Author: Martin Wheatcroft

This week’s chart is about export credit guarantees and the associated risk carried on government balance sheet. We compared the exposure of the UK government to guarantees provided by UK Export Finance to the equivalent exposure of the German federal government. 

It is important to stress that businesses can and do access other forms of government support such as loans, as well as commercial insurance, letters of credit and other risk management tools. After all, UK exporters do have access to the most sophisticated insurance market in the world.

What this does show is the relative willingness of the UK and German governments to take on risk in order to achieve a policy objective – support to exports. Of course, some of the difference is down to the relative size of the economies. Germany’s economy is over 40% larger than the UK’s.

A fairer comparison for the £12bn UK’s exposure to export credit guarantees might be to an economy-adjusted £53bn rather than the actual £76bn (€86bn) reported by the Federal Ministry of Finance’s export credit guarantee division. 

However you measure it, it is clear that the German government has assumed a much higher level of risk to support its exporters that the UK government.

Something to think about.

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-71709483.

The recent budget contained 53 announcements on spending and 33 announcements on tax. 

As our chart this week shows, the headline was an extra £7bn for the NHS in 2019-20, rising to £28bn in 2023-24. £84bn over the forecast period and an increase of 1.77% in public spending. 

Only nine other spending announcements exceeded £0.5bn. Additional funds for Universal Credit, social housing, social care, defence, High Streets, City-regions, road maintenance and school buildings added a further 0.33%. Altogether £4.8tn for the period to March 2024. 

The other 40 measures which together added £1.9bn or 0.04% to the total were all below that level. 24 of them were for £25m or less – each a miniscule share of total spending. 

It is unusual to identify such small amounts within the top level of the budgeting process for the government of the sixth biggest economy in the world. They could easily have been covered by existing departmental budgets, or by HM Treasury’s central contingency. 

Except of course the Budget is as much political theatre as it is a fiscal event. Who would want to deprive the Chancellor of the opportunity to announce an increase of total spending by 0.0002% for urban tree planting or 0.0001% for digital skills boot camps?

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1336743052.

Our chart this week takes a look at the OBR’s latest forecast for public sector net debt over the next five years.

While the Chancellor said debt is expected to fall, it is important to understand that this does not mean that debt will go down. Reported debt is actually forecast to be 5% higher in 2024, from about £1,810bn at 1st April 2019 to £1,896bn at 31 March 2024.

What will go down is the ratio of debt to GDP, because the economy is expected to grow faster than debt over the period. Inflation alone is expected to add 10% to GDP with 8% from economic growth.

The increase in public sector net debt would be closer to 13% if not for loans provided under the Bank of England’s Term Funding Scheme, with loans of £127bn to high street banks to be repaid in 2020-21 and 2021-22. This will partially offset the extra £213bn the government expects to borrow over the next five years.

This is not the full story. With more than £400bn needed to repay existing debt as it falls due the government has to borrow a total of £623bn over the period

The moral of this story – is that words and numbers are not always what they appear. In the strange world of the public finances, debt can go up – and down – at the same time.

To join the conversation: https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1246452697

The Chancellor was in a positive mood yesterday as he presented a budget to deliver the commitment to increase NHS spending without large tax increases.

The reason was an improvement in the OBR’s fiscal forecasts. As illustrated by our chart of the week on the 2018 budget, forecast receipts have been revised up by around 1%, and previously planned spending revised down by 0.6%, to give an additional £13bn a year in this and the next two years, rising to £16bn and £19bn in the two years after that. 

This is not due to significant changes in the economy. Lower unemployment and some additional revenues from higher oil prices have delivered an extra £1bn. A long period of very low interest rates and court wins on tax rules has also helped, but much of the improvement is from things not turning out as badly as forecast back in 2016. 

This has let him sprinkle a little extra cash to ease some of the pressure on public services, not to mention spending a penny or two on improving public conveniences. 

With the mantra of government changing from ‘austerity’ to ‘fiscal discipline’ it is clear that we are not out of the woods yet, especially with £1.8tn in net debt and £4.3tn in total liabilities weighing on the public finances for a long time to come.

With the budget less than a week away our two chapters in this year’s IFS Green Budget are proving highly relevant. 

While the Chancellor will benefit from prudence in previous forecasts, the underlying position remains extremely challenging. Total public liabilities are £4.3tn or 214% of GDP, while an increasingly long-lived population places ever greater demands on the state. 

One area where spending pressure may be unavoidable is Defence where a higher level of perceived threat, may result in higher spending. The Defence Select Committee has even suggested an extra £20bn a year may be needed. 

The burden would be less if all NATO members met the 2% defence and security spending commitment. This would lead to an extra £83bn of spending across NATO. The UK meets this threshold: spending £43bn, or 2.1% of GDP. Persuading our allies to meet this target would boost our collective defence with no extra funding by the UK taxpayer. 

Less likely to gain traction is President Trump’s suggestion that NATO members spend 4% of GDP. This implies a £38bn increase in defence spending by the UK and proportionately much greater increases by most NATO members. 

Watch this space and stay in touch with the Budget with ICAEW at https://www.icaew.com/technical/economy/uk-budget-2018.

Our #ICAEW #chartoftheweek is about defence this week – the subject of our second chapter in this year’s #IFSGreenBudget. This examines how the evolving defence and security position might affect defence resources and spending, and the pressure this could put on the public finances.

Our chart reflects the ‘peace dividend’ following the end of the Cold War, with the UK’s regular forces falling by more than half from 320,700 in 1980 to 146,560 in 2018.

The savings were used to fund a growing welfare state – with defence falling from 15% to 5% of total public spending over the last fifty years just as health and welfare spending has increased from around 25% to over half. Defence and security spending now stands at 2.1% of GDP.

This long-term decline will have to end if the UK is to meet its commitment as a member of NATO to spend at least 2% of GDP on defence and security. Indeed, changing perceptions of potential threats may lead to defence spending starting to increase. To read all about defence – and public sector assets (our first chapter), go to www.icaew.com/technical/economy/ifs-green-budget-2018. See the launch presentation online, read the full report or find out more at our follow up webinar on 25 October at 1pm – to register go to events.icaew.com/pd/11508.

Next Tuesday, ICAEW will host the launch of the Institute for Fiscal Studies’ 2018 Green Budget. This is the authoritative pre-Budget report on the outlook for the UK economy supported by in-depth analysis on the options available to the Chancellor.

The ICAEW has again contributed two chapters, the first of which is on the subject of public assets, complementing the chapter we did last year on liabilities. In the past the government focused on a narrow range of fiscal measures, however with the advent of the Whole of Government Accounts it has started to think about the wider public balance sheet.

This year’s Budget is scheduled to include a progress report on the Balance Sheet Review being undertaken by HM Treasury to look at ways public assets can be used more effectively, be freed up for other uses, or generate better returns. As our chart of the week illustrates, the UK’s £1.9 trillion (94% of GDP) of public assets are dwarfed by £4.3 trillion (214% of GDP) in public liabilities. With many public assets not readily saleable, effective asset management is more important than ever.

You can find out more about the 2018 IFS Green Budget event next Tuesday and register for your free place to attend at: https://lnkd.in/gu-PKEU.

Today’s chart of the week is on the recent increase in the oil price to above $80 a barrel. Given the potential impact on the global economy, this rise is the cause of some concern. A sudden spike in oil prices has been linked to a number of past recessions.

The last time that the one-month forward price for Brent Crude was above $80 was in October 2014, when it cost $85.93 to buy a barrel of mixed hydrocarbons (with free sulphur included).

Just 15 months later in January 2016 the price was down to less than $35, but since then the price has bounced back and was up to $82.69 at 30 September 2018, reaching $84.79 at the close yesterday – just 1.3% below the 31 October 2014 price.

From a US perspective, this is a return to the position of four years ago, but for the UK it is different. With Sterling weaker against USD, the price yesterday was £65.34, over 20% higher than the £53.71 a barrel it would have cost in October 2014.

This effect is even more pronounced for emerging economies with weakening domestic currencies. The price of oil in Brazilian Reals is now over 50% higher that it was four years ago.

For growing economies, higher oil prices are unhelpful. For economies that are struggling, markedly higher oil prices might prove devastating.