#icaewchartoftheweek – Martin Wheatcroft

ICAEW chart of the week: Commonwealth of Australia balance sheet

My chart for ICAEW this week heads down under for some warmer weather and to take a look at the Australian federal government balance sheet in its recently published consolidated financial statements for the year ended 30 June 2024.

Column chart illustrating the Commonwealth of Australia balance sheet. Assets of A$989bn in the left hand column and liabilities of (A$1,557bn) in the right hand column.

19 Dec 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Commonwealth of Australia, 'Consolidated financial statements 2023/24'.

The Commonwealth of Australia consolidated financial statements for the year ended 30 June 2024 were published on 12 December, bringing together the results and financial position of 199 audited financial statements for entities within the federal government system, public financial corporations (such as the Reserve Bank of Australia and Export Finance Australia), and public non-financial corporations (including Australia Post and Snowy Hydro for example). However, this does not include state and territory governments or local authorities in each state and territory.

As my chart this week illustrates, the balance sheet reports negative net worth of $568bn (21% of GDP or £284bn at the current exchange rate of approximately A$1 = £0.50), comprising assets of A$989bn (37% of GDP or £495bn) less liabilities of A$1,557bn (58% of GDP or £779bn).

Assets consisted of investments and cash of A$527bn (£264bn), receivables and other financial assets of A$162bn (£81bn) and non-financial assets of A$300bn (£150bn), while liabilities comprised debt of A$1,044bn (£522bn), payables and provisions of A$205bn (£103bn), and superannuation liabilities of A$308bn (£154bn).

Investments and cash of A$527bn consisted of investments, loans and placements of A$417bn, equity investments of A$102bn, and cash of A$8bn. Investments include $225bn invested in the Australia Future Fund, a sovereign wealth fund established in 2006 to strengthen the Australian government’s long-term financial position, together with $A$44bn in a series of other sovereign wealth funds established over the last decade.

Receivables and other financial assets of A$162bn comprised tax receivables and accrued taxation of A$59bn, other receivables and accrued revenue of A$26bn, student loans of A$54bn, and other advances of A$23bn.

Non-financial assets of A$300bn comprised A$89bn of military equipment, A$88bn of other plant, equipment and infrastructure, A$74bn in land and buildings, A$17bn in intangibles, $A13bn in heritage and cultural assets, and A$19bn of inventories and other non-financial assets.

Debt of A$1,044bn consisted of interest-bearing liabilities of A$943bn (A$611bn in government securities, A$227bn in central bank deposit liabilities, A$32bn for leases, and A$73bn in loans and other interest-bearing liabilities) and A$101bn in Australian currency in circulation.

Payables and provisions of A$205bn included A$90bn in provisions, A$63bn in non-pension employee liabilities, A$26bn in supplier payables and A$26bn in other payables.

The net pension obligation of A$308bn includes A$276bn for partially funded defined benefit schemes (obligations of $323bn less scheme assets of $A47bn) and A$32bn for one unfunded scheme. These schemes are now all closed to new members and so the liability is gradually reducing over time.

Not shown in the chart is the operating statement, which reported revenue of A$728bn (27.2% of GDP or £364bn), expenses of A$718bn (26.9% of GDP or £359bn) and net capital investment of A$12bn (0.5% of GDP or £6bn) to result in an operating surplus of A$10bn (0.4% of GDP or £5bn) and a fiscal deficit (on an accounting basis) of A$2bn (0.1% of GDP or £1bn).

Although the reported net worth in the financial statements is negative, Australia’s public finances are in a much stronger position than for many other countries. Australia’s general government net debt (including 13% for state and territory governments) was 32% of GDP on 30 June 2024, in contrast with the equivalent of 91% of GDP for the UK on the same date. This also doesn’t take account of the UK’s much larger public sector pension liabilities that are not included within net debt.

As a result there are more reasons than just the warmer weather to be thinking about enjoying a Christmas barbie on the beach on the other side of the world at this time of the year.

This is the last chart of the week for 2024 and so we would like to wish our readers all the best for the holiday season and for a healthy and prosperous 2025. We return in January.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK public sector pension liabilities

My chart for ICAEW this week looks at how public sector net pension obligations reduced by £1.2tn from £2.6tn to £1.4tn during the financial year ended 31 March 2023 as a consequence of a sharply rising discount rate.

Step chart on UK public pension liabilities in the Whole of Government Accounts 2022/23. Opening position at 1 April 2022 £2,639bn (£2,539bn unfunded and £100bn funded) + £117bn service costs + £48bn net interest costs - £1,269bn net actuarial gains = £50bn unfunded benefits paid - £70bn other movements = £1,415bn pension liability on 31 Mar 2023 (£1,419bn unfunded scheme liabilities - £4bn funded scheme net pension asset).

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

My chart of the week for ICAEW is on UK public sector pension liabilities, analysing how the net pension obligations reported in the Whole of Government Accounts 2022/23 reduced from £2,639bn on 1 April 2022 to £1,415bn on 31 March 2023.

The Whole of Government Accounts are prepared in accordance with International Financial Reporting Standards (IFRS), with net pension obligations calculated in line with International Accounting Standard 19 (IAS19): Employee benefits.

The chart starts with opening net pension liabilities on 1 April 2022 of £2,639bn, comprising £2,539bn for unfunded schemes (including the NHS, teachers, civil services, armed forces, police and fire service schemes, among others) and a net liability of £100bn for funded schemes (principally local government schemes, but also some central government entities such as the BBC and the Bank of England, for example). The closing position on 31 March 2023 was £1,415bn, being pension liabilities of £1,419bn for unfunded schemes and a net pension asset of £4bn for funded schemes.

Service costs added £117bn to pension liabilities during 2022/23 and net interest added a further £48bn. These increases were more than offset by £1,269bn in net actuarial gains, £50bn in payments to pensioners in the unfunded pension schemes, and £70bn in other movements.

Service costs principally arise from the additional pension entitlements earned by public sector workers during the year, while net interest comprises the unwinding of the discount on pension liabilities (£40bn for unfunded schemes and £11bn for funded schemes) less investment income on assets in funded schemes (£3bn).

The net actuarial gains of £1,269bn comprises £1,357bn from changes in the assumptions underlying the value of liabilities (£1,218bn on unfunded schemes and £139bn in funded schemes) less £60bn (£59bn on unfunded schemes and £1bn on funded schemes) in experience gains and losses, less a loss of £28bn on investments. The principal assumption changes related to a change in the discount rates used to calculate pension obligations, which for the unfunded schemes increased from a real (i.e. inflation-adjusted) rate of 1.3% on 31 March 2022 to 1.7% on 31 March 2023.

The unfunded scheme liability is reduced for pensions paid on behalf of the schemes by the government. This contrasts with the funded schemes where assets are used to fund settlement of pension liabilities, resulting in no change in the net position. Other movements include £35bn in opening balance restatements relating to the NHS and former Royal Mail pension schemes and £39bn from the failure of 198 local authorities and the Northern Ireland Teachers Superannuation Scheme to report numbers to HM Treasury, less a net £4bn in other movements.

The omission of so many local authorities, and the lack of audit assurance for many others, has led to the first ever audit opinion disclaimer by the Comptroller and Auditor General on the consolidated financial statements for the UK public sector.

Not shown in the chart is the breakdown of the £1,419bn closing balance for unfunded schemes into its constituent schemes: £535bn for NHS workers, £335bn for teachers, £222bn for civil servants, £156bn for the armed forces, £104bn for police, £30bn for pre-privatisation Royal Mail workers, £23bn for fire services, and £14bn for public sector staff in other unfunded schemes. Also not shown is the £304bn of liabilities in local government and other funded pension schemes or the related £308bn in investments in those schemes that result in a net pension fund asset of £4bn on 31 March 2023.

The recognition of a £1.3tn actuarial gain in the statement of comprehensive income and expenditure appears positive for the reported financial position of the nation by contributing to a reduction in overall net liabilities from £3.9tn to £2.4tn. However, it is important to realise that the future obligations to pay pensions to public sector employees haven’t changed – it is how those obligations are converted into current values.

Irrespective of the discount rate used, we as a nation will need to pay out very large amounts of money in public sector pensions.

This chart was originally published by ICAEW.

ICAEW chart of the week: US federal debt

My chart for ICAEW this week looks at how US federal debt has almost doubled over the past decade from $17.8tn in September 2014 to $35.5tn at the end of the most recent financial year in September 2024, with debt held by the public increasing from $12.8tn to $28.3tn.

Column chart on US federal debt, showing how debt of $17.8tn in Sep 2024 ($12.8tn debt held by the public and $5.0tn intragovernmental holdings) had increased to $35.5tn in Sep 2024 ($28.3tn debt held by the public and $7.2tn intergovernmental holdings).

6 Dec 2024. Chart by Martin Wheatcroft FCA. Source: US Treasury, US Governmental Accountability Office.

My chart of the week for ICAEW is on how much the US federal government owes has grown over the past decade. Total debt has increased by 99% from £17.8tn in September 2014 to $35.5tn at the end of the most recent financial year on 30 September 2024, reflecting a 121% increase in debt held by the public from $12.8tn to $28.3tn over 10 years, and a 44% increase in intragovernmental debt from $5.0tn to £7.2tn over the same period.

Debt held by the public on 30 September 2024 is equivalent to 97.8% of GDP, up from 96.0% of GDP a year earlier and from 73.3% of GDP at the end of the 2014 fiscal year.

Debt held by the public comprises amounts owed to banks, other corporations, individuals, and non-federal entities (including states) in the US and to foreign investors, including foreign governments. Intragovernmental debt includes amounts owed to the US social security system and funds carried forward by federal agencies, among others.

The increase in US federal debt held by the public has primarily been driven by borrowing to fund fiscal deficits incurred over the past decade, which amounted to $0.4tn, $0.6tn, $0.7tn, $0.8tn, $1.0tn, $3.1tn, $2.8tn, $1.4tn, $1.7tn and $1.8tn in the financial years ending 30 September 2015 through to 2024. Although the deficit peaked at $3.1tn in the year to 30 September 2020 during the pandemic, it has continued to exceed a trillion dollars each year since then.

The provision deficit in the year to 2024 of $1,833bn comprised $4,919bn in tax and other receipts, less $6,752bn in total outlays.

According to the Congressional Budget Office, the deficit is expected to average $2.2tn a year over the next decade, with debt held by the public on the basis of their most recent projections expected to rise to almost $51tn or 122% of GDP in September 2034.

The assumptions behind those projections don’t take account of the plans of the incoming Trump administration to slash taxes and federal spending over the next four years, which could result in a variety of different paths for debt that are currently difficult to predict.

This chart was originally published by ICAEW.

ICAEW chart of the week: What do we all do?

My chart for ICAEW this week looks at what we all do for a living and how the government wants to move more of us from economically inactive categories into the workforce.

Pie chart breaking down UK population between 29.0m employees (42%), 4.3m self-employed (6%), 1.5m unemployed (2%), 3.0m ill or disabled (4%), 2.7m homemakers and other (4%), 12.3m retired (18%), 13.9m children under 16 (20%), 2.5m students 16 and over (4%).

My chart of the week for ICAEW looks at what we do for a living, according to the latest labour market statistics from the Office for National Statistics (ONS) for the third quarter between July and September, when the estimated population was 69.2m.

According to the ONS, 29m people (42% of the total population) were in employment, 4.3m (6%) were self-employed and 1.5m (2%) were unemployed seeking work. In total this is fractionally just over half of the population (50.3%).

The other (almost) half of the population were not in work. They comprised 3m (4%) not working because of illness or disability, 2.7m (4%) homemakers or not working for other reasons, 12.3m (18%) people in retirement, 13.9m (20%) children under the age of 16, and 2.5m (4%) students aged 16 or over who were not also working.

The 33.3m who were employed or self-employed include 1.5m people aged 65 or more and 1.1m students in full-time education who also work. Around 5.9m work in the public sector. Overall, there are 24.9m people working full-time and 8.4m working part-time, while some 1.2m workers have more than one job.

The 1.5m unemployed include 0.2m students in full-time education who are actively seeking work. Meanwhile, the 12.3m in retirement include 1.1m people who are under the age of 65.

The ONS also reports that 1.9m of those who are economically inactive between the ages of 16 and 64 would like a job, including 0.7m of those who are not working because of illness or disability.

The government is very keen to get as many as possible of the 1.5m people who are unemployed, and the 3.0m not working because of illness or disability, into work. This would benefit the public finances twice over by not only reducing the cost to the exchequer of welfare payments paid out, but also by increasing the amount of tax receipts coming in.

Recent statements from government ministers have suggested that their strategy includes tightening the eligibility criteria for illness and disability benefits, in addition to providing additional support to help people back into the workforce.

The government is also looking at how it can encourage some of the 1.1m retirees below the age of 65 back into work, as well as persuading more of us to work beyond the statutory retirement age of 66.

This chart was originally published by ICAEW.

ICAEW chart of the week: Inflation jump

Our chart this week looks at how the jump in annual inflation from 1.7% in September to 2.3% in October was driven by higher energy bills.

Side-by-side step charts comparing the components of inflation for two overlapping periods. Visually each bar is weighted to its contribution to the inflation to the index.

12 months to Sep 2024: core inflation +3.2%, food prices +1.9%, alcohol and tobacco +4.9% and energy prices -16.9% = CPI all items 1.7%.

12 months to Oct 2024: core inflation +3.3%, food prices +1.9%, alcohol and tobacco +5.3% and energy prices -10.1% = CPI all items 2.3%.

Our chart of the week illustrates how the annual rate of consumer price inflation (CPI) has changed between September and October 2024.

In the year to September 2024, core inflation – being CPI excluding the more volatile price rises of food, alcohol and tobacco, and energy – was 3.2%, while food prices were 1.9% higher than a year previously, alcohol and tobacco were 4.9% higher and energy prices were 16.9% lower. On a weighted basis these contributed 2.5%, 0.2%, 0.2% and -1.2% respectively to the overall CPI index.

This contrasts with the year to October 2024, where core inflation was 3.3%, food price inflation was 1.9%, alcohol and tobacco prices were up 5.3%, and energy prices were down 10.1%, contributing 2.6%, 0.2%, 0.2% and -0.7% to the annual rise in the CPI all items index.

In moving to the latest set of statistics, price changes during October 2023 are dropped from the annual rate and those for October 2024 are added. This results in a very different picture for energy prices, as a fall in domestic electricity and gas prices in October 2023 was replaced by an increase in the domestic energy price cap in October 2024. This caused energy prices overall to fall by a smaller amount in the year to October than they did in the year to September.

After weighting the different components of the CPI index, the 0.6 percentage point change in the annual rate of inflation reflected a 0.1 percentage point contribution from core inflation, close to zero from food inflation, 0.015 percentage points from higher alcohol and tobacco prices, and a 0.5 percentage point contribution resulting from a lower annual rate of fall in energy prices.

Despite the slight uptick in the annual core inflation rate in October 2024 to 3.3%, it is still significantly lower than the 5.7% rate it was in October 2023, providing some encouragement to the Bank of England to reduce interest rates still further during 2025.

However, the concern for monetary policymakers before they decide to cut rates again will be the potential upward pressures on inflation from measures in the Autumn Budget 2024. The course they chart will be affected by how these and other economic factors (both domestic and international) play out over the course of the next six months or so.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK international trade

My chart for ICAEW this week is inspired by International Trade Week and looks at where UK imports come from and exports go to, ahead of what might be some major changes in US trade policy when President-elect Trump assumes office on 20 January 2025.

Column chart showing imports and exports to and from the UK in 2023.

Imports: Americas £142bn + Asia-Pacfic £155bn + Europe £504bn + Rest of the world £75bn = £876bn.

Exports: Americas £219bn + Asia-Pacific £142bn + Europe £400bn + Rest of the world £100bn = £861bn.

My chart of the week illustrates how UK imports in 2023 totalled £876bn, £15bn more than total exports of £861bn.

Imports comprise £142bn (16%) from the Americas, £155bn (18%) from Asia-Pacific, £504bn (57%) from European countries, and £75bn (9%) from the rest of the world. Exports comprise £219bn (25%) to the Americas, £142bn (16%) to Asia-Pacific, £400bn (46%) to European countries, and £100bn (12%) to the rest of the world.

Imports can be analysed between £581bn in goods and £295bn in services, while exports can be broken down into £393bn in goods and £468bn in services, meaning the UK had a trade deficit of £188bn in goods and a trade surplus of £173bn in services in 2023.

The UK’s largest overall trade partner is the EU, which makes up most of the UK’s trade with countries in Europe, while its largest individual trade partner is the US. Excluding Germany (the largest country in the EU), the UK’s next largest trade partner is China. Together, imports from these three economies add up to £635bn or 72% of the total, while exports to the US, EU and China equate to £594bn or 69% of the total.

International Trade Week is an opportunity to celebrate the successes of the UK’s importers in sourcing the goods and services that individuals and businesses need and of the UK’s exporters in selling goods and services around the world.

However, this time around all eyes are on the result of the US general election, and what the potential trade policies of the incoming US administration under Donald Trump might mean for the UK. Not only could they result in major changes in how trade is conducted between the UK and the US (17% of our total trade), but also between the UK and the EU (46%), and between the UK and China (7%).

We trade in interesting times.

Major trading partners

Americas

US – £115bn imports (£58bn goods, £57bn services); £187bn exports (£60bn goods, £127bn services)

Canada – £9bn imports (£5bn goods, £4bn services); £16bn exports (£7bn goods, £9bn services)

Brazil – £5bn imports (£4bn goods, £1bn services); £6bn exports (£3bn goods, £3bn services)

Other countries in the Americas – £13bn imports (£7bn goods, £6bn services), £10bn exports (£5bn goods, £5bn services)

Asia-Pacific

China (including Hong Kong) – £69bn imports (£61bn goods, £8bn services); £51bn exports (£32bn goods, £19bn services)

India – £24bn imports (£10bn goods, £14bn services); £16bn exports (£6bn goods, £10bn services)

ASEAN – £22bn imports (£14bn goods, £8bn services); £25bn exports (£12bn goods, £13bn services)

Japan – £14bn imports (£8bn goods, £6bn services); £14bn exports (£6bn goods, £8bn services)

Australia – £6bn imports (£2bn goods, £4bn services); £15bn exports (£5bn goods, £10bn services)

South Korea – £7bn imports (£6bn goods, £1bn services); £10bn exports (£6bn goods, £4bn services)

Other countries in Asia-Pacific – £13bn imports (£8bn goods, £5bn services); £11bn exports (£4bn goods, £7bn services)

Europe

EU – £451bn imports (£318bn goods, £133bn services); £356bn exports (£186bn goods, £170bn services)

EFTA – £50bn imports (£37bn goods, £13bn service); £40bn exports (£17bn goods, £23bn services)

Other European countries – £3bn imports (£1bn goods, £2bn services); £4bn exports (£3bn goods, £1bn services)

Rest of the world

Turkey – £16bn imports (£11bn goods, £5bn services); £10bn exports (£7bn goods, £3bn services)

UAE – £8bn imports (£3bn goods, £5bn services); £13bn exports (£7bn goods, £6bn services)

Saudi Arabia – £4bn imports (£3bn goods, £1bn services); £13bn exports (£5bn goods, £8bn services)

South Africa – £6bn imports (£4bn goods, £2bn services); £4bn exports (£2bn goods, £2bn services)

UK dependencies – £10bn imports (£1bn goods, £9bn services); £21bn exports (£1bn goods, £20bn services)

Everywhere else – £31bn imports (£20bn goods, £11bn services), £39bn (£18bn goods, £21bn services)

This chart was originally published by ICAEW.

ICAEW chart of the week: Economic outlook

My chart for ICAEW this week looks at how the OBR is forecasting growth in economic activity per person of 1.1% a year between 2024 and 2030. While better than the average of 0.3% a year achieved over the past 16 years, it is significantly lower than the 2.3% a year seen in the 50 years before that.

Line chart showing GDP per capita between Q1 2008 and Q1 2030, with the forecast period from Q1 2024 onwards shaded grey.

GDP per capita - blue line falling from 2008 to 2010 then rising unevenly to 2019 falling hugely in 2020 then rising again to just below 2019 in 2021 before falling to 2024 and then a projected rise from 2024 onwards.

Trend lines overlaid as follows:
Q1 1958 to Q1 2008: +2.3% a year (not shown in the chart).
Q1 2008 to Q1 2024: +0,3% a year (purple).
Q1 2009 to Q3 2019: +1.3% a year (yellow).
Q1 2024 to Q1 2030: +1.1% a year (dotted black line).

My chart of the week is on the economic projections calculated by the Office for Budget Responsibility (OBR) in its October 2024 economic and fiscal outlook that accompanied the Autumn Budget 2024.

This assumption is a key driver for the OBR’s fiscal projections for tax receipts between now and March 2030, and hence how much the government will need to borrow to finance the current deficit and its investment plans.

The chart starts in March 2008 at the height of the financial crisis, illustrating how economic activity per person after adjusting for inflation fell significantly until September 2009. Real GDP per capita then grew at an average rate of 1.3% a year until September 2019, before the rollercoaster ride that saw the economy collapse during the pandemic, recover and then slide back during the energy crisis. A small uptick in the first quarter of 2024 is hardly noticeable.

The result was that real GDP per capita was only 4.4% higher in March 2024 than it was in March 2008, the equivalent of 0.3% a year on average over 16 years.

The OBR has been more optimistic for the current financial year up until March 2030, predicting per capita economic growth of 1.1% a year on average between the first quarter of 2024 and the first quarter of 2030.

This is of course much better than the 0.3% average increase over the past 16 years, but it is below the 1.3% growth in real GDP per capita during the ‘austerity years’ following the financial crisis and is substantially below the 2.3% average increase over the 50 years prior to the financial crisis.

From a ‘glass half empty’ perspective, this emphasises just how poorly the UK economy has performed since the financial crisis and the challenges the incoming government has in trying to improve productivity and economic output, even without the risk of an economic shock, events that appear to occur every decade or so.

However, those with a ‘glass half full’ temperament will be more cheerful. After all, there does appear to be substantial space for economic growth to improve from the OBR’s less-than-sparkling predictions, even without returning to the heady days of the pre-financial crisis long-term trend.

This chart was originally published by ICAEW.

ICAEW chart of the week: Autumn Budget 2024

My chart for ICAEW this week looks at how the fiscal baseline inherited by the Chancellor has changed as a consequence of the Autumn Budget, with higher capital investment driving up borrowing needed to fund the deficit over the next five years.

Column chart showing Spring Budget fiscal deficit and the Autumn Budget change over the forecast period.

2024/25: Spring Budget forecast £87bn + Autumn Budget change £40bn = £127bn (4.5% of GDP).

2025/26: £78bn + £28bn = £106bn (3.6% of GDP).

2026/27: £69bn + £20bn = £89bn (2.9% of GDP).

2027/28: £51bn + £21bn = £72bn (2.3% of GDP).

2028/29: £39bn + £33bn = £72bn (2.2% of GDP).

2029/30: £35bn + £36bn = £71bn (2.1% of GDP).

Our chart of the week sets out the changes in fiscal projections calculated by the Office for Budget Responsibility (OBR) in its October 2024 economic and fiscal outlook compared with the numbers at the time of the Spring Budget seven months ago.

These form a revised baseline for the public finances that will form the basis of the Chancellor’s spending and investment plans over the rest of the Parliament.

As our chart highlights, the fiscal deficit – the shortfall between tax and other receipts and public spending calculated in accordance with statistical standards – was forecast to amount to £87bn in 2024/25, but this has increased by £40bn to £127bn, or 4.5% of GDP.

The projections for the following five years were also revised upwards between 2025/26 and 2029/30 have increased from £78bn, £69bn, £51bn, £39bn and £35bn by £28bn, £20bn, £21bn, £33bn and £36bn to result in a revised profile of £106bn (3.6% of GDP), £89bn (2.9% of GDP), £72bn (2.3% of GDP), £72bn (2.2% of GDP) and £71bn (2.1%).

This contrasts with the previous government’s plan to bring down the deficit in relation to the size of the economy to 1.2% of GDP by 2028/29.

Perhaps the biggest surprise was the £40bn upward revision to the budgeted deficit of £87bn for the current financial year ending in March 2025. This reflects a combination of £14bn in higher debt interest and £6bn in other forecast revisions, £23bn in higher spending (most of which is the £22bn ‘black hole’ identified by the incoming government over the summer) and £2bn in additional capital investment, less £1bn in tax measures and £4bn from the indirect economic effect of policy decisions.

In later years, the principal driver of the increases in the deficit is higher capital investment as the Chancellor replaced the previous government’s plan to cut public sector net investment by almost a third over the next five years (from 2.5% to 1.7% of GDP) to a profile that sees net investment increase to 2.7% of GDP in 2025/26 and 2026/27 before returning to 2.5% of GDP in 2029/30.

The changes in the deficit between 2025/26 and 2029/30 can be summarised as follows:

2025/26: £28bn increase = £18bn higher capital investment + £10bn net other changes (£42bn additional spending – £25bn tax rises – £6bn indirect effects of decisions – £1bn forecast changes).

2026/27: £20bn = £23bn capital – £3bn net other changes (£44bn – £35bn – £5bn – £7bn).

2027/28: £21bn = £26bn capital – £5bn net other changes (£47bn – £40bn – £2bn – £10bn)

2028/29: £33bn = £27bn capital + £6bn net other changes (£49bn – £40bn + £2bn – £5bn)

2029/30: £36bn = £25bn capital + £11bn net other changes (£47bn – £42bn + £6bn – not published).

The increases in taxation, spending and capital investment won’t avoid the need for difficult choices in the Spending Review next year as departmental budgets will remain tight.

ICAEW chart of the week: Prime Minister’s salary

My chart for ICAEW this week illustrates how PM Keir Starmer’s £172,153 official salary entitlement would have been £305,770 if prime ministerial pay had kept pace with inflation since 2009.

Column chart showing the Prime Minister's actual salary, official salary and official salary extrapolated in line with inflation on 1 April between 2009 and 2024. See text for numbers.

26 Sep 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: House of Commons research briefings; ICAEW calculations. (c) ICAEW 2024.

Prime ministerial pay has been in the news quite a lot in recent weeks for a range of reasons, leading our chart of the week to look at how the prime minister’s salary has evolved over the last 15 years.

As the chart illustrates, former PM Gordon Brown was entitled to a salary of £197,689 and had an actual salary of £193,885 on 1 April 2009, significantly higher than today’s current official salary of £172,153 or the actual salary of £166,786 taken by current PM Keir Starmer. This is despite cumulative inflation of 55% (3.0% a year on average) or an increase in MP base pay of 41% (2.3% a year) over the past 15 years.

The reasons for these reductions in prime ministerial salary are primarily the result of a voluntary pay cut to £150,000 taken by Gordon Brown in the run up to the May 2010 election, and a further cut of 5% to £142,500 adopted by incoming PM David Cameron.

Cameron maintained his pay at this level for the duration of his first term in office, converting his voluntary decision into a permanent change in 2012 (backdated to 2011) in how much he and his successors have been entitled to receive. The chart shows how Cameron accepted a pay rise following the 2015 general election, taking him from a salary of £142,500 on 1 April 2012 out of an official entitlement of £142,545 to £150,402 on 1 April 2016 out of £152,532.

Subsequent prime ministers have also exercised pay restraint by restricting increases in ministerial pay, or in not taking all of the increases to which they were entitled. As a consequence, Theresa May concluded her period as prime minister in 2019 on a salary of £154,908 out of an official salary of £158,754, while Boris Johnson and Liz Truss were on annual salaries of £159,584 in 2022, short of their full entitlement of £164,951.

Rishi Sunak concluded his period as prime minister on an official salary of £172,153 from 1 April 2024 onwards, being the amount to which Sir Keir Starmer is entitled to claim if he wanted. However, the politics of accepting pay rises is difficult – perhaps now more than ever – and so Keir Starmer has stuck with the £166,786 actual salary that his predecessor was on before the 2024 general election.

Our chart illustrates how the prime minister’s official salary has eroded in value over the last 15 years by calculating how it would have risen to £219,800 on 1 April 2012, £232,000 on 1 April 2016, £247,720 on 1 April 2019, £266,020 on 1 April 2022 and £305,770 this year if it had increased in line consumer price inflation instead.

There are arguments for using other indexes for this comparison, such as public sector pay, which if used would have led to an official salary of £299,060 on 1 April 2024 ; average GDP per capita, perhaps a better measure of national economic performance, would have resulted in an official salary of £301,530. Linking to overall average pay would have led to an official salary of £311,990 today, while maintaining its value in comparison with pay in the private sector would have delivered a potential pay packet for the PM of £334,360.

The requirement for successive prime ministers to approve their own pay has led to the opposite of what you might think would happen. Instead of raising their salary ever higher because they have the power to do so, political choices and pressures have led them instead to cut or freeze their pay at different points over the last 15 years, resulting in a significant erosion in prime ministerial pay in that time.

These choices have led to the UK paying its head of government substantially less than comparable leaders such as Australian PM Anthony Albanese’s annual salary of A$607,500 (£311,500), German Chancellor Olaf Scholz’s €348,300 (£290,250) or Canadian PM Justin Trudeau’s C$408,200 (£226,800).

Ironically, it might be the prime minister (and his successors) who could benefit most of all of our public servants by taking the power to set his own pay away and giving it to an independent pay review body instead.

This chart was originally published by ICAEW.

ICAEW chart of the week: Eurozone government bond yields

My chart for ICAEW this week is on the cost of government borrowing in the Eurozone, which on 4 September ranged from 2.17% for Danish 10-year bonds up to 3.59% for their Italian equivalents.

My chart this week is on the range of yields payable on 10-year government bonds by 18 out of the 20 countries in the Eurozone for which data is available.

The chart illustrates how investors in German 10-year government bonds (known as ‘bunds’) would have received a yield to maturity of 2.22% – or conversely the German government could have borrowed at an effective interest rate of 2.22% if issuing fresh debt at that point in time. Yields on German bunds are used as benchmark rates for government debt not just in the Eurozone, but globally.

Just one country in the Eurozone has a lower 10-year bond yield than Germany, which is Denmark at 2.17% on 4 September, which is a 0.05 percentage points or 5 basis points (bp) ‘spread’ below the benchmark bund rate.

While quoted yields move up and down all the time, sometimes by quite large amounts, spreads are much less volatile, providing an insight into how debt investors perceive the relative risks of investing in different countries’ sovereign debt.

The next lowest yields were the Netherlands at 2.51%, with a spread of 0.29 percentage points above bunds, and Finland at 2.59% (+0.37%). This is then followed by Ireland on 2.67% (+0.45%), Austria on 2.71% (+0.49%), Belgium on 2.80% (+0.58%), Portugal on 2.82% (+0.60%), France on 2.93% (+0.71%), Slovenia on 2.94% (+0.72%), Cyprus on 3.00% (0.78%) and Spain on 3.02% (+0.80%). There is then a small jump to Greece on 3.28% (+1.06%), Slovakia on 3.30% (+1.08%), Malta on 3.34% (+1.12%), Lithuania on 3.36% (+1.14%) and Croatia on 3.41% (+1.19%).

The highest yield for investors among Eurozone countries – and hence the highest borrowing cost for its government – is Italy with 3.59%, which is 1.37 percentage points above the effective interest rate at which Germany could in theory borrow.

Comparing the bond yields in the Eurozone provides an insight into the relative strengths and weaknesses of these countries’ public finances and economies given that they all share a currency, a central bank base interest rate (currently 3.75%), and are all in the EU Single Market and Customs Union. Comparing yields with other currencies, such as the UK’s 3.95% for example (not shown in the chart), needs to take other factors into account, such as the UK’s much higher central bank base rate of 5%.

The chart also reports the government debt to GDP levels of each country for the second quarter of 2024 according to Eurostat, which may help explain why Denmark (with debt/GDP of 34%) pays a significantly lower borrowing cost than Spain (109%).

However, debt/GDP doesn’t explain all of the differences, with the 10-year yield on Greek government debt (debt/GDP 160%) of 3.28% for example being significantly lower than the 10-year yield on Italian government debt (debt/GDP 138%) of 3.59%.

Not shown in the chart are Estonia (debt/GDP 24%) and Latvia (45%), both of which tend to borrow at shorter maturities.

The lack of a firm correlation between debt/GDP and bond spreads should not be surprising as debt/GDP is a relatively crude measure of public finance strength or weakness. It excludes most government assets and non-debt liabilities, the funded or unfunded nature of their social security systems, as well as a country’s medium- and longer-term economic prospects and the perceived stability of that country’s government. These are all factors debt investors take into account when deciding the level of risk that they are willing to accept when investing.

This chart was originally published by ICAEW.