Martin Wheatcroft – Page 2 – Martin Wheatcroft

Government enters crisis control mode to curb public spending

Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.

The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.

“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.

“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”

Month of July 2024

There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.

Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023.

Financial year to date

The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.

Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts.

Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.

The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.

Table 1: Summary receipts and spending

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn	Change %
Income tax	89.9	86.4	+4%
VAT	67.9	66.0	+3%
National insurance	53.5	58.3	-8%
Corporation tax	34.0	31.6	+8%
Other taxes	73.5	72.1	+2%
Other receipts	40.5	37.5	+8%
Total receipts	359.3	351.9	+2%

Public services	(212.2)	(204.8)	+4%
Welfare	(103.1)	(97.5)	+6%
Subsidies	(10.6)	(14.0)	-24%
Debt interest	(46.6)	(52.7)	-12%
Gross investment	(38.2)	(34.8)	+10%
Total spending	(410.7)	(403.8)	+2%

Deficit	(51.4)	(51.9)	-1%

Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.

The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.

Table 2: Public sector net debt and net debt/GDP

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn
PSNB	51.4	52.3
Other borrowing	4.4	(11.4)
Net change	55.8	40.9
Opening net debt	2,694.1	2,539.7
Closing net debt	2,745.9	2,580.6
*PSNB/GDP*	*1.9%*	*2.0%*
Other/GDP	0.2%	(0.4%)
Inflating away	(0.8%)	(1.5%)
*Net change*	*1.3%*	*0.1%*
Opening net debt	98.1%	95.7%
*Closing net debt*	*99.4%*	*95.6%*

Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.

Revisions and other matters

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. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.

The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.

A new dawn for local government has broken, has it not?

With money tight and many local authorities in a precarious financial state, ICAEW’s Alison Ring asks how the government can deliver on its commitment to devolution in the latest instalment of Room 151’s Municipal Missions Manifesto series.

A change in government. A commitment to devolve power. No money.

We all know that England is the most centralised of the advanced economies, but it is still difficult to comprehend just how strange it is that in a nation of 58 million people (out of a UK total of 69 million), the national government in Westminster should be so intimately involved in deciding which high streets in Nottinghamshire or Cornwall are improved, whether to fund public conveniences in Lancashire or Kent, or which parks in Herefordshire or Hertfordshire should get outdoor chess sets.

We might also wonder why we have a central government ministry dedicated to local government at all when in most countries it is the regions, states or provinces that are responsible for local authorities.

Here in the UK, there is a large bureaucracy devoted to overseeing hundreds of councils across England of many shapes and sizes, while another department decides whether to fund road schemes hundreds of miles from London that the ministers and civil servants making those decisions may never use.

Despite the extensive control exercised by Whitehall, successive governments have found that this does not translate into effective action on the ground, while local leaders are frustrated by excessive bureaucracy and limitations on how they can drive economic development and deliver public services locally and regionally. Labour has committed to devolving power in England, but without resolving many of the current problems in local and regional government it is going to be difficult to make devolution a practical possibility.

Step 1 – stabilise the system

The new government has already made two promising announcements that should go a small way to stabilising the existing system. Firstly, it has confirmed that local authorities will participate in rolling three-year spending reviews to be carried out every other year. This will make a huge difference by enabling budget holders to plan ahead more effectively, particularly on capital investments where projects can often span multiple financial years.

Secondly, a ministerial statement from local government minister Jim McMahon has confirmed that action will be taken to tackle the backlog of incomplete audits which is undermining local authority financial reporting and the assurance provided by external auditors. Although tempered by the knowledge that it will take several years to get local audits back on track, and that many of the longer-term fundamental issues identified by the Redmond Review remain unaddressed, this is a positive step forward.

While money is tight, if funds can be found then supporting local authorities under the most financial pressure should be a priority.

Step 2 – complete the roll out of a regional tier of government

A combination of gentle encouragement, financial incentives and some arm twisting has led to the establishment of 11 combined authorities led by regional ‘metro’ mayors mainly in so called ‘city-regions’. Together with the Greater London Authority this means that around half of the English population now have a regional mayor, but the corollary is that the other half do not.

While a large part of devolution is about empowering individual local authorities, gaps in the regional tier of government make it difficult for Whitehall to hand out some of its core functions. This is particularly the case for economic development where, for example, Greater Manchester’s mayor Andy Burnham is all too eager to grasp whatever powers he can and run with them, but there is no one to take the lead in the same way for most of the South West.

One way to fill in the gaps would be to accelerate the roll-out of combined authorities, while another would be to go for the ‘big bang’ approach adopted by France in 1986 when it created a new tier of regional government across Metropolitan France in one fell swoop.

Step 3 – separate out social care and SEND from funding for local public services

One of the biggest drivers of the financial challenges faced by many local authorities is the growing cost of welfare provision – principally adult social care and special educational needs and disabilities (SEND) support. The ‘reverse hypothecation’ caused by these two costs has had the effect of squeezing budgets for local public services and pretty much everything else delivered by local authorities outside of (ring-fenced) social housing.

Ironically, one of the most effective ways to strengthen local government would be to centralise or regionalise social care and SEND budgets or at the very least deal with them separately in council tax bills as a distinct precept. Depending on how this is implemented, this could provide a much closer link between how much communities pay to their local councils and the local public services they receive.

Step 4 – sort out the finances

As the joke goes, if you want to get to where you want to go, then you shouldn’t start from here.

In this case, ‘here’ is a place where many local authorities are in financial difficulty and struggling to meet their statutory obligations. Funding formulas that are based on out-of-date population numbers and don’t reflect underlying needs. A council tax system reliant on 1991 property valuations. Business rates that are an unwieldy tangled mess.

These weak financial foundations to the local government system in England are crying out for reform, even it is necessary to acknowledge that change will be very difficult and politically risky. Despite the many different options that are theoretically possible, it is worth considering the proposal put forward by the Fabian Society in a recent report on fiscal devolution produced in association with ICAEW.

The Fabians suggested that the distribution of central government grants be agreed among local authorities rather than determined in Westminster, accompanied by a more stable basis to determining their amount. Another route that the Fabians looked at is the system of shared taxation in Germany which provides the core funding for German regions out of national taxes in a way that equalises funding between richer and poorer regions.

Step 5 – rebuild trust

Prising the hand of Whitehall off the shoulder of English local authorities is not going to be easy. It will take significant political capital to make devolution happen, and there will be many reasons found to not hand over control of the purse strings ‘just yet’.

Many of these reasons will be down to a lack of trust. Trust in the ability of local authorities to manage money wisely, not helped by the governance failures of recent years. Trust in the transparency of local authority finances, not helped by the impenetrable nature of the accounts. Trust in the quality of local public audit, not helped by the local audit crisis.

That is why devolution is not just about the decisions that central government makes to give away or delegate power and money, and how it chooses to structure the system. It is also about the choices made by local and regional authorities asking for those new powers.

So, if you are in an area without a combined authority, it is time to start talking to your neighbouring areas about forming one. If your accounts make it difficult for stakeholders to understand how you have spent public money, it is time to streamline and invest in making them better. And if you are behind on your audits, then you need to do what you can to work with your external auditors to get back on track.

There is a big prize here. More effective and efficient local and regional government leading to better outcomes. And more bandwidth in Whitehall to focus on national and international priorities.

Alison Ring OBE FCA is director for public sector and taxation at ICAEW, the Institute of Chartered Accountants in England and Wales.

This article was written on behalf of ICAEW by Martin Wheatcroft in conjunction with Alison Ring, and was originally published in Room 151 and subsequently (with some minor changes) by ICAEW.

ICAEW chart of the week: BBC

My chart for ICAEW this week highlights how the BBC is struggling financially after incurring an operating loss of £0.3bn on the provision of public service broadcasting and the failure of commercial activities to contribute to the bottom line.

The British Broadcasting Corporation (BBC) recently published its annual report and accounts for the year ended 31 March 2024 (2023/24) and my chart highlights how the BBC is struggling financially with a reported operating loss of £0.3bn and no operating profit contribution from commercial activities.

Licence fee income was £3.7bn in 2023/24, which combined with other income of £0.3bn resulted in public services broadcasting revenue of £4.0bn. After deducting operating costs of £4.3bn, this meant the BBC lost £0.3bn on its eight national and seven regional TV channels, 10 national and 46 regional and local radio stations, BBC World Service radio in 42 languages, BBC iPlayer, BBC Sounds, BBC Education, news, sport and weather internet sites, orchestras and other activities, including funding of the independent S4C TV channel in Wales.

External income generated by the BBC’s commercial operations amounted to £1.4bn but this was offset by £1.4bn in operating costs, leaving the overall group operating loss broadly unchanged from the public service broadcasting total.

Licence fee income of £3.7bn was just under £0.1bn or 2% lower than the year before as the number of households paying the full licence fee reduced from 23.2m to 22.7m at the end of March 2024 on a fee frozen at £159 per year (equivalent to £13.25 per month). There were approximately 4,000 households with monochrome licences and 0.2m households on concessionary fees, with a further 1.0m with free licences (principally given to those aged 75 or more receiving pension credit).

Other income includes £0.2bn from contract income and £0.1bn in grants from the Foreign Office towards the cost of the World Service.

Public services broadcasting expenditure of £4.3bn was £149m lower than the year before and can be analysed between spending on content of £3.0bn, distribution and support costs of £0.9bn, and other activities of £0.4bn. Content spending can be further broken down into £1.7bn on TV channels, £0.5bn on radio, £0.3bn on the World Service, £0.2bn on online services including BBC iPlayer, and £0.3bn on other content.

While external commercial income was broadly matched by costs once intra-group transactions are taken account of, the BBC’s commercial businesses contributed £325m in 2023/24 towards the BBC’s overheads, down from £368bn in the previous year. They principally comprise BBC Studioworks, which supplies studio time and post-production services to the major TV networks and most production companies in the UK, and BBC Studios, which produces TV shows and films on behalf of the BBC and other broadcasters, as well as distributing BBC content around the world. BBC Studios also operates the UKTV network of four ad-supported TV channels, four ad-supported streaming channels and three pay TV channels in the UK, several international TV channels (including BBC America and BBC News international services), and the BritBox International streaming service outside the UK (now 100% owned by the BBC).

Not shown in the chart is £0.5bn in non-operating gains, most of which were one-off items, including £0.2bn in gains on disposals in the year and £0.2bn from tax adjustments in respect of prior years. This resulted in an overall net surplus of £0.2bn for the year ended 31 March 2024.

Real-term cuts in the value of the licence fee and falling returns from commercial activities have put significant financial pressure on the BBC in recent years, causing it to cut back on content and some services, consolidate operations such as domestic and international news gathering, and undergo a series of restructurings to improve efficiency.

The 8.7% increase in the licence fee to £169.50 from 1 April 2024 (equivalent to £14.13 per month) and inflation-linked increases planned over the next three years should help ease some of the pressure in the current financial year, although returning to operating profitability is likely to still require the BBC to look for further savings in its public service broadcasting operations.

Unfortunately, the BBC has not been able to replicate its commercial success in the years before streaming when it was able to generate significant returns from the sale of DVDs and international content licensing. While there are plans to build up its international streaming services (from a relatively low base), the BBC’s commercial businesses are unlikely to generate enough money to affect the dilemma facing the new government on what to do with the licence fee when the BBC’s current financial settlement ends on 31 December 2027.

The temptation will be for the government to defer reform of how the BBC is funded yet again, just as its predecessors have done over the last couple of decades. However, the erosion of income from younger households choosing to not watch broadcast television to stop paying the licence fee, and the likely consolidation of streaming services into a handful of global online ‘broadcasters’ that will dominate the market, is likely to make avoiding this conundrum that much more difficult this time around.

For more information, read the BBC annual report and accounts 2023/24 and the December 2022 House of Lords Communications and Digital Committee report on future funding of the BBC.

This chart was originally published by ICAEW.

Q1 public finances confirm challenging position for new government

First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.

The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face.

“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.

“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”

Month of June 2024

Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.

Financial year to date

Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.

Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)	Change (%)
Income tax	58.1	56.1	+4%
VAT	49.9	49.6	+1%
National insurance	39.7	43.4	-9%
Corporation tax	25.3	23.4	+8%
Other taxes	54.9	54.1	+1%
Other receipts	30.1	27.7	+9%
Total receipts	258.0	254.3	+1%
Public services	(158.8)	(152.6)	+4%
Welfare	(76.9)	(73.7)	+4%
Subsidies	(7.8)	(11.3)	-31%
Debt interest	(35.2)	(41.1)	-14%
Gross investment	(29.1)	(26.5)	+10%
Total spending	(307.8)	(305.2)	+1%
Deficit	(49.8)	(50.9)	-2%

Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.

Table 2: Public sector net debt

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)
Deficit	(49.8)	(50.9)
Other borrowing	3.9	(7.7)
Debt movement	(45.9)	(58.6)
Opening net debt	(2,694.1)	(2,539.7)
Closing net debt	(2,740.0)	(2,598.3)
Net debt/GDP	99.5%	96.7%

Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.

The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.

Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.

Revisions and other matters

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 increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.

This article was originally published by ICAEW.

ICAEW chart of the week: World population

My chart for ICAEW this week looks at how a declining fertility rate means the global population is now anticipated to reach a peak of ‘just’ 10.3bn in 2084, according to the UN.

World population.
ICAEW chart of the week.

Column chart showing the world’s population in 2000, 2025, 2050, 2075 and 2100.

Europe and Middle East – 0.8bn, 0.9bn, 1.0bn, 1.0bn and 1.0bn.
Americas – 0.8bn, 1.1bn, 1.2bn, 1.2bn and 1.1bn.
Asia-Pacific – 2.1bn, 2.4bn, 2.3bn, 1.9bn and 1.5bn.
South and Central Asia – 1.7bn, 2.3bn, 2.7bn, 2.9bn and 2.8bn.
Africa – 0.8bn, 1.5bn, 2.5bn, 3.3bn and 3.8bn.

Total – 6.2bn, 8.2bn, 9.7bn, 10.3bn (10,250m) and 10.2bn (10,180m), with a peak of 10.3bn (10,289m) in 2084.

For the purposes of this chart, Europe and Middle East comprises Europe and Western Asia as defined by the UN but excludes Russia and Northern Africa, Asia-Pacific comprises Eastern Asia, Southeastern Asia and Oceania, and South and Central Asia comprises Southern Asia, Central Asia and Russia.

18 Jul 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.

Source: UN Department of Economic Affairs, ‘World Population Prospects’.

© ICAEW 2024

The Population Division of the UN Department of Economic and Social Affairs (UN DESA) recently published its latest population projections for the 21st century. Its central projection is for the world’s population to increase from 8.2bn next year to a peak of 10.3bn in 2084 in 2084 before falling slightly to 10.2bn at the end of the century.

This means that the population will have increased by 2.0bn between 2000 and 2025 and is projected to increase by 1.5bn over the next 25 years to 9.7bn in 2050 and by 0.6bn to 10.3bn in 2075, before gradually starting to fall from 2084 onwards.

My chart illustrates how this change differs by region, with the population of Africa expected to grow throughout the century from 1.5bn in 2025 to 3.8bn in 2100. South and Central Asia, which has seen its population grow from 1.7bn in 2000 to an anticipated 2.3bn next year, is expected to see further growth to 2.9bn in 2075 before then falling to 2.8bn in 2100, while the population of the Asia-Pacific region is expected to increase from 2.1bn in 2000 to 2.4bn in 2025, is expected to fall gradually from 2030 onwards to 1.5bn in 2100.

The population of the Americas is expected to grow slightly from 1.1bn in 2025 (up from 0.8bn in 2000) to 1.2bn before falling back to 1.1bn by 2100, while Europe and Middle East’s population is expected to increase from 0.9bn in 2025 (up from 0.8bn in 2000) to close to 1.0bn in 2050 and for the rest of the century.

UN DESA says the main driver of global population increase over the next 60 years until it peaks is the momentum created by growth in the past, with increases in the number of women of reproductive age until the late 2050s offsetting a declining fertility rate – currently one child fewer on average than in the 1990s (2.25 live births per woman currently compared with 3.31 in 1990). They also project that the number of people aged 65 will reach 2.2bn in 2080, surpassing the number of children under 18 in that year.

The declining fertility rate is one reason that the UN are projecting that the world’s population in 2100 will be 700m or 6% smaller than they were anticipating a decade ago, despite life expectancy starting to increase again after falling during the COVID-19 pandemic.

For some countries and areas, the declines in population are expected to be quite significant over the remainder of the century, such as the populations of China and Japan, which are expected to reduce from 1,416m to 633m and from 123m to 77m between 2025 and 2100 respectively. Meanwhile India is expected to grow from a population of 1,464m in 2025 to a peak of 1,701m in 2061 before falling to 1,505m in 2100.

Many other countries and areas have already or will shortly see their populations start to decline, except for about 52 countries and areas up until 2054, and 62 up until 2100, where immigration will be the main driver of population growth. The latter includes the UK, where the population is expected to rise from 70m in 2025 to a peak of 76m in 2073 before falling to 74m in 2100, and the US, expected to grow from 347m in 2025 to 421m in 2100.

According to the analysis by the UN, there are around 100 countries and areas (out of the 237 included in their analysis) with relatively youthful populations over the next half century that have a window of opportunity to accelerate their economic development. This ‘demographic dividend’ occurs when the share of the population of working ages is increasing faster than the overall population and a substantial and sustained decline in fertility increases the numbers available to work, assuming the countries concerned can put in the investment needed to take advantage of this opportunity.

This chart was originally published by ICAEW.

ICAEW chart of the week: GDP over five years

My chart for ICAEW this week looks at how negative economic growth per capita over the last five years may have contributed to the recent change in government.

GDP over five years.
ICAEW chart of the week.

Step (waterfall) chart showing the changes in quarterly GDP in 2019 Q1 and 2024 Q1.

2019 Q1: £549bn

+ Inflation: +£120bn (+4.0% per year)

+ Population: +£22bn (+0.6% per year)

+ Growth per capita: -£3bn (-0.1% per year)

= 2024 Q1: £688bn

11 Jul 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.

Source: ONS, ‘UK quarterly national accounts: Jan-Mar 2024’.

© ICAEW 2024

My chart this week is on the change in quarterly GDP over the past five years, analysing the change between GDP as calculated by the Office for National Statistics (ONS) of £549bn in the first quarter of 2019 and £688bn in the first quarter of 2024, a net increase of £139bn.

Inflation, at 4% a year on average over the past five years, was the largest contributor to the change, being £120bn out of £139bn of the increase. An increase in population of more than 0.6% a year added a further £22bn, but this was offset by £3bn from negative economic growth per capita of 0.1% on average over the past five years.

Breaking down the £19bn change resulting from economic growth (0.5% a year on average), between population change and economic growth per capita in this way highlights how net inward migration has been one of the most significant drivers of the UK economy over the past five years.

While there are multiple reasons why the electorate decided to vote in a new government in the recent UK general election, the £41 reduction in quarterly GDP per capita over the past five years after adjusting for inflation – and the associated drop in living standards – to £9,994 per person in 2024 Q1 is likely to have been one of them.

The good news is that the next five years may be better, with monthly GDP up by 0.40% over the course of April and May 2024. This can be broken down between an estimated population growth of 0.16% and an increase in monthly GDP per capita over the two months of 0.24%, a positive sign, especially in the light of the latest ICAEW Business Confidence Monitor reporting that business confidence has risen to its highest level in over two years.

This chart was originally published by ICAEW.

ICAEW chart of the week: Debt on the fourth of July

My chart for ICAEW this week ‘celebrates’ US Independence Day by setting out the latest congressional projections for federal debt.

Debt on the fourth of July.
ICAEW chart of the week.

Column chart showing projected US federal debt held by the public in $tn (plus as % of GDP) between 2023 and 2034.

2023: $26.2tn (97.3%).
2024: $28.2tn (99.0%).
2025: $30.2tn (101.6%).
2026: $32.1tn (104.1%).
2027: $33.9tn (106.2%).
2028: $36.0tn (108.6%).
2029: $38.0tn (110.5%).
2030: $40.2tn (112.7%).
2031: $42.5tn (114.8%).
2032: $45.0tn (117.1%).
2033: $47.8tn (119.9%).
2034: $50.7tn (122.4%).

04 Jul 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.
Source: Congressional Budget Office, ONS, ‘An Update to the Budget and Economic Outlook, June 2024'.

© ICAEW 2024

Two hundred and forty-eight years ago, on 4 July 1776, the United States of America declared its independence from Great Britain, inheriting debts used to finance the revolutionary war but without any tax raising powers to fund repayment of the amounts owed. This was addressed by the adoption of the US Constitution in 1789, which enabled Secretary of the Treasury Alexander Hamilton to raise taxes, start repaying those initial debts, and issue new debt to finance a fledgling nation.

My chart this week illustrates how the US federal government has continued to borrow since then, with the Congressional Budget Office (CBO) reporting that US federal debt held by the public was $26.2tn or 97.3% of GDP in September 2023, on track to reach $28.2tn or 99.0% of GDP on 30 September 2024, before rising to a projected $50.7tn or 122.4% on 30 September 2034.

Debt on 4 July this year is estimated to be close to $27.8tn.

The projected rise in debt held by the public over the coming decade is based on extrapolating the gap between federal revenues and spending of around $160bn a month in the current financial year, based on tax and spending legislation enacted at 12 May 2024 together with the CBO’s own assessment of the administration’s financial plans (for example over student loan relief) and assumptions around factors such as interest rates and economic growth.

However, the CBO is keen to stress that these numbers are not a forecast. They say: “The baseline projections are meant to provide a benchmark that policymakers can use to assess the potential effects of changes in policy; they are not a forecast of future budgetary outcomes. Future legislative action could lead to markedly different outcomes. But even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline projections, not only because of unanticipated economic conditions, but also because of the many other factors that affect federal revenues and outlays.”

The challenge for the US is that despite almost 250 years of taxation with representation, that representation finds it difficult to raise taxes to bring debt down, often choosing to cut taxes and increase borrowing instead.

Whether that will change, or whether debt markets force it to change, remains a big unknown in the experiment commenced by George Washington and Alexander Hamilton all those years ago.

This chart was originally published by ICAEW.

New government to inherit tough public finances

Public sector net debt has passed £2.7tn for the first time. In May the debt increased by £49bn from £2,694bn to £2,743bn, 51% higher than it was in March 2020 at the start of the pandemic.

The monthly public sector finances for May 2024 released by the Office for National Statistics (ONS) on Friday 21 June 2024 reported a provisional deficit for the first two months of the 2024/25 financial year of £33.5bn, £1.5bn better than the £35.0bn predicted by the Office for Budget Responsibility (OBR) and £0.4bn higher than in April and May 2023.

An ICAEW spokesperson said: “Today’s numbers show that public sector net debt continues to grow, up from £2.69tn in April to £2.74tn in May, the first time it has exceeded £2.7tn.

“Net debt is now 51% higher than it was at the start of the pandemic in March 2020, and 167% higher than it was in March 2010, pushed up by the spikes in spending during the pandemic and to offset energy bills, as well as borrowing to fund day-to-day spending and investment. High borrowing costs and the financial consequences of more people living longer mean that the public finances are significantly weaker and less resilient than they were 14 years ago.

“When the country goes to the polls on 4 July, the reality is that whoever wins power will inherit an extremely challenging fiscal position that will hamper their ability to turn the country around.”

Month of May 2024

Taxes and other receipts amounted to £85.1bn in May 2024, up 2% compared with the same month last year, while total managed expenditure was also 2% higher at £100.1bn.

The resulting fiscal deficit of £15.0bn for the month was £0.8bn higher than in May 2023.

Financial year to date

As summarised in Table 1, total receipts in April and May 2024 of £170.4bn were 2% higher than in the same two months last year, with the cuts to employee national insurance rates offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Two months to	May 2024 £bn	May 2023 £bn	Change %
Income tax	38.2	36.8	+4%
VAT	33.9	33.6	+1%
National insurance	25.9	28.2	-8%
Corporation tax	16.6	15.5	+7%
Other taxes	36.0	35.2	+2%
Other receipts	19.8	18.5	+7%
Total receipts	170.4	167.8	+2%
Public services	(108.3)	(104.5)	+4%
Welfare	(51.4)	(49.1)	+5%
Subsidies	(5.2)	(7.8)	-33%
Debt interest	(21.4)	(21.6)	-1%
Gross investment	(17.6)	(17.9)	-2%
Total spending	(203.9)	(200.9)	+1%
Deficit	(33.5)	(33.1)	+1%

Table 1 also shows how total managed expenditure for the two months of £203.9bn was up by more than 1% compared with April and May 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and marginally lower debt interest. The latter was driven by significantly lower indexation on inflation-linked debt offsetting the much higher rates of interest payable on variable rate and refinanced fixed-rate debt.

Table 2: Public sector net debt

Two months to	May 2024 £bn	May 2023 £bn
Deficit	(33.5)	(33.1)
Other borrowing	(10.2)	2.1
Debt movement	(43.7)	(31.0)
Opening net debt	(2,699.2)	(2,539.7)
Closing net debt	(2,742.9)	(2,570.7)
Net debt/GDP	99.8%	96.1%

Public sector net debt as of 31 May 2024 was £2,743bn or 99.8% of GDP, just under £44bn higher than at the start of the financial year. The increase reflects borrowing to fund the deficit of £33.5bn and £10.2bn borrowed to fund lending by government and other cash requirements, net of loan recoveries.

Public sector net debt was £172bn or 7% higher than a year previously, and 3.7 percentage points higher in relation to the size of the economy.

Public sector net debt is £928bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,715bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last 14 years.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,074bn in non-liquid financial assets minus £2,743bn of net debt (£300bn liquid financial assets – £3,043bn public sector gross debt) and other liabilities of £670bn. This is a £47bn deterioration from the start of the financial year and is £95bn more negative than the -£631bn net worth number for May 2023.

Revisions and other matters

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 reduce the reported deficit for April 2024 by £2.1bn from £20.5bn to £18.4bn and revise the deficit for the year to March 2024 up by £0.7bn from £121.4bn to £122.1bn as estimates of tax receipts and expenditure were updated for better data.

This article was originally published by ICAEW.

ICAEW chart of the week: General election 2024

This week’s chart for ICAEW is on manifesto costings, illustrating the scale of each party’s promises and how they expect to fund them.

General election 2024.
ICAEW chart of the week.

Column chart comprising 5 double columns (left with funding and right with costings).

Party manifestos: sources of funding and costings 2028/29.

Labour:
- Tax rises £9bn | Spending cuts or efficiencies £1bn.
- Spending increases £11bn.

Conservatives:
- Tax rises £5bn | Spending cuts or efficiencies £21bn.
- Tax cuts £16bn | Spending increases £9bn.

Liberal Democrats:
- Tax rises £27bn | Spending cuts or efficiencies £6bn.
- Spending increases £53bn.

Reform UK:
- Tax rises £14bn | Spending cuts or efficiencies £136bn.
- Tax cuts £88bn | Spending increases £53bn.

Green Party:
- Tax rises £151bn | Spending cuts or efficiencies £12bn.
- Spending increases £226bn.

20 June 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.

Sources: GE 2024 party manifestos or manifesto costing documents, 2028/29 amounts.
Reform UK numbers and £21bn of LibDem extra spending are annualised over five years.

© ICAEW 2024.

My chart for ICAEW this week summarises the financial commitments in the manifestos of the five UK-wide political parties, together with how they propose to fund their plans.

The Labour Party

The Labour Party manifesto costings are the most cautious financially, with plans to find £9bn in 2028/29 from a combination of tax rises and tackling tax avoidance and evasion and £1bn or so in spending reductions to provide most of the funding for its spending commitments of £11bn.

The additional tax revenue proposed by Labour includes £5.2bn from increasing taxes on non-doms and tackling tax avoidance and evasion, £1.5bn from VAT and business rates on private schools, £1.2bn from extending windfall tax on oil and gas, and £0.6bn from increasing the tax rate on private equity carried interest. Spending reductions include £0.7bn from cutting spending on consultants, £0.4bn from increased collaboration between police forces, and £0.2bn from scrapping the Rwanda plan and ending the use of hotels for asylum seekers.

Labour’s proposals for new spending comprise approximately £6bn for public services and £5bn a year in capital investment. The former includes £1.8bn for the NHS, £1.0bn for schools and young people (including £0.3bn for primary school breakfast clubs), £0.9bn for HMRC to tackle tax avoidance and evasion, £0.7bn for improving public service delivery and capability, £0.4bn for 13,000 neighbourhood and community PCSOs, and £0.2bn for asylum and border control. The latter includes £1.7bn for Great British Energy, £1.5bn for green investment programmes, £1.1bn for home insulation, and £0.3bn in incentives for green energy suppliers.

Labour’s proposals add up to £1bn in extra borrowing in 2028/29, although Labour suggest that they could add £3.5bn to borrowing in 2028/29, implying a further £2.5bn could be available for other priorities.

The Conservative Party

The Conservative Party’s plans are more ambitious, with plans to raise £5bn a year by 2028/29 from tackling tax avoidance and evasion and £21bn from spending cuts and efficiency savings, which they intend to use to fund tax cuts of £16bn and extra spending of £9bn.

Proposed spending cuts by the Tories comprise £11bn from cutting planned spending on welfare (principally disability benefits), £5bn from other cuts (£1.6bn R&D, £1.5bn regional development, £0.9bn from cutting ‘low value’ degrees, £0.4bn from visa changes, and £0.6bn in other measures), and £5bn from efficiency savings (£2.9bn civil service headcount, £1.1bn from quangos, £0.6bn consultancy and £0.4bn NHS managers).

Proposed tax cuts include £10bn per year by 2028/29 to halve employee national insurance, £1.7bn to abolish self-employed national insurance, £2.2bn to increase pensioner tax allowances, £1.2bn to reform the high-income child benefit charge, and £0.6bn to reduce stamp duty for first time buyers.

Unlike Labour, there is no additional investment in HMRC to help achieve the planned reduction in the tax gap, but there is £4.5bn in 2028/29 to increase defence spending to 2.44% of GDP (on its way to 2.5% by 2030/31), £2.0bn for national / community service, £1.4bn for the NHS, £0.8bn for 8,000 more police officers, and £0.7bn for apprenticeships.

The Liberal Democrats

The Liberal Democrats are more hopeful in that they believe they can find £7.2bn from tackling tax avoidance and evasion to supplement proposed tax rises of £19.7bn (£5.2bn capital gains tax, £4.3bn bank levies, £4.0bn aviation taxes, £2.1bn oil and gas, £2.1bn digital services tax, £1.4bn on share buybacks and £0.6bn other). The party also plans to find £5.8bn from spending cuts (£4.3bn asylum, £0.9bn free schools, and £0.6bn consultants).

The Lib Dems plan use this additional funding to spend an extra £32bn on public services in 2028/29 (£9.8bn NHS and social care, £6.7bn on defence, borders and international aid, £6.6bn on education and childcare, £4.1bn to tackle child poverty, £2.9bn for the devolved administrations, £1.0bn for farmers and the environment and £0.6bn for transport.

The balance of £20.7bn a year on average over five years for capital investment is expected to be funded mainly by additional borrowing, including £8.4bn to tackle climate change and protect the environment, £6.2bn for social housing, £1.9bn on school buildings, £1.9bn for the devolved administrations, £1.2bn on transport infrastructure, and £1.1bn for hospitals and other health facilities.

The Reform Party

The Reform UK costings in the ‘Our Contract with You’ are on a much bigger scale than everyone apart from the Green Party, with proposals to raise taxes by £14bn and cut spending by £136bn (10% of total public spending, or more once costs such as the state pensions are excluded) in order to fund an £88bn programme of tax cuts and £53bn a year in spending commitments.

The proposed spending cuts include a blanket £50bn a year in efficiency savings from cutting public service spending by 5% “without touching front line services”, £35bn from ceasing to pay interest to commercial banks on central bank deposits, £20bn from scrapping net zero, £15bn from cutting welfare benefits, £6bn from foreign aid, £5bn from reducing immigration and £5bn from stopping HS2 completely. The tax rises comprise a £10bn tax on renewable electricity generators and a £4bn immigration surcharge on employers, together with unquantified amounts from a 4% online delivery tax and a cut in entrepreneur’s relief to 5% that are netted off within the numbers below.

Reform UK plans to use these sums to cut personal taxes by £70bn (raise income tax threshold to £20,000, abolish VAT on energy bills, cut stamp duty, allow VAT reclaims for tourists, halve inheritance tax rate to 20% and raise threshold to £2m), cut business taxes by £18bn (reduce corporation tax to 15% and to zero for profits under £100,000, increase the VAT threshold to £150,000, abolish business rates for high street SMEs and create SME enterprise zones with zero tax when creating jobs).

Spending commitments include £17bn health and social care (a three-year basic rate tax holiday for NHS and social care staff, 20% tax relief on private healthcare and insurance, write-off medical student fees over 10 years and private treatment vouchers), £14bn for defence and veterans (2.5% of GDP with an aspiration to meet 3% after 2030), £8bn for children and families (including £5,000 transferrable marriage allowance and front loading of child benefit for ages 1-4), £5bn for police and courts (recruiting 40,000 new officers over five years), £5bn for education (including 20% tax relief on private school fees – and no VAT), and £4bn for agriculture, fishing and coastal communities

The Green Party

The Green Party has the most ambitious set of proposals, with tax rises of £151bn and cost savings of £12bn together with £63bn in additional borrowing to fund incremental spending of £226bn in 2028/29. It has an expansive agenda that involves nationalising water and the Big 5 energy companies, investing large sums in the green transition, and spending a significant amount more on health and welfare.

Its proposed tax increases comprise £72bn in higher personal and wealth taxes, £70bn from a carbon tax and around £9bn from business taxation, with £12bn in savings from cancelling the Trident replacement and roadbuilding programmes. Its proposals include aligning capital gain tax rates and investment income with income tax, increasing national insurance above the upper earnings limit from 2% to 10%, restricting pension tax relief to the basic rate, reforming inheritance tax, and introducing a 1% wealth tax on individuals with assets above £10m and 2% above £1bn. It also wants to replace council tax and business rates with land value taxes.

If achieved, this would allow it to pay for £145bn in additional current spending of £145bn in 2028/29 and £81bn in extra capital investment. The former includes £46.4bn for health and social care, £27.2bn welfare, £20.1bn overseas aid, £13.2bn education, £11.9bn transport, £4.5bn nature, food and farming, and £21.7bn for other priorities. The latter includes £56.7bn for green investment, £10.5bn for social housing, £6.6bn for health and education, and £6.8bn for other capital expenditures.

Upcoming Spending Review does not feature

None of the parties addresses the ‘elephant in the room’ represented by the upcoming three-year Spending Review for 2025/26 to 2027/28 that is expected by the Institute for Fiscal Studies and others to identify up to £20bn per year of additional funding requirements to maintain public services at their current level.

Overcoming the current weak state of the public finances is likely to be first order of business for whichever party wins the election.

This chart was originally published by ICAEW.

ICAEW chart of the week: Labour market

My chart for ICAEW this week is on the labour market, breaking down the employment status of the 55.1 million adults aged 16 or over in the UK.

Labour market |
ICAEW chart of the week |

‘Treemap’ chart featuring rectangles scaled to the numbers.

55.1m UK adults aged 16 or over.

Active: 34.5m (left hand side).

Private sector employees 22.6m.
Public sector employees 6.0m.
Self-employed 4.5m.
Unemployed 1.5m.

Inactive: 20.6m (right hand side).

Inactive 65+ 11.2m.
Sick 3.0m.
Students 2.5m.
Homemakers 1.7m.
Retired 16-64 1.1m.
Other 1.1m.

13 June 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.

(C) ICAEW 2024.

Our chart illustrates the employment status of the 55.1m adults in the UK on the basis of the latest statistics reported by the Office for National Statistics (ONS), published on 11 June 2024 for the three months from February to April 2024. The ONS is well ahead of the Labour Party’s proposals to extend the franchise in that it has long classified individuals aged 16 or 17 as ‘adults’ for the purposes of its labour market statistics.

According to the latest numbers, there are 34.5m economically active individuals in the UK, comprising 22.6m private sector employees, 6.0m public sector employees, 4.4m self-employed and 1.5m unemployed.

A further 20.6m adults are not economically active, comprising 11.2m individuals aged 65 or more (most of whom are retired), 3.0m aged 16-64 who are sick, 2.5m students, 1.7m homemakers, 1.1m who have taken early retirement, and 1.1m others who are either not active for other reasons, or where the reason they are not active is not clear.

The 2.5m student number excludes 1.2m students and pupils with part-time jobs, who are included within the economically active category.

The inactive total includes 1.7m adults aged 16-64 who don’t meet the criteria to be officially classified as unemployed but say that they would like a job, comprising 0.3m or so students, 0.4m homemakers, 0.7m sick and 0.3m other.

The inactive numbers between age 16 and 64 have been broadly stable over the past few years (plus or minus 0.1m) with the exception of the number who are sick. This has increased from 2.3m (2.1m long-term sick and 0.2m temporarily sick) in the same period in 2020 – at the start of the pandemic – to 3.0m (2.8m long-term sick and 0.2m temporarily sick) today. This is a 32% increase in the number of long-term sick, a major issue both for the economy and the NHS.

The 33.0m people in work include 1.5m who are aged 65 or over, but unfortunately the ONS doesn’t provide a breakdown between those in work who are aged 65 (and therefore still shy of the state retirement age) and those who are aged 66 or more who could retire but have chosen or need to continue working.

Public sector employees comprise 2.0m in the NHS, 1.5m in education, 1.2m in public administration (including 0.5m in the civil service), 0.4m in the police and armed forces, 0.2m in other health and social work, and 0.7m in other areas.

According to the ONS, the employment rate is 74.3%, being the total of those in work between 16 and 64 (33.0m total – 1.5m over 65 = 31.5m) divided by the total number aged between 16 and 64 (31.5m in work + 1.5m unemployed + 9.4m inactive = 42.4m).

In contrast, the unemployment rate of 4.4% is calculated including those aged 65 or more but excluding those who are inactive, dividing the just over 1.5m who are officially unemployed (of whom 48,000 are 65 or more) by the just under 34.5m total number of economically active individuals

This chart was originally published by ICAEW.