I take a look at Africa this week and how its current population of 1.5bn, 18% of the world’s total, is distributed across the continent.
My chart this week illustrates how Africa’s population of 1,460m can be divided into five regions. These comprise Western Africa with 435m people, Northern Africa with 221m, Central Africa with 178m, Southern Africa with 198m, and Eastern Africa with 428m.
These regions are based on the African Union’s official regions for its 55 member states, which differ from the regions used by the United Nations. They include Réunion (1.0m) and Mayotte (0.3m), two French overseas territories in the Indian Ocean that are not members of the African Union, as well as St Helena (5,000), an overseas territory of the UK in the Atlantic. It also includes an estimated 5.8m people living in African Union applicant Somaliland that are included within the number for Somalia.
Excluded are 175,000 or so people living on the African continent in Ceuta and Melilla (Spain), around 2.2m and 250,000 respectively in the Atlantic Ocean on the Canary Islands (Spain) and Madeira (Portugal), and several hundred people in the Indian Ocean within France’s Southern Territories.
The table below breaks down the total by country within each region, highlighting how the four largest countries by population each have more than 100m people, led by Nigeria with 223.8m (15.3% of Africa’s total), Ethiopia with 126.5m (8.7%), Egypt with 112.7m (7.7%) and the Democratic Republic of the Congo with 102.3m (7.0%).
The next largest are Tanzania with 67.4m (4.6%), South Africa with 60.4m (4.1%), Kenya with 55.1m (3.8%), Uganda with 48.6m (3.3%), Sudan with 48.1m (3.3%), Algeria with 45.6m (3.1%), Morocco with 37.8m (2.6%), Angola with 36.7m (2.5%), Ghana with 34.1m (2.3%), Mozambique with 33.9m (2.3%), Madagascar with 30.3m (2.1%) and Côte d’Ivoire with 28.9m (2.0%).
The population of Africa is expected to grow significantly over the rest of the century, with the UN’s medium variant projecting a population of 1.7bn (20% of the projected global total) in 2030, 2.1bn in 2040 (23%), 2.5bn (26%) in 2050, 2.9bn (28%) in 2060, 3.2bn (31%) in 2070, 3.5bn (34%) in 2080, 3.7bn (36%) in 2090 and 3.9bn (38%) in 2100. This is despite a rapidly declining birth rate, with many more Africans living much longer lives than preceding generations.
Africa is currently relatively poor compared with advanced economies, with the total GDP for its 55 countries and 1.5bn people close in size to the UK’s single country GDP for 67.5m people of around £2.5trn a year at current exchange rates. This is around 3% of the global economy in each case.
The UK’s share of the global economy is likely to decline over the rest of the century as Africa and other developing economies grow at a much faster pace. For Africa the combination of a rapidly growing population and economic development should see it become substantially more significant to the global economy than it is today.
Local government in England remains a complex patchwork despite a cut in the number of local authorities in England from 333 to 317 on 1 April 2023.
Our chart this week takes a look at the structure of local government in England following the abolition of three county councils and seventeen district councils to form four new unitary authorities on 1 April 2023. This reduces the total number of local authorities in England from 333 to 317, while there was no change in the number of regional authorities at 11.
Cumbria county council and its six district councils were abolished and their functions were transferred to two newly formed unitary authorities. Cumberland, with 274,000 local residents, absorbed the now defunct Allerdale, Carlisle and Copeland district councils. Westmorland and Furness, serving a population of 227,000, took over Eden, South Lakeland and Barrow-in-Furness.
Somerset county council and its four districts (Mendip, Sedgemoor, Somerset West and Taunton, and South Somerset) were merged into a new Somerset unitary authority serving 573,000 local residents.
North Yorkshire county council and its seven districts (Craven, Hambleton, Harrogate, Richmondshire, Ryedale, Scarborough and Selby) were merged into a single North Yorkshire unitary council, responsible for a local population of 619,000.
As our chart illustrates, there is a complex patchwork quilt of regional and local authorities in England. Around 24.2m people, or 43% of the 56.5m population of England in mid-2021, live in areas with a regional level of government, while 18.6m (33%) people are served by a two-tier structure of county and district councils and 13.7m (24%) by single-tier unitary authorities.
Regional authorities comprise the Greater London Authority (with a population of 8.8m) and 10 combined authorities: West Midlands (2.9m), Greater Manchester (2.9m), West Yorkshire (2.3m), Liverpool City Region (1.4m), South Yorkshire (1.4m), North East (1.2m), West of England (0.9m), Cambridgeshire and Peterborough (0.9m), North of Tyne (0.8m) and Tees Valley (0.7m).
Regional and local public services in London are provided by the GLA and 32 London boroughs and the City of London, and by the relevant combined authority and seven metropolitan boroughs in the West Midlands ‘Greater Birmingham’ combined authority area; 10 in Greater Manchester; five in South Yorkshire ‘Sheffield City Region’; five in Liverpool City Region; and four in the West Yorkshire ‘Leeds City Region’. There are three metropolitan boroughs plus one unitary authority in the North East ‘Sunderland and County Durham’ combined authority area; three unitary authorities in West of England ‘Greater Bristol’; one county council, five district councils and one unitary authority in Cambridgeshire and Peterborough; two metropolitan boroughs and one unitary authority in the North of Tyne ‘Newcastle and Northumberland’ combined authority area; and five unitary authorities in Tees Valley.
Local public services in two-tier areas without a combined authority above them comprise Kent county council (with 12 district councils), Essex (12), Hampshire (11), Lancashire (12), Surrey (11), Hertfordshire (10), Norfolk (7), West Sussex (7), Staffordshire (8), Nottinghamshire (7), Devon (8), Derbyshire (8), Lincolnshire (7), Suffolk (5), Oxfordshire (5), Leicestershire (7), Gloucestershire (6), Worcestershire (6), Warwickshire (5) and East Sussex (5). Many of these county councils do not cover the whole of their counties, with unitary authorities such as Southend-on-Sea and Thurrock carved out of Essex, Derby carved out of Derbyshire, and Plymouth and Torbay carved out of Devon, for example.
There are 51 unitary authorities plus the Isles of Scilly outside of combined authority areas, responsible for providing local services that traditionally county councils are responsible for, such as education, transport, fire and public safety, social care, libraries, waste management, and trading standards, as well as services typically provided by district councils such as rubbish collection, recycling, social housing, planning approvals and collecting council tax and business rates.
North Yorkshire and Somerset are now the largest local authorities outside of metropolitan areas with populations of 619,000 and 573,000, followed by Cornwall (572,000), Buckinghamshire (555,000) and Wiltshire (513,000). Excluding these five authorities and tiny Rutland (41,000), the average population size served by unitary authorities outside of combined authority areas is 240,000.
Overall the 317 local authorities in England comprise 32 London boroughs, the City of London, 36 metropolitan boroughs, 21 county and 164 district councils, 62 unitary authorities and the Isle of Scilly. This contrasts with the simpler one-tier approach of 32 local councils in Scotland, 16 in Wales and 11 in Northern Ireland.
The lack of a standard model for local government and an incomplete regional tier is a big challenge for the national government, unlike similar countries where the national government deals with a much smaller number of states, provinces or regional administrations and lets them deal with their localities. Trying to work with 11 regional authorities and 317 local authorities in a mixture of region + one-tier, region + two-tier, no region + one-tier, and no region + two-tier structures is difficult in practice, not helped by a very centralised approach that requires Whitehall to be involved very closely in what regional and local authorities are doing, and a lack of fiscal devolution that means local authorities are dependent on central funding and national government approvals for many of their activities.
A radical proposal to abolish district councils completely and move to a one-tier system of unitary authorities and boroughs, potentially with full regional coverage, was rumoured to be imminent when Boris Johnson was prime minister. Instead, the government has continued with its more glacial approach of providing financial and other encouragement to local authorities willing to form regional combined authorities with elected mayors, and to replace two-tier county and district councils with unitary authorities where some consensus can be reached, as in Cumbria, Somerset and North Yorkshire this year.
While an unwieldy structure is not the main problem facing local government in England, it doesn’t make it easy for any government wanting to level up opportunity across the country to deliver, nor to find efficiency savings in central government departments that have to deal with that structure.
My chart this week examines the late lamented Silicon Valley Bank and how its outsized investment in securities made it particularly vulnerable to a bank run.
Silicon Valley Bank collapsed on 10 March 2023 after a bank run saw depositors rapidly withdraw funds as they lost confidence in the bank’s ability to survive. The bank’s collapse followed concerns that had been growing since 24 February 2023, when Silicon Valley Bank’s parent company, SVB Financial Group, published its annual consolidated financial statements for the year ended 31 December 2022.
As illustrated by this week’s chart, SVB’s consolidated balance sheet at 31 December 2022 comprised assets of $212bn, liabilities of $196bn and equity of $16bn.
Assets consisted of investment securities recorded at amortised cost of $91bn, investment securities recorded at fair value of $26bn, loans of $74bn, cash of $13m, and other assets of $8bn. Liabilities comprised customer deposits of $173bn, short-term debt of $14bn, and other liabilities of $9bn (including long-term debt of $5bn).
Not shown in the chart is the breakdown of equity of $16bn, which at 31 December 2022 primarily comprised preference stock of $4bn, additional paid-in capital of $5bn and $9bn of retained earnings, less $2bn in negative accumulated other comprehensive income.
As disclosed on the face of the balance sheet, the fair value of SVB’s $91bn portfolio of held-to-maturity investment securities was $15bn below its carrying value at amortised cost, reflecting how the main fixed-asset securities in this category – predominantly federally guaranteed mortgage-backed securities and collateralised-mortgage obligations – had fallen in value as interest rates climbed over the course of 2022. These unrealised losses of $15bn were not that far off the $16bn of equity reported by SVB, suggesting the bank would struggle if it ever had to sell these investments before they matured.
SVB’s intention had been to hold onto these investments, but circumstances changed on 9 March when depositors – concerned about further falls in the value of SVB’s assets as interest rates continued to rise during 2023, and an adverse reaction to a belated capital raising exercise launched by SVB on 8 March – withdrew $42bn in one day. This forced SVB to rapidly liquidate assets and borrow to find the cash required to repay depositors, but by then the first major digital bank run had gained too much momentum, with depositors attempting to withdraw a further $100bn on Friday 10 March. With insufficient cash to repay the amounts requested by SVB’s customers, the bank was closed by regulators that lunchtime.
A similar situation played out in the UK, where £3bn out of £10bn of deposits in SVB’s local subsidiary were withdrawn on Friday 10 March, causing the Bank of England to step in over the weekend to enforce a sale to HSBC for £1, a significant discount to previously reported equity of £1.4bn.
While banking regulators in the US, the UK and elsewhere will pour over the entrails of Silicon Valley Bank (and other recent bank failures such as Signature Bank of New York and Switzerland’s Credit Suisse) for some time to come, most commentators consider SVB to be unusual in how it had (or rather hadn’t) managed its exposure to changes in interest rates. At a minimum, closer regulatory supervision appears a likely consequence.
However, perhaps the biggest legacy of the failure of SVB is the decision of US regulators to protect the full amount of customer deposits and not just those covered by the $250,000 federal deposit insurance cap. For depositors in this mid-size banking institution that is of course good news, but the concern is that this might set a precedent for how to deal with potential bank failures in the future, where the price tag could be very much larger.
My chart takes a look at how employment in the public sector has grown from 5.3m to 5.8m over the past five years.
The size of the public sector workforce has grown significantly over the last five years between December 2017 and December 2022, with the number of full-time-equivalent employees (FTEs) increasing by 11% from 4,430,000 to 4,911,000 and headcount rising by 9% from 5,344,000 to 5,801,000.
This compares with a population increase of 2% over that time, but a 7% increase in those aged 65 or more (from 12.1m to 12.9m), which adds significantly to the demands placed on the National Health Service.
Our chart highlights how the number of FTEs working in health and social care increased by 16% from 1,602,000 to 1,864,000 between 2017 and 2022, while headcount went up by 14% from 1,870,000 to 2,134,000. This principally relates to the National Health Service, which saw FTEs go up 19% from 1,430,000 to 1,700,000 and headcount go up 17% from 1,640,000 to 1,916,000. Other health and social work staff fell slightly with FTEs down from 172,000 to 164,000 and headcount from 230,000 to 216,000. The latter excludes most social care staff, which are principally employed in the private sector.
The next biggest category is education, which saw FTEs increase by 2% from 1,099,000 to 1,119,000 at the same time as headcount was broadly flat, going from 1,494,000 to 1,498,000, implying more hours being worked by school staff and other state employees in the education sector. This represents an increase in efficiency given that pupil numbers have increased by around 4% over the same period.
Public administration FTEs increased by 16% from 859,000 to 996,000 and headcount by 13% from 1,018,000 to 1,154,000. This category includes the civil service (FTEs up 22% from 396,000 to 483,000 and headcount up 21% from 427,000 to 515,000) in addition to local authority and other office staff across the wider public sector. Much of this increase in public administration has been driven by Brexit, which has required more staff to perform duties previously outsourced to the EU as well as to administer more bureaucracy in the nation’s trading arrangements, although other factors such as pandemic have also had an impact.
Police and armed forces FTEs increased by 8% from 391,000 to 421,000 and headcount by 7% from 404,000 to 431,000. This can be analysed between the armed forces where FTEs were broadly the same at around 155,000 for both FTEs and headcount in both 2017 and 2022, and the police, including civilians, where both FTEs and headcount increased by around 12% (FTEs from 236,000 to 265,000 and headcount from 246,000 to 276,000). The latter principally reflects the government’s decision to reverse cuts in police numbers implemented in the early 2010s.
Other staff in the public sector have also increased over the last five years, with FTEs up 7% from 479,000 to 511,000 and headcount up 5% from 5,344,000 to 5,801,000.
Overall, the public sector in the UK has seen both employment headcount and hours worked per employee grow over the last five years as demands on public services have increased significantly. This is partly down to an ageing society, which puts pressure on the NHS, combined with the consequences of the pandemic, which exacerbated backlogs throughout the system. It is also a consequence of Brexit, which has added significantly to administrative and policy burdens placed on the civil service in particular.
These significant increases in FTEs and headcount perhaps explain the government’s moves to cut public sector pay in real-terms over the last few years. It remains to be seen if that Canute-like policy will be sufficient to hold back the tide of higher payroll costs that have been and are continuing to roll in to the shores of the public finances.
February fiscal deficit hits £17bn, while the cumulative deficit for 11 months of £132bn doesn’t include backdated public sector pay awards.
The monthly public sector finances for February 2023 released on Tuesday 21 March 2023 reported a provisional deficit for the month of £17bn, which is a return to red after a surplus of £8bn last month in January 2023.
The deficit was £10bn more than the £7bn deficit reported for the same month last year (February 2022), as higher interest costs, higher inflation on index-linked debt, and the cost of the energy price guarantee for households and businesses incurred during the month drove up the need to borrow.
The cumulative deficit for the first 11 months of the financial year was £132bn, which is £15bn more than in the same period last year but £155bn lower than in 2020/21 during the first stages of the pandemic. It was £78bn more than the deficit of £54bn reported for the first 11 months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.
The reported deficit does not reflect backdated public sector pay settlements that have been or are expected to be agreed in March 2023, although the numbers are broadly in line with the £152bn estimated deficit for the full year in the Office for Budget Responsibility (OBR)’s revised forecasts made at the time of the Spring Budget. This was lower than their previous forecast of £177bn in November, primarily because the energy price guarantee is costing less than anticipated.
Public sector net debt was £2,507bn or 99.2% of GDP at the end of February 2023. This is £692bn higher than net debt of £1,815bn on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic. The OBR’s latest forecast is for net debt to reach £2,546bn by March 2023 and to exceed £2.9trn by March 2028.
Tax and other receipts in the 11 months to 28 February 2023 amounted to £924bn, £91bn or 11% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance for part of the year, while VAT receipts benefited from inflation in retail prices.
Expenditure excluding interest and investment for the 11 months of £888bn was £52bn or 6% higher than the same period in 2021/22, with Spending Review planned increases in spending, the effect of inflation, and the cost of energy support schemes partially offset by the furlough programmes and other pandemic spending in the comparative period not being repeated this year.
Interest charges of £120bn for the 11 months were £51bn or 73% higher than the £69bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt.
Cumulative net public sector investment to February was £48bn, £4bn more than this time last year. This is much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.
The increase in net debt of £125bn since the start of the financial year comprised borrowing to fund the deficit for the 11 months of £132bn, less £7bn in net cash inflows from repayments of deferred taxes, and loans made to businesses during the pandemic, less funding for student, business and other loans together with working capital requirements.
Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The public finances are back in the red this month as a deficit of £17bn brings the total for the 11 months to February to £132bn, with public sector net debt in excess of £2.5trn. Although broadly in line with the OBR’s improved estimate accompanying the Spring Budget, the numbers don’t reflect the cost of backdated public sector pay settlements to be recorded in the final month of the 2022/23 financial year.
“The chancellor still needs to top up departmental budgets for pay awards in the next financial year, reducing his capacity to address inflationary cost pressures in other areas. HS2 may not be the only capital programme at risk of being scaled back or delayed as he seeks to make savings.”
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The ONS made several revisions to prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the 10 months ended 31 January 2023 by £1bn to £116bn.
Jeremy Hunt limits his tax and spending ambitions in the Spring Budget to stay within a very tight fiscal rule.
The Spring Budget 2023 for the government’s financial year of 1 April 2023 to 31 March 2024 was presented by the Chancellor of the Exchequer to Parliament on Wednesday 15 March 2023, accompanied by medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) covering the period up to 2027/28.
The fiscal numbers in the Budget are based on the National Accounts prepared in accordance with statistical standards. They differ in material respects from the financial performance and position that will eventually be reported in the Whole of Government Accounts prepared in accordance with International Financial Reporting Standards (IFRS).
A (slightly) lower fiscal deficit in 2023/24
Table 1 shows the Spring Budget estimate for the deficit in 2023/24 is £132bn, £8bn lower than the £140bn forecast in November 2022. Positive revisions to the forecast added £27bn to the bottom line, before £19bn from tax and spending decisions made by the Chancellor.
Forecast revisions in 2023/24 comprised £13bn in lower debt interest, £7bn less in energy support and £8bn in higher tax receipts, less £1bn other changes. The cost of tax and spending decisions in 2023/24 was estimated to be £8bn in lower corporation tax receipts from the full expensing of capital expenditure, £5bn from freezing fuel duties, £5bn from extending the energy price guarantee and other energy support measures, £2bn more for defence and security and £2bn from other decisions, less £3bn in indirect effects of those policy decisions on tax receipts and welfare spending.
Total receipts in 2023/24 are now expected to be £1,057bn (£2bn higher than previously forecast) and total managed expenditure is now anticipated to be £1,189bn (£10bn lower).
The forecast for the deficit in 2024/25 was up £1bn at £85bn and was unchanged in 2025/26 at £77bn, with upward revisions of £18bn and £19bn respectively offset by an estimated £19bn net cost of tax and spending decisions. The latter includes £3bn in 2024/25 and £4bn in 2025/26 for expanded childcare eligibility.
The final two years of the forecast were better by £17bn in 2026/27 (down to a fiscal deficit of £63bn) and by £20bn in 2027/28 (down to £49bn), although several commentators have pointed out this is on the basis of unrealistic spending assumptions that do not take account of significant pressures on public services.
In addition to forecasts for the next five years, the OBR also revised its estimate for the deficit in the current financial year ending 31 March 2023 to £152bn, £25bn lower than November’s estimate of £177bn. This is £53bn more than the OBR’s March 2022 estimate of £99bn and £69bn more than the November 2021 Budget estimate of £83m.
Table 2 provides a breakdown of the forecast changes by year, showing how lower debt interest and higher tax receipts flowing through the forecast period have provided the Chancellor with capacity to extend energy support, incentivise business investment, freeze fuel duty for yet another year (and extend the temporary 5p cut) and increase spending in specific areas.
Receipts and expenditure development
As illustrated by Table 3, receipts are expected to rise from £1,020bn in the current financial year to £1,231bn in 2027/28, while expenditure excluding energy support and interest is expected to rise from £968bn in 2022/23 to £1,121bn in 2027/28..
Interest costs are expected to fall from £115bn this year to £77bn in 2025/26 as interest rates and inflation moderate, before rising to £97bn in 2027/28 based on a growing level of debt.
Net investment is expected to increase in 2023/24 as an £8bn one-off credit from changes in student loan terms in 2022/23 reverses, before declining gradually as capital expenditure budgets flatline and depreciation grows. Public sector gross investment is planned to be £134bn, £134bn, £133bn, £132bn and £132bn over the five years to 2027/28, in effect a cut in real terms over the forecast period.
The government’s secondary fiscal target is to keep the fiscal deficit below 3% of GDP by the end of the forecast period. Based on the March 2023 forecasts, it has headroom of 1.3% of GDP, or £39bn, against this target.
Table 4 provides a summary of the year-on-year changes in receipts and spending, together with the forecast for the increase in the size of the economy, including inflation. This highlights how tax and other receipts are expected to increase faster than the overall rate of growth in the overall size of the economy, while the government plans to constrain the average rise in expenditure excluding energy support and interest to 3.0% including inflation.
The former is principally a result of ‘fiscal drag’ as tax allowances are frozen, bringing in proportionately more in tax as incomes rise with inflation. The latter reflects what is generally considered to be unrealistic plans to constrain public spending in the context of an expected 9% rise in the number of pensioners over the five-year period (that will add to pensions, welfare, health and social care spending), pressure on public sector pay and the deteriorating quality of public services.
Average nominal GDP growth over the five years of 3.3% combines average real-terms economic growth of 1.7% a year and inflation of 1.6%, the latter using the GDP deflator, a ‘whole economy’ measure of inflation. This is different to consumer price inflation, which is forecast to fall to 4.1% in 2023/24 and average 1.4% over the five years to 2027/28.
Public sector net debt
Lower deficits over the forecast period translate into lower borrowing requirements, reducing forecasts for public sector net debt from just under £3.0trn to £2.9trn. This is partly increased or offset by changes in the forecasts for financial and other transactions and working capital movements.
Table 5 shows how forecast public sector net debt is now expected to reach £2,909bn by March 2028, £54bn less than was forecast in November. Although an improvement, debt at the end of the forecast period is expected to be £1,089bn higher than £1,820bn reported for March 2020 before the pandemic, reflecting the large amounts borrowed during the pandemic, in addition to borrowing planned over the next five years.
The government’s primary fiscal target is based on ‘underlying debt’, a non-generally accepted statistical practice measure that excludes the Bank of England and hence quantitative easing balances. Underlying debt needs to be falling as a proportion of GDP between the fourth and fifth year of the forecast period.
The forecast gives the Chancellor just £6.5bn in headroom against this target, with underlying debt / GDP expected to fall from 94.8% to 94.6% between March 2027 and March 2028.
Fiscal rules limit ambitions for tax and spending
Following the disastrous ‘mini-Budget’ of his predecessor Kwasi Kwarteng, the Chancellor’s principal goal has been to stabilise the public finances to provide confidence to debt markets. To do this he has prioritised meeting his fiscal rules over incentivising business investment, cutting taxes and increasing defence spending. He has also adopted what are generally considered to be unrealistic assumptions about public spending in the later years of the forecast to keep within his self-imposed fiscal rules.
This has led to the Chancellor announcing ‘ambitions’ to extend the full expensing of capital expenditure beyond three years and to increase defence and security spending to 2.5% of GDP, as well as continuing to plan for increases in fuel duties each year despite the repeated practice of cancelling these rises.
Because these are ambitions and not plans, they are not incorporated into the forecasts enabling fiscal targets to be met. The OBR reports that continuing to cancel fuel duty rises each year would reduce the headroom to just £2.8bn, while converting the Chancellor’s ambitions to extend full expensing beyond three years and to increase defence spending to 2.5% of GDP into formal plans would cause him to breach his primary fiscal rule.
The overall fiscal position remains weak, with public finances vulnerable to potential economic shocks.
The Chancellor has followed the practice of many of his predecessors in increasing planned borrowing when fiscal forecasts worsen, as occurred in November 2022, only to then use upsides from improvements in subsequent forecasts to fund new tax and spending commitments. This ratchets up borrowing and debt as forecasts fluctuate and creates instability in both tax policy and public spending plans.
The consequence is a relatively unchanged fiscal position for the financial year commencing 1 April 2023 and the two subsequent financial years, as tax and spending decisions offset forecast upsides. And although there is an anticipated improvement in the projected fiscal position in the final two years of the OBR’s five-year forecast (after the next general election), the likelihood is that it will be offset in due course by the reality of pressures on public service and welfare budgets.
There is a reason why the first Budget following a general election typically sees taxes rise and the Spring Budget 2023 suggests that this pattern is likely to be repeated, irrespective of whichever party wins power.
My chart this week is on the Chancellor’s tax and spending plans for the coming financial year commencing on 1 April 2023.
Chancellor Jeremy Hunt presented his first Budget to Parliament on Wednesday 15 March 2023, setting out his formal Budget estimate for the financial year ended 31 March 2024 (2023/24) accompanied by fiscal forecasts from the Office for Budget Responsibility (OBR) for the period up to 2027/28 and the OBR’s final estimate for the current financial year ending on 31 March 2023.
Our chart this week starts by summarising the final estimate for 2022/23, highlighting an expected shortfall of £152bn between anticipated receipts of £1,020bn and spending of £1,172bn. This is followed by a similar analysis for the budget year of 2023/24, with a deficit of £132bn resulting from a shortfall between estimated taxes and other receipts of £1,057bn and spending of £1,189bn.
Receipts in 2022/23 and 2023/34 respectively comprise £922bn and £950bn in tax and £98bn and £107bn in other receipts. The increase in tax of 3.0% is perhaps lower than might be expected given the level of inflation and the new higher rate of corporation tax from 1 April 2023, with an anticipated 10% growth in corporation tax receipts (net of full expensing of business investment) offset by flat or relatively small growth in other taxes. Other receipts are expected to increase by 9%, primarily the effect of higher interest rates on investments.
Total managed expenditure in 2022/23 and 2023/24 respectively comprise £968bn and £1,015bn in current expenditure excluding energy support costs and debt interest, £30bn and £5bn in energy support packages, £115bn and £95bn in debt interest, and £59bn and £74bn in net investment.
Current expenditure excluding energy support costs and debt interest is expected to increase by 4.9% in 2023/24 compared with 2022/23, more than the 2.5% ‘whole economy’ measure of inflation used by the government and the 4.1% forecast for consumer price inflation. This partly relates to inflation in the current financial year feeding through into next year’s budgets, as well as spending measures announced by the Chancellor.
The three-month extension of the energy price guarantee is anticipated to cost £3bn in 2023/24, with other energy support measures adding a further £2bn to the forecast.
Debt interest is expected to fall by 17% to £95bn, principally because of the effect of a much lower rate of inflation on index-linked debt more than offsetting higher interest rates overall.
Public sector net investment comprises gross investment of £116bn and £134bn in the two years respectively, net of depreciation of £57bn and £60bn respectively. The increase in gross investment is flattered by a £8bn one-off credit in the current financial year arising from changes to student loans, which if excluded implies an 8% increase in capital expenditure and other public investment overall. This reflects delays in capital programmes that are expected to come in significantly under budget in the current financial year but cost more in the next, relatively high construction price inflation, and an extra £2bn of capital investment allocated to defence.
The final estimate for the deficit in the current financial year of £152bn is £25bn lower than was expected in the OBR’s November 2022 forecast of £177bn, while the Budget estimate for 2023/24 of £132bn is £8bn lower than the £140bn forecast last time. The reduction in 2022/23 reflects the benefit of a slightly improved economic outlook, with policy decisions for the last couple of weeks of the financial year by the Chancellor netting off to close to nil. This contrasts with 2023/24, where forecast upsides amounting to around £27bn have been mostly offset by a net cost of £19bn from tax and spending decisions.
Overall, the chart highlights just how much money the UK raises in tax and incurs in public spending. Tax and other receipts are expected to approach £1.1trn in the coming financial year, while public spending is anticipated to be just under £1.2trn.
On a per capita basis in 2023/24 this is equivalent to receipts and spending of approximately £1,290 per month and £1,450 per month for each person in the UK respectively, a shortfall of £160 per person per month that needs to be funded by borrowing.
The challenge for the Chancellor is that with the number of pensioners projected to increase by 9% over the next five years (with consequent implications for spending on pensions, welfare, health and social care), there is not much room to invest in public services or in infrastructure at the same time as also reducing taxes as he would very much like to do.
The Chancellor wasn’t able to square this circle in the Spring Budget 2023, so watch this space to see whether he can be any more successful in future fiscal events.
Ahead of the Spring Budget on 15 March, I take a look at how the official forecast for the 2022/23 fiscal deficit has fluctuated through successive forecasts.
My chart this week is on the topic of fiscal forecasting, and how the forecast deficit for the UK government’s financial year ending 31 March 2023 (2022/23) has changed over the course of five or so years of official forecasts.
Our story starts with the Autumn Budget in November 2017, when the Office for Budget Responsibility (OBR) first published a medium-term fiscal forecast that extended to 2022/23. After plugging economic assumptions into its model and combining it with the government’s plans for public spending, it came up with a forecast of £26bn for the 2022/23 fiscal deficit, the shortfall between receipts and public spending calculated in accordance with statistical rules.
Then Chancellor Philip Hammond was at that time pretty positive about the economic prospects for the UK, despite weak productivity causing him to abandon the government’s medium-term plan to completely eliminate the budget deficit. Instead, he settled for a more modest objective of a balanced current budget and a falling debt-to-GDP ratio, extending austerity policies to cut public spending.
The next few fiscal events saw the OBR revise down its forecast for the 2022/23 deficit in the light of moderately better economic data each time. This saw the forecast for the 2022/23 deficit reduce to £21bn in the March 2018 forecast, stay at £21bn in October 2018 and fall to £14bn in the March 2019 forecast.
The forecasts up to this point were before methodology changes announced in 2019 relating to the treatment of student loans and other items. According to the OBR these had the effect of increasing the forecast for the fiscal deficit in 2022/23 by an estimated £21bn.
The calling of a general election in December 2019 prevented Chancellor Sajid Javid from presenting a Budget in November 2019, so the OBR had to wait until March 2020 to publish its next forecast. At this point, 2022/23 was in the middle of the forecast period and Rishi Sunak’s first fiscal event as Chancellor saw a £26bn increase in the 2022/23 deficit to £61bn in an ‘end-to-austerity’ Budget that saw £46bn in extra planned spending compared with previous forecasts.
Frustratingly for the OBR, its forecasts that day were immediately out of date, as initial emergency pandemic measures were decided too late to be incorporated into its calculations. While these and subsequent temporary measures to support households and businesses through the pandemic primarily affected the 2020/21 and 2021/22 financial years, the economic hit caused by COVID-19 was the primary reason for the OBR increasing its forecast for the 2022/23 fiscal deficit to £105bn in November 2020.
March 2021 saw a small tweak to the forecast to £107bn, but the Autumn Budget and Spending Review in November 2021 saw an improvement to £83bn as the economy emerged from the lockdown phases of the pandemic in a slightly better place than was previously anticipated, with higher spending funded by planned tax rises.
This positive move went into reverse in March 2022 as the OBR revised its Budget estimate upwards to £99bn, reflecting rising interest rates on government debt and the government’s initial response to an emerging cost-of-living crisis.
The OBR was not asked to produce an official forecast to accompany short-lived Chancellor Kwasi Kwarteng’s tax-cutting ‘mini-Budget’ in September. At £177bn the OBR forecast for the 2022/23 fiscal deficit in November 2022 was eye-watering enough, and that was after current Chancellor Jeremy Hunt’s Budget had reversed most of his predecessor’s tax cuts.
Lower than anticipated wholesale energy prices have led several commentators to suggest that the OBR’s final estimate for the fiscal deficit could be revised down by £30bn or more when it presents its medium-term forecasts up to 2027/28 to accompany the Spring Budget on 15 March 2023. As the chart suggests, this is not a ‘windfall’ as some commentators have claimed. Even if the gap between receipts and spending narrows, the deficit will still be significantly higher than the £83bn official estimate included in the Budget for 2022/23 presented to Parliament.
Fiscal forecasting is of course a very difficult task even in normal times. The deficit is the difference between two very large numbers – receipts of just over a trillion pounds and public spending of nearly £1.2trn – that can each move up or down significantly as economic conditions change, and policy choices are made. Add to that a global pandemic, a cost-of-living crisis and an uncertain policy outlook, and it is perhaps unsurprising that the forecasts have changed so much over the past five years.
In an uncertain world, fiscal forecasts fluctuate.
In response to the crisis in financial reporting and audit in local authorities in England, ICAEW argues that urgent action is needed to bring confidence to the finances of local public bodies.
ICAEW’s vision for local audit sets out its support for understandable financial reports, timely high-quality local audits, strong financial management and good governance, value for money and protecting the public interest, and the critical role accountants and auditors play in enhancing transparency and accountability in the public sector.
The proportion of local authorities in England publishing their audited financial statements on time has fallen from more than 95% in 2017 to less than 12% in 2022, with knock-on effects for the audits of other local public bodies such as in the NHS. High-profile governance failures have led to significant financial losses. Unnecessarily impenetrable financial statements are not well understood and are not being used effectively to hold local public bodies to account. There is insufficient capacity in the local audit market, while auditors, finance teams and regulators are not aligned in their view of audit risks. Under-resourced finance teams struggle to produce good quality working papers. Local authority finance teams and audit firms struggle to retain staff in the profession.
ICAEW is publishing its vision for local audit to accompany the recent publication of a Memorandum of Understanding (MoU) between the Department of Levelling Up, Housing and Communities (DLUHC) and the Financial Reporting Council (FRC). The Institute welcomes the MoU, which covers the role of the ‘shadow’ system leader for local audit pending the establishment of the Audit, Reporting and Governance Authority (ARGA).
ICAEW also believes more needs to be done urgently if the local financial reporting and audit crisis is to be resolved.
Designed to prompt discussion about the need for urgent action, the vision identifies a series of challenges we believe need to be overcome, and actions we support to address those challenges. The vision in draft form has provided ICAEW with a focus for engagement with local authorities, auditors, government, and regulators, provoking debate and encouraging everyone involved to take action.
Alison Ring OBE FCA, Director of Taxation and Public Sector at ICAEW, commented: “Urgent action is needed to address the crisis in local financial reporting and audit in England. Local authority finances are under extreme pressure and the need for high quality financial statements, with the assurance that timely audit provides, is more important than ever.
“We want to see a robust financial reporting and audit system, underpinned by strong financial management, good governance and value for money, to protect the public interest. The vision highlights the critical role accountants and auditors play in enhancing transparency and accountability in the public sector.”
My chart this week looks at what a difference one year has made to the cost at which governments around the world can borrow.
The past year has seen a dramatic change in economic fundamentals around the world as inflation has surged and growth has stuttered. One of the most dramatic changes has been to the cost of new government borrowing, with the yields payable by governments to sovereign debt investors increasing significantly from where they were a year ago.
As our chart of the week illustrates, Japan has seen yields on 10-year government bonds increase from 0.13% on 2 Mar 2023 to 0.50% on 2 Mar 2023, a far cry from the negative yields it has obtained over much of the last decade when (in effect) investors were paying the government of Japan for the privilege of lending it money. The change for Germany has been even more marked, from a position a year ago where it could borrow over 10 years for almost nothing (0.02%) to today where if it wanted to raise new funds it would pay an interest rate of 2.71% over 10 years.
The other members of the G7 have also seen the effective interest rate payable on 10-year government bonds rise, with France going from 0.47% a year ago to 3.19% today, Canada from 1.81% to 3.40%, the UK from 1.26% to 3.84%, the USA from 1.87% to 4.02%, and Italy from 1.55% to 4.56%.
Yields from 10-year government bonds are seen as a benchmark rate for most countries, as although governments can and do borrow for much longer periods – with market data often available for 20-year and 30-year bonds as well – most countries have average maturities of much shorter periods. The UK is an outlier in this respect with an average debt maturity on government securities of just over 15 years (before taking account of quantitative easing), in contrast with the more typical average maturity of seven years for Italian government debt.
Although the amount payable on new debt has risen significantly, this should in theory feed in to overall cost of government borrowing gradually as it will take time for existing government bonds to mature and be refinanced. For some time to come the overall cost of borrowing will continue to benefit from medium- and long-term government bonds that were issued at the ultra-low borrowing rates experienced over the last decade or so.
However, in practice not all government borrowing is at fixed rates, with many governments (including the UK) issuing inflation-linked debt, adding to their interest costs as inflation has surged. In addition, some government debt is short term or pays a variable rate of interest, while quantitative easing has seen central banks swap a substantial proportion of fixed-rate government bonds into variable-rate central bank deposits, increasing governments’ exposure to changes in short-term interest rates.
Either way, the rapid rise in the interest rates payable on sovereign debt marks a significant shift in the fiscal calculus for most governments when combined with much higher levels of debt in most developed countries. Lots more pounds, euros, dollars and yen will need to be diverted to servicing debt, making for hard choices for finance ministers as they work out their budgets for coming years.