Category: ICAEW article

ICAEW’s latest report is on managing the public balance sheet. As governments around the world start to adopt accruals accounting, they are gaining a wealth of valuable information about their financial position. 

The aim of this policy insight to offer some thoughts about how that information can be used in policy making and financial management.

For more information, visit the ICAEW website by clicking here.  To read the report itself, download it by clicking here.

Money will be a critical part of Brexit negotiations. In this report written for ICAEW, we reveal the key components of a deal and estimate the potential EU exit bill.

Key points to highlight:

• Potential exit charges range from a low cost of £5bn to a maximum cost of £30bn, with the central scenario cost £15bn (based on an exchange rate of €1.20 to £1). This is equivalent to £225 per person expected to be living in the UK in 2019.
• To put this in context, the UK’s share of the EU budget each year is approximately £20-£21bn, before an estimated rebate of £5-6bn, and spending returning to the UK of £6-£7bn.
• While the estimated rebate is expected to be received back, the EU could attempt to withhold this if there is no agreement on wider exit charges.
• Liabilities include EU staff pension and sickness payments which will be close to £63bn when the UK leaves, and of which the UK’s share is £10bn. This could be dealt with through a one-off settlement or the UK could agree to continue to contribute £0.2bn a year for the next 50 years or so.
• The value of the EU’s fixed assets will also need to be determined, but as these are relatively small compared with other numbers revaluing them is unlikely to have significant impact on the total exit charge.
• Additional areas for negotiation include the European Investment Bank (EIB), of which the UK has a 16% share. As ownership of the EIB is restricted to EU members, the UK may need to sell its stake to other EU members, or existing rules may need to change.
• The EU is likely to argue that costs incurred caused by the UK’s decision to leave should be paid for by the UK rather than by other member states.

To find out more and to read the report, visit http://www.icaew.com/en/technical/economy/brexit/analysing-the-eu-exit-charge

In a letter to the new Chancellor, Phillip Hammond, ICAEW has urged Government to take action urgently and reverse the trend by increasing investment in public infrastructure. It also calls for new fiscal rules to support greater private investment.

In its paper ‘Funding UK Infrastructure’, ICAEW argues that for all the new initiatives announced by Government in recent years, public investment in economic infrastructure appears to be static or declining until the end of the decade, while attempts to encourage greater private investment have not been successful. It also reveals:

• private finance initiative (PFI) contracts have been drying up, with only £0.7bn of projects reaching financial closure during 2014-15
• although the Government announced that the total National Infrastructure Pipeline had increased from £411bn in 2015 to £425.6bn in 2016, the near term profile of investment grew by less than the overall growth in the economy, with investment in energy infrastructure declining
• investment in social infrastructure – schools, hospitals and housing – is also static or declining, with claimed increases in social housing investment being offset by expected reductions in capital spending by housing associations

Vernon Soare, ICAEW Chief Operating Officer and Executive Director, said:

“In the past we have seen too much talk and not enough action on infrastructure. The combination of a new Chancellor, low interest rates and Brexit means that now is the time for decisions to be taken and investment to be made. Wavering on projects such as a new runway in the south east of England and a lack of public investment have meant that we are not getting the economic benefits that infrastructure can generate. If Government leads the way, private investment will follow.”

The new Chancellor has already made the decision to change fiscal rules to permit borrowing to fund investment. However, priority now needs to be given to infrastructure investments that provide a positive return to the taxpayer and so pay for themselves, while PFI contracts need to be brought back onto the balance sheet so that they no longer bypass fiscal targets and can be properly evaluated based on whether they provide value for money to the taxpayer.

Vernon Soare adds: “With cost cutting and austerity only getting the UK so far, it is now necessary to generate revenue growth. That will require more investment in key infrastructure projects and spades in the ground. There is now the potential to use borrowing to fund an immediate increase in infrastructure investment.”

Click here to see the full report.

This year’s Institute for Fiscal Studies pre-Budget report for 2016, the ‘Green Budget’, will be launched on Monday 8 February.

In association with ICAEW and funded by the Nuffield Foundation, it will analyse the issues and challenges facing Chancellor George Osborne as he prepares for the UK government’s Budget in March.

The areas covered by IFS researchers will include:
– the government’s framework of fiscal rules
– risks to the public finances
– issues coming up for corporate tax policy
– the design of ‘sin taxes’
– the (changing) effects of Universal Credit

Oxford Economics will be giving their view on the prospects for the economy, while I have been working with the ICAEW on their contribution to this year’s report.

For more information go to http://www.ifs.org.uk/publications/8129.

 

As the Government works on its plans to cut spending over the next four years, it may be helpful to understand the overall plan.  As ‘Simply UK: A Summary Guide to UK Government Finances 2015/16’ illustrates vividly, the Chancellor’s plan to eliminate the deficit comprises three main components once inflation and population growth are taken account of:

1. Increase tax revenues by £51 billion a year through growth in the economy;
2. Increase tax revenues on top of that by £16 billion a year through tax rises and cracking down on tax avoidance; and
3. Reduce spending by £16 billion.

Reducing spending by £16 billion out of a total annual spend of £742 billion  doesn’t sound too difficult in theory – after all that’s only 2% of the total.  However, once you factor in a £16 billion for higher interest costs because of interest rate rises and £3 billion in additional spending from commitments to protect pensions, health, defence and international development, that means the total cuts needed of £35 billion will be closer to a 5% reduction.

But that’s 5% of the total.  Once you exclude protected areas, the impact on individual areas is much more significant.  Welfare cuts of £12 billion translate into a reduction of around 10% to the current welfare budget of £121 billion, while cuts to unprotected departmental spending of over £20 billion a year will mean cuts of between 25% and 40% in some areas. These including policing, the courts, prisons and emergency services, local services, social care, further and higher education, transport and housing.

And even in the protected departments, there will be a need for savings.  Schools spending is protected only in cash terms, which with increased pupil numbers means a reduction in spending per student.  Health care may be increasing just ahead of inflation and overall population growth, but increased demand from an increasingly long-lived population means that in reality the NHS will need to make significant efficiency savings just to stand still and provide the current level of care, let alone improve it.

So, roll on Comprehensive Spending Review.  It’s going to a be a roller coaster ride for sure.

The past few weeks, ahead of a ‘supplementary’ Budget, have been remarkably exciting

Rumours of major tax changes have abounded, while speculation about how planned cuts in welfare of £12 billion are to be achieved have occupied many headlines. Added to this has been a swarm of lobbying, with both left and right calling for increases in the minimum wage in order to reduce the dependence of the low paid on tax credits and housing benefit, and an apparent U-turn by Labour to say that they now accept the principle of targeting a cash surplus in ‘normal circumstances’.

Interestingly, most of this debate is not about the Government’s financial budget for the current year, the main subject of a Budget announcement. Rather it is focused on the Chancellor’s four-year plan to cut expenditure until there is a surplus in cash terms and about how we can improve the tax and welfare system to make it more effective.

This shifting of the debate is welcome. Although many commentators are still debating the minutiae of the tax and welfare system, such as the intricacies of inheritance tax and benefit caps, or the merits of reducing one of the seven different rates of tax on our salaries, there is an increasing acceptance amongst policy makers across the political spectrum that the complexity of the current system is an obstacle to achieving its objectives of raising money in fair way and supporting those in need effectively.

Perhaps even more welcome is the realisation that our public finances need to be managed much better than they have been in the past. Not only does our Government owe £1.5 trillion in debt, but it has £1.3 trillion in unfunded public sector pension obligations on its whole-of-government accounting balance sheet that will need to be paid for by increased taxes or through further cuts in welfare or public services. And that is even before considering how we find the money to pay for the costs of an increasingly long-lived population, with the future cost of the state pension alone estimated to be more than £4 trillion in a recent report by the Centre for Policy Studies.

Piecemeal tinkering with the tax and welfare system is not going to be enough; we need a plan.

Hence what would be most welcome in this Budget would be an announcement of a comprehensive financial review, as called for by the ICAEW. Considering income, expenditure, cash flow and the balance sheet over the long-term, it would lead to the development of a coherent long-term financial strategy setting out how we can achieve sustainable public finances over the next quarter of a century and beyond.

Such a strategy should include a roadmap to radically restructured system of tax and welfare, with a wholesale replacement of the complex array of inconsistent taxes and welfare benefits with a simple and coherent system of fair taxes and welfare support for those in need, reflecting the following characteristics:

• Simple – benefiting government just as much as citizens and businesses through clarity, lower administration costs and more effective targeting of support.

• Sustainable – affordable to both individuals and to the taxpayer over the long-term.

• Integrated – with a consistent set of rules across taxes and welfare benefits that would mitigate the need for anti-avoidance measures or complex welfare enforcement processes.

• Joined up – across government, for example with housing policy.

• Incentivising – making it financial rewarding to work and addressing the poverty trap inherent in the current system that reinforces welfare dependency.

• Funded – increasing the emphasis on savings, so that we are less reliant on the uncertain ability of future generations to fund our old age.

• Helpful – establishing a structure that helps people to do the right thing, such as automatic enrolment in pensions, social care insurance and savings plans.

• Cross-party – sufficient support for core elements of the strategy so that it will survive changes in government over the transition period of ten to twenty years likely to be needed.

• Fair – and perceived to be fair.

That the focus of a Budget announcement has changed from a one-year time horizon into a more substantive debate about the Government’s medium-term fiscal strategy is positive. But we need to go much further if we are to end the piecemeal tinkering of successive governments applying patches to address the problems caused by an overcomplicated system, while at the same time advancing their own policy goals by adding further complexity.

It is time for a coherent long-term strategy. A plan that not only sets out how we can fund our nation in the future, but that also establishes a path to replacing a failed system of tax and welfare.

Martin Wheatcroft is managing director of Pendan.

This article was originally published in Economia.