Fiscal deficit of £24.3bn in May as COVID spending trends downward

COVID-related spending continues to drive borrowing even as receipts approach pre-pandemic levels, with debt up by £24.9bn to £2,195.8bn or 99.2% of GDP in May 2021.

The latest public sector finances released on Tuesday 22 June reported a deficit of £24.3bn for May 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. An improvement from the £43.8bn reported for the same month last year during the first lockdown, it was still significantly higher than the £5.5bn reported for May 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.1bn from £300.3bn to £299.2bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Cumulative receipts in the first two months of the financial year of £128.6bn were £15.9bn or 14% higher than a year previously, but this was still £0.7bn or 0.5% below the level seen a year before that in April and May 2019. At the same time cumulative expenditure of £165.8bn was £20.9bn or 11% lower than the first two months of 2020-21, but £37.2bn or 29% higher than the same period two years ago.

Ultra-low interest rates continued to benefit the interest line, which at £9.1bn in April and May 2021 was £0.1bn or 1% lower than April and May 2020 and £1.5bn or 14% lower than April and May 2019.

Net public sector investment was slightly lower than last year with £7.1bn invested in April and May 2021, down £0.8bn or 10% from a year before but up £0.9bn or 15% from two years ago.

This combined to produce a cumulative deficit for the first two months of the 2021-22 financial year of £53.4bn, £37.7bn or 41% below that of the same period a year previously, but up £37.3bn or 232% from the total for April and May 2019.

Public sector net debt increased to £2,195.8bn or 99.2% of GDP, an increase of £58.4bn since March, reflecting £5.0bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses. Debt is £259.1bn or 13% higher than a year earlier and £427.2bn or 24% higher than in April and May 2019.

Alison Ring, ICAEW Public Sector Director, said: “With numbers for the second month of the financial year now in, we can see tax receipts are starting to approach pre-pandemic levels, while borrowing continues to increase despite COVID-19 spending starting to decrease. 

“The public finances remain in a fragile state, and ongoing debates about education spending, adult social care and the pensions triple-lock highlight the difficult decisions facing Rishi Sunak as he seeks to balance pressures on our public services with still growing levels of public debt. The prospects of the Chancellor raising taxes in the Autumn Budget appear to be increasing.”

Images showing a table of the fiscal numbers for 2 months to May 2021 and variances against the prior year and two years. Click on link at end of this post to the ICAEW website which has a readable version of the table.
Images showing a table of the fiscal deficit by month, including receipts, expenditures interest and net investment. Click on link at end of this post to the ICAEW website which has a readable version of the table.

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 a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £31.7bn to £29.1bn and the deficit for the twelve months ended 31 March 2021 from £300.3bn to £299.2bn.

This article was originally published by ICAEW.

NAO: UK ‘lacked playbook’ for emergencies like the pandemic

National Audit Office says the UK government acted at unprecedented speed to respond to the virus, but needs to build resilience and management capabilities if it is to cope better with future emergencies.

The National Audit Office (NAO) issued a report on ‘Initial learning from the government’s response to the COVID-19 pandemic’ on 13 May 2021. This attempts to identify key lessons for the government to take if it is to improve the UK’s ability to respond to future emergencies.

The report sets out six themes where the NAO believes that the government could learn from the experience of the covid-19 pandemic, which has involved measures with estimated lifetime costs of £372bn so far.

Risk management

  • Identifying the wide-ranging consequences of major emergencies and developing playbooks for the most significant impacts.
  • Being clear about risk appetite and risk tolerance as the basis for choosing which trade-offs should be made in emergencies.

Transparency and public trust

  • Being clear and transparent about what the government is trying to achieve, so that it can assess whether it is making a difference.
  • Meeting transparency requirements and providing clear documentation to support decision-making, with transparency being used as a control when other measures, such as competition, are not in place.
  • Producing clear and timely communications.

Data and evidence

  • Improving the accuracy, completeness and interoperability of key datasets and sharing them promptly across delivery chains.
  • Monitoring how programmes are operating, forecasting changes in demand as far as possible, and tackling issues arising from rapid implementation or changes in demand.
  • Gathering information from end-users and front-line staff more systematically to test the effectiveness of programmes and undertake corrective action when required.

Coordination and delivery models

  • Ensuring that there is effective coordination and communication between government departments, central and local government, and private and public sector bodies.
  • Clarifying responsibilities for decision-making, implementation and governance, especially where delivery chains are complex and involve multiple actors.
  • Integrating health and social care and placing social care on an equal footing with the NHS. Balancing the relative merits of central, universal offers of support against targeted local support.

Supporting and protecting people

  • Understanding to what extent the pandemic and government’s response have widened inequalities, and taking action where they have.
  • Providing appropriate support to front-line and other key workers to cope with the physical, mental and emotional demands of responding to the pandemic.

Financial and workforce pressures

  • Placing the NHS and local government on a sustainable footing, to improve their ability to respond to future emergencies.
  • Ensuring that existing systems can respond effectively and flexibly to emergencies, including provision for spare or additional capacity and redeploying staff where needed.
  • Considering which COVID-19-related spending commitments are likely to be retained for the long term, and what these additional spending commitments mean for long-term financial sustainability.

The report does not contain any new substantive recommendations as it in effect brings together insights from 17 individual reports conducted by the NAO into different aspects of the government’s response to the pandemic. However, it is helpful in identifying some of the common strands emerging from the NAO’s work, such as the importance of effective cross-government working.

Perhaps the most significant finding is that the government lacked a playbook for many aspects of its response, with pre-existing pandemic contingency planning not including plans for identifying and supporting a large population advised to shield, employment schemes, financial support to local authorities and managing mass disruption to schooling.

Alison Ring, director for public sector at ICAEW, commented: “The NAO is careful to balance the negatives it saw in the government’s response to coronavirus with positives such as the design and roll-out at speed of large-scale interventions under huge pressure. However, it is clear that the NAO believes that the UK was underprepared for a high-impact low-likelihood event like the pandemic, and the lack of detailed plans in key areas hampered the government’s response.

“While accepting that no plan can cover all the specific circumstances of every potential crisis, the NAO nevertheless believes that more detailed contingency planning can improve the government’s ability to respond to future emergencies.” 

For more information, the full report is available from the NAO website.

This article was originally published by ICAEW.

April fiscal deficit drops to £31.7bn as new financial year gets underway

The latest public sector finances reported a deficit of £31.7bn for April 2021, as COVID-related spending continued to weigh on the public finances.

Although an improvement from the £47.3bn deficit reported for the same month last year during the first lockdown, the figures are still significantly higher than the £10.6bn reported for April 2019.

The Office for National Statistics also revised the reported deficit for the year ended 31 March 2020 down by £2.8bn from £303.1bn to £300.3bn, still a peacetime record. The ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number and estimates will be refined further over the next few months.

Receipts in April 2021 of £64.6bn were £7.8bn or 14% higher than a year previously, but this was still £1.1bn or 2% below the level seen a year before that in April 2019. At the same time, expenditure of £83.3bn was £9.3bn or 10% lower than April 2020, but £18.7bn or 29% higher than two years before.

Ultra-low interest rates continued to benefit the interest line, which at £5.3bn in April 2021 was £0.2bn or 4% lower than April 2020 and £1.5bn or 22% lower than April 2019.

Net public sector investment, as planned, has continued to grow with £7.7bn invested in April 2021, up £1.7bn or 28% from a year before and £2.8bn or 57% from two years ago.

This combined to produce a deficit for the first month of the 2021-22 financial year of £31.7bn, £15.6bn or 33% below that of the same month a year previously, but £21.1bn or 199% higher than April 2019.

Public sector net debt increased to £2,171.1bn or 98.5% of GDP, an increase of £33.6bn over the course of April, reflecting £1.9bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses and tax deferral measures. Debt is £304.6bn or 16% higher than a year earlier and £410.2bn or 23% higher than in April 2019.

The net cash outflow (the ‘public sector net cash requirement’) for the month was £34.5bn.

Commenting on the figures, ICAEW’s Public Sector Director Alison Ring said: “It is difficult to read too much into the first month’s numbers in a new financial year, but the Chancellor is likely to be relieved that the gap between receipts and spending is narrower than that seen last year during the first lockdown. But the public finances are not out of the woods, with tax receipts still below pre-pandemic levels and COVID-related spending continuing to drive up borrowing. 

“The focus over the next few months is likely to be on the next Spending Review, which will decide on future public spending and investment with the long-awaited social care funding strategy now anticipated to be announced later this year. However, the need to address the long-term unsustainability of the public finances shouldn’t be forgotten.”

Image showing receipts, expenditure, interest, net investment, deficit, other borrowing, changes in net debt, and net debt for April 2021 public sector finances, together with variances against April 2020 and April 2019.

For a readable version of the table click on the link to the ICAEW article at the end of this post.

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 a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the twelve months ended 31 March 2021 from £303.1bn to £300.3bn.

For further information, read the public sector finances release for April 2021.

This article was originally published by ICAEW.

What COVID-19 means for the future of tax

This article features in the May 2021 edition of TAXline, ICAEW Tax Faculty’s monthly magazine. One article is freely available each month.

With the pandemic increasing pressure on public finances, could this prompt overdue discussions on tax reform? ICAEW’s Head of Tax Frank Haskew and independent adviser Martin Wheatcroft reflect on recent announcements and challenges facing the Chancellor.

With the UK’s deficit set to increase to £2.5tn by 2023, the fact that tax revenues do not cover public spending is starker than ever. However, the problem of balancing the books far predates COVID-19

An aging population coupled with funding and tax administrative decisions made many decades ago have meant that the gap has been slowly but inexorably widening. Frank Haskew, Head of Tax at ICAEW, says: “Since the turn of the century, we have been running deficits almost every year. The fact is that we’re not raising enough tax meet to our day-to-day spending commitments.”

Martin Wheatcroft, an independent adviser and author on public finances who works closely with ICAEW, explains: “People are living longer which is a good thing, but it has a financial impact. For example, the NHS spends an average of £80 a month on 18-year-olds, while for 80-year-olds that cost is more than £500. The perennial issue is that we don’t have a clear long-term strategy for how the government, or any government, plans to deal with that.”

To balance the books, the primary strategy of governments has been to grow the economy and have a moderate level of inflation to inflate away debt. However, financial crises and recessions have meant that in the past decade growth has been a lot weaker than expected. George Osborne, for example, was forced to leave the Exchequer without fulfilling his pledge of eliminating the deficit due to the underperformance of the economy. “When you combine the demographic pressures with slower economic growth then it’s a difficult situation,” says Wheatcroft.

Paying for coronavirus

Into this strained situation enters a global pandemic and its huge financial repercussions. Alongside the severe and prolonged impact on economic activity, stimulus and support packages are expected to add between £0.5tn–£1tn onto UK debt in the next few years. 

Ahead of the Budget in March, the expectation was that the Chancellor would be looking for ways to raise revenues to help cover the costs of COVID. However, the measures announced will not do so – in the short term at least.

“It’s fair to say that there was no serious attempt to tackle a growing fiscal deficit in the Red Book,” says Haskew. “The 2019 manifesto pledge that there would be no rise in VATincome tax or national insurance means that the Chancellor is prevented from the most obvious, and quick, ways in which to raise revenues.”

The flagship measure for revenue raising in the Budget was the increase to corporation tax rates. However, as the change will not come into effect until 2023, this will not provide a quick cash injection. Haskew also argues that the fiscal impact may not be significant. “The potential corporation tax revenues over the forecast period are pretty much balanced by the cost of the super deduction. In overall terms any difference is probably loose change,” he says.

Wheatcroft believes the measure gives an indication of the government’s medium-term plans. “One of the more positive things you can do in the medium term to get your public finances under control is encourage stronger economic growth. By taking action on corporation tax the government wants to try and at least stabilise the situation.” 

Reallocating spending

Evidence for where the Chancellor is securing finance in the short term can be seen in the integrated defence review published on 16 March, which confirmed that the size of the army would be further reduced by 2025. “Since the 1950s the UK has cut defence spend from 10% of GDP down to 2%. Reallocating that finance to healthcare that has helped successive governments avoid increasing taxes,” explains Wheatcroft. “However, with defence spend now just above the NATO minimum, there’s no further capacity and taxes are going to have to go up at some point.” 

Haskew agrees: “The measures announced so far are just nibbling at the edges of the problem. The UK has a strategic question as to whether it tackles the deficit and if so how. Since the start of the pandemic there’s been suggestions from some commentators that capital gains tax and inheritance tax might rise, and other have proposed wealth taxes, but we saw none of those suggestions in the Budget. It shows just how hard it is to raise taxes.”

The need for change

There are a number of areas of the UK tax system that have been ripe for reform for many years, including the differences between the taxation of the employed and self-employed. “We’ve had a position of significant difference between these two types of taxpayer for 20 years and more. Successive governments, of every political hue, have identified it as a concern but never successfully addressed it,” says Haskew. 

He cites Philip Hammond’s attempt to make relatively modest changes to national insurance contributions for the self-employed in 2017, which were reversed within a week. 

Wheatcroft, meanwhile, points to the perennial thorny issue of business rates and the interim review published as part of HM Treasury’s Tax Day announcements on 23 March. “Everybody was in total agreement that it’s a bad tax and needs reform, but they were also very unhappy about the main alternative option,” he says. “There’s definitely an inertia bias when it comes to changing taxes because it is so difficult. It’s much easier to stay with the current ones, simply because they already exist and they are collecting revenue, however imperfectly.”

Haskew agrees: “These cases highlight that a lot of the structural problems in the tax system have become so ingrained that trying to change them is almost impossible.”

Catalyst for reform

Decisions on how to balance the books have been getting increasingly difficult year on year, but could the dramatic impact of the pandemic provide the impetus for the government to set out a long-term vision of how to tackle the deficit and for Rishi Sunak to make some brave choices?

“From a public support point of view, this past Budget was politically the best possible time to raise taxes, with everyone understanding the financial impact of the interventions that the government has had to take,” says Wheatcroft. “However, from an economic perspective it would be the worst time. At the moment the government wants to do everything possible to encourage a strong economic recovery. This is probably why the government took the opportunity to pre-announce raising corporation tax rates now, rather in three years’ time immediately prior to a general election.”

Wheatcroft suggests that the Chancellor has potentially another 12 months of political goodwill in which to implement changes and suggests that Tax Day is a good indication of travel. “The very fact of having a Tax Day announcing the consultations and setting out a 10-year strategy, which it did last year, is a positive sign of longer-term thinking,” he says.

Haskew believes that now is the time to start having a national conversation about the future of tax and cites a Treasury Committee report, Tax after coronavirus, published on 1 March as a step in the right direction. “It’s a really interesting report because there was a consensus among the cross-party members about proposals to try and address some of these issues,” he says. 

“The deficit and tax reform are more than political issue, so reaching a consensus was really encouraging,” he says. “We have this growing problem as a nation, so what are we going to do about it? These things need to be debated, to see whether we can reach some consensus about the best way of raising tax without harming productivity.”

This article was originally published by ICAEW.

March fiscal deficit hits £28bn as departments rush to spend capital budgets

The UK reported a £28.0bn fiscal deficit in March 2021, bringing the total shortfall for 2020-21 to £303.1bn. The last month of the financial year saw net investment of £10.3bn, up from a monthly average of £4.0bn over the previous eleven months.

The latest public sector finances released on Friday 23 April reported a deficit of £28.0bn for March 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the financial year to £303.1bn, £246.0bn more than the £57.1bn reported for the same period last year.

The combination of receipts down 5%, expenditure up 27% and net investment up 25% has resulted in a deficit for the twelve months to March 2021 that is more than five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 25%.

The deficit is smaller than the £354.6bn forecast by the Office for Budget Responsibility (OBR) in March as the economy has been less damaged than was feared, despite the extended lockdown during the final quarter of the financial year. However, some of this difference relates to spending that has been deferred into the following financial year, while the provisional numbers also exclude £27bn of bad debts on COVID-related lending that were included in the OBR forecast.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last twelve months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. 

Net investment is greater than last year (mostly as planned), while the interest expense line has benefited from ultra-low interest rates. March 2021 saw a return to the traditional end-of-financial-year rush to get capital budgets spent, with net investment spending of £10.3bn in March contrasting with an average of £4.0bn over the previous eleven months.

Public sector net debt increased to £2,141.7bn or 97.7% of GDP, an increase of £344.0bn from the start of the financial year. This reflected £40.9bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures. Although net debt was reported as exceeding 100% of GDP at various points during the financial year, slightly improved GDP numbers have kept the ratio below that point.

The cash outflow (the ‘public sector net cash requirement’) for the month was £16.4bn, increasing the cumulative total cash outflow for 2020-21 to £339.0bn. This is a significant increase over the cumulative net cash outflow of £17.2bn reported for 2019-20.

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 a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first eleven months from £278.8bn to £275.1bn and the reported deficit for 2019-20 from £57.7bn to £57.1bn.

This article was originally published by ICAEW.

Biggest peacetime deficit caps extraordinary year for UK public finances

Huge economic shock combined with unprecedented fiscal interventions results in a provisional fiscal deficit of £303bn or 14.5% of GDP for the year ended 31 March 2021.

The Office for National Statistics today published its first estimate of fiscal history, reporting a provisional fiscal deficit of £303bn or 14.5% of GDP for 2020-21 and a £344bn increase in public sector net debt from £1.8bn to £2.14tn at 31 March 2021, breaking peacetime records for the public finances. This compares with an official forecast for the deficit of £55bn presented by the Chancellor just prior to the start of the financial year last March, admittedly together with the first in a series of mini-fiscal announcements that saw spending soar to tackle the pandemic at the same time as tax revenues collapsed.

The damage is less than had been feared at some points during the past year, with the provisional deficit coming in below the £355bn estimated by the Office for Budget Responsibility (OBR) at the time of the Spring Budget 2021 last month and substantially below their forecast of £394bn in November 2020 at the time of the Spending Review. While some of this is down to better economic performance as lockdowns have been less harmful than anticipated, there has been an offsetting increase in the forecast deficit for the 2021-22 financial year starting this month to £234bn compared with the pre-pandemic projection of £67bn. The provisional deficit of £303bn also excludes somewhere in the region of £27bn for bad debts on covid-related lending that will need to be accounted for at some point.

The deficit is only part of the story, as the government has borrowed significant amounts to finance tax deferrals and lending to business to help them survive. As a consequence, public sector net debt has increased by more than the deficit, with an increase of £344bn to a provisional £2,142bn or 97.7% of GDP at 31 March 2021. Debt is expected to rise over the next couple of years to in excess of £2.5tn.

While the numbers for both the deficit and debt are likely to be revised up or down over the next few months, the big picture won’t change – debt as a proportion of GDP has increased from 35% in March 2008 before the financial crisis to around 80% of GDP a couple of years ago before climbing to in the region of 100% of GDP today. These numbers don’t include other significant liabilities in the government balance sheet such as public sector employee pension obligations, nor do they include future financial commitments such as for welfare benefits. Despite that they still provide an indication of just how significantly the UK’s fiscal position has changed over a period of less than a decade and a half.

Fortunately, interest rates have been coming down even faster than debt has been going up, enabling the Government to reduce its interest bill over the course of the year. However, higher leverage comes with a greater exposure to movements in interest rates going forward, a concern for the Chancellor in mapping out his plans for the next few years.

While the Spring Budget last month provided some indications on how the Chancellor aims to stabilise the public finances through a combination of higher investment spending, short-term economic stimulus and a corporation tax rise, there is as yet no indication of his longer-term fiscal strategy to address the unsustainability of the public finances identified by the OBR before the pandemic.

While the government has been taking steps to set the foundations for better management of the public finances, for example through the National Infrastructure Strategy released last year, the soon to be launched National Data Strategy and actions coming out of HM Treasury’s recent Balance Sheet Review, there is no clear plan for how the government intends to fund pensions, health and social care over the next quarter of a century. These costs will continue to grow as many more people live longer in retirement and the working age population shrinks, just at a time that huge investments are needed to achieve net zero and pressures on public spending are unlikely to disappear. At the same time the government needs to work out how it can ensure the public finances are more resilient and better prepared for future crises – from whatever corner they may come.

Alison Ring, ICAEW Public Sector Director, said: “Today’s numbers cap a dramatic year for the UK’s public finances, and show this is the biggest deficit since the end of World War Two. However, the damage is less than had been feared, with the shortfall lower than the OBR had forecast.

Ultra-low borrowing costs have provided the government with the room it needed to provide unprecedented spending to tackle the coronavirus pandemic, protect jobs and prevent the economy from crashing, as well as the opportunity to invest for growth in the coming years.

However, even as the economy starts to recover, the legacy of higher debt and a greater exposure to changes in interest rates will be with us for years, if not decades to come. The public finances were already on an unsustainable path before the pandemic, and the government will need a long-term strategy for rebuilding them.”

This article was originally published by ICAEW.

Fiscal deficit on course to exceed £300bn in 2020-21

The UK reported a £19.1bn fiscal deficit in February 2021, bringing the total shortfall over eleven months to £278.8bn. Public sector net debt is up by £333.0bn at £2.13tn.

The latest public sector finances released on Friday 19 March reported a deficit of £19.1bn for February 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the first eleven months of the financial year to £278.8bn, £228.2bn more than the £50.6bn reported for the same period last year.

The reported deficit for the eleven months excludes £27.2bn in potential business loan write-offs that the Office for Budget Responsibility (OBR) has included in its forecast deficit of £354.6bn for the full financial year.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last eleven months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. Net investment is greater than last year (mostly as planned), while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,131.2bn or 97.5% of GDP, an increase of £333.0bn from the start of the financial year and £347.2bn higher than in February 2020. This reflects £54.2bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures.

The cash outflow (the ‘public sector net cash requirement’) for the month was £11.4bn, increasing the cumulative total cash outflow this financial year to £322.3bn. This is a significant swing from the cumulative net cash inflow of £10.9bn reported for the equivalent eleven-month period in 2019-20.

The combination of receipts down 5%, expenditure up 27% and net investment up 21% has resulted in a deficit for the eleven months to February 2021 that is around five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 27%.

Alison Ring, ICAEW Public Sector Director said: “Today’s numbers are in line with expectations, with the deficit for the past 11 months reaching £278.8bn. This means we are on track for public sector net borrowing to exceed £300bn for the full year once a potential £27bn in bad debts that have not yet been recorded are factored in.

“Our eyes are now focused on what possible tax measures, in addition to the planned corporation tax rise, the government might use to start rebuilding the public finances.”

Table: public sector finances month ended 28 February 2021. Analyses deficit of £19.1bn for month and variances from same month last year.

Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: public sector finances 11 months ended 28 February 2021. Analyses deficit of £278.8bn and change in net debt of £333.03bn and variances from same period last year, together with net debt of £2,131.2bn or 97.5% of GDP.

Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the 11 months to 28 February 2021.
 
Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the prior year.
 
Click on link at the end of the post to ICAEW article for a readable version of the table.

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 a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first ten months from £270.6bn to £259.7bn and increasing the reported deficit for 2019-20 from £57.1bn to £57.7bn.

This article was originally published by ICAEW.

Long-term vision for public finances unclear in a Spring Budget focused on recovery

4 March 2021: The UK economy is set to be 3% smaller than expected before the pandemic, with public sector net debt forecast to peak at 110% of GDP in 2024.

The Chancellor of the Exchequer’s second Budget on Wednesday 3 March 2021 was dominated by the coronavirus pandemic and how the economic recovery can be accelerated through stimulus measures.

The estimated deficit for the current financial year of £355bn is now expected to be £39bn smaller than was forecast in November. This reflects a slightly better economic performance than had been anticipated, despite the extended lockdown, as well as unused contingency within the budget for COVID-19 spending.

This has been more than offset in the current budget by a continuation of support to businesses and individuals affected by the pandemic, including extending the furlough scheme, the self-employed support scheme and the Universal Credit supplement during the first half of 2021-22, together with further support to businesses, such as on business rates relief.

There were no major spending decisions, as the one-year Spending Review in November had already set departmental budgets for non-COVID-related expenditures for 2021-22, while decisions about subsequent years will be made in the three-year Comprehensive Spending Review planned for the autumn.

Tax decisions mainly comprised economic stimulus measures in 2021-22 and 2022-23, primarily the super-deduction for private sector capital expenditure that the government hopes will bring forward investment and boost the economic recovery. This is followed by tax rises over the following three years, principally from higher corporation tax on larger businesses’ profits.

The Office for Budget Responsibility’s economic forecasts remained similar to its central scenario set out in November, with the economy on track in their view to be 3% smaller than their pre-pandemic expectations. As a consequence, economic forecast changes (net of the indirect effect of government decisions) were relatively small as illustrated in Table 1.

Image of table showing government decisions and forecast changes for 2020-21 through 2025-26. Click on link to ICAEW article at end for a readable version.

The forecast deficit for 2021-22 of £234bn is expected to be the second-largest peacetime deficit ever recorded after the current financial year, emphasising just how significant a hit the economy has suffered as a consequence of the pandemic and the restrictions on economic activity that have been necessary. 

Higher corporation tax receipts are expected to reduce the deficit in the second half of the forecast period and start to stabilise the level of public debt in relation to the size of the economy. However, deficits are still expected to remain higher than pre-pandemic forecasts, with the Chancellor confirming that eliminating the deficit was no longer a government objective.

The Chancellor did not announce any new fiscal rules during his speech, although he hinted strongly they would feature targeting the deficit to be no higher than the level of public sector net investment and a stable or falling debt to GDP ratio. He stated that it made sense to use borrowing to invest while interest rates remained very low.

Although there was an indication that the Chancellor believes action is needed to deliver sustainable public finances, there was little of this action in his statement beyond the rise in the rate of corporation tax and the freezing of tax allowances from 2022-23 onwards.

Image of table showing debt and deficit forecast for 2020-21 through 2025-26. Click on link to ICAEW article at end for a readable version.

Commenting on the March 2021 Budget Alison Ring, ICAEW Public Sector Director, said: “While the deficit for the current financial year will come in £39bn below what was previously expected, this is forecast to be offset by an increase to the deficit of £70bn in 2021-22. This increase reflects both the continuation of support schemes for people and businesses, as well as sizeable stimulus measures to support economic recovery.

“The additional resources being provided to HMRC to tackle fraud will be needed to provide proper scrutiny of claims for the Help To Grow and super-deduction schemes in particular.

“While the Chancellor did take action to restrain the growth in debt over the next five years, he did not fully address how he plans to deliver sustainable public finances in the longer-term. The Chancellor chose to focus on an alternative metric of ‘underlying debt’ in his speech, rather than the official measure for public sector net debt which is predicted to peak at close to 110% of GDP in 2024. Whichever measure is used, further difficult choices will be needed in future Budgets to address the fundamental challenges facing the public finances.”

For more information on the March 2021 Budget visit ICAEW’s Budget page.

This article was originally posted on the ICAEW website.

No public sector finance surplus in January as pandemic spending rises

22 February 2021: The UK reported an £8.8bn fiscal deficit in January, bringing the total shortfall over ten months to £270.6bn. Public sector net debt is up by £316.4bn and now exceeds £2.11tn.

The latest public sector finance figures for January 2021, published on Friday 19 February 2021 by the Office for National Statistics (ONS), reported a deficit of £8.8bn in January 2021, a contrast from the surplus typically reported in most years as expenditures outpaced the extra taxes that come with self-assessment filings. This brought the cumulative deficit for the first ten months of the financial year to £270.6bn, £222bn more than the £48.6bn reported for the same period last year.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates continued to drive lower tax revenues, while large-scale fiscal interventions resulted in much higher levels of expenditure. Net investment is greater than last year (mostly as planned), while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,114.6bn or 97.9% of GDP, an increase of £316.4bn from the start of the financial year and £328.6bn higher than in January 2020. This reflects £45.8bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to business and tax deferral measures.

Cash funding (the ‘public sector net cash requirement’) for the month was a net cash inflow of £22.3bn, reflecting self-assessment and corporation tax receipts in the month. This reduced the cumulative total cash outflow this financial year to £311.1bn, still a significant change from the cumulative net cash inflow of £16.0bn reported for the same ten-month period in 2019-20.

The combination of receipts down 6%, expenditure up 28% and net investment up 31% has resulted in a deficit for the ten months to January 2021 that is almost six times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 28%.

The numbers reported by the ONS exclude £29.5bn in estimated bad debts from coronavirus lending that is expected to be reflected in the deficit for the full year, which is on track to end up somewhere between £350bn and the £393.5bn as forecast by the Office for Budget Responsibility in November.

Commenting on the numbers, Alison Ring OBE FCA, public sector director at ICAEW, said: “Although a little lower than some had expected, the sheer scale of the public borrowing undertaken in the first ten months of this financial year remains unprecedented in peacetime. 

The upcoming Budget will provide an opportunity for the Chancellor to outline a vision for how to repair the public balance sheet and put the public finances onto a sustainable path over the coming decade, even if 2021 is not the time for major tax changes.

We want to see the Budget focus on building a bridge to economic recovery, getting people back into work, help for exporters, and greater investment in digital technology to make our businesses competitive in the 21st-century economy.”

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 a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first nine months from £270.8bn to £261.8bn and increasing the reported deficit for 2019-20 from £57.0bn to £57.1bn.

For further information, read the public sector finances release for January 2021.

This article was originally published by ICAEW.

PAC demands improvements in the Whole of Government Accounts

4 February 2021: The Public Accounts Committee has said production of the WGA should be speeded up and a better commentary is needed on the government’s financial position and exposure to forward-looking fiscal risks.

The Public Accounts Committee (PAC) recently issued a report on the Whole of Government Accounts (WGA). The PAC says that while the WGA is a world-leading document in helping the public understand both how government has used taxpayers’ money and what challenges face public finances in the future, the focus on the WGA being a backwards-looking document considerably hampers its usefulness as a tool for information, accountability and planning.

In 2018-19, the WGA reported public sector assets and liabilities of £2.1tn and £4.6tn respectively, equivalent to approximately £75,000 and £165,000 per household.

The PAC is particularly concerned about how the WGA sets out the Government’s financial position and its exposure to financial risks, including:

  • How income and expenditure are expected to change in the future and what this means for the sustainability of the public finances
  • How fiscal sustainability risks are being managed by HM Treasury, including from EU exit, covid-19 and other emerging risks
  • HM Treasury’s role in managing specific risks in the balance sheet, in particular the £152bn nuclear decommissioning obligation and the £85bn clinical negligence liability
  • What analysis and scenario planning has been done, for example, to address the impact that increases in interest rates might have on the economy and government spending
  • What HM Treasury is doing to address the fiscal sustainability of local authorities, particularly in the light of concerns over local authority investment in commercial property and the weaknesses in local audit and transparency of local authority financial reporting identified by the Redmond review.

The PAC was critical of the lack of more detailed disclosures in particular areas, such as the cost of exiting the EU where more information on the EU exit settlement and cross-government spending on preparations was needed. COVID-19 spending will need to be fully captured to assess both the true cost to the government and whether government can deliver.

The PAC acknowledges that improvements have been made in the quality of analysis in the WGA and work on better categorisation of expenditure across government to improve analysis is underway. In particular, there are plans to implement a new chart of accounts and a new financial consolidation system (OSCAR II) in 2021.

The 2018-19 WGA took 15 months to produce and the PAC highlights how pandemic-driven delays in producing departmental and local government financial statements last year will present significant challenges in producing the 2019-20 WGA in less than 14 months. 

The timetable remains significantly more than the two to three months typically taken for large multinational listed companies to produce audited financial statements, the five to six months taken by New Zealand, Canada and Australia, or the six to nine months that might be reasonably possible given the WGA incorporates local as well as central government.

The PAC concludes by commenting that the WGA still does not provide Parliament and the public with the information needed to understand the government’s financial position and exposure to fiscal risk. 

Using the annual report to give the reader an understanding of the development, performance and position of an organisation’s business, including a consideration of how forward-looking risk is managed, is standard practice across the private and public sector. The WGA falls significantly below this standard and is not meeting the needs of its users.

Martin Wheatcroft FCA, external advisor to ICAEW on public finances, commented: “The PAC is right to highlight how far HM Treasury still needs to go in improving the WGA to provide Parliament and the public with the comprehensive overview of financial performance, position and risks that a good quality annual report and financial statements can do. 

HM Treasury should be applauded for putting the UK at the forefront of international developments in public sector financial reporting when it introduced the WGA a decade ago. However, progress since then has been hampered by inadequate internal reporting systems and underinvestment in financial analysis. The WGA remains far behind best practice.

Speeding up production and improving the clarity and quality of analysis will not only make the WGA much more useful to Parliament and citizens, but it will help improve the decision-making within government that is needed to put the public finances onto a sustainable path.”