Tag: #publicspending

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: Criminal justice

My chart this week looks at how the criminal justice system in England and Wales is performing by examining how long cases are taking to make their way through the Crown Courts to completion.

Criminal justice Line chart showing median time in days between offence and completion 210 days in 2014 Q1 rising and falling to 248 in 2015 Q2 242 in 2016 Q1 260 in 2016 Q2 and Q3 230 in 2017 Q4 245 in 2018 Q2 230 in 2018 Q3 254 in 2020 Q1 falling to 211 in 2020 Q2 rising sharply to 438 in 2021 Q3 falling to 351 in 2022 Q3 rising to 398 in 2023 Q1 falling slightly to 387 in 2023 Q2 2 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Ministry of Justice, 'England and Wales criminal court statistics: Apr to Jun 2023'.

My chart this week is inspired by the Institute for Government (IfG) and CIPFA Performance Tracker 2023 published on 31 October 2023. Concluding that “government is stuck in a public service doom loop”, IfG and CIPFA together analyse how the performance of key public services has deteriorated in recent years, and not just because of the pandemic.

The chart (an expanded version of Figure 0.1 in the Performance Tracker) is based on the median time between an offence being committed and completion (conviction, acquittal or dismissal) in Crown Courts in England and Wales, according to Ministry of Justice statistics for the criminal justice system up to June 2023. 

This is a key metric in understanding how efficient the police, prosecutors and courts together are in bringing criminals to justice, as well as an indicator of just how long the lives of victims, their families, witnesses and defendants are being put on hold while cases work their way through the system.

Back in the first quarter of 2014, the median time from offence to completion was 210 days (6.9 months). This trended up to reach 248 days (8.2 months) in 2015 Q2, before hovering around that level in the years before the pandemic, with our chart highlighting how it fell to 242 in 2016 Q1, rose to 260 in 2016 Q2 and Q3, fell to 230 in 2017 Q4, rose to 245 in 2018 Q2, back to 230 the following quarter, before rising to 254 days (8.4 months) in the first quarter of 2020 at the start of the pandemic. 

The median fell to 211 days in 2020 Q2 as more complex cases were deferred during the first lockdown, increasing sharply to reach a peak of 438 days (14.4 months) by the third quarter of 2021. The time taken improved to 351 days (11.5 months) by the third quarter of 2022 as the courts started to clear the backlog, but then increased to 398 days (13.1 months) in the first quarter of 2023. The most recent data is for the second quarter, with a median average time taken of 387 (12.7 months) for cases completing in that quarter.

While there are inevitably going to be a number of complex criminal cases that are going to take a long time to be investigated and then come to trial, for the median average case to be taking more than a year to complete its journey through the justice system in England and Wales is not a good sign.

Read more:

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.

August public sector finances: fourth-highest monthly deficit on record

Deficit marginally better than had been expected according to the latest figures from the ONS, but costly public sector problems emerge.

 The monthly public sector finances for August 2023 were released by the Office for National Statistics (ONS) on Thursday 21 September 2023. These reported a provisional deficit for the fifth month of the 2023/24 financial year of £12bn, bringing the total deficit for the five months to £70bn, £19bn more than in the same period in the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “While August’s deficit was marginally better than expected, problems costly to the public sector continue to emerge, from crumbling concrete in public buildings to Birmingham Council’s recent bankruptcy, and are likely to weigh on the Chancellor’s mind as he considers November’s Autumn Statement. 

“Both main parties are rightly cautious about making new public spending commitments in the current economic environment, including whether or not to extend the state pension triple lock into the next parliament. Whether they can hold this position as they enter into the party conference season remains to be seen.”

Month of August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of August 2023 was just under £12bn, being tax and other receipts of £84bn less total managed expenditure of £96bn – up 5% and 8% respectively compared with August 2022.

This was the fourth highest August deficit on record since monthly records began in 1993, following the deficits of £14bn in August 2021 and £24bn in August 2020 during the pandemic and £12bn in August 2009 during the financial crisis.

Five months to August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the five months to August 2023 was £70bn, £20bn more than the £50bn deficit reported for the first five months of 2022/23. This reflected a widening gap between tax and other receipts for the five months of £428bn and total managed expenditure of £498bn, up 7% and 10% respectively compared with April to August 2022.

Inflation benefited tax receipts for the first five months compared with the previous year, with income tax and VAT receipts both up 12% to £104bn and £84bn respectively. However, corporation tax was only up 13% to £37bn despite the increase in the corporation tax rate from 19% to 25% from 1 April 2023, and national insurance receipts were down by 3% to £71bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by £2bn or 29% to £6bn and the total for all other taxes was up just 3% to £82bn as economic activity slowed. Non-tax receipts were up 12% to £44bn, primarily driven by higher investment income.

Total managed expenditure of £428bn in the five months to August can be analysed between current expenditure excluding interest of £418bn (up £34bn or 9% over the same period in the previous year), interest of £61bn (up £6bn or 11%), and net investment of £19bn (up £7bn or 57%).

The increase of £34bn in current expenditure excluding interest compared with the prior year has been driven by a £14bn increase in benefit payments, £9bn in higher central government staff costs, £5bn in additional central government procurement spending and £5bn in energy support scheme costs, plus £1bn in net other changes.

The rise in interest costs of £6bn to £61bn reflects a £14bn increase in interest on non-inflation linked debt to £38bn as the Bank of England base rate rose, offset by an £8bn fall in the interest payable on index-linked debt to £23bn as inflation is running at a lower level than it was for the same period last year.

The £7bn increase in net investment spending to £15bn in the first five months of the current year reflects high construction cost inflation among other factors that saw an £8bn or 23% increase in gross investment to £44bn, less a £1bn increase in depreciation to £25bn. 

Public sector finance trends: August 2023 Image of a table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the five months (cumulative) to Aug 2019, 2020, 2021, 2022 and 2023 respectively. Receipts: £336bn (for the five months to Aug 2019(, £298bn, £355bn, £401bn, and £428bn (for the five months ended Aug 2023). Expenditure excluding interest: (£323bn), (£428bn), (£386bn), (£384bn) and (£418bn). Interest (£28bn), (£18bn), (£30bn), (£55bn) and (£61bn). Net investment: (£13bn), (£30bn), (£18bn), (£12bn) and (£19bn). (Subtotal) Deficit: (£28bn), (£178bn), (£79bn), (£50bn) and (£70bn). Other borrowing: £13bn, (£74bn), £6bn, £2bn and £14bn. (Total) Debt movement: (£15bn), (£252bn), (£73bn), (£48bn) and (£56bn). Net debt: £1,792bn, £2,067bn, £2,226bn, £2431bn and £2,594bn. Net debt / GDP: 79.8%, 98.8%, 96.2%, 96.5% and 98.8%,

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 four months to July 2023 up by £2bn as estimates of tax receipts and expenditure were updated for better data, and it also reduced the reported deficit for the 2022/23 financial year by £1bn to £128bn for methodology changes in addition to new data. 

The methodology changes also saw small revisions in the reported deficits for previous periods back to 1999, most notably reductions of £1bn to the deficits in 2019/20 and 2020/21 and an increase of £2bn in the reported deficit for 2021/22.

Balance sheet metrics

Public sector net debt was £2,594bn at the end of August 2023, equivalent to 98.8% of GDP.

The debt movement since the start of the financial year was £56bn, comprising borrowing to fund the deficit for the five months of £70bn less £14bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £779bn or 43% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£618bn on 31 August 2023, comprising £1,604bn in non-financial assets, £1,038bn in non-liquid financial assets, £2,594bn of net debt (£339bn in liquid financial assets less public sector gross debt of £2,933bn) and other liabilities of £667bn. This is a £61bn deterioration from the -£557bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to over £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

This article was originally published by ICAEW.

July public sector finances: a mixed set of results

Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.

The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.

“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”

Month of July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.

This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.

Four months to July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.

Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.

Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).

The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.

The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose. 

The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn. 

Public sector finance trends: July 2023

 Four months toJul 2019 (£bn)Jul 2020 (£bn) Jul 2021 (£bn) Jul 2022 (£bn) Jul 2023 (£bn)
 Receipts270234282320343
 Expenditure(259)(348)(310)(308)(334)
 Interest(24)(15)(23)(44)(51)
 Net investment(10)(26)(13)(11)(15)
 Deficit(23)(155)(64)(43)(57)
 Other borrowing 4 (66) (22) 5 10
 Debt movement(19)(221)(86)(38)(47)
 Net debt 1,7962,0362,2392,4202,579
 Net debt / GDP 80.1% 96.9% 97.7% 96.6% 98.5%
Source: ONS, ‘Public sector finances, July 2023’.


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 three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.

The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

For further information, read the public sector finances release for July 2023.

This article was originally published by ICAEW.

Councils should ‘comply or explain’ on governance code

ICAEW welcomes proposed statutory guidance that establishes a corporate governance code for local authorities in England, but says councillors need better training and support if they are to be able to hold leaders to account.

Financial collapses and major stresses in local government finances have led the government to undertake a major rewrite of the applicable statutory guidance, in effect establishing a corporate governance code for local authorities in England.

ICAEW has formally responded to welcome the proposed new guidance, while also making some recommendations for improvements.

The government is introducing the new guidance in response to a series of high-profile collapses of local authorities in England in which governance failures were identified as a common feature, as well as an increasing number of local authorities reporting that they are in financial difficulty or at risk of being so.

Local authorities in Thurrock, Woking and Croydon are together estimated to have lost local and national taxpayers in excess of £1bn, with their communities adversely affected by significant cuts to local public services and higher council tax bills. Central government has also stepped in to provide additional funding and loans, some of which are unlikely ever to be repaid.

The proposed guidance technically relates to the ‘best value duty’, a legal obligation placed on specified public sector bodies, including local authorities, to have arrangements in place to secure continual improvement in how they carry out their work. Relevant public bodies are required to have regard to any statutory guidance issued by the government in deciding how they comply with this duty.

As the proposed guidance acknowledges, meeting the best value duty will only be possible if councils have adequate governance arrangements in place. It goes on to set out a series of characteristics of well-functioning authorities, as well as indicators of potential failure, covering continuous improvement, leadership, governance arrangements, culture, use of resources, service delivery, and partnerships and community engagement.

Accountability is not accidental

ICAEW has suggested a need for accountability events. These should include a formal presentation on financial performance and position each year by leaders and officers to councillors within four months of the end of the financial year, and proper consideration and adoption by full council of the annual financial report once the external audit is completed. The latter should cover the financial statements and accompanying narrative reports on financial performance and position, audit reports, and statements on governance arrangements; regard for the statutory guidance on best value duty; and responsibilities for the preparation of the financial statements and internal financial control.

ICAEW has recommended a ‘comply or explain’ approach when local authorities report on how they have had regard to the guidance. This would provide clarity on how local authorities have set about applying the guidance, where they have chosen to diverge, and where they have been unable to comply.

A feature of recent failures has been inadequate accountability, with councillors not being properly equipped to hold leaders and officers to account for unwise debt-leveraged investment strategies, poor individual financial decisions, and inadequate governance arrangements. In most cases councillors were not fully aware or did not fully understand the scale of the risks that were being assumed and the consequent financial implications for their local communities. ICAEW’s response stresses that councillors need sufficient training, information and support to undertake this role.

ICAEW has separately submitted evidence to the House of Commons Levelling Up, Housing and Communities Select Committee on how local authority financial statements must be understandable if they are to provide the information councillors need to hold their local authorities to account and to be used effectively in governance and risk management processes.

Good governance is critical

The proposed guidance stresses the importance of good governance and strong financial management, providing a useful framework for local authorities in how they set about ensuring they have appropriate governance arrangements in place.

However, the proposed guidance does not make it clear that performance management should include monitoring and management of the balance sheet and financial risks, a feature that was missing in recent local authority failures that saw debt-leveraged investments significantly increase balance sheet risk.

ICAEW’s response also highlights the role that internal audit can play in assuring governance arrangements are in place, while noting that local councillor codes of conduct will need to be updated to reflect the new guidance.

The role of the audit committee is extremely important to an effective system of governance, and ICAEW calls for the government to legislate, as promised, to require independent members of local authority audit committees.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, commented:

“We are very pleased that the government has recognised the need for a corporate governance code for local government in the form of new statutory guidance on the best value duty. This is particularly welcome in the light of recent financial collapses at Thurrock, Woking and Croydon that together have cost local and national taxpayers in excess of £1bn, as well as increasing levels of financial stress on local authorities across England.

“We believe that accountability does not happen by accident. There is a need for regular accountability events covering financial performance and the annual financial report as well as budgets, for a ‘comply or explain’ approach to reporting on how the best value duty guidance has been implemented, and for councillors to be properly equipped with the training, information and support they need to hold leaders and officers to account.

“Good governance is essential if local authorities in the UK are to ensure they obtain value for the more than £200bn of public money they spend each year on our behalf.”

Read ICAEW’s response to the consultation here.

This article was first published by ICAEW. The article, and the consultation response it refers to, were written by Martin Wheatcroft of behalf of ICAEW.

ICAEW chart of the week: Whole of Government Accounts 2020/21

My chart this week looks at the £3.3trn of net liabilities presented in the UK government’s consolidated financial statements for the year ended 31 March 2021 that were finally published more than 27 months after the balance sheet date.

Two column chart showing assets and liabilities that make up net liabilities of £3.3trn reported in the Whole of Government Accounts 2020/21 at 31 March 2021: Assets £2.2trn Fixed assets £1.3trn Receivables £0.2trn Investments £0.4trn Financial assets £0.3trn Liabilities (£5.5trn) Financial liabilities (£2.6trn) Payables (£0.2trn) Provisions (£0.4trn) Pensions (£2.3trn)

The UK’s Whole of Government Accounts for the year ended 31 March 2021 were published and submitted to Parliament on 20 July 2020, more than 27 months after the balance sheet date. These are consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) that incorporate the financial results of more than 10,000 public bodies in the UK across central government, local government, and other parts of the public sector. 

The Whole of Government Accounts provide a much more comprehensive picture of the financial performance and position of the UK public sector than is presented in the statistics-based National Accounts, using a financial language familiar to millions of users of financial reports in the private sector. 

As our chart this week highlights, the statement of financial position (balance sheet) of the UK public sector at 31 March 2021 was in heavily negative territory with £3.3trn in net liabilities, comprising assets of £2.2trn less liabilities of £5.5trn. This compares with net liabilities of £2.8trn a year earlier.

Assets of £2.2trn comprised £1.3trn in tangible and intangible fixed assets, £0.2trn in receivables and other non-financial assets, £0.4trn in non-current investments and £0.3trn in cash and other current financial assets. Liabilities of £5.5trn comprised £2.6trn in debt and other financial liabilities, £0.2trn in payables, £0.4trn in provisions and £2.3trn in net pension obligations.

Fixed assets of £1,313bn consisted of infrastructure assets of £677bn, land and buildings of £409bn, plant and equipment of £184bn, and intangible assets of £41bn. Receivables and other non-financial assets of £218bn comprised £164bn in tax receivable and accrued, £39bn in other receivables, prepayments and accruals, and £15bn in inventories. Non-current investments of £360bn comprised £152bn in loans and deposits, £85bn in student loans, £44bn in equities, £60bn in other financial investments, £16bn in investment properties, and £3bn in assets held for sale. Cash and other current financial assets of £317bn comprised £40bn in cash and cash equivalents, £12bn in gold, £129bn in debt securities, £101bn in loans and deposits, and £35bn of other financial assets.

Debt and other financial liabilities of £2,639bn comprised £1,265bn in externally held gilts, £203bn in direct borrowing from the public through National Savings & Investments, £53bn in short-term treasury bills, £815bn in Bank of England deposits, £84bn in bank and other borrowing, £85bn in banknotes, £27bn in derivatives, £20bn in financial guarantees, and £87bn in other financial liabilities. Payables of £221bn comprised £44bn in trade and other payables, £81bn in accruals and deferred income, £55bn in tax refunds, and £41bn on PFI, finance leases and other contracts. Provisions of £366bn consisted of £159bn for nuclear decommissioning, £87bn for clinical negligence, £36bn for payments to the EU, £29bn for the Pension Protection Fund, and £55bn in other provisions for liabilities and charges. Net public sector pension obligations of £2,306bn comprised £2,168bn in unfunded pension obligations (including £792bn for the NHS, £501bn for teachers, £339bn for the civil service, £254bn for the armed forces, £209bn for police and fire services, and £73bn other) and a net £138bn (£479bn of obligations less £341bn in fund assets) for local government and other funded pension schemes. 

Not shown in the chart is the revenue and expenditure statement, which reported revenue of £732, expenditure of £1,063bn and finance and other items of £73bn to give a net accounting loss for the year of £404bn – more than twice the £192bn loss reported for the pre-pandemic year. The financial statements covered the first year of the coronavirus pandemic, which saw income fall and costs soar, resulting in net borrowing during the year of £524bn according to the cash flow statement.

The Whole of Government Accounts is probably the most important report published by the UK government each year, but you wouldn’t have known that by the lack of fanfare on its publication amid the wave of hundreds of other documents released ahead of the parliamentary recess. This may be driven by understandable embarrassment by the length of time it has taken to prepare them – more than 27 months after the balance sheet date compared with the nine months that is its long-term aim – as well as by the gaps in preparation caused by local authorities and other public bodies that are substantially behind in producing their individual financial statements, leading to an additional audit qualification for completeness this year.

Despite that, and the other audit qualifications that highlight problems with the numbers reported, every citizen ideally should read the Whole of Government Accounts 2020/21. After all, it tells the financial story of the most dramatic year in recent history.

Read more: Whole of Government Accounts 2020/21.

This chart was originally published by ICAEW.

ICAEW chart of the week: A big number

Public spending is expected to approach £1.2trn this year, an extremely large and incomprehensible number to most of us. Our chart this week attempts to make that number more digestible.

Chart labelled 'A big number' comprising nine boxes in a grid each with the same number in nine difference versions: First row of three boxes - £1.2bn for UK budgeted public spending in 2023/24 - equivalent to £99bn per month - or £23bn per week Second row: - £1.2bn is equivalent to £41,600 per household in 2023/24 - or £3,470 per household per month - or £800 per household per week Third row: - £1.2bn is equivalent to £17,400 per person for 2023/24 - or £1,450 per person per month - or £335 per person per week

Public spending in the current financial year is budgeted to amount to £1,189bn or just under £1.2trn. But what does such a large number really mean? 

It can be difficult to comprehend the sheer scale of public spending that a major economy such as the UK incurs each year. The 2023/24 budget of £1,189,000,000,000 is just a huge amount of money to think about.

One way to understand the number is to break it down a little; knowing that the UK public spending is expected to be an average of £99bn a month or £23bn a week during the current financial year helps a little. However, smaller but still exceptionally large amounts can be equally difficult to understand.

The traditional way to look at the public finances, not shown in the chart, is to relate it to the size of the UK economy. GDP is projected to amount to £2,573,000,000,000 in 2023/24, meaning that public spending should be equal to around 46% of the overall economy. However, while this is helpful in putting public spending into context, it is still just a ratio between two incredibly large numbers that very few of us really comprehend. Surely there must be a better way of getting to grips with the public finances.

Our chart this week attempts to do so. By dividing the total for public spending by the number of households in the UK (expected to reach around 28.6m in September, the middle of the financial year) and by the size of the UK population (anticipated to be approximately 68.2m) as well as by month and by week, we can hopefully get a better a feeling for what is going on.

As our chart this week illustrates, average public spending in 2023/24 is equivalent to £41,600 per household, which breaks down to £3,470 per household per month or £800 per household per week, and it may be helpful to think about public spending. Whether you prefer to think in annual, monthly or weekly time periods, they are pretty big numbers in the context of most people’s household budgets.

Alternatively, you may find it easier to identify with how public spending in 2023/24 is equivalent to an average of £17,400 per person living in the UK, breaking down to £1,450 per person per month or £335 per person per week. Again, a very large number, particularly when you realise the average covers children as well as the adult population.

In some ways these much smaller versions of a big number – such as public spending of £3,470 per household per month – feel a lot larger when brought into a more relatable context. The figure of £1.2trn is baffling, but when you know the UK public sector plans to spend £800 per week for each of its 28.6m households, you get a better sense of just how much the UK state spends.

Of course, in working out averages it is important to be clear that they are just that – averages. Many people will benefit more, or less, from public spending than others, while conversely different groups will pay more or less in the taxes needed to fund that spending. Pensioners and children generally pay much less in taxes than those of working age, while benefiting from a much greater proportion of public spending. Similarly, poorer households will receive more in benefits and other forms of support, while richer households pay more in taxes. 

Despite that, per household and per person averages give us an opportunity to compare public spending with reference points we can relate to, such as our own salary or household budget.

One of the reasons the numbers are so high, whichever way you look at them, is that the state does an awful lot. Average spending planned of £1,450 per person per month can be broken down further to approximately £420 on pensions and welfare, £350 on health and social care, £160 on education, £140 on defence, security, policing and justice, £140 on debt interest, £75 on transport, and £165 per person per month on everything else. Each of these in turn are made up of hundreds if not thousands of different central and local government programmes, many costing mere fractions of a penny per person per month, but that together add up to a lot of money.

No matter how you break it down, public spending will always be a huge number.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public finances 2022/23

The public finances continue to be battered by economic shocks as this week’s chart on the past five years of red ink illustrates.

Column chart with five financial years illustrating tax and other receipts (top bar) less total managed expenditure (middle bar) = deficit (bottom bar). 2018/19 outturn: £813bn - £837bn = -£44bn 2019/20 outturn: £827bn - £888bn = -£61bn 2020/21 outturn: £793bn - £1,106bn = -£313bn 2021/22 outturn: £920bn - £1,041bn = -£121bn 2022/23 provisional: £1,016bn - £1,155bn = -£139bn

The monthly public sector finances for March 2023 released on Tuesday 25 April contained the first cut of the government’s financial result for 2022/23, with our chart this week illustrating trends over the past five years in receipts, expenditure and the deficit.

As our chart highlights, tax and other receipts increased from £813bn in 2018/19 to £827bn in 2019/20, before falling to £793bn during the first year of the pandemic. They recovered to £920bn in 2021/22 before rising with inflation to a provisional estimate of £1,016bn for the year ended 31 March 2023.

Total managed expenditure (TME) increased from £857bn in 2018/19 to £888bn in 2019/20, before exceeding £1trn for the first time in 2020/21 as the pandemic caused expenditure to rise significantly. TME fell in 2021/22 to £1,041bn as pandemic-released spending was scaled back, before rising this year to £1,155bn as inflation, higher interest rates and energy support packages more than offset the pandemic related spending that was not repeated in 2022/23.

The deficit of £44bn in 2018/19 was the lowest it had been since the financial crisis, following an extended period of spending restraint over a decade. The purse strings were loosened a little in 2019/20 as previous government plans to eliminate the deficit were abandoned, with the deficit rising to £61bn. The huge cost of the pandemic saw the deficit rise to £313bn in 2020/21 as the borrowing rose to meet the huge costs of dealing with the pandemic, before falling back to £121bn in 2021/22.

There were hopes that the situation would improve further, with the government in October 2021 budgeting for a deficit of £83bn. Unfortunately, rampant inflation and the energy crisis following Russia’s invasion of Ukraine mean that the government does not currently expect to reduce the deficit to below £50bn until 2027/28 at the earliest. And that is with what some commentators believe are unrealistic assumptions about the government’s ability to reduce spending on public services beyond the cuts already delivered.

Provisional receipts in 2022/23 were 25% higher than the outturn for 2018/19, which in the absence of economic growth has principally been driven by inflation of around 15% over that period combined with an increase in the level of taxation and other receipts from around 37% to approaching 41% of the economy. Total managed expenditure is provisionally 35% higher than in 2018/19, although this includes substantial amounts of one-off expenditures on the energy support packages and index-linked debt interest that should moderate, at least assuming inflation reduces in the coming financial year.

Not shown in the chart is what these numbers mean for public sector net debt, which has increased by £753bn over the past five years from £1,757bn at 1 April 2018 to a provisional £2,530bn at 31 March 2023. This comprises £678bn in borrowing to fund the deficits shown in the chart, and £75bn to fund lending by government and working capital requirements.

Our chart this week may be well presented, but it is not a pretty picture.

This chart was originally published by ICAEW.