ICAEW article – Page 2 – Martin Wheatcroft

Public sector net debt hits an unprecedented £2.6trn

Monthly public sector finances for October saw spending continue to exceed receipts by a large margin, even if by less than was predicted earlier in the year.

The Office for National Statistics (ONS) released the month public sector finances for October on Tuesday 21 November 2023. It reported a provisional deficit for the month of October of £15bn, bringing the cumulative deficit for the first seven months of the year to £98bn, £22bn more than in the same period last year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Although it is positive that the cumulative deficit to October of £98bn is less than the £115bn predicted by the OBR, cash going out continues to exceed cash coming in by a very large margin. Public sector net debt has now exceeded £2.6 trillion for the first time, which is a staggering new record.

“Tomorrow’s Autumn Statement will see the OBR revise and roll forward its forecast, giving the Chancellor so-called headroom to cut taxes or increase spending. But in reality there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”

Month of October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of October 2023 was £15bn, made up of tax and other receipts of £85bn less total managed expenditure of £100bn, up 3% and 6% respectively compared with October 2022.

This was the second highest October deficit on record since monthly records began in 1993, following a monthly deficit of £18bn in October 2020 at the height of the pandemic.

Public sector net debt as of 31 October 2023 was £2,644bn or 97.8% of GDP, the first time it has exceeded £2.6trn – only eight months after it first reached £2.5trn.

Seven months to October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the seven months to October 2023 was £98bn, £22bn more than the £76bn deficit reported for the first seven months of 2022/23. This reflected a widening gap between tax and other receipts for the seven months of £595bn and total managed expenditure of £693bn, up 5% and 8% respectively compared with April to October 2022.

Inflation benefited tax receipts for the first seven months compared with the first half of the previous year, with income tax up 10% to £137bn and VAT up 9% to £117bn. Corporation tax receipts were up 12% to £55bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 4% to £99bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £8bn and the total for all other taxes was up just 3% to £115bn, much less than inflation as economic activity slowed. Non-tax receipts were up 10% to £63bn, primarily driven by higher investment income.

Total managed expenditure of £693bn in the seven months to October 2023 can be analysed between current expenditure excluding interest of £587bn, up £39bn or 7% over the same period in the previous year, interest of £76bn, up £4bn or 5%, and net investment of £30bn, up £9bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £20bn increase in pension and other welfare (including cost-of-living payments), £12bn in higher central government pay, £6bn in additional central government procurement spending, plus £1bn in net other changes.

The rise in interest costs for the seven months of £4bn to £76bn comprises a £18bn or 53% increase to £52bn for interest not linked to inflation as the Bank of England base rate rose, mostly offset by an £14bn or 37% fall to £24bn for interest accrued on index-linked debt from lower inflation than last year.The £9bn increase in net investment spending to £30bn in the first seven months of the current year reflects high construction cost inflation amongst other factors that saw a £11bn or 17% increase in gross investment to £65bn, less a £2bn or 6% increase in depreciation to £35bn.

Public sector finance trends: October 2023

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the seven months to October 2023 plus net debt and net debt / GDP at 31 October 2023.

Receipts: £466bn (Oct 2019), £425bn (Oct 2020), £500bn (Oct 2021), £565bn (Oct 2022), £595bn (Oct 2023)
Expenditure: (£457bn), (£582bn), (£536bn), (£548bn), (£587bn)
Interest: (£38bn), (£26bn), (£41bn), (£72bn), (£76bn)
Net investment: (£20bn), (£42bn), (£28bn), (£21bn), (£30bn)
[line above subtotal]
Deficit: (£49bn), (£225bn), (£105bn), (£76bn), (£98bn)
Other borrowing: £5bn, (£61bn), (£61bn), £5bn, (£7bn)
[line above total]
Debt movement: (£44bn), (£286bn), (£166bn), (£71bn), (£105bn)
[line below total]

Net debt: £1,821bn, £2,101bn, £2,319bn, £2,454bn, £2,644bn.
Net debt / GDP: 82.1%, 99.3%, 97.5%, 95.5%, 97.8%

The cumulative deficit of £98bn is £17bn lower than the Office for Budget Responsibility (OBR)’s official forecast of £115bn for the first seven months of 2023/24 as compiled in March 2023. The OBR is expected to revise its forecast for the full year deficit down from £132bn in tomorrow’s Autumn Statement, but it is still on track to be more than double the £50bn projection for 2023/24 set out in the official forecast from a year earlier (March 2022).

Balance sheet metrics

Public sector net debt was £2,644bn at the end of October 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £105bn, comprising borrowing to fund the deficit for the seven months of £98bn plus £7bn in net cash outflows to fund lending to students, businesses and others net of loan repayments together with working capital movements.

Public sector net debt is £829bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,106bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£716bn on 31 October 2023, comprising £1,565bn in non-financial assets, £1,029bn in non-liquid financial assets, £2,644bn of net debt (£305bn in liquid financial assets less public sector gross debt of £2,949bn) and other liabilities of £666bn. This is a £102bn deterioration from the -£614bn reported for 31 March 2023.

Revisions

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 revise the reported deficit for the six months to September 2023 up by £1.7bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of September 2023 was revised down by 1.4 percentage points from 97.8% to 96.4% as a consequence of updated estimates of GDP.

This article was originally published by ICAEW.

August public sector finances: fourth-highest monthly deficit on record

Deficit marginally better than had been expected according to the latest figures from the ONS, but costly public sector problems emerge.

The monthly public sector finances for August 2023 were released by the Office for National Statistics (ONS) on Thursday 21 September 2023. These reported a provisional deficit for the fifth month of the 2023/24 financial year of £12bn, bringing the total deficit for the five months to £70bn, £19bn more than in the same period in the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “While August’s deficit was marginally better than expected, problems costly to the public sector continue to emerge, from crumbling concrete in public buildings to Birmingham Council’s recent bankruptcy, and are likely to weigh on the Chancellor’s mind as he considers November’s Autumn Statement.

“Both main parties are rightly cautious about making new public spending commitments in the current economic environment, including whether or not to extend the state pension triple lock into the next parliament. Whether they can hold this position as they enter into the party conference season remains to be seen.”

Month of August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of August 2023 was just under £12bn, being tax and other receipts of £84bn less total managed expenditure of £96bn – up 5% and 8% respectively compared with August 2022.

This was the fourth highest August deficit on record since monthly records began in 1993, following the deficits of £14bn in August 2021 and £24bn in August 2020 during the pandemic and £12bn in August 2009 during the financial crisis.

Five months to August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the five months to August 2023 was £70bn, £20bn more than the £50bn deficit reported for the first five months of 2022/23. This reflected a widening gap between tax and other receipts for the five months of £428bn and total managed expenditure of £498bn, up 7% and 10% respectively compared with April to August 2022.

Inflation benefited tax receipts for the first five months compared with the previous year, with income tax and VAT receipts both up 12% to £104bn and £84bn respectively. However, corporation tax was only up 13% to £37bn despite the increase in the corporation tax rate from 19% to 25% from 1 April 2023, and national insurance receipts were down by 3% to £71bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by £2bn or 29% to £6bn and the total for all other taxes was up just 3% to £82bn as economic activity slowed. Non-tax receipts were up 12% to £44bn, primarily driven by higher investment income.

Total managed expenditure of £428bn in the five months to August can be analysed between current expenditure excluding interest of £418bn (up £34bn or 9% over the same period in the previous year), interest of £61bn (up £6bn or 11%), and net investment of £19bn (up £7bn or 57%).

The increase of £34bn in current expenditure excluding interest compared with the prior year has been driven by a £14bn increase in benefit payments, £9bn in higher central government staff costs, £5bn in additional central government procurement spending and £5bn in energy support scheme costs, plus £1bn in net other changes.

The rise in interest costs of £6bn to £61bn reflects a £14bn increase in interest on non-inflation linked debt to £38bn as the Bank of England base rate rose, offset by an £8bn fall in the interest payable on index-linked debt to £23bn as inflation is running at a lower level than it was for the same period last year.

The £7bn increase in net investment spending to £15bn in the first five months of the current year reflects high construction cost inflation among other factors that saw an £8bn or 23% increase in gross investment to £44bn, less a £1bn increase in depreciation to £25bn.

Public sector finance trends: August 2023

Image of a table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the five months (cumulative) to Aug 2019, 2020, 2021, 2022 and 2023 respectively.

Receipts: £336bn (for the five months to Aug 2019(, £298bn, £355bn, £401bn, and £428bn (for the five months ended Aug 2023).

Expenditure excluding interest: (£323bn), (£428bn), (£386bn), (£384bn) and (£418bn).

Interest (£28bn), (£18bn), (£30bn), (£55bn) and (£61bn).

Net investment: (£13bn), (£30bn), (£18bn), (£12bn) and (£19bn).

(Subtotal) Deficit: (£28bn), (£178bn), (£79bn), (£50bn) and (£70bn).

Other borrowing: £13bn, (£74bn), £6bn, £2bn and £14bn.

(Total) Debt movement: (£15bn), (£252bn), (£73bn), (£48bn) and (£56bn).

Net debt: £1,792bn, £2,067bn, £2,226bn, £2431bn and £2,594bn.

Net debt / GDP: 79.8%, 98.8%, 96.2%, 96.5% and 98.8%,

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 revise the reported deficit for the four months to July 2023 up by £2bn as estimates of tax receipts and expenditure were updated for better data, and it also reduced the reported deficit for the 2022/23 financial year by £1bn to £128bn for methodology changes in addition to new data.

The methodology changes also saw small revisions in the reported deficits for previous periods back to 1999, most notably reductions of £1bn to the deficits in 2019/20 and 2020/21 and an increase of £2bn in the reported deficit for 2021/22.

Balance sheet metrics

Public sector net debt was £2,594bn at the end of August 2023, equivalent to 98.8% of GDP.

The debt movement since the start of the financial year was £56bn, comprising borrowing to fund the deficit for the five months of £70bn less £14bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £779bn or 43% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£618bn on 31 August 2023, comprising £1,604bn in non-financial assets, £1,038bn in non-liquid financial assets, £2,594bn of net debt (£339bn in liquid financial assets less public sector gross debt of £2,933bn) and other liabilities of £667bn. This is a £61bn deterioration from the -£557bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to over £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

This article was originally published by ICAEW.

July public sector finances: a mixed set of results

Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.

The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.

“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”

Month of July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.

This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.

Four months to July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.

Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.

Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).

The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.

The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose.

The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn.

Public sector finance trends: July 2023

Four months to	Jul 2019 (£bn)	Jul 2020 (£bn)	Jul 2021 (£bn)	Jul 2022 (£bn)	Jul 2023 (£bn)
Receipts	270	234	282	320	343
Expenditure	(259)	(348)	(310)	(308)	(334)
Interest	(24)	(15)	(23)	(44)	(51)
Net investment	(10)	(26)	(13)	(11)	(15)
Deficit	(23)	(155)	(64)	(43)	(57)
Other borrowing	4	(66)	(22)	5	10
Debt movement	(19)	(221)	(86)	(38)	(47)
Net debt	1,796	2,036	2,239	2,420	2,579
Net debt / GDP	80.1%	96.9%	97.7%	96.6%	98.5%

Source: ONS, ‘Public sector finances, July 2023’.

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 revise the reported deficit for the three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.

The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

For further information, read the public sector finances release for July 2023.

This article was originally published by ICAEW.

Councils should ‘comply or explain’ on governance code

ICAEW welcomes proposed statutory guidance that establishes a corporate governance code for local authorities in England, but says councillors need better training and support if they are to be able to hold leaders to account.

Financial collapses and major stresses in local government finances have led the government to undertake a major rewrite of the applicable statutory guidance, in effect establishing a corporate governance code for local authorities in England.

ICAEW has formally responded to welcome the proposed new guidance, while also making some recommendations for improvements.

The government is introducing the new guidance in response to a series of high-profile collapses of local authorities in England in which governance failures were identified as a common feature, as well as an increasing number of local authorities reporting that they are in financial difficulty or at risk of being so.

Local authorities in Thurrock, Woking and Croydon are together estimated to have lost local and national taxpayers in excess of £1bn, with their communities adversely affected by significant cuts to local public services and higher council tax bills. Central government has also stepped in to provide additional funding and loans, some of which are unlikely ever to be repaid.

The proposed guidance technically relates to the ‘best value duty’, a legal obligation placed on specified public sector bodies, including local authorities, to have arrangements in place to secure continual improvement in how they carry out their work. Relevant public bodies are required to have regard to any statutory guidance issued by the government in deciding how they comply with this duty.

As the proposed guidance acknowledges, meeting the best value duty will only be possible if councils have adequate governance arrangements in place. It goes on to set out a series of characteristics of well-functioning authorities, as well as indicators of potential failure, covering continuous improvement, leadership, governance arrangements, culture, use of resources, service delivery, and partnerships and community engagement.

Accountability is not accidental

ICAEW has suggested a need for accountability events. These should include a formal presentation on financial performance and position each year by leaders and officers to councillors within four months of the end of the financial year, and proper consideration and adoption by full council of the annual financial report once the external audit is completed. The latter should cover the financial statements and accompanying narrative reports on financial performance and position, audit reports, and statements on governance arrangements; regard for the statutory guidance on best value duty; and responsibilities for the preparation of the financial statements and internal financial control.

ICAEW has recommended a ‘comply or explain’ approach when local authorities report on how they have had regard to the guidance. This would provide clarity on how local authorities have set about applying the guidance, where they have chosen to diverge, and where they have been unable to comply.

A feature of recent failures has been inadequate accountability, with councillors not being properly equipped to hold leaders and officers to account for unwise debt-leveraged investment strategies, poor individual financial decisions, and inadequate governance arrangements. In most cases councillors were not fully aware or did not fully understand the scale of the risks that were being assumed and the consequent financial implications for their local communities. ICAEW’s response stresses that councillors need sufficient training, information and support to undertake this role.

ICAEW has separately submitted evidence to the House of Commons Levelling Up, Housing and Communities Select Committee on how local authority financial statements must be understandable if they are to provide the information councillors need to hold their local authorities to account and to be used effectively in governance and risk management processes.

Good governance is critical

The proposed guidance stresses the importance of good governance and strong financial management, providing a useful framework for local authorities in how they set about ensuring they have appropriate governance arrangements in place.

However, the proposed guidance does not make it clear that performance management should include monitoring and management of the balance sheet and financial risks, a feature that was missing in recent local authority failures that saw debt-leveraged investments significantly increase balance sheet risk.

ICAEW’s response also highlights the role that internal audit can play in assuring governance arrangements are in place, while noting that local councillor codes of conduct will need to be updated to reflect the new guidance.

The role of the audit committee is extremely important to an effective system of governance, and ICAEW calls for the government to legislate, as promised, to require independent members of local authority audit committees.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, commented:

“We are very pleased that the government has recognised the need for a corporate governance code for local government in the form of new statutory guidance on the best value duty. This is particularly welcome in the light of recent financial collapses at Thurrock, Woking and Croydon that together have cost local and national taxpayers in excess of £1bn, as well as increasing levels of financial stress on local authorities across England.

“We believe that accountability does not happen by accident. There is a need for regular accountability events covering financial performance and the annual financial report as well as budgets, for a ‘comply or explain’ approach to reporting on how the best value duty guidance has been implemented, and for councillors to be properly equipped with the training, information and support they need to hold leaders and officers to account.

“Good governance is essential if local authorities in the UK are to ensure they obtain value for the more than £200bn of public money they spend each year on our behalf.”

Read ICAEW’s response to the consultation here.

This article was first published by ICAEW. The article, and the consultation response it refers to, were written by Martin Wheatcroft of behalf of ICAEW.

Spotlight on local audit also shines on the accounts

Alison Ring, ICAEW Director Public Sector and Taxation, says we must take a once-in-a-generation opportunity to fix long-standing underlying problems with the way local government financial statements are used.

There is a crisis in local government financial reporting and audit in England that urgently needs resolving. Some 74% of 2021/22 local authority financial statements were still not signed off after a year, 31% after two years, and some audited accounts are still not published from 2018/19 or earlier. These delays are not just a compliance issue – they are fundamental to how our local democratic institutions operate at a time when many authorities are struggling amid difficult economic conditions.

Getting local audits back on track must be the immediate priority, even if it will mean accepting some unpalatable measures, such as temporary relaxations in some audit requirements, or the postponement of new accounting standards. All parts of the system will need to compromise a little to unlock audit sign-offs, clear the backlog, and get the system up and running and sustainable again.

However, the spotlight focused on local audit illuminates some uncomfortable truths about the underlying effectiveness of audited financial statements in ensuring that councils are well managed and public money is spent wisely. They are often not understood, not read by enough people, and not used by councillors and other stakeholders in holding local authorities to account, as part of governance processes or when approving major financial decisions.

Many of these problems were identified by the Redmond Review, but progress in addressing its recommendations is, perhaps inevitably, much slower than anyone would like. In the meantime, there have been several well-publicised disasters as the financial tide has swept out to expose the naked vulnerability of some local authorities.

Much more than an informative read

Done well, financial statements are much more than an informative read that sets out the story of the most recent financial year. They are a multi-purpose tool for accountability, governance, risk management, strategic decision-making, regulatory and system oversight. They are also the apex of the system of internal financial control and the vehicle through which external assurance is delivered.

The trouble is that financial statements can only serve these purposes if they are read, understood, and actively utilised in each of these roles. When I hear that “nobody reads the accounts” I start to worry. Even though I know this is an exaggeration and that many people do of course read the annual financial report, the implication is that accounts are not being used to their full extent.

This poses some big questions. Are councillors able to properly hold their local authority and its management team to account if they aren’t actively using the principal tool designed to help them do so?

Are governance committees able to ensure their local authority is well run if they aren’t using the official document that brings together the effects of thousands of financial decisions made every year into a single assured report that summarises financial performance as well as the end-of-year financial position?

Are they able to assess the effectiveness of risk management if they aren’t looking at the balance sheet and the financial exposures disclosed in the notes to the financial statements?

Where decisions are being made, are council leaders, cabinets, officers, and management teams able to make effective strategic choices, potentially transforming their balance sheets, if they aren’t starting from the foundation provided by the audited financial statements?

Are DLUHC and other government departments, including HM Treasury, able to make good funding decisions, or assess the effectiveness of the overall system of local government in England, if they aren’t reading the accounts in some detail?

Finally, how can the preparation of financial statements be a key factor in promoting financial control if they lack the challenge of having an interested readership?

Of course, this is not the whole story. Unlike in the private sector where internal financial reports are confidential, a whole swathe of financial documents are in the public domain.

Why would anyone need to read a long and complicated set of accounts when they have access to this other “more useful” stuff?

The answer is that in many cases councillors and other stakeholders can’t properly understand the budget or other financial information provided to them if they haven’t first read and understood the annual report and accounts, and the financial context in which decisions are being made.

“The accounts are impenetrable”

This brings us on to another point that I have also heard frequently, which is that a reluctance to read the accounts is forgivable given how long and complicated many local authority annual financial reports are – “impenetrable”, in the words of some. Given my own attempts to grapple with some local authority annual accounts, I have sympathy for this claim.

To get this system working better, financial statements and accompanying narrative reports need to be much more understandable, so more people read them and use them as the multi-purpose tool they should be.

These concerns about whether accounts are being used effectively is one of the reasons I am so pleased that the Levelling Up, Housing and Communities Commons Select Committee is conducting an inquiry into the purpose and use of local authority financial statements and external audit in England, to which ICAEW and others have given evidence.

The committee is focusing on both the overall financial reporting and audit framework for local authorities in England as well as the immediate challenges of clearing the backlog of unaudited accounts.

A vision for local financial reporting and audit

To make the system work better we need everyone to agree on a clear vision for local financial reporting and audit, which is why ICAEW developed its own.

ICAEW’s vision is to bring confidence to the finances of local public bodies through a valued and thriving profession, high-quality understandable financial reports, high-quality timely local audits, strong financial management, good governance, value for money, and protecting the public interest.

When we started this project, it reminded us that everything starts with the financial statements. Not because they are more important than high-quality timely external audits, strong financial management, good governance, or a proper system of accountability, but because they are the rock on which everything else stands.

We need financial statements to be as understandable as they can be. We need them to be read. And – most importantly – we need them to be used.

This article was written by Martin Wheatcroft on behalf of ICAEW and was originally published in Room 151, an online news, opinion and resource service for local authority finance officers covering treasury, pensions, strategic finance, funding, resources and risk, and subsequently published by ICAEW.

Public sector finances return to red

February fiscal deficit hits £17bn, while the cumulative deficit for 11 months of £132bn doesn’t include backdated public sector pay awards.

The monthly public sector finances for February 2023 released on Tuesday 21 March 2023 reported a provisional deficit for the month of £17bn, which is a return to red after a surplus of £8bn last month in January 2023.

The deficit was £10bn more than the £7bn deficit reported for the same month last year (February 2022), as higher interest costs, higher inflation on index-linked debt, and the cost of the energy price guarantee for households and businesses incurred during the month drove up the need to borrow.

The cumulative deficit for the first 11 months of the financial year was £132bn, which is £15bn more than in the same period last year but £155bn lower than in 2020/21 during the first stages of the pandemic. It was £78bn more than the deficit of £54bn reported for the first 11 months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.

The reported deficit does not reflect backdated public sector pay settlements that have been or are expected to be agreed in March 2023, although the numbers are broadly in line with the £152bn estimated deficit for the full year in the Office for Budget Responsibility (OBR)’s revised forecasts made at the time of the Spring Budget. This was lower than their previous forecast of £177bn in November, primarily because the energy price guarantee is costing less than anticipated.

Public sector net debt was £2,507bn or 99.2% of GDP at the end of February 2023. This is £692bn higher than net debt of £1,815bn on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic. The OBR’s latest forecast is for net debt to reach £2,546bn by March 2023 and to exceed £2.9trn by March 2028.

Tax and other receipts in the 11 months to 28 February 2023 amounted to £924bn, £91bn or 11% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance for part of the year, while VAT receipts benefited from inflation in retail prices.

Expenditure excluding interest and investment for the 11 months of £888bn was £52bn or 6% higher than the same period in 2021/22, with Spending Review planned increases in spending, the effect of inflation, and the cost of energy support schemes partially offset by the furlough programmes and other pandemic spending in the comparative period not being repeated this year.

Interest charges of £120bn for the 11 months were £51bn or 73% higher than the £69bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt.

Cumulative net public sector investment to February was £48bn, £4bn more than this time last year. This is much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £125bn since the start of the financial year comprised borrowing to fund the deficit for the 11 months of £132bn, less £7bn in net cash inflows from repayments of deferred taxes, and loans made to businesses during the pandemic, less funding for student, business and other loans together with working capital requirements.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The public finances are back in the red this month as a deficit of £17bn brings the total for the 11 months to February to £132bn, with public sector net debt in excess of £2.5trn. Although broadly in line with the OBR’s improved estimate accompanying the Spring Budget, the numbers don’t reflect the cost of backdated public sector pay settlements to be recorded in the final month of the 2022/23 financial year.

“The chancellor still needs to top up departmental budgets for pay awards in the next financial year, reducing his capacity to address inflationary cost pressures in other areas. HS2 may not be the only capital programme at risk of being scaled back or delayed as he seeks to make savings.”

Table showing fiscal numbers for the last four 11 month periods to February.

Receipts - Expenditure - Interest - Net investment = Deficit - Other borrowing = Debt movement.
Followed by Net debt and Net debt / GDP. All numbers in £bn, except for percentages.

Apr 2019 - Feb 2020: 755 - 720 - 53 - 36 = -54 + 22 = -32.
Debt: 1,811, 84.2%.

Apr 2020 - Feb 2021: 721 - 906 - 40 - 62 = -287 - 56 = -343.
Debt: 2,158, 98.0%.

Apr 2021 - Feb 2022: 832 - 836 - 69 - 44 = -56 - 85 = -202.
Debt: 2,356, 97.0%.

Apr 2022 - Feb 2023: 924 - 888 - 120 - 48 =-132 + 7 = -125.
Debt: 2,507, 99.2%.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made several revisions to prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the 10 months ended 31 January 2023 by £1bn to £116bn.

This article was originally published by ICAEW.

Chancellor spends forecast upside to leave public finances largely unchanged

Jeremy Hunt limits his tax and spending ambitions in the Spring Budget to stay within a very tight fiscal rule.

The Spring Budget 2023 for the government’s financial year of 1 April 2023 to 31 March 2024 was presented by the Chancellor of the Exchequer to Parliament on Wednesday 15 March 2023, accompanied by medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) covering the period up to 2027/28.

The fiscal numbers in the Budget are based on the National Accounts prepared in accordance with statistical standards. They differ in material respects from the financial performance and position that will eventually be reported in the Whole of Government Accounts prepared in accordance with International Financial Reporting Standards (IFRS).

A (slightly) lower fiscal deficit in 2023/24

Table 1 shows the Spring Budget estimate for the deficit in 2023/24 is £132bn, £8bn lower than the £140bn forecast in November 2022. Positive revisions to the forecast added £27bn to the bottom line, before £19bn from tax and spending decisions made by the Chancellor.

Image of Table 1 - showing changes in the OBR forecast for the fiscal deficit

Click on link to ICAEW version of article which has a machine readable table.

Forecast revisions in 2023/24 comprised £13bn in lower debt interest, £7bn less in energy support and £8bn in higher tax receipts, less £1bn other changes. The cost of tax and spending decisions in 2023/24 was estimated to be £8bn in lower corporation tax receipts from the full expensing of capital expenditure, £5bn from freezing fuel duties, £5bn from extending the energy price guarantee and other energy support measures, £2bn more for defence and security and £2bn from other decisions, less £3bn in indirect effects of those policy decisions on tax receipts and welfare spending.

Total receipts in 2023/24 are now expected to be £1,057bn (£2bn higher than previously forecast) and total managed expenditure is now anticipated to be £1,189bn (£10bn lower).

The forecast for the deficit in 2024/25 was up £1bn at £85bn and was unchanged in 2025/26 at £77bn, with upward revisions of £18bn and £19bn respectively offset by an estimated £19bn net cost of tax and spending decisions. The latter includes £3bn in 2024/25 and £4bn in 2025/26 for expanded childcare eligibility.

The final two years of the forecast were better by £17bn in 2026/27 (down to a fiscal deficit of £63bn) and by £20bn in 2027/28 (down to £49bn), although several commentators have pointed out this is on the basis of unrealistic spending assumptions that do not take account of significant pressures on public services.

In addition to forecasts for the next five years, the OBR also revised its estimate for the deficit in the current financial year ending 31 March 2023 to £152bn, £25bn lower than November’s estimate of £177bn. This is £53bn more than the OBR’s March 2022 estimate of £99bn and £69bn more than the November 2021 Budget estimate of £83m.

Table 2 provides a breakdown of the forecast changes by year, showing how lower debt interest and higher tax receipts flowing through the forecast period have provided the Chancellor with capacity to extend energy support, incentivise business investment, freeze fuel duty for yet another year (and extend the temporary 5p cut) and increase spending in specific areas.

Image of Table 2 - showing breakdown of forecast revisions and policy decisions.

Click on link to ICAEW version of article which has a machine readable table.

Receipts and expenditure development

As illustrated by Table 3, receipts are expected to rise from £1,020bn in the current financial year to £1,231bn in 2027/28, while expenditure excluding energy support and interest is expected to rise from £968bn in 2022/23 to £1,121bn in 2027/28..

Interest costs are expected to fall from £115bn this year to £77bn in 2025/26 as interest rates and inflation moderate, before rising to £97bn in 2027/28 based on a growing level of debt.

Net investment is expected to increase in 2023/24 as an £8bn one-off credit from changes in student loan terms in 2022/23 reverses, before declining gradually as capital expenditure budgets flatline and depreciation grows. Public sector gross investment is planned to be £134bn, £134bn, £133bn, £132bn and £132bn over the five years to 2027/28, in effect a cut in real terms over the forecast period.

Image of Table 3 - summarising the March 2023 OBR forecast

Click on link to ICAEW version of article which has a machine readable table.

The government’s secondary fiscal target is to keep the fiscal deficit below 3% of GDP by the end of the forecast period. Based on the March 2023 forecasts, it has headroom of 1.3% of GDP, or £39bn, against this target.

Table 4 provides a summary of the year-on-year changes in receipts and spending, together with the forecast for the increase in the size of the economy, including inflation. This highlights how tax and other receipts are expected to increase faster than the overall rate of growth in the overall size of the economy, while the government plans to constrain the average rise in expenditure excluding energy support and interest to 3.0% including inflation.

The former is principally a result of ‘fiscal drag’ as tax allowances are frozen, bringing in proportionately more in tax as incomes rise with inflation. The latter reflects what is generally considered to be unrealistic plans to constrain public spending in the context of an expected 9% rise in the number of pensioners over the five-year period (that will add to pensions, welfare, health and social care spending), pressure on public sector pay and the deteriorating quality of public services.

Image of Table 4 - year-on-year % changes in receipts and spending.

Click on link to ICAEW version of article which has a machine readable table.

Average nominal GDP growth over the five years of 3.3% combines average real-terms economic growth of 1.7% a year and inflation of 1.6%, the latter using the GDP deflator, a ‘whole economy’ measure of inflation. This is different to consumer price inflation, which is forecast to fall to 4.1% in 2023/24 and average 1.4% over the five years to 2027/28.

Public sector net debt

Lower deficits over the forecast period translate into lower borrowing requirements, reducing forecasts for public sector net debt from just under £3.0trn to £2.9trn. This is partly increased or offset by changes in the forecasts for financial and other transactions and working capital movements.

Table 5 shows how forecast public sector net debt is now expected to reach £2,909bn by March 2028, £54bn less than was forecast in November. Although an improvement, debt at the end of the forecast period is expected to be £1,089bn higher than £1,820bn reported for March 2020 before the pandemic, reflecting the large amounts borrowed during the pandemic, in addition to borrowing planned over the next five years.

Image of Table 15- showing changes in the OBR forecast for public sector net debt.

Click on link to ICAEW version of article which has a machine readable table.

The government’s primary fiscal target is based on ‘underlying debt’, a non-generally accepted statistical practice measure that excludes the Bank of England and hence quantitative easing balances. Underlying debt needs to be falling as a proportion of GDP between the fourth and fifth year of the forecast period.

The forecast gives the Chancellor just £6.5bn in headroom against this target, with underlying debt / GDP expected to fall from 94.8% to 94.6% between March 2027 and March 2028.

Fiscal rules limit ambitions for tax and spending

Following the disastrous ‘mini-Budget’ of his predecessor Kwasi Kwarteng, the Chancellor’s principal goal has been to stabilise the public finances to provide confidence to debt markets. To do this he has prioritised meeting his fiscal rules over incentivising business investment, cutting taxes and increasing defence spending. He has also adopted what are generally considered to be unrealistic assumptions about public spending in the later years of the forecast to keep within his self-imposed fiscal rules.

This has led to the Chancellor announcing ‘ambitions’ to extend the full expensing of capital expenditure beyond three years and to increase defence and security spending to 2.5% of GDP, as well as continuing to plan for increases in fuel duties each year despite the repeated practice of cancelling these rises.

Because these are ambitions and not plans, they are not incorporated into the forecasts enabling fiscal targets to be met. The OBR reports that continuing to cancel fuel duty rises each year would reduce the headroom to just £2.8bn, while converting the Chancellor’s ambitions to extend full expensing beyond three years and to increase defence spending to 2.5% of GDP into formal plans would cause him to breach his primary fiscal rule.

Conclusion

The overall fiscal position remains weak, with public finances vulnerable to potential economic shocks.

The Chancellor has followed the practice of many of his predecessors in increasing planned borrowing when fiscal forecasts worsen, as occurred in November 2022, only to then use upsides from improvements in subsequent forecasts to fund new tax and spending commitments. This ratchets up borrowing and debt as forecasts fluctuate and creates instability in both tax policy and public spending plans.

The consequence is a relatively unchanged fiscal position for the financial year commencing 1 April 2023 and the two subsequent financial years, as tax and spending decisions offset forecast upsides. And although there is an anticipated improvement in the projected fiscal position in the final two years of the OBR’s five-year forecast (after the next general election), the likelihood is that it will be offset in due course by the reality of pressures on public service and welfare budgets.

There is a reason why the first Budget following a general election typically sees taxes rise and the Spring Budget 2023 suggests that this pattern is likely to be repeated, irrespective of whichever party wins power.

ICAEW publishes its vision for local audit

In response to the crisis in financial reporting and audit in local authorities in England, ICAEW argues that urgent action is needed to bring confidence to the finances of local public bodies.

ICAEW’s vision for local audit sets out its support for understandable financial reports, timely high-quality local audits, strong financial management and good governance, value for money and protecting the public interest, and the critical role accountants and auditors play in enhancing transparency and accountability in the public sector.

The proportion of local authorities in England publishing their audited financial statements on time has fallen from more than 95% in 2017 to less than 12% in 2022, with knock-on effects for the audits of other local public bodies such as in the NHS. High-profile governance failures have led to significant financial losses. Unnecessarily impenetrable financial statements are not well understood and are not being used effectively to hold local public bodies to account. There is insufficient capacity in the local audit market, while auditors, finance teams and regulators are not aligned in their view of audit risks. Under-resourced finance teams struggle to produce good quality working papers. Local authority finance teams and audit firms struggle to retain staff in the profession.

ICAEW is publishing its vision for local audit to accompany the recent publication of a Memorandum of Understanding (MoU) between the Department of Levelling Up, Housing and Communities (DLUHC) and the Financial Reporting Council (FRC). The Institute welcomes the MoU, which covers the role of the ‘shadow’ system leader for local audit pending the establishment of the Audit, Reporting and Governance Authority (ARGA).

ICAEW also believes more needs to be done urgently if the local financial reporting and audit crisis is to be resolved.

Designed to prompt discussion about the need for urgent action, the vision identifies a series of challenges we believe need to be overcome, and actions we support to address those challenges. The vision in draft form has provided ICAEW with a focus for engagement with local authorities, auditors, government, and regulators, provoking debate and encouraging everyone involved to take action.

Alison Ring OBE FCA, Director of Taxation and Public Sector at ICAEW, commented: “Urgent action is needed to address the crisis in local financial reporting and audit in England. Local authority finances are under extreme pressure and the need for high quality financial statements, with the assurance that timely audit provides, is more important than ever.

“We want to see a robust financial reporting and audit system, underpinned by strong financial management, good governance and value for money, to protect the public interest. The vision highlights the critical role accountants and auditors play in enhancing transparency and accountability in the public sector.”

This article was originally published by ICAEW.

January surplus small comfort for Chancellor ahead of Spring Budget

Better than expected self assessment tax receipts helped generate a small fiscal surplus of £5bn in January, reducing the year-to-date deficit to £117bn, £7bn more than the comparative period in the previous financial year.

The monthly public sector finances for January 2023 released on Tuesday 21 February 2023 reported a provisional surplus for the month of £5bn. This was a significant improvement over the deficit of £26bn reported for the previous month (December 2022), but £7bn less than the surplus reported for the same month last year (January 2022).

A surplus arose primarily because better than expected self assessment tax receipts were sufficient to offset the effect of higher interest costs, higher inflation on index-linked debt, and the cost of the energy price guarantee for households and businesses incurred during the month. January also saw the Office for National Statistics (ONS) record a £2bn charge for custom duties that the UK had failed to collect when it was a member of the EU Customs Union.

The cumulative deficit for the first 10 months of the financial year was £117bn, which is £7bn more than in the same period last year but £155bn lower than in 2020/21 during the first stages of the pandemic. It was £64bn more than the deficit of £53bn reported for the first 10 months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.

The deficit was £22bn below the Office for Budget Responsibility (OBR)’s revised forecast made at the time of the Autumn Statement in November, primarily because the energy price guarantee has cost less than anticipated.

Public sector net debt was £2,492bn or 98.9% of GDP at the end of January 2023, dipping below the £2.5tn reported last month because of corrections to prior month data. This is £672bn higher than net debt of £1,820bn at 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic. The OBR’s latest forecast is for net debt to reach £2,571bn by March 2023 and to approach £3trn by March 2028.

Tax and other receipts in the 10 months to 31 January 2023 amounted to £839bn, £88bn or 12% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance for part of the year, while VAT receipts benefited from inflation in retail prices.

Expenditure excluding interest and investment for the ten months of £802bn was £41bn or 5% higher than the same period in 2021/22, with Spending Review planned increases in spending, the effect of inflation, and the cost of energy support schemes partially offset by the furlough programmes and other pandemic spending in the comparative period not being repeated this year.

Interest charges of £110bn for the 10 months were £49bn or 80% higher than the £61bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt.

Cumulative net public sector investment to January was £44bn, £5bn more than a year previously. This is much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £120bn since the start of the financial year comprised borrowing to fund the deficit for the 10 months of £117bn together with a further £3bn to fund student loans, lending to businesses and others, and working capital requirements, net of cash inflows from repayments of deferred taxes and loans made to businesses during the pandemic.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “With a small surplus, January’s fiscal numbers benefited from stronger self-assessment tax receipts than expected, providing some comfort to Chancellor Jeremy Hunt as he assembles his first Budget. The deficit for the current financial year is still on track to be one of the highest ever recorded, reaching £117bn for the ten months to January 2023 after energy support and interest costs more than offset the benefit of higher tax receipts.

“Although it appears that inflation has peaked, the near-term economic outlook continues to deteriorate and so calls for immediate tax cuts are likely to remain unanswered. We are asking the Chancellor to take urgent action to eliminate the backlog at HMRC that is inhibiting business growth, and to make improving the resilience of the UK economy and the public finances a priority.”

Table containing four columns with the cumulative ten month numbers from April to January to Jan 2020, 2021, 2022 and 2023 - receipts, expenditure, interest, net investment, deficit, other borrowing, debt movement, net debt and net debt / GDP.

Click on link at end of this post to go to the ICAEW website for a readable version.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made several revisions to prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the nine months ended 31 December 2022 by £6bn to £122bn and reducing the reported fiscal deficit for the year to 31 March 2022 by £1bn to £122bn.

For further information, read the public sector finances release for January 2023.

This article was originally published by ICAEW.

Public sector net debt tops £2.5trn for the first time

The highest December deficit on record has been driven by higher debt interest costs and the cost of energy support schemes.

The monthly public sector finances for December 2022, released on Tuesday 24 January 2023, reported a provisional deficit for the month of £27bn, the highest December deficit since records began in 1993. This was despite a mild December helping to mitigate some of the cost of energy support schemes.

The deficit for the month of £27bn was £12bn higher than the equivalent month in the previous financial year (December 2021) and £8bn more than the previous month (November 2022).

This brought the cumulative deficit for the first three quarters of the financial year to £128bn, which is £3bn below the Office for Budget Responsibility (OBR)’s revised forecast made at the time of the Autumn Statement last November. This substantially exceeds the budget of £99bn for the entire financial year to March 2023 forecast by the OBR at the time of the Spring Statement as higher interest costs, the effect of higher inflation on index-linked debt, and the cost of the energy price guarantee for households and businesses over the winter all add to public spending.

Public sector net debt was £2,504bn or 99.5% of GDP at the end of December 2022, up £131bn from £2,373bn at the end of March 2022. This is £684bn higher than net debt of £1,820bn on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

The OBR’s latest forecast is for net debt to reach £2,571bn by March 2023 and to approach £3trn by March 2028, although energy prices falling faster than expected may help improve the outlook somewhat.

The cumulative deficit for the first three quarters of the financial year of £128bn was £5bn lower than this time last year and £143bn lower than in 2020/21 during the first stages of the pandemic. However, it was £67bn more than the deficit of £61bn reported for the first nine months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.

Tax and other receipts in the three quarters to 31 December 2022 amounted to £721bn, £73bn or 11% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance, while VAT receipts benefited from inflation in retail prices. Year-to-date receipts included £3.7bn accrued for the energy profits levy ‘windfall tax’.

Expenditure excluding interest and investment for the nine months of £716bn was £30bn or 4% higher than the same period in 2021/22, with Spending Review planned increases in spending, high inflation and the cost of energy support schemes more than offsetting the furlough programmes and other pandemic spending in the comparative period not repeated this year.

Interest charges of £100bn for the three quarters were £46bn or 85% higher than the £54bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt.

Cumulative net public sector investment to December was £33bn. This is £2bn more than a year previously, much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £131bn since the start of the financial year comprised borrowing to fund the deficit for the nine months of £128bn together with a further £3bn to fund student loans, lending to businesses and others, and working capital requirements, net of cash inflows from repayments of deferred taxes and loans made to businesses during the pandemic.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “A mild December was not enough to prevent public debt from reaching £2.5tn for the first time, in a disappointing set of numbers for December 2022. However, the Chancellor will take comfort that cumulative borrowing for the first three quarters of the financial year was less than feared when the budget for 2022/23 was updated back in November. Energy prices coming down much faster than expected should also improve the outlook for the final quarter as well as the new financial year.

“The deficit is still on track to be one of the highest ever recorded in peacetime and stabilising the fiscal position is the best that Jeremy Hunt can hope for in the short term. Amid a sea of red ink, sustainable public finances remain a distant prospect for now.”

Table showing trends in receipts, expenditure, interest, net investment, deficit, other borrowing, debt movement, net debt and net debt / GDP for the nine months Apr-Dec 2019, 2020, 2021 and 2022.

Click on the link to ICAEW article at the end for a readable version of this 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 several revisions to prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the eight months ended 30 November 2022 by £5bn to £101bn and reducing the reported fiscal deficit for the year to 31 March 2022 by £2bn to £123bn.

The revisions in the current year principally relate to an increase of £4bn in the estimate for accrued corporation tax receipts at 30 November 2022, while the prior year numbers were updated to reflect a £0.7bn correction to reported VAT cash receipts during 2021/22 and a £1bn increase in the estimate for accrued corporation tax receipts at 31 March 2022.

This article was originally published by ICAEW.