported a provisional deficit for the month of £14bn and revised the year-to-date deficit up by £4bn, bringing the cumulative deficit for the first two-thirds of the financial year to £116bn, £24bn more than in the same eight-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “These numbers confirm that the government’s financial difficulties are continuing to mount, with the shortfall between income and public spending reaching an unsustainable £116bn for the first two-thirds of the financial year, surpassing the £100bn milestone and providing a challenging fiscal backdrop for both the government and the opposition ahead of a general election.

“While the Prime Minister and the Chancellor continue to search for cost savings to free up capacity for further pre-election tax cuts, the opposition will be concerned about the fiscal legacy it would inherit if it were to take power. 

“The deteriorating state of the UK’s public services is a big concern for all politicians given that it implies a need for substantial tax rises after the general election, irrespective of who wins.”

Month of November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of November 2023 was £14bn, made up of tax and other receipts of £86bn less total managed expenditure of £100bn, up 5% and 3% respectively compared with November 2022. 

This was the fourth highest November deficit on record since monthly records began in 1997, following monthly deficits of £15bn, £22bn and £15bn in November 2010, 2020, and 2022 respectively.

Public sector net debt as of 30 November 2023 was £2,671bn or 97.5% of GDP, up £30bn during the month and £132bn higher than at the start of the financial year.

Table titled 'Public sector finance trends: November 2023' Eight months to Nov 2019, Nov 2020, Nov 2021, Nov 2022 and Nov 2023 respectively. £bn except where stated. Receipts: 530, 491, 574, 648, 682 Expenditure: (522), (661), (610), (635), (676) Interest: (41), (30), (46), (83), (90) Net investment: (22), (46), (31), (22), (32) Subtotal line Deficit: (55), (246), (113), (92), (116) Other borrowing: 5, (67), (83), (4), (15) Total line above Debt movement: (50), (313), (196), (96), (131) Total line below Net debt: £1,827bn, £2,128bn, £2,348bn, £2,477bn, £2,671bn Net debt / GDP: 83.4%, 99.1%, 98.5%, 95.7%, 97.5%.

Eight months to November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first two thirds of the financial year to November 2023 was £116bn, £24bn more than the £92bn deficit reported for the first eight months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £682bn and total managed expenditure of £798bn, up 5% and 8% respectively compared with April to November 2022.

Inflation benefited tax receipts for the first eight months compared with the same period in the previous year, with income tax up 10% to £156bn and VAT up 8% to £134bn. Corporation tax receipts were up 10% to £62bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 3% to £114bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £9bn and the total for all other taxes was up just 3% to £132bn, much less than inflation, as economic activity slowed. Non-tax receipts were up 11% to £75bn, primarily driven by higher investment income.

Total managed expenditure of £798bn in the eight months to November 2023 can be analysed between current expenditure excluding interest of £676bn, up £41bn or 6% over the same period in the previous year, interest of £90bn, up £7bn or 8%, and net investment of £32bn, up £10bn or 45%.

The increase of £41bn in current expenditure excluding interest was driven by a £21bn increase in pension and other welfare benefits (including cost-of-living payments), £14bn in higher central government pay and £7bn in additional central government procurement spending, less £1bn in net other changes.

The rise in interest costs for the eight months of £7bn to £90bn comprises a £20bn or 43% increase to £67bn for interest not linked to inflation as the Bank of England base rate rose, partially offset by an £13bn or 37% fall to £23bn for interest accrued on index-linked debt from lower inflation than last year.

The £10bn increase in net investment spending to £32bn in the first eight months of the current year reflects high construction cost inflation amongst other factors that saw a £13bn or 21% increase in gross investment to £75bn, less a £3bn or 8% increase in depreciation to £43bn. 

The cumulative deficit of £116bn for the first two-thirds of the financial year is £8bn below the Office for Budget Responsibility (OBR)’s official forecast of £124bn for the full financial year as compiled in November 2023 for the Autumn Statement. The deficit for the last third of the financial year is normally much smaller than for the first two-thirds because of self assessment tax returns arriving in January that boost tax receipts.

Balance sheet metrics

Public sector net debt was £2,671bn at the end of November 2023, equivalent to 97.5% of GDP.

The debt movement since the start of the financial year was £131bn, comprising borrowing to fund the deficit for the eight months of £116bn plus £15bn in net cash outflows to fund lending to students, businesses and others net of loan repayments and working capital movements.

Public sector net debt is £856bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,133bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 30 November 2023, comprising £1,565bn in non-financial assets and £1,054bn in non-liquid financial assets minus £2,671bn of net debt (£303bn liquid financial assets – £2,974bn public sector gross debt) and other liabilities of £663bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

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 latest release saw the ONS revise the reported deficit for the seven months to October 2023 up by £4bn from £98bn to £102bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of October 2023 was revised down by 1.2 percentage points from 97.8% to 96.6% as a consequence of updated estimates of GDP.

The ONS also revised up its estimates for the deficit for the financial years to March 2023 and 2022 respectively, by £3bn to £131bn for 2022/23 and by £2bn to £124bn for 2021/22.

This article was originally published by ICAEW.

ICAEW chart of the week: Civil service numbers

My chart for ICAEW this week illustrates how the civil service has grown by 92,000 or 23% to 496,000 FTEs over the past five years.

Step chart titled 'Civil service numbers' (First column) September 2018: 179,000 ministerial departments, 22,000 in Scottish and Welsh governments, and 203,000 in agencies and non-ministerial departments = 404,000 total number of civil servants. (Middle column) Change: +38,000 minisministerial departments, +10,000 Scottish and Welsh governments, +44,000 agencies and non-ministerial departments = +92,000 total change. September 2023: 217,000 ministerial departments, 32,000 Scottish and Welsh governments, 247,000 agencies and non-ministerial departments = 496,000 total number of civil servants.

The number of civil servants has increased by 92,000 or 23% from 404,000 full-time equivalents (FTEs) in September 2018 to 496,000 FTEs in September 2023, which may be surprising in the light of government rhetoric about cutting public spending.

As my chart for ICAEW this week illustrates, the size of the UK civil service has grown significantly over the past five years. FTEs in ministerial departments have grown by 38,000 or 21% from 179,000 to 217,000, in the Scottish and Welsh governments by 10,000 or 45% from 22,000 to 32,000, and in agencies and non-ministerial departments by 44,000 or 22% from 203,000 to 247,000.

The civil service is just one part of the public sector workforce, which has increased by 571,000 or 13% from 4,433,000 to 5,004,000 FTEs over the same period. 300,000 of the increase has been in the NHS (up 21% from 1,451,000 to 1,751,000 FTEs in September 2023), which after taking account of the 92,000 increase in the civil service means the rest of the public sector workforce (schools, police, army, local government and others) has grown by a relatively slower number of 179,000 or 7% from 2,578,000 to 2,757,000 over the same period.

The increases in the civil service reverse cuts in the austerity years that saw the civil service fall from 493,000 FTEs in September 2009 to 384,000 in June 2016, just before the Brexit referendum.

The UK’s departure from the EU Single Market and the EU Customs Union on 31 December 2020 has been a major driver in the increase, most prominently in the Home Office, which has grown by 15,000 from 29,000 to 44,000 FTEs. Machinery of government changes make it difficult to track the other impacts, but it is likely that another 20,000 of the increase is likely driven by Brexit, made up of small changes across Whitehall departments and individual agencies, such as the 80% increase in the size of the Rural Payments Agency (from 1,400 to 2,600), 

The individual agency with the largest increase is HM Prisons and Probation Service, up 15,000 from 49,000 to 64,000 as the outsourced probation was re-absorbed back into the civil service.

The pandemic also had a small impact on the civil service (as opposed to the NHS) with the Department of Health and Social Security more than doubling in size from just under 1,500 FTEs in September 2018 to almost 3,200 in September 2023.

Some increases are more difficult to attribute, such as the 30% increase in the size of the National Crime Agency from 4,200 to 5,500 or the 9% increase in the size of HM Revenue and Customs from 57,100 to 62,000. Brexit is likely to be part of the story following the reversion of responsibilities from Brussels to London, but the growth of cybercrime (for example) in the past few years will also have been a factor.

The civil service numbers reported by the Office for National Statistics exclude civil servants working for the Northern Ireland Executive and its agencies, but do include both the Scottish and Welsh governments. Most of the growth in numbers from 22,000 to 32,000 has been in Scotland as more powers have been devolved to its devolved administration, with the 16,800 FTEs in September 2018 growing by 9,700 or 58% to 26,500 in September 2023. The size of the civil service in Wales has gone up by a much more modest 700 or 13% from 5,200 to 5,900 in the same period.

One possible driver for some of the other increases is that cuts in the civil service made during the austerity years were never sustainable in the longer-term, with the demands that drove those numbers never having gone away. Another is that governments tend to want to “get things done” and there is therefore a need to find people to do them. 

Both of these factors may explain why both government departments and agencies have grown in size over the past half a decade.

While the civil service is less than 10% of the public sector workforce, it is often the first place that the government looks when it wants to find cost savings – and the current government is no different in seeking to cut the size of the civil service again. Whether those costs savings are sustainable in the long-term without more fundamental reform is another matter.

This chart was originally published by ICAEW.

ICAEW chart of the week: Exploding debt

My chart for ICAEW this week takes a look at how UK public debt has exploded since the financial crisis to more than quintuple from £0.6trn in March 2008 to a projected £3.1trn in March 2029.

Exploding debt Step chart showing how UK public sector net has changed between March 2008 and the projected position in March 2029. [debt bars shaded orange, changes shaded in purple] March 2008: £0.6trn Financial crisis: +£0.7trn March 2012: £1.3trn Austerity years: +£0.5trn March 2020: £1.8trn Pandemic / energy crisis: +£0.9trn March 2024: £2.7trn [bar colours shaded by 50% to indicate the following are projected numbers] Latest plan: +£0.4trn March 2029: £3.1trn 30 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: OBR, 'Public finances databank - Nov 2023'.

As illustrated by our chart this week, the sums borrowed by the government since the financial crisis of a decade and half ago have been truly astonishing. 

In March 2008, the official measure of net debt for the UK public sector was less than £0.6trn. During the financial crisis, government borrowing totalled £0.7trn over a four-year period, causing public sector net debt to more than double to £1.3bn in March 2012. 

The eight austerity years saw government cut spending on public services to a significant degree but still borrow a further £0.5trn to see net debt reach £1.8trn in March 2020 – arguably not mending the roof while the sun was shining. This was then followed by an exceptional amount of borrowing during four years of pandemic and energy crisis (including the current financial year) that is expected to see net debt increase by a total of £0.9trn to reach £2.7trn in March 2024.

The Autumn Statement 2023 on Wednesday 22 November saw the Chancellor set out his latest plan for the UK public finances over the next five financial years. This includes a further £0.4trn of borrowing, with public sector net debt projected to amount to £3.1trn in March 2029 – more than quintuple the net amount owed by the UK state 21 years earlier in March 2008.

This assumes that the government can stick to its borrowing plans – many commentators have suggested that planned cuts in spending on public services are unrealistic, meaning more borrowing if taxes are not to rise.

The £2.5trn increase in debt between 2008 and 2029 comprises £2.2trn in borrowing to fund 21 years of deficits (the annual shortfall between receipts and spending) and £0.3trn in other borrowing to fund government lending (such as student loans) and working capital requirements.

As a share of the economy, the increase is less dramatic but still significant – rising from a net debt to GDP ratio of 35.6% in March 2008, to 74.3% in March 2012, to 85.2% in March 2020, to an anticipated 97.9% in March 2024. However, the good news is that net debt / GDP is expected to fall to 94.1% in March 2029 as inflation and economic growth offset the additional borrowing.

The worry for this (or any alternative) government is that while borrowing levels in the OBR’s forecast spreadsheet for the next five years appear manageable and are (just) within the current fiscal rules, the numbers assume that we don’t enter another recession or other economic crisis in that time. Otherwise, we could see debt exploding again.

This chart was originally published by ICAEW.

ICAEW chart of the week: Autumn Statement 2023

My chart for ICAEW this week illustrates how Chancellor Jeremy Hunt used almost all of the available upside from inflation and fiscal drag to fund his tax measures and a series of business growth initiatives.

Autumn Statement 2023 Step chart (waterfall diagram) showing the average change to 2023/24 to 2027/28 forecasts since the Spring Budget 2023. Forecast revisions (steps in orange): Inflation +$41bn Fiscal drag +£7bn Other changes +£4bn Debt interest -£21bn Welfare uprating -£13bn = Forecast revisions +£18bn (subtotal in purple) Policy measures (steps in blue): Tax measures -£11bn Spending and other -£6bn = Net changes +£1bn (total in purple) 23 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Autumn Statement 2023'; OBR, 'Economic and fiscal outlook, Nov 2023'.

The Autumn Statement 2023 on Wednesday 22 November featured a surprise tax cut to national insurance and a perhaps less surprising decision to make full expensing of business capital expenditure permanent.

As my chart illustrates, the forecasts for the deficit over the next five years benefited by £41bn a year on average in higher receipts from inflation, £7bn a year on average in additional ‘fiscal drag’ as higher inflation erodes the value of frozen tax allowances more quickly, and a net £4bn in other upward forecast revisions. These improvements to the forecasts were offset by an average of £21bn a year in higher debt interest and £13bn from the expected inflation-driven uprating of the state pension and welfare benefits, to arrive at a net improvement of £18bn a year on average over the five financial years from 2023/24 to 2027/28 before policy decisions.

In theory, these upward forecast revisions should be absorbed by more spending on public services as higher inflation feeds through into salaries and procurement costs. However, the Chancellor has chosen to (in effect) sharply cut public spending and use almost all of the upward revisions to fund tax measures and business growth initiatives instead. These amounted to £11bn a year on average in tax changes and £6bn a year on average in spending increases and other changes to reduce the net impact to just £1bn a year on average over the five-year period.

The resulting net change of £1bn on average in forecasts for the deficit is to reduce the forecast deficit by £8bn for the current year (from £132bn to £124bn) and by £1bn for 2024/25 (to £85bn), with no net change in 2025/26 (at £77bn), an increase of £5bn in 2027/28 (to £68bn), and no net change for 2027/28 (at £49bn).

The main tax changes announced were the cuts in national insurance for employees by 2 percentage points from 12% to 10% and by 1 percentage point for the self-employed from 9% to 8%, reducing tax receipts by an average of £9bn over five years. This is combined with the effect of making full expensing permanent of £4bn – this change mainly affects the later years of the forecast (£11bn in 2027/28), although ironically the average is a better proxy for the long-term cost of this change, which the OBR estimates is around £3bn a year. 

Other tax changes offset this to a small extent. 

Spending and other changes of £6bn a year on average comprise incremental spending of £7bn a year plus £2bn higher debt interest to fund that spending, less £3bn in positive economic effects from that spending and from the tax measures above.

Although the cumulative fiscal deficit over five years has been revised down by £4bn, the OBR has revised its forecast for public sector net debt as of 31 March 2028 up by £94bn from to £3,004bn. This principally reflects changes in the planned profile of quantitative tightening and higher lending to students and businesses.

The big gamble the Chancellor appears to be making by choosing to opt for tax cuts now is that the OBR and Bank of England’s pessimistic forecasts for the economy are not realised – enabling him to find extra money in future fiscal events to cover the effect of inflation on public service spending. Otherwise, while it may be possible to cut public spending by as much as the Autumn Statement suggests, it is difficult to see how he can do so without a further deterioration in the quality of public services given he is not providing any additional investment in technology, people and process transformation to deliver sustainable efficiency gains.

This chart was originally published by ICAEW.

Public sector net debt hits an unprecedented £2.6trn

Monthly public sector finances for October saw spending continue to exceed receipts by a large margin, even if by less than was predicted earlier in the year.

The Office for National Statistics (ONS) released the month public sector finances for October on Tuesday 21 November 2023. It reported a provisional deficit for the month of October of £15bn, bringing the cumulative deficit for the first seven months of the year to £98bn, £22bn more than in the same period last year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Although it is positive that the cumulative deficit to October of £98bn is less than the £115bn predicted by the OBR, cash going out continues to exceed cash coming in by a very large margin. Public sector net debt has now exceeded £2.6 trillion for the first time, which is a staggering new record.  

“Tomorrow’s Autumn Statement will see the OBR revise and roll forward its forecast, giving the Chancellor so-called headroom to cut taxes or increase spending. But in reality there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”

Month of October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of October 2023 was £15bn, made up of tax and other receipts of £85bn less total managed expenditure of £100bn, up 3% and 6% respectively compared with October 2022. 

This was the second highest October deficit on record since monthly records began in 1993, following a monthly deficit of £18bn in October 2020 at the height of the pandemic.

Public sector net debt as of 31 October 2023 was £2,644bn or 97.8% of GDP, the first time it has exceeded £2.6trn – only eight months after it first reached £2.5trn.

Seven months to October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the seven months to October 2023 was £98bn, £22bn more than the £76bn deficit reported for the first seven months of 2022/23. This reflected a widening gap between tax and other receipts for the seven months of £595bn and total managed expenditure of £693bn, up 5% and 8% respectively compared with April to October 2022.

Inflation benefited tax receipts for the first seven months compared with the first half of the previous year, with income tax up 10% to £137bn and VAT up 9% to £117bn. Corporation tax receipts were up 12% to £55bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 4% to £99bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £8bn and the total for all other taxes was up just 3% to £115bn, much less than inflation as economic activity slowed. Non-tax receipts were up 10% to £63bn, primarily driven by higher investment income.

Total managed expenditure of £693bn in the seven months to October 2023 can be analysed between current expenditure excluding interest of £587bn, up £39bn or 7% over the same period in the previous year, interest of £76bn, up £4bn or 5%, and net investment of £30bn, up £9bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £20bn increase in pension and other welfare (including cost-of-living payments), £12bn in higher central government pay, £6bn in additional central government procurement spending, plus £1bn in net other changes.

The rise in interest costs for the seven months of £4bn to £76bn comprises a £18bn or 53% increase to £52bn for interest not linked to inflation as the Bank of England base rate rose, mostly offset by an £14bn or 37% fall to £24bn for interest accrued on index-linked debt from lower inflation than last year.The £9bn increase in net investment spending to £30bn in the first seven months of the current year reflects high construction cost inflation amongst other factors that saw a £11bn or 17% increase in gross investment to £65bn, less a £2bn or 6% increase in depreciation to £35bn. 

Public sector finance trends: October 2023 Table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the seven months to October 2023 plus net debt and net debt / GDP at 31 October 2023. Receipts: £466bn (Oct 2019), £425bn (Oct 2020), £500bn (Oct 2021), £565bn (Oct 2022), £595bn (Oct 2023) Expenditure: (£457bn), (£582bn), (£536bn), (£548bn), (£587bn) Interest: (£38bn), (£26bn), (£41bn), (£72bn), (£76bn) Net investment: (£20bn), (£42bn), (£28bn), (£21bn), (£30bn) [line above subtotal] Deficit: (£49bn), (£225bn), (£105bn), (£76bn), (£98bn) Other borrowing: £5bn, (£61bn), (£61bn), £5bn, (£7bn) [line above total] Debt movement: (£44bn), (£286bn), (£166bn), (£71bn), (£105bn) [line below total] Net debt: £1,821bn, £2,101bn, £2,319bn, £2,454bn, £2,644bn. Net debt / GDP: 82.1%, 99.3%, 97.5%, 95.5%, 97.8%

The cumulative deficit of £98bn is £17bn lower than the Office for Budget Responsibility (OBR)’s official forecast of £115bn for the first seven months of 2023/24 as compiled in March 2023. The OBR is expected to revise its forecast for the full year deficit down from £132bn in tomorrow’s Autumn Statement, but it is still on track to be more than double the £50bn projection for 2023/24 set out in the official forecast from a year earlier (March 2022). 

Balance sheet metrics

Public sector net debt was £2,644bn at the end of October 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £105bn, comprising borrowing to fund the deficit for the seven months of £98bn plus £7bn in net cash outflows to fund lending to students, businesses and others net of loan repayments together with working capital movements.

Public sector net debt is £829bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,106bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£716bn on 31 October 2023, comprising £1,565bn in non-financial assets, £1,029bn in non-liquid financial assets, £2,644bn of net debt (£305bn in liquid financial assets less public sector gross debt of £2,949bn) and other liabilities of £666bn. This is a £102bn deterioration from the -£614bn reported for 31 March 2023.

Revisions

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 latest release saw the ONS revise the reported deficit for the six months to September 2023 up by £1.7bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of September 2023 was revised down by 1.4 percentage points from 97.8% to 96.4% as a consequence of updated estimates of GDP.

This article was originally published by ICAEW.

ICAEW chart of the week: Pensioners dilemma

The ‘elephant in the room’ of growing numbers of pensioners and what that will mean for the long-term prospects of the public finances is likely to be avoided yet again at next week’s Autumn Statement.

Pensioners dilemma Two column chart with lines between them showing projected changes in the UK population between 2023 and 2043. 2023: 68.1m (left hand column) Change: +4.0m (+6%) 2043: 72.1m (right hand column) Split into two bars in each column. Pensioners (in purple) 2023: 12.4m Change: +3.3m (+27%) 2043: 15.7m Everyone else 2023: 56.7m Change +0.7m (+1%) 2043: 56.4m

My chart for ICAEW this week is on the ‘elephant in the room’ that haunts fiscal events such as next week’s Autumn Statement – the rapidly rising number of pensioners that is driving some of the biggest line items in the national budget: pensions, health and social care.

This fiscal event is unlikely to be any different, with the Chancellor expected to focus most of his statement on short-term measures to free up headroom for pre-election tax cuts at a time of stagnant economic growth.

Any substantive discussion on the long-term prospects for the public finances is likely to be absent beyond a continued commitment to seeing the debt to GDP ratio start to fall within the next five years. How he – or more likely his successors – might be able to avoid having to raise taxes significantly in the coming decades to pay for the cost of pensions, health and social care for many more people, living longer, sometimes less healthy lives, is unlikely to be at the core of what is announced.

To illustrate the dilemma facing policymakers and the public, our chart shows how pensioners represent 3.3m out of the 4.0m projected increase in the size of the UK population between 2023 and 2043. The total population of the UK is projected to increase by 6% from 68.1m in 2023 to 72.1m in 2043, with the number of pensioners expected to increase by 27% from 12.4m this year to 15.7m in 20 years’ time. 

The number of non-pensioners is expected to increase by 0.7m or 1% from 55.7m to 56.4m, with net inward migration of 5.0m over that period offsetting what would otherwise be a significant fall in the numbers below retirement age. (Not shown in the chart is a projected 3% rise in the working age population and a 7% fall in the number of children.)

The projected 27% rise in the number of pensioners is despite a planned increase in the state pension age from age 66 to age 67 in 2027, one of the few long-term steps the government has taken to mitigate the fiscal effects of rising pensioner numbers. However, increasing the retirement age doesn’t directly impact health and social care costs, as well as being partly offset by the cost of supporting increasing numbers of people out of work between traditional retirement age and the age at which they can take their state pension.

Given the significance of the demographic challenge to the public finances, there is very little public debate on what to do, especially as the current policy of cutting the proportion of spending going on public services outside of health appears increasingly unsustainable. 

Spending on defence and security (the traditional budget to raid) is already close to the NATO minimum and appears likely to need to increase given the global security situation, while extracting further savings from other public services seems extremely unlikely, especially given the reluctance of successive governments to put in the level of upfront and ongoing capital investment that might make operational savings possible.

The irony is that, unlike the game-theory scenario of the prisoners’ dilemma that makes optimal decision-making difficult for two prisoners who can’t communicate with each other, there is no theoretical restriction on the ability of policymakers to talk to the public about the pensioners dilemma and to have a proper debate about that might mean for taxes and public services in the long term.

Read more: ICAEW Autumn Statement 2023 hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: US federal government deficit 2023

My chart this week looks at the federal deficit of $1.7trn reported by the US government for its recently completed financial year ended 30 September 2023.

Column chart split into three vertical sections: receipts, outlays and deficit. Actuals for the five years to the year ended September 2023, then budget for Y/E Sep 2024. Y/E Sep 2019: $3.5trn receipts - $4.5trn outlays = -$1.0trn deficit Y/E Sep 2020: $3.4trn - $6.5trn = -$3.1trn Y/E Sep 2021: $4.0trn - $6.8trn = -$2.8trn Y/E Sep 2022: $4.9trn - $6.3trn = -$1.4trn Y/E Sep 2023: $4.4trn - $6.1trn = -$1.7trn Y/E Sep 2024 (Budget): $5.0trn - $6.9trn = -$1.9trn 26 Oct 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: US Department of the Treasury; US Office of Budget and Management.

The US Department of Treasury published on 20 October 2023 its final monthly treasury statement for the US government’s financial year ended 30 September 2023 (FY2023), enabling our chart this week to look at the actual numbers over the past five years and the budget for the new financial year that started on 1 October.

Our chart illustrates how the deficit increased significantly from the $1.0trn reported for FY2019 ($3.5trn receipts less $4.5trn outlays) to $3.1trn in FY2020 ($3.4trn-6.5trn) and $2.8trn in FY2021 ($4.0trn-$6.8trn) at the height of the pandemic, before falling to $1.4trn in FY2022 ($4.9trn-$6.3trn) as the US economy recovered. The deficit by $0.3trn increased to $1.7trn in FY2023 ($4.4trn-$6.1trn) and is budgeted to increase by a further $0.2trn to $1.9trn in FY2024 ($5.0trn forecast receipts-$6.9trn forecast outlays).

Not shown in the chart is the excess of financial liabilities over financial assets, which increased by $1.7trn from $22.3trn on 30 September 2022 to $24.0trn on 30 September 2023. This differs from ‘debt held by the public’ (the headline measure of federal debt), which increased by $2.0trn from $24.3trn to $26.3trn, more than the federal deficit because of movements in other financial assets and liabilities.

Receipts in FY2023 of $4,439bn comprised $2,176bn in individual income taxes, £1,614bn in social security and retirement contributions, $420bn in corporation income taxes, $80bn in customs duties, $76bn in excise taxes, £34bn in estate and gift taxes and $39bn in other receipts. Outlays for same period of $6,134bn comprised $1,737bn on health and Medicare, $1,354bn on social security, $821bn on defence, $774bn in welfare benefits, $659bn in interest, $302bn for veteran services and benefits, $127bn on transportation, $100bn on commerce, and $260bn on other outlays. 

The latter includes the administration of justice, agriculture, community and regional development, education, training, employment and social services, energy, general government, general science, space and technology, international affairs, natural resources and environment, and undistributed offsetting receipts.

These amounts are different from the accruals-based US GAAP federal government financial statements for FY2023 that are expected to be published next April, which will show a much larger accounting loss than the federal deficit reported here. For example, the FY2022 net operating cost (ie accounting loss) of $4.2trn was $2.8trn higher than the federal deficit of $1.4trn for last year, of which the largest difference of $2.6trn related to accruals for federal employee and veteran benefits.

These amounts appear astronomical, especially to those of us living in smaller (and unfortunately) less prosperous countries than the 335m people who live in the US, with its estimated GDP of $26.3trn in FY2023 – equivalent to around $6,600 per person per month.

Federal receipts and outlays in FY2023 represented 17% and 23% of GDP respectively or on a per capita basis were approximately $1,105 and $1,525 per person per month. The federal deficit was therefore equivalent to 6% of GDP or $420 per person per month. 

The excess of financial liabilities over financial assets and debt held by the public were 91% and 100% of GDP respectively, equivalent to an amount owed of around $71,500 or $78,500 per person, depending on which measure is used.

This chart was originally published by ICAEW.

ICAEW chart of the week: Home Office financial statements 2022/23

The Home Office spent £24.5bn in 2022/23 according to its recently published annual financial report, funded by £5.4bn in income and £19.2bn in net parliamentary funding.

Column chart showing main components of the Home Office financial statements 2022/23. Column 1: Net parliamentary funding £19.2bn Column 2: Income £5.4bn = Customer contracts £3.7bn + Other income £1.7bn Column 3: Expenditure (£24.5bn) = Police grants (£9.2bn) + Other grants (£5.6bn) + Goods and services (£4.3bn) + Staff costs (£2.4bn) + Other operating costs (£3.0bn) 21 Sep 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Home Office, 'Annual Report and Accounts 2022/23'.

The Home Office published its Annual Report and Accounts for the year ended 31 March 2023 on 19 September 2023. 

Net expenditure in 2022/23 was £19.1bn, comprising expenditure of just over £24.5bn net of income of £5.4bn, while parliamentary funding net of other items amounted to £19.2bn.

The Home Office breaks down its income for the year of £5.4bn between revenue from contracts with customers of £3.7bn and other income of £1.7bn. The former includes £2.2bn from visa and immigration charges, £0.6bn in passport fees, £217m for the disclosure and barring service (DBS), and £0.7bn from other sources. Other income is primarily comprised of immigration health surcharges payable by foreign residents and visitors for the use of the National Health Service, a proportion of which is transferred to the Department of Health and Social Care and the devolved administrations.

As our chart this week illustrates, the majority of the Home Office’s spending is in the form of grants. The largest grants, totalling £9.2bn, are to local police forces across England to supplement the council tax precepts they raise locally. Other grants include £1.7bn to top up police pensions, £0.4bn to top up fire and rescue services pensions, £3.3bn in other operating grants (many of which also go to police forces, in addition to transfers to other government departments) and £209m in capital grants.

Purchases of goods and services of £4.3bn is dominated by the £3.1bn paid in relation to asylum and detention, together with £287m in facilities management and staff services, £229m on professional fees, £219m for media and IT, £169m for passport printing and stationery and £120m for visa and immigration commercial partners amongst other costs.

Staff costs of £2.4bn cover the costs of employing full-time equivalent averages of 41,607 permanent staff, seven ministers, seven special advisers, and 6,489 other staff during 2022/23. Wages and salaries amounted to £1.8bn, equivalent to an average full-time equivalent salary of £37,900. 

At 31 March 2023 there were 345 senior civil servants on salaries in excess of £70,000, of which 251 were between £70,000 and £100,000, 86 between £100,000-£150,000 and eight between £150,000 and £190,000. The average of seven government ministers who served during the year (a total of 22 different individuals!) earned the equivalent of an average annual salary not including pension entitlements of around £49,000 in addition to their parliamentary salary or House of Lords attendance allowances.

Other operating costs of £3.0bn include £1.6bn on IT and accommodation-related service charges, £0.7bn for depreciation and amortisation of assets, and £113m in asset recovery costs together with other costs.

Parliamentary funding net of other items of £19.2bn is reported in the consolidated statement of taxpayers’ equity and comprised £19.4bn in drawn-down parliamentary funding, £0.3bn in deemed funding less £0.5bn in amounts repayable.

Not shown in the chart is the Home Office’s consolidated balance sheet, which comprised £2.6bn in non-current assets, trade and other receivables of £0.7bn and cash and cash equivalents of £0.6bn less trade and other payables of £3.7bn, £0.6bn in lease liabilities and £0.5bn in provisions to give net liabilities of £0.9bn. 

Reported in the notes to the accounts are £0.8bn in capital additions, of which £374m was incurred on software and other intangible assets.

Find out more: Home Office annual report and accounts: 2022 to 2023.

This chart was originally published by ICAEW.