My chart this week is about visits abroad by UK residents, illustrating how people have started to travel again following restrictions during the pandemic.
Visits abroad by UK residents have picked up following the depths of the pandemic but have yet to recover to pre-pandemic levels.
According to the Office for National Statistics, the number of visits abroad by UK residents by quarter amounted to 15.9m, 23.7m, 28.7 and 18.9m in 2017; 16.6m, 24.6m, 29.9m and 19.4m in 2018; 18.2m, 25.8m, 30.0m and 19.2m in 2019; 13.9m, 0.9m, 6.2m and 2.8m in 2020; 0.9m, 1.2m, 8.1m and 9.0m in 2021; and 9.4m and 20.4m in the first two quarters of 2022.
Although substantially higher than at the height of COVID-19 travel restrictions, trips abroad during the first half of 2022 were still substantially lower than before the pandemic.
The 20.4m visits during the second quarter of 2022 comprised 15.1m to countries in the European Union, 1.3m to other European countries, 1.0m to North America and 3.0m to other countries around the world. Of these trips, 13.4m were for holidays, 5.1m were to visit friends or relatives, 1.4m for business and 0.5m were for other reasons.
These numbers compare with 25.8m visits in the second quarter of 2019, comprising 18.9m to the EU, 1.4m to other European countries, 1.6m to North America and 3.9m to the rest of the world. This comprised an estimated 16.8m holidays, 6.0m visits to friends or relatives, 2.5m business trips and 0.5m other.
The amount spent by travellers in the second quarter of 2022 was estimated to be £15.8bn, an average of approximately £775 per visit. This compares with an average of around £630 in the second quarter of 2019, reflecting a weaker pound, inflation and the mix of travellers and countries visited.
Trips abroad during the key summer quarter of July to September 2022 has yet to be released by the ONS, so we wait to see whether there will be anywhere near the peak of 30.0m visits recorded in Q3 of 2019.
My chart this week illustrates how home broadband capabilities have been improving in recent years, although still far short of ambitions to provide ultrafast speeds to most households across the UK.
Ofcom recently published its latest data on UK home broadband performance, highlighting how nearly nine in ten (87%) of UK households take a home fixed broadband service.
Based on data as of March 2022, Ofcom reports that connection speeds have continued to improve, with the median average download speed of UK home broadband connections increasing by 18% to 59.4 megabits per second (Mbit/s or Mbps) over the year to March 2022. Over the same period the median average upload speed increased by 9% to 10.7 Mbit/s.
The chart illustrates how speeds have improved since November 2018, when 16% of households had average 24-hour download speeds of 10 Mbit/s or less, 27% had ‘high-speed’ connections (over 10 Mbit/s up to 30 Mbit/s), 41% had superfast broadband (over 30 Mbit/s up to 100 Mbit/s), 15% had extra-superfast broadband (over 100 Mbit/s up to 300 Mbit/s) and just 1% had ultrafast connections over 300 Mbit/s. Overall this meant 43% of households were on what used to be considered high-speed or slower connections and 57% were on superfast or ultrafast connections.
By March 2022, households on slower connections below 10 Mbit/s (mostly legacy ADSL) had fallen to 4% and high-speed connections (10-30 Mbit/s) had fallen to 13%, a drop of 26 percentage points in the proportion of households with high-speed or slower broadband to 17%. The proportion on superfast or higher speeds had increased to 83%, with 58% on superfast (30-100 Mbit/s), 18% on extra-superfast (100-300 Mbit/s) and 7% on ultrafast connections in excess of 300 Mbit/s.
With broadband increasing in popularity, future charts are likely to feature the proportion of gigabit or hyperfast connections of more than 1,000 Mbit/s, while the number of households on less than 30 Mbit/s – now accepted to be too slow for most purposes – should continue to fall as those households upgrade to faster services.
The challenge for Ofcom is in how to improve both rural connectivity and performance, with median average peak-time downloads of 39.4 Mbit/s in rural areas compared with 62.1 Mbit/s in urban areas.
The ‘hyperinflationary’ increase in broadband speeds over recent years suggests that there is a case for redefining the ‘currency’ of broadband speed, given that ‘high-speed’ connections are now commonly accepted to be too slow for practical usage, ‘superfast’ describes a basic level of internet service and ‘ultrafast’ connections are no longer the fastest speeds available.
My chart this week looks at the changes in the numbers of people between 16 and 64 who are employed, unemployed or economically inactive over the past three years.
According to the Office for National Statistics, on a seasonally adjusted basis the working-age population (ages 16 to 64) comprised 31,366,000 people in employment, 1,297,000 unemployed and 8,675,000 economically inactive in the quarter from June to August 2019.
As our chart this week illustrates, the numbers in employment fell by 486,000 over the following 18 months to the quarter from December 2019 to February 2021. Over the same period, there were 385,000 more people aged 16 to 64 recorded as being unemployed and 106,000 more as economically inactive. This was a net increase of just 5,000 as the normal growth in population was offset by migrants returning home at the start of the pandemic and a higher death rate than normal as a consequence of the pandemic.
Over the subsequent 18 months to the quarter from June to August 2022, employment of those between the ages of 16 and 64 recovered as the economy reopened, growing by 520,000, while unemployment fell by 518,000. However, the number economically inactive continued to grow, increasing by a further 218,000.
This resulted in a net movement over the three years of 225,000, comprising 34,000 more people in employment (to 31,400,000 in the quarter ended August 2022), 133,000 fewer unemployed (to 1,164,000), and 324,000 more who were economically active (to 8,999,000).
The numbers who were economically inactive in the June to August 2022 quarter comprised 2,419,000 students (up 103,000 from three years previously), 1,726,000 homemakers (down 254,000), 2,662,000 who were sick (up 424,000), 1,181,000 in early retirement (up 61,000) and 1,011,000 others (down 10,000).
This is not the total workforce, which in the quarter to August 2022 also includes 1,355,000 aged 65 or over in employment (up 27,000 from three years previously), 24,000 who were registered as unemployed (up 7,000) and 10,994,000 economically inactive (up 355,000), the majority of whom were retired.
Not shown in the chart is the change in the number of vacancies, which fell by 188,000 in the 18-month period from 812,000 in the quarter from June to August 2019 to 624,000 in the quarter from December 2020 to February 2021 and then rose by 635,000 over the following 18 months to 1,259,000 in the quarter from June to August 2022, a net movement of +447,000 over three years.
There has been much debate about the rise in the number of people who are categorised as long-term sick, which is believed to be down to a combination of ‘long Covid’ and NHS treatment backlogs.
The big jump in vacancies over the last three years – to a point where there are now more vacancies than the number of people recorded as unemployed – is putting significant pressure on businesses that are struggling to recruit new workers.
This position could change rapidly, however, with many commentators concerned that the cost-of-doing business crisis could result in a sharp rise in unemployment and a fall in vacancies over the next six months as consumers reign back spending in response to energy costs, rapidly rising prices, higher mortgage payments and an increasingly uncertain economic outlook.
My chart this week looks at how the benchmark percentage used to determine the rise in the state pension and many welfare benefits from next April reached 10.1% in September 2022.
The ICAEW chart of the week is on consumer price inflation, illustrating how the CPI index rose from 106.1 in September 2018 to 108.5 in September 2019, 109.1 in September 2020, 112.4 in September 2021 and 123.8 in September 2022. According to the Office for National Statistics (ONS), this meant that annual consumer price inflation was 1.7%, 0.5%, 3.1% and 10.1% for each of the four years to September 2022.
The percentage increase in the consumer price inflation index to each September is an important number as it is used to uprate most welfare benefits from the following April. In addition, under the triple-lock formula that has just been recommitted to by the government, it will be used to uprate the state pension in place of the statutory requirement for a rise in line with average earnings, which in September 2022 was 5.5%.
There has been speculation that the Chancellor of the Exchequer might try to restrict the uprating of welfare benefits (other than the state pension) to below inflation in order to meet his fiscal objectives. However, there is significant political pressure not to do so during a cost-of-living crisis that means many households are already struggling to pay their bills, even before the large rise in energy prices this month.
In theory, the sharp upward slope in the index over the last year provides some hope for both consumers and the Bank of England, as price increases from a year earlier fall out of the index, at least from November onwards given the energy price guarantee that means domestic energy prices should be flat for the following six months. With petrol and diesel prices appearing to moderate, and the ‘medicine’ of higher interest rates starting to take effect, the hope is that prices will rise less rapidly than they have this year, and so cause the annual rate of inflation to fall in the first half of next year.
Having said that, if recent events have taught us anything it is that our ability to predict the future is far from perfect.
My chart this week illustrates how tax cuts, higher interest charges and energy support packages contribute to the Institute for Fiscal Studies forecast of big increases in the fiscal deficit over the next few years.
The Institute for Fiscal Studies (IFS) published its annual Green Budget pre-Budget report on Tuesday 11 October. My chart this week summarises how the government’s energy support packages, higher interest rates and planned tax cuts contribute to a big jump in the fiscal deficit for the next few years up until the financial year ending 31 March 2027 (2026/27).
The chart starts with the Office for Budget Responsibility’s March 2022 Economic and Fiscal Outlook forecast for the deficit of £99bn in 2022/23, £50bn in 2023/24, £37bn in 2024/25, £35bn in 2025/26 and £32bn in 2026/27.
Forecasts from the IFS suggest that the deficit will almost double to £194bn in the current financial year, principally as a consequence of the £75bn cost-of-energy support packages announced by the government in May and September 2022, together with £20bn from higher interest and other forecast changes. The £7bn in lost tax revenue from cancelling the national insurance rise from November onwards and £1bn from cutting stamp duty is offset by £8bn in anticipated receipts from the energy windfall tax introduced by Rishi Sunak in May.
In the next financial year 2023/24, the IFS has forecast a £126bn increase in the forecast deficit from the OBR’s £50bn back in March to £176bn. This comprises an estimated £43bn cost of the domestic energy price guarantee, an extra £56bn from the effect of higher interest costs and other forecast changes, and £27bn in lower receipts as a consequence of the tax cuts announced by Chancellor of the Exchequer Kwasi Kwarteng on 23 September and partially reversed on 4 October.
The IFS emphasises that the forecast for the cost of domestic energy price guarantee is highly uncertain given how volatile energy prices are; it could vary up or down by tens of billions of pounds. There is also nothing in the forecast for an extension of the temporary energy support package for businesses that is due to expire on 31 March 2023, despite the potential that this may be required if energy prices remain elevated.
Higher interest charges are driven by a number of factors, including higher Bank of England base rates over the next few years, an increase in the yields on government borrowing when debt is refinanced, the effect of higher inflation on gilts linked to the retail prices index and the higher level of debt consequent on running bigger deficits. Other forecast changes principally relate to the effect of higher inflation on receipts and spending.
The effect of the tax cuts in 2023/24 has been estimated by HM Treasury to reduce receipts by £18bn from the cancellation of the national insurance rise, £11bn from cancelling the previously legislated increase in corporation tax from 19% to 25% from 1 April 2023, £5bn from implementing the cut in the income tax base rate from 20% to 19% a year early, £1bn from cutting stamp duty, £1bn from permanently setting the annual investment allowance for businesses to £1m and £1bn from rolling back IR35, net of £10bn generated by the energy profits levy.
In 2024/25, the forecast assumes energy prices continue to reduce, resulting in a cost for the final six months of the energy price guarantee to £8bn to add to the £37bn forecast by the OBR back in March. Higher interest and other forecast changes should add £29bn, while the government’s tax cuts should add a further £30bn, resulting in a new forecast for the deficit that year of £107bn. Similarly in 2025/26, the OBR’s spring forecast of £35bn has been revised up to £101bn, comprising £29bn from higher interest and other forecast changes and £37bn from tax cuts.
In 2026/27, the IFS forecasts the deficit to be £103bn, with the OBR March forecast of £32bn being increased by £28bn for higher interest charges and other forecast changes and £43bn from the effect of tax cuts. The latter comprises £19bn from the cancellation of the health and social care levy, £18bn from the cancellation of the corporation tax rise to 25%, £2bn from the cut in stamp duty, £2bn from a VAT-free shopping scheme for tourists, and £2bn in other tax measures.
While the huge cost of the government’s energy support packages is the largest contributor to the increase in the deficit in the first two years of the forecast, it is the persistent effect of higher interest rates combined with tax cuts that is the bigger concern for the IFS. Based on its calculation, it suggests that public spending cuts of £62bn a year might be necessary to achieve a falling ratio of debt to GDP by the fifth year of the forecast period – a not insignificant sum.
Our chart this week looks at how the price of the 1½% UK Treasury Gilt 2047 has changed over a nine-week period, falling from £84.73 for a £100 gilt on 2 August to £51.88 on 27 September, before recovering to £60.65 on 4 October.
Recent events in the government bond markets have been featuring on the front pages since the mini-Budget. As our chart illustrates, gilt prices – that had already been falling as interest rates increased – dived to their lowest level for many years following the Chancellor’s announcement of unfunded tax cuts at the same time as an unprecedented intervention in energy markets.
The chart is based on the Tuesday closing price of a long-dated gilt, the 1½% UK Treasury Gilt 2047 (GB00BDCHBW80), which is due to mature on 22 July 2047. Originally a 30-year gilt issued in 2016, 2017 and 2018 at a weighted average price of £93.90 and a weighted average accepted yield of 1.8%, there are around 249m £100 gilts with a total nominal value of £24.9bn traded on the London Stock Exchange.
Debt investors that purchased at that price would have made a tidy profit if they had sold when the price peaked at £125.41 on 9 March 2020 (when the yield was 0.51%) but the price has fallen over the last couple of years as interest rates have risen, dropping to £84.73 at the close of business on Tuesday 2 August, providing a yield of 2.31% to a debt investor intending to hold this gilt over the remaining 25 years until it matures.
Worsening inflation expectations since then have caused the yields demanded by investors to rise, resulting in the price falling by 14% over a four-week period to £83.14 on 9 August, £80.50 on 16 August, £75.15 on 23 August and £73.14 on 30 August, as the yield rose to 2.41%, 2.57%, 2.92% and 3.06% respectively. The slide continued in September as the price fell by a further 10% to £68.35 on 6 September, £66.96 on 13 September and £65.54 on 20 September as the yield rose to 3.41%, 3.52% and 3.63%, bring the cumulative fall since the first Tuesday in August to 23%.
The price plunged to £51.88 in the wake of the mini-Budget, causing the yield to spike to 4.89%, a 21% fall in one week that brought the cumulative fall over eight weeks to 39%. The Bank of England’s intervention managed to stabilise the gilt market, with the price increasing by 17% to £60.65 over the week to Tuesday 4 October. This has brought the yield back down to 4.05% and reduces the cumulative fall in price over nine weeks between 2 August and 4 October to 28%.
The turmoil in the gilt markets has shone a light on the risks associated with investing in what is often described as a ‘very safe’ investment in gilt-edged government securities issued by one of the world’s largest economies. While the creditworthiness of the British government remains unquestioned, recent events have demonstrated just how quickly debt markets can move in response to changing economic conditions and prospects.
Whether you are invested in bonds directly, or indirectly through your pension, recent events have confirmed, in an all-too-dramatic way, the truism that stock prices can – and do – go down as well as up.
My chart this week illustrates how five or seven different personal tax bands are expected in the coming financial year, despite the top rate of income tax being abolished.
Amid market chaos it might be forgotten that the ‘mini’ Budget was primarily about reforming the personal tax system. In abolishing the 45% top rate of income tax from 6 April 2023 onwards, the Chancellor simplified the tax system by removing the personal tax band that currently applies to earnings above £150,000.
Despite that simplification, our chart this week highlights how the personal tax system remains quite complicated, much more than might be assumed based on just two rates of income tax (19% and 40%), two rates of national insurance (12% and 2%) and recent alignment in income tax and national insurance thresholds.
In practice, our chart is an oversimplification, as it does not attempt to incorporate welfare benefits and hence the full complexity of how people are ‘taxed’ as their incomes rise – for example the 55% taper rate at which universal credit is withdrawn from those on the lowest incomes. It also does not attempt to reflect the tax treatment on non-earned income such as dividends, interest and capital gains, nor the intricacies of how pension contributions or other tax reliefs are dealt with.
Nor does it show the different rates of income tax applicable in Scotland, which currently has three more tax bands than elsewhere in the UK and is likely to continue to do so once the Scottish Budget establishes tax rates for next financial year.
Our chart assumes the thresholds for personal income tax and national insurance remain frozen as currently planned, illustrating how there is no tax to pay on the first £12,570 of earned income – the first band in the UK’s personal tax system.
From this point upwards, income tax of 19% (a 1% cut from the current rate) and employee national insurance of 12% (a reduction from the 13.25% in force until next month) are expected to apply in 2023/24, a combined rate of 31% that reduces take-home pay to 69% of each extra pound earned.
These rates apply to earnings up to £50,000, when a strange quirk of the tax system comes into play if you are a parent with a child or children receiving child benefit. Assuming child benefit is uprated by inflation in April, then the amount clawed back between £50,000 and £60,000 from the higher-earning parent is likely to be equivalent to somewhere in the region of an extra 12% (for one child) or 20% (for two children). The quirk is the misalignment between the £50,000 at which child benefit starts to be withdrawn through the tax system and the £50,270 point at which the 40% higher rate of income tax rate and 2% lower rate of national insurance of £50,270 come into force.
This creates a small band where the higher-earning parent of one child faces a combined tax rate of 43%, followed by a band between £50,270 and £60,000 where a combined rate of 52% applies. Not shown in the chart is the even higher rates of tax for two children – 39% income tax + 12% national insurance and 60% income tax + 2% national insurance – or even higher for three or more children receiving child benefit.
For those without children, or for the lower-earning parent, there is a more straightforward jump as income exceeds £50,270, with an extra 21% taken as the income tax rate rises from 19% to 40%, partially offset by a 10 percentage-point reduction in national insurance from 12% to 2%.
Those without children and lower-earning parents should retain 58% of each pound of earnings over £50,270, as will higher-earning parents on incomes above £60,000.
For earnings above £100,000 the personal allowance is withdrawn, creating an extra tax band between £100,000 and £125,140 where there is a marginal income tax rate of 60%, which with 2% of employee national insurance means retaining 38% of each additional pound earned within this band. The new top band is above £125,140, where income tax reverts to 40%, which combined with 2% of national insurance results in 58% being retained for each extra pound earned.
With the current 45% top rate of tax abolished, there is no further band for earnings above £150,000, meaning that all incomes above £125,140 are taxed at a combined rate of 42%, at least before taking account of tax reliefs that might apply.
There have been suggestions that the Chancellor intends to attempt to simplify personal tax bands further, perhaps by abolishing the 60% tax rate between £100,000 and £125,140 by allowing higher earners to retain the personal allowance rather than have it withdrawn. A less expensive option would be to align the child benefit withdrawal threshold with that for the higher income tax rate, getting rid of the mini-tax band for higher-earning parents on incomes between £50,000 and £50,270.
We will no doubt discover whether the government’s new-found zeal to simplify the tax system will continue, or if they will revert to the longer-term trend of adding in new complications to the tax system whenever a little extra money needs to be found.
We take a look at what makes up UK public debt and who it is owed to, before the Chancellor borrows hundreds of billions more in his emergency fiscal event.
We take a look at what makes up UK public debt and who it is owed to, before the Chancellor borrows hundreds of billions more in his emergency fiscal event.
Our chart this week is on public debt, illustrating how public sector gross debt is currently in the region of £2.7tn and public sector net debt is in the order of £2.4trn.
HM Treasury owes £2.1trn to holders of British government securities, of which approximately £745bn is owed to the Bank of England and £1,355bn to external investors. These securities are tradable on the London Stock Exchange, comprising fixed-interest bonds (‘gilts’) with an average maturity of 14 years, retail price index-linked gilts with an average maturity of 18 years and treasury bills that mature and roll over within six months or less.
The next largest public sector borrower is the Bank of England, which owes around £1,060bn to its depositors. This mostly comprises deposits created under its quantitative easing programme to support the economy, in the order of £850bn to finance fixed-interest gilt purchases, £20bn to finance corporate bond purchases and around £190bn to finance Term Funding Scheme loans.
The public is directly owed £210bn in the form of National Savings & Investments premium bonds and savings certificates.
The balance of £75bn comprises £25bn in Network Rail loans, £15bn in local authority external debt (local authorities owe £120bn in total, but £105bn is owed to central government) and £35bn in other sterling and foreign currency debt. These numbers do not include £21bn in central government leases and £10bn in other debts that have recently been added to the official measure for government debt following changes in methodology.
After deducting £300bn in cash and other liquid assets, this means public sector net debt stands at around £2.4trn, of which in the order of £930bn is owed to UK banks and other financial institutions, £635bn to UK institutional investors (pension funds and insurance companies), £215bn to UK individual investors, and £620bn to foreign investors, including foreign central banks and governments as well as private sector investors.
The chart illustrates how, despite the efforts of HM Treasury’s Debt Management Office to lock in fixed interest rates for long periods, the government is exposed to significant interest rate and inflation exposure, with the Bank of England having – in effect – swapped a significant proportion of government debt from fixed-rate gilts into variable rate central bank deposits through its quantitative easing programmes.
The consequence is that the majority of public debt is exposed to changes in interest rates or, in the case of index-linked gilts, to changes in retail price inflation, driving interest costs higher and higher each time the Bank of England raises its benchmark central bank deposit rate.
This provides a difficult backdrop for the Chancellor’s plans to borrow substantial sums to cut taxes, cap energy prices for households and businesses and increase defence spending. Most of the extra borrowing will be financed by issuing new British government securities at a time when the Bank of England is starting to put its quantitative easing programme into reverse and so selling some of its stock of fixed-interest gilts back into the market.
There is no need for an official forecast to be confident of two things: public debt, and the cost of public debt, are both going up.
My chart this week looks at how receipts and spending vary by age, a key driver for public finances that new Chancellor Kwasi Kwarteng will need to factor into his fiscal plans.
Kwasi Kwarteng’s first Budget will be an emergency one, not only setting out his plans for the financial year commencing on 1 April 2023, but also re-opening the budget for the current financial year. It will be dominated by the emergency support package for individuals and businesses already announced, alongside starting to deliver on Prime Minister Liz Truss’s commitments to cut taxes and ‘shrink the state’.
The new Chancellor is likely to find that cutting public spending is not going to be easy given the increasing financial commitments made by successive governments since the Second World War on education, pensions, health and social care, the areas that now dominate public spending. He supported adding to those commitments only a couple of years ago when then Prime Minister Boris Johnson decided to expand eligibility for social care, and former Chancellor Rishi Sunak re-committed to the ‘triple-lock’ that guarantees increases in the state pension every year.
As our chart this week illustrates, receipts and spending vary significantly across age groups, with spending on education higher on the young, who pay very little in taxes, and spending on pensions, health and social care much higher for older generations who contribute less than the average, especially after reaching retirement age. This contrasts with the profile for those of working age who pay the most into the system while on average taking the least out.
Derived from an analysis from the Office for Budget Responsibility’s fiscal risks and sustainability report published in July, the chart shows how – before the emergency Budget scheduled for 21 September – budgeted tax and other receipts for the current financial year 2022/23 are equivalent to £1,220 per person per month, based on forecast receipts of £988bn and a population of 67.5m. This is below budgeted public spending of £1,340 per person per month (£1,087bn/67.5m people/12 months), with the deficit of £120 per person per month (£99bn in total) funded by borrowing.
Average receipts per person per month by age group are estimated to be in the order of £150, £210, £1,150, £1,930, £2,200, £1,960, £1,240, £800 respectively for those aged 0-9, 10-19, 20-29, 30-39, 40-49, 50-59, 60-69, 70-79 and 80+ respectively. These numbers include £115 per person per month of non-tax receipts spread evenly across everyone.
Spending on public services and interest in the order of £510 per person per month, or £550, £620, £440, £430, £430, £450, £480, £640, £730 by age group, is less variable across age groups because it much of this spending is incurred on behalf of everyone, including £125 in interest, £73 on defence and security and £53 on policing, justice and safety for example.
Spending on pensions and welfare of £365 per person per month is less evenly spread, with £290 and £320 per month spent on those in their first two decades and £440, £430, £430 and £450 on those in their twenties, thirties, forties and fifties respectively. This increases to average spending per person per month of £480, £640 and £730 on those in their sixties, seventies and eighties or over.
Health and social care spending of £310 is biased towards older generations, with per person per month spending of £270, £110, £160, £180 and £200 for the first five decades of life contrasting with the £300, £370, £600 and £1,270 spent on average on those in their fifties, sixties, seventies and eighties or over.
As you would expect, education spending of £155 per person per month on average is mostly spent on the young, with around £380 per person per month spent on the under-10s, £750 spent on those between 10 and 19, £110 spent on those in their twenties, and £30, £20 and £10 respectively spent on those in their thirties, forties and fifties.
The reason this chart is so critical is because demographics are not in a steady state, with the ONS projecting that there will be an additional 3.3m pensioners in 20 years’ time, a 27% increase. This will have significant cost implications for this and future governments over a period when the working-age population – who pay most of the taxes to fund public spending – is projected to grow by just 4% in total.
While a declining birth rate might relieve some of the pressure on education spending over the next 20 years, spending on the state pension, the NHS and on social care will grow significantly if the commitments made by the current and previous governments to provide for income in retirement, universal free health care and an increasing level of social care provision are to be met, at the same time as running public services to the standard required.
Kwasi Kwarteng’s predecessors have been able to cover the expanding share of public spending going on pensions and health and social care without raising taxes above 40% of the economy by cutting spending on public services, in particular the defence budget, which has declined from in the order of 10% of GDP to around 2% over the last half century. However, with defence already at the NATO minimum, and many public services under significant pressure to improve delivery, there is much less scope to find savings than there has been in the past.
This poses a very big challenge for the Chancellor as he puts together his medium-term fiscal plans. Economic growth needs to be much higher than it has been in recent years, not only to cover the cost of tax cuts that he hopes will generate that growth, but also to generate the extra tax receipts needed to fund pensions and health and social care as more people live longer lives.
My chart this week looks at how the budgeted deficit was supposed to play out according to the Spring Statement back in March, ahead of an emergency fiscal event expected within the next few weeks.
The new Chancellor will be looking at a range of possible large scale interventions to support individuals and businesses as they face unprecedented cost-of-living and cost-of-doing-business crises this winter. Several commentators have suggested that the combination of tax cuts trailed by new Prime Minister Liz Truss and a massive emergency support package could add more than £100bn to the deficit, more than doubling the budgeted deficit of £99bn established back in March 2022 just before the start of the financial year.
My chart illustrates how the deficit was expected to change from a provisional outturn of £144bn for the deficit in the year ended 31 March 2022, when taxes and other receipts were £914bn and total managed expenditure amounted to £1,058bn.
Last year’s totals included £84bn in COVID-19 related measures (£14bn of tax cuts and £70bn of spending measures) that are not repeated this year, with further spending this year – including continuing to treat COVID-19 patients and tackling NHS backlogs that stem from the pandemic – folded into departmental budgets set during the three-year Spending Review back in October 2021.
Economic growth net of inflation was expected to reduce the deficit by a further £18bn, comprising £21bn in extra receipts from forecast economic growth of 2.2% less £3bn (£41bn on spending, £38bn on receipts) from forecast inflation of 4.1%. The latter uses the GDP deflator measure for the ‘whole economy’ and was estimated at a point when consumer price inflation was expected to reach 8.0% this year.
Inflation also drove much of the jump in interest costs of £27bn in comparison with the previous year, principally because of interest accrued on inflation-linked gilts, but also as a consequence of higher interest rates.
Tax and spending changes amounted to £30bn, comprising £31bn in additional spending less a net £1bn in tax changes. The former comprises a £21bn or 2.0% increase in public spending principally stemming from the 2021 Spending Review, together with £10bn of support for household energy bills announced by former chancellor Rishi Sunak back in February and March 2022. Tax rises were expected to add £20bn to the top line, of which £18bn stems from the rise in national insurance rates from April pending the introduction of the health and social care levy next year. However, this was offset by £19bn in tax cuts and other movements, including a £6bn tax cut from increasing national insurance thresholds, £2bn from cutting fuel duty by 5p, and £1bn from freezing the business rates multiplier.
These changes result in a budgeted deficit of £99bn, being forecast tax and other receipts of £988bn less public spending of £1,087bn.
These amounts exclude £15bn in additional help for energy bills since the budget was finalised in March 2022, partially offset by £5bn from the windfall tax on energy companies announced at the same time. Adjusting for these two items, however, is relatively small beer compared with the large-scale fiscal announcements made by new Chancellor Kwasi Kwarteng. This is before the Office for Budget Responsibility works its magic in updating the fiscal forecasts for changes in the economic situation, taking account of higher inflation and interest rates, and lower economic growth or even an economic contraction.
The worsening economic outlook continues to overshadow the public finances, providing perhaps one of the worst foundations for any incoming Chancellor since the Second World War.
