#icaewchartoftheweek – Page 16

ICAEW chart of the week: UK population projections 2020 to 2045

Our chart this week is based on the latest population projections for the UK, with an expected 67% increase in the number of people over the age of 75 and a fall in the number under the age of 25 over the next quarter of a century.

Chart illustrating how population of 67.1m people in 2020 (19.8m ages 0-24, 21.8m ages 25-49, 19.7m ages 50-74, 5.8m ages 75+) changes over the 25 years with 16.6m births, 18.0m deaths and 5.3m net migrants to get to 71.0m in 2024 (18.0m ages 0-24, 22.4 ages 25-49, 20.9m ages 50-74 and 9.7m ages 75+). For more detail see the text.

The Office for National Statistics (ONS) released 2020-based interim population projections on 12 January 2022 providing an insight into how the population of the UK is expected to change over the next 100 years. They are interim because they don’t include the results of the 2021 Census (which is still being worked on), but they do reflect updated assumptions from the 2018-based projections.

The main differences from the previous projections are a lower fertility rate (revised down from 1.78 to 1.59 per woman) reducing the numbers of births significantly, and slight reductions in anticipated life expectancy (from 82.8 years to 82.2 for males and from 85.7 to 85.3 for females) increasing the number of deaths. This has been partly offset by an increase in net annual long-term international migration from 190,000 a year to 205,000 a year, with a central projection last time of 72.8m people in 2045 revised down to 71.0m. The population is then expected to gradually increase to a peak of 71.8m in 2081, before declining back to 71.0m in 2120.

Our chart focuses on the first 25 years of the projections, illustrating how each generation is expected to change over that time. Overall, the estimated population of 67.1m in June 2020 is expected to change by 16.6m births (an average of around 665,000 a year) less 18.0m deaths (720,000 a year), which would result in a fall of 1.4m (55,000 a year) to 65.7m in 2045, at least before taking into account the effects of migration. Estimated net immigration of 5.3m (230,000 a year until 2026, then 205,000 a year) is expected to mean that the population will instead increase, reaching 71.0m in 2045.

There were an estimated 19.8m 0-24 year-olds in 2020, but in a quarter of a century they will all be in the 25-49 age group and so those under 25 will be formed from the 16.6m projected to be born in the 25 years from 2020, which after around 65,000 deaths would be 16.5m before taking account of migration. Some will leave the country and others will arrive, with a projected 1.5m net addition to take the total to 18.0m in 2045, a reduction of 1.8m compared with the previous cohort.

For the 19.8m under-25s in 2020 moving up a cohort to the 25-49 age group in 2045, deaths of 0.2m would reduce this to 19.6m before taking account of net inward migration of 2.8m to get to a projected 22.4m. This is a net increase of 0.6m compared with the previous generation of 21.8m. That generation, which would be aged 50-74 a quarter of a century later, would be reduced by 1.7m deaths to arrive at 20.1m before adding a net 0.8m from migration to get to 20.9m, a 1.2m increase over the 19.7m who were aged 50-74 in 2020.

A much greater proportion of this cohort will not be around in 2045, with a projected 10.2m deaths reducing numbers to 9.5m before adding 0.2m from net inward migration to arrive at a projected total of 9.7m. This is a 67% increase over the current generation of over-75s of 5.8m, with all bar the 38,000 expected to be over 100 in 2045 expected to have passed on, barring major developments in medical science. This compares with the approximately 15,000 people over the age of 100 in 2020.

Overall the rate of increase in the UK population is expected to fall from an estimated 0.4% a year in 2020 to 0.15% by 2045, an average of 0.2% over the coming quarter of a century. This compares with growth rates of 0.6% to 0.8% a year experienced in the last couple of decades, which has been a key driver of economic growth in that time.

The substantial increase in the numbers aged 75 and over is of course a hugely positive development as more people live much longer lives than in previous generations. However, this will have huge implications for the public finances given the cost implications of providing health services, social care and pensions to older generations, particularly those over the age of 75. With proportionately fewer workers (even with planned increases in the retirement age) this is expected to drive higher levels of taxation over the next quarter of a century without much higher levels of economic growth than are currently anticipated.

Fortunately a quarter of a century provides opportunity for governments to address the financial challenges posed by our success in extending lives if they are willing to do so, even with the added debt arising from the pandemic, which is why ICAEW continues to argue for the development of a long-term fiscal strategy to put the public finances on a sustainable path. Such a strategy could make a significant difference to the prosperity of future generations.

This chart was originally published by ICAEW.

ICAEW chart of the week: Government borrowing rates

Our first chart of 2022 highlights how the cost of government borrowing remains extremely low for most of the 21 largest economies in the world, despite the huge expansion in public debt driven by the pandemic.

Government 10-year bond yields: Germany -0.13%, Switzerland -0.07%, Netherlands 0.00%, Japan 0.09%, France 0.23%, Spain 0.60%, UK 1.08%, Italy 1.23%, Canada 1.59%, USA 1.65%, Australia 1.79%, South Korea 2.38%, China 2.82%, Poland 3.87%, Indonesia 6.38%, India 6.51%, Mexico 8.03%, Russia 8.38%, Brazil 10.73%, Turkey 24.21%.

Our chart of the week illustrates how borrowing costs are still at historically low rates for most of the 21 largest national economies in the world, with negative yields on 10-year government bonds on 5 January 2022 for Germany (-0.13%) and Switzerland (-0.07%), approximately zero for the Netherlands, and yields of sub-2.5% for Japan (0.09%), France (0.23%), Spain (0.60%), the UK (1.08%), Italy (1.23%), Canada (1.59%), the USA (1.65%), Australia (1.79%) and South Korea (2.38%).

This is despite the trillions added to public debt burdens across the world over the past couple of years as a consequence of the pandemic, including the $5trn added to US government debt since March 2020 (up from $17.6trn to $22.6trn owed to external parties) and the more than £500bn borrowed by the UK government (public sector net debt up from £1.8trn to £2.3trn) for example.

Yields in developing economies are higher, although China (2.82%) and Poland (3.87%) can borrow at much lower rates than Indonesia (6.38%), India (6.51%), Mexico (8.03%), Russia (8.37%) and Brazil (10.73%). The outlier is Turkey (24.21%), which is experiencing some difficult economic conditions at the moment. Data was not available for Saudi Arabia, the 19th or 20th largest economy in the world, which has net cash reserves.

With inflation higher than it has been for several years, real borrowing rates are negative for most developed countries, meaning that in theory it would make sense for most countries to continue to borrow as much as they can while funding is so cheap. However, in practice fiscal discipline appears to be reasserting itself, with Germany, for example, planning on returning to a fully balanced budget by the start of next year and the UK targeting a current budget surplus within three years.

For many policymakers, the concern is not so much about how easy it is to borrow today, but the prospect of higher interest rates multiplied by much higher levels of debt eating into spending budgets just as they are looking to invest to grow their economies over the rest of the decade. Despite that, with the pandemic still raging and an emerging cost of living crisis, there may well be a temptation to borrow ‘just one more time’ to support struggling households over what is likely to be a difficult start to 2022.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK international trade

As 2021 draws to a close, our chart this week looks back on a rocky couple of years for UK international trade which has endured Brexit complications and the global COVID-19 pandemic.

A column chart showing monthly exports (in orange) and imports (in purple) stacked on top of each other, going from October 2014 to October 2021. The y-axis goes from £0bn to just over £120bn.

Total exports + imports increased from £92bn in October 2014 to a peak of £123bn in March 2019, fell £113bn the following month before peaking again at £122bn in October 2019.

Trade fell to a low of £86bn in May 2020, recovered to £111bn in December 2020, fell to £93bn in January 2020 and grew to £104bn in July 2021 with similar monthly totals in September and October 2021.

Our chart of the week illustrates how Brexit and COVID-19 have combined to create a rocky couple of years for UK exports and imports of goods and services, reflecting the trials and tribulations of the Brexit process as well as the impact of the coronavirus pandemic on trade since the first lockdown last year.

The monthly trade total (exports + imports) increased from £92bn (£45bn + £47bn) in October 2014 to a peak of £123bn (£57bn + £65bn) in March 2019 at the height of Brexit ‘no deal’ preparations before falling back to £113bn (£54bn + £59bn) the following month before peaking again at £122bn (£61bn + £62bn) in October 2020 ahead of the end of the transition period. Following the introduction of new trading arrangements and the run-down of inventories, trade fell to a low of £86bn (£47bn + £39bn) in May 2020 during the first lockdown before recovering to £111bn (£52bn + £59bn) in December 2020. Trade fell back to £93bn (£45bn + £48bn) in January 2020 before growing back to £104bn (£51bn + £53bn) in July 2021 where it has appeared to stabilise with similar monthly totals in September and October 2021.

The chart provides only a hint of the challenges that have faced both importers and exporters over the past couple of years as they have had to navigate new trading arrangements with our European neighbours just as the pandemic has caused massive disruption across the planet. Imports and exports to EU countries have both fallen, but the EU still remains the UK’s principal trading partner, comprising almost half of the UK’s trade in goods for example.

The stabilisation in trade flows in the last few months for which statistics are available may be a hopeful sign, but with greater customs checks on the imports of goods from the UK coming into force in January, and the continuing evolution of the pandemic, the position is still very uncertain.

This is our last chart of the week for 2021 and so we would like to take this opportunity to wish you all the best for a safe and enjoyable Christmas break and for a healthy and prosperous 2022. We look forward to seeing you again in the new year.

This chart was originally published by ICAEW.

ICAEW chart of the week: Bounce Back Loans

My chart this week is on Bounce Back Loans, one of the principal sources of financial support for businesses during the first year of the pandemic and the subject of a recent investigation by the National Audit Office.

Chart analysing Bounce Back Loans of £47bn by region and by recoverability.

London £11bn, South £10bn, Midlands & East £11bn, North £9bn, Scotland, Wales & Northern Ireland £6bn.

Repaid £2bn, recoverable £28bn, bad debts £12bn, fraud £5bn.

The recent publication of the Department for Business, Energy & Industrial Strategy (BEIS) accounts for 2020-21 contained an assessment of the losses expected on the financial provided to businesses through the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Future Fund. This was followed by an updated report from the National Audit Office (NAO) on the administration of the scheme and the potential losses to the taxpayers.

The largest of these schemes was BBLS, with Bounce Back Loans of up to £50,000 provided to eligible businesses to help them weather the first lockdown in the second quarter of 2020, before being extended to the whole of the 2020-21 financial year. In the end, around a quarter of businesses took out a Bounce Back Loan, comprising 1.5m loans for a total of £47bn at an interest rate of 2.5% repayable over six years. The interest in the first year was covered by the government, with no repayments due in that period.

Businesses can extend the loans to ten years through the Pay As Your Grow option, as well as being allowed up to one six month payment holiday and three interest-only payments to provide flexibility without going into default.

The seven main UK banks provided around 90% of the loans by value, with the rest provided by other banks and non-bank lenders, such as peer-to-peer lenders. Each participating financial institution was provided with a 100% guarantee by the government to cover any amounts not repaid. Half a million or nearly 35% of the loans were for the maximum amount of £50,000 (adding up to £27bn) with £18bn lent out between £10,000 and £50,000 and £2bn lent for amounts between £2,000 (the minimum possible) and £10,000.

As the chart illustrates, the geographical distribution of loans was weighted towards the south and centre of England, with £11bn borrowed by businesses in London, £10bn in the South (£6.5bn South East and £3.6bn South West) and £11bn in the Midlands & East (£3.8bn West Midlands, £2.9bn East Midlands and £4.5bn East of England), a total of £32bn. The balance of £15bn was split between £9bn in the North (£3.2bn Yorkshire & the Humber, £4.8bn North West and £1.3bn North East) and £6bn in the other nations of the UK (£2.7bn Scotland, £1.6bn Wales and £1.3bn Northern Ireland).

More than 90% of the loans, amounting to £40bn, went to micro-businesses, ie businesses with turnover below £632,000.

BEIS have estimated in their 2020-21 financial statements that they do not expect 37% of the loans with a value of £17bn to be repaid, comprising £12bn in estimated bad debts and £5bn in estimated losses from fraud, although the NAO says that these numbers are highly uncertain at this stage. With £2bn already repaid, this leaves £28bn believed to be recoverable over the remainder of the six years of the loans (or 10 years for those that are extended).

The fraud estimate, for 11% of the loans with a value of £4.9bn, was based on a sample of 1,067 loans as at 31 March 2021, but a subsequent analysis in October 2021 suggests that the level of fraud may be lower at around 7.5% of loans and so there is some hope that BEIS and the British Business Bank will be able to reduce the amount they will have to reimburse to participating banks under the 100% guarantees.

However, as the NAO reports, these guarantees mean participating banks have no financial incentive to chase repayment and it has raised concerns that insufficient resources are being dedicated by BEIS and the British Business Bank to recovering outstanding amounts.

The challenge for government is that many businesses have not been able to get back to their pre-pandemic level of operation and so there is a need to be sensitive, whilst at the same time seeking to protect public money and tackle those who made fraudulent claims.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK payrolled employees

My chart this week looks at how the number of employees on UK payrolls has been supported by the furlough scheme, with more people employed in October 2021 than before the pandemic.

Chart showing UK payrolled employees in work and on furlough:

Oct 2015: 27.7m
Oct 2016: 28.1m
Oct 2017: 28.5m
Oct 2018: 28.8m
Oct 2019: 29.0m
Nov 2019: 29.1m
Feb 2020: 28.9m
Mar 2020: 22.0m (6.8m on furlough)
Apr 2020: 19.7m (8.8m on furlough)
Oct 2020: 23.8m in October 2020 (2.4m on furlough)
Jan 2021: 23.1m (4.9m on furlough)
Feb 2021: 23.3m (4.7m on furlough)
Sep 2021: 28.1m (1.1m on furlough)
Oct 2021: 29.4m (no furlough)

Concerns that the end of the furlough scheme in September 2021 would be followed by a sharp rise in unemployment proved to be unfounded, with the flash estimate of the number of people on UK payrolls increasing to 29.4m in October 2021, an increase of 166,000 from the previous month and greater than before the pandemic. This is positive news as it suggests that the majority of the 1.1m still on the furlough scheme when it ended on 30 September 2021 have been able to retain their jobs or have found work elsewhere.

The chart shows how payrolled employees increased gradually before the pandemic from 27.7m in October 2015 to 28.1m in October 2016, 28.5m in October 2017, 28.8m in October 2018 and 29.0m in October 2019, peaking in November 2019 at 29.1m. Numbers fell to 28.9m in February 2020 although on a seasonally adjusted basis the numbers increased slightly. Those in work fell significantly by the end of March 2020 to 22.0m when 6.8m were placed on furlough under the government’s Coronavirus Job Retention Scheme (CJRS) and to 19.7m at the end of April 2020 when 8.8m were on furlough.

Despite the furlough scheme overall payrolled numbers fell during the pandemic from 28.9m in March 2020 (including 6.8m on furlough) to 28.2m in October 2020 (when 2.4m were on furlough) to 28.0m at its lowest in January and February 2021 (when 4.9m and 4.7m were on furlough), before gradually rising to 29.2m in September 2021 (when 1.1m were on furlough) and 29.4m in October 2021 (when no one was on furlough).

Although the flash numbers for October 2021 are provisional and subject to change, they should be sufficiently reliable for policy makers to take some comfort that the furlough scheme has done its job in stabilising the economy and avoiding significant levels of unemployment. However, with the pandemic still not over, there will be concerns about whether growth in employment can be maintained over the coming months.

According to the ONS, the median monthly pay in October 2021 was £2,005, slightly down on the £2,010 reported for September 2021, but an increase of 4.9% compared with the £1,911 calculated for October 2020. The latter compares with consumer price inflation of 4.2% over the same period.

The idea that we might be emerging from the pandemic with higher levels of employment and wages than before it started might have seemed unlikely at the start of the first lockdown. But then at an estimated total cost of £370bn, of which £70bn was for the CJRS, the eye watering sums incurred by the government in getting to this position have been far from insubstantial.

This chart was originally published by ICAEW.

ICAEW chart of the week: Germany

My chart this week is on Germany, where a new ‘traffic light’ coalition government headed by Chancellor-designate Olaf Scholtz is poised to take charge of Europe’s most prosperous nation.

Map of Germany showing population of 83.2m by state or 'bundesländer': Nordrhein-Westfalen (North Rhine Westphalia) 17.9m, Bayern (Bavaria) 13.1m, Baden-Württemberg 11.1m, Niedersachsen (Lower Saxony) 8.0m, Hessen 6.3m, Rheinland-Pfalz (Rhineland Palatinate) 4.1m, Sachsen (Saxony) 4.1m, Berlin 3.7m, Schleswig-Holstein 2.9m, Brandenburg 2.5m, Sachsen-Anhalt (Saxony-Anhalt) 2.2m, Thüringen 2.1m, Hamburg 1.9m, Mecklenburg-Vorpommern 1.6m, Saarland 1.0m and Bremen 0.7m

With a population of 83.2m and a €3.4tn (£2.9tn) economy, Germany is the largest member of the European Union and the fourth biggest national economy in the world after the USA, China and Japan.

The formal agreement of a red-green-yellow ‘traffic light’ coalition between the centre-left Social Democratic Party (SPD), the Green Party and the liberal Free Democratic Party (FDP) means that Angela Merkel can finally retire as Chancellor to be replaced by SPD-leader Olaf Scholz, the current Vice-Chancellor and Finance Minister in the outgoing ‘Grand Coalition’.

According to the coalition agreement, which is still subject to ratification by the three parties, Olaf Scholtz will become the new Chancellor with the SPD filling six of the 15 federal ministries, the Green party filling five ministries and the FDP filling four. Green co-leaders Annalena Baerbock and Robert Habeck are expected to become Foreign Minister and Economy & Climate Change Minister respectively, while FDP leader Christian Lindner is expected to become Finance Minister.

Despite running the most powerful country in Europe, the new coalition is only responsible for the federal government. As the chart illustrates, Germany has sixteen Bundesländer or federal states, comprising Nordrhein-Westfalen (North Rhine Westphalia) with 17.9m people, Bayern (Bavaria) with 13.1m, Baden-Württemberg with 11.1m, Niedersachsen (Lower Saxony) with 8.0m, Hessen with 6.3m, Rheinland-Pfalz (Rhineland Palatinate) and Sachsen (Saxony) each with 4.1m, the city-state of Berlin with 3.7m, Schleswig-Holstein with 2.9m, Brandenburg with 2.5m, Sachsen-Anhalt (Saxony-Anhalt) with 2.2m, Thüringen with 2.1m, the city-state of Hamburg with 1.9m, Mecklenburg-Vorpommern with 1.6m, Saarland with 1.0m and the city-state of Bremen with 0.7m.

The state governments are also run by coalitions. The now federal opposition Union parties (the Christian Democratic Union and the Bavarian Christian Social Union) lead two- or three-party coalitions in seven states, the SPD lead in seven states, the Greens in one state and Der Linke (the Left) in one state. With a proportional voting system at state and federal levels, coalition government is a way of life in Germany, with parties that are in government in one state being in opposition to each other in others.

Despite being the first three-party coalition at a federal level, with the more complicated negotiations that entails, the coalition agreement has been reached fairly ‘speedily’ by German standards – taking just over two months compared with the six months taken to agree the ‘Grand Coalition’ between the Union parties and the SPD following the last election in September 2017.

The inclusion of the Greens puts climate change at the top of the new government’s priorities, bringing forward the end of coal from 2038 to 2030 for example, while the inclusion of the fiscally prudent FDP will mean limited scope for new government borrowing. Other plans include raising the minimum wage, more defence spending, and legalising cannabis,

To read about the federal budget see my previous ICAEW chart of the week: German federal budget 2022.

This chart was originally published by ICAEW.

ICAEW chart of the week: Consumer Prices Index

My chart this week looks at how price rises have accelerated over the last few months, with consumer price inflation reaching 4.2% in October, the highest it has been for a decade.

Line chart showing how the Consumer Prices Index has increased from 106.7 in Oct 2018 to 107/6 in Apr 2019 to 108.3 in Oct 2019 (a +1.5% increase over a year earlier) to 108.5 in Apr 2020 to 109.1 in Oct 2020 (up 0.7% over the year) to 110.1 in Apr 2021 to 113.6 in Oct 2021 (a 4.2% annual increase).

The Office for National Statistics published its latest estimates for inflation on Wednesday 17 November, reporting a 12-month increase in the Consumer Prices Index (CPI) of 4.2% and a 12-month increase in the Consumer Prices Index including owner occupiers’ house costs (CPIH) of 3.8%, both of which are the highest they have been since November 2011 when CPI was 4.8% and CPIH was 4.1%.

CPI and CPIH are calculated using a basket of goods and services to assess the level of inflation experienced by consumers, with the current index set to 100 in July 2015.

The ICAEW chart of the week shows how CPI fell before increasing from 106.7 in October 2018 to 107.6 in April 2019 and 108.3 in October 2019, an annual increase of 1.5% that was within the 1% to 3% Bank of England target range. This was followed by smaller increases to 108.3 in April 2020 and 109.1 in October 2020, a 0.7% annual increase in CPI driven in part by the pandemic. The index hovered around that level for several months until starting to increase more rapidly from March onwards as the economy started to re-open, reaching 110.1 in April 2021 and continuing to increase sharply to 113.6 in October 2021, an annual increase of 4.2%.

The Governor of the Bank of England is required to write to the Chancellor of the Bank of England whenever inflation is more than 1% above or below the 2% target and he did so on 23 September when inflation reached 3.2% and he will again now that it has reached 4.2%. Part of the explanation he has given and will give are ‘base effects’, where price discounting during 2020 at the height of the first and second waves of the pandemic suppressed some of the inflation that is being experienced now.

Further letters are likely over the next few months as even if prices don’t rise any further, given how the index bounced around the 109 level between September and March 2021. This means inflation should continue to stay substantially above 3% for the next four months or so unless prices were to fall again, which is unlikely given how global commodities and supply constraints continue to feed into rising domestic prices. A 12-month CPI-inflation rate of 5% appears more than likely at some point in the next few months.

The Bank of England’s Monetary Policy Committee (MPC) isn’t panicking at this stage given that the annualised rate of inflation over the last three years (comparing October 2021 with October 2018) is an almost on-target 2.1% and their expectation that inflation rate will come down once the flat inflationary period of a year ago starts to drop out of the comparison. However, they are sufficiently concerned about the steep slope in the CPI in the last few months to signal that interest rates may need to rise if prices continue to increase at the pace seen in recent months.

The MPC’s original plan was to hang tight through what they hoped would be a short inflationary spurt as the economy emerges from the pandemic. In the event it looks like they won’t be able to hold that line, with higher interest rates a distinct possibility in the coming months.

This chart was originally published by ICAEW.

ICAEW chart of the week: US Infrastructure & Jobs Act

My chart this week looks at the $550bn of incremental funding over five years allocated by the US Infrastructure & Jobs Act just passed by Congress.

Chart showing $550bn in incremental investment over five years, with $110bn allocated to roads & bridges, $66bn railroads, $65bn power grid, $65bn broadband, $63bn water, $47bn resilience, $39bn public transit, $25bn airports, $21bn environment, $17bn ports, $15bn electric vehicles and $11bn safety.

The $1.2tn US Infrastructure & Jobs Act authorises $550bn in incremental spending over five years on top of existing infrastructure investment planned by the federal government on highways, railroads, electricity networks, water, public transit, airports, and ports across the US. Passed by Congress with some bipartisan support it aims to renew the nation’s infrastructure and stimulate the economy as the US emerges from the pandemic.

The White House describes the Act as delivering “no more lead pipes, high-speed internet access, better roads and bridges, investments in public transit, upgraded airports and ports, investment in passenger rail, a network of electric vehicle chargers, an upgraded power infrastructure, resilient infrastructure, and investment in environmental remediation.”

The incremental spending can be broken down as follows:

$110bn for roads and bridges – rebuilding the crumbling highway network, transportation research, funding for Puerto Rico’s highways, and ‘congestion relief’ in American cities
$66bn for railroads – upgrades and maintenance of the passenger rail system, and freight rail safety
$65bn for the power grid – investment in power lines and cables, and in clean energy
$65bn for broadband – expanding broadband in rural areas and low-income communities, including $14bn to reduce internet bills for low-income citizens
$63bn for water infrastructure – including $15bn for lead pipe replacement, $10bn for chemical clean-up, and $8bn for water facilities in the western half of the country to address ongoing drought conditions.
$47bn for resilience – a Resilience Fund to protect infrastructure from cybersecurity attacks and address flooding, wildfires, coastal erosion, and droughts along with other extreme weather events
$39bn for public transit – upgrades to public transport systems nationwide, new bus routes, and public transport accessibility for seniors and disabled Americans
$25bn for airports – major upgrades and expansions at airports, including $5bn for air traffic control towers and systems
$21bn for the environment – to clean up polluted ‘superfund’ and other brownfield sites, abandoned mines, and old oil and gas wells
$17bn for ports – half to the Army Corps of Engineers for port infrastructure, with the balance to the Coast Guard, ferry terminals, and to reduce truck emissions at ports
$15bn for electric vehicles – including $7.5bn on electric vehicle charging points, $5bn for bus fleet replacement in low-income, rural, and tribal communities, and $2.5bn for zero- and low-emission ferries
$11bn for safety – mostly highway safety improvements, but also for pedestrian, pipeline, and other safety areas

The plan was for a combination of tax rises, economic returns on the investments made and savings from other areas (including unused pandemic-relief) to fully cover the cost of these investments, however, many of the proposed tax increases did not make it to final bill and the independent Congressional Budget Office (CBO) estimates that there is less unused pandemic-relief available than originally thought. The CBO estimates that the fiscal deficit will be $350bn higher over the next five years.

The Act is the economic infrastructure element of President Biden’s “Build Back Better Framework”, with the separate $1.75tn Build Back Better Bill covering social infrastructure (including more than a million homes for low-income families) and large amounts for social programmes. These include universal pre-school for three- and four-year olds, free community college, expanded healthcare through Medicare (for over 65s) and Medicaid (for low-income families), lower prescription drug costs, tax cuts for children and childcare support, and paid family leave. There is also some money for tax cuts for electric vehicles and other climate incentives, although more ambitious plans such as forcing utilities to phase in renewable energy are believed to be less likely to make it into the final legislation. The Build Back Better Bill does not have bipartisan support and so requires all 50 Democrats in the Senate and almost all the Democrats in the House of Representatives to agree if it is to pass.

Whether the other elements of the Build Back Better Framework come to fruition remains to be seen, but President Biden will definitely be pleased that he can chalk up this major legislative achievement.

This chart was originally published by ICAEW.

ICAEW chart of the week: the path to net zero

All eyes have been on COP26 as the world’s leaders seek to set a course to eliminating carbon emissions over the next quarter of a century or so. Our chart highlights what it will take for the UK to do its part of delivering net zero by 2050.

Chart showing how the UK plans to go from 520m tonnes CO2-equivalent of greenhouse gas emissions in 2019 to net zero in 2020:

146m power & heat in 2019 -57m power -86m heat = 3m in 2050

167m transport in 2019 -117m domestic transport -24m international travel = 26m in 2050

207m industry, agriculture & waste in 2019 -86m industry -42m agriculture -27m waste = 52m in 2050

less: 81m greenhouse gas removals in 2050

to get to net zero

The Breakthrough Agenda agreed at COP26 by countries representing more than 70% of the world economy will be key, by making clean technologies the most affordable, accessible and attractive choice for all globally in each of the most polluting sectors. This involves ensuring that clean power, zero emission vehicles, near-zero emission steel, green hydrogen and climate-resilient sustainable agriculture are in place by 2030 so that countries including the UK can deliver on their ambitious plans to eliminate greenhouse emissions from their economies.

For the UK, the plan is to reduce greenhouse gas emissions from the 520m tonnes CO2-equivalent (tCO2e) emitted in 2019 to between 75m and 81m in 2050, with a combination of natural and technological solutions to remove an equivalent amount of carbon from the atmosphere to bring net emissions down to zero. This is based on the scenarios set out in the UK’s Net Zero Strategy published on 19 October 2021, which starts from 146m tCO2e of emissions from power and heat, 167m tCO2e from transport and 207 tCO2e from industry, agriculture & waste.

The different steps that will be needed to achieve this goal start with decarbonising power generation and heating, going from 146m to 3m tCO2e in 2050. The UK has already made substantial progress in installing renewable generation and appears on track to achieve the 57 MtCO2e further reduction to almost entirely remove fossil fuels from electricity. Challenging as that will be, it will be even more difficult to replace natural gas as the principal source of heating for the majority of buildings across the UK in order to find a further 86m tCO2e of reduction.

Eliminating 117m out of 122m tCO2e of emissions from domestic transport will mainly be accomplished by replacing petrol and diesel vehicles with electric, not only requiring affordable car technology but an entire new infrastructure of charging points. There is less optimism for international travel, where the ambition is to take out 24m of the 45m tCO2e emitted in 2019 in the ‘high innovation’ scenario presented in the chart and only 10m tCO2e in the other two scenarios (which assume greater reductions in other areas to arrive at a similar end point).

Industry, agriculture, and waste have even more to do, with businesses including steel producers, manufacturers and the fuel supply chain needing to decarbonise to remove 86m tCO2e out of 104m tCO2e. Agriculture and land use will need to take out 42m of 63m tCO2e of emissions, while emissions from waste and fluorinated greenhouse gases (F-gases) will need to come down by 27m from 40m to 13m tCO2e.

The result will be a UK economy still emitting 81m tCO2e a year, comprising 3m from power and heat, 26m from transport and 52m from industry, agriculture, and waste. Net zero will be achieved by removing an equivalent amount of carbon from the atmosphere, partially through natural means but in practice through technological solutions that have yet to be developed.

There is a lot that all of us need to do to achieve net zero here in the UK. The positive news emerging from COP26 is that the rest of the world is also committed to doing so too – a global solution for a global climate emergency.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spending Review 2021

Chancellor of the Exchequer Rishi Sunak found some extra money to supplement the Spending Review 2021, turning a very tough settlement for government departments into a moderately tough one.

Departmental budgets chart.

2019-20: £416bn (£346bn resource, £70bn capital)
2020-21: £570bn (£355bn, £88bn, £127bn covid-19 supplementary budget)
2021-22: £554bn (£385bn, £99bn, £70bn)

Spending Review 2021

2022-23: £542bn (£435bn resource with +£15bn health & social care and +£27bn spending review, £107bn capital)
2023-24: £554bn (£443bn with +£12bn and +£21bn, £111bn)
2024-25: £566bn (£454bn with +£14bn and +£13bn, £112bn)

The Chancellor had already announced an increase in the health budget from the proceeds of the health and social care levy, but as highlighted by our chart last week, this implied a very tough budget settlement for most other departments, including cuts for some. Instead, Rishi Sunak was able to use some of the upward revisions in the economic forecasts from the Office for Budget Responsibility to add to departmental resource budgets, ensuring that each department receives a real term spending increase in their combined resource and capital budgets even with higher levels of inflation in the coming year.

However, there was a sting in the tail, as supplementary COVID-19 funding ceases at the end of this financial year, leaving departments to absorb further COVID-related expenditure within their budgets from next April onwards. This will include catching up on backlogs built up during the pandemic in addition to any incremental costs that may continue into the Spending Review period.

The chart starts by highlighting how departmental resource and capital budgets of £346bn and £70bn in 2019-20, increased to £355bn and £88bn in 2020-21 and to £385bn and £99bn in the current year. This is before £127bn in COVID-19 supplementary budgets last year and £70bn this year.

The Spending Review period itself covers the three financial years 2022-23, 2023-24 and 2024-25, with the combination of funding from the health and social care levy and the Spending Review seeing departmental resource budgets increase to £435bn, £443bn and £454bn respectively. This is more than the spending envelope originally set out by the Chancellor last month.

Capital investment budgets remained broadly unchanged at £107bn, £111bn and £112bn respectively, continuing the significant jump from the £70bn invested in 2019-20 in the coming financial year before flattening out in the following two years.

Over the three years, the resource budget settlement implies annualised average real terms growth in the health & social care budget of 4.1% and in the education budget of 2.2%, while the defence budget is broadly frozen in cash terms and cut by 1.4% in real terms. This assumes average inflation over the three years of 2.2%, with higher inflation in the coming financial year offset by much lower rates in the following two years.

Other departments are expected to grow by 3.1% on average over the period, with central funding for local government up 9.4%, transport up 6.8%, work & pensions up 4.6% and justice up 4.1%, each receiving larger relative settlements than other departments. International trade (+0.1%), HM Treasury (+0.9%), levelling up, housing & communities (+1.1%), HMRC (+1.2%), the Cabinet Office (+1.4%), business, energy & industrial strategy (+1.4%), and intelligence (+1.7%) are the departments receiving increases below 2% a year on average.

	2021-22 £bn	2022-23 £bn	2023-24 £bn	2023-24 £bn	Average real-terms growth
Education	147.1	167.9	173.4	177.4	+4.1%
Defence	70.7	77.0	79.0	80.6	+2.2%
Transport	31.5	32.4	32.2	32.2	-1.4%
Large departments	249.3	277.3	284.6	290.2	+2.9%
Other departments	70.7	83.9	82.7	82.7	+3.1%
Devolved administrations	56.8	63.0	64.3	65.3	+2.5%
ODA to 0.7% of GDP	–	–	–	5.2
Reserves	8.1	11.0	10.9	10.3
Total excluding covid-19	384.9	435.2	442.5	453.7	+3.3%

HM Treasury, ‘Autumn Budget and Spending Review 2021’

The above growth rates exclude capital budgets, expected to increase in real terms by 1.9% a year on average over the three years of the Spending Review. Departments benefiting from higher capital budgets include small and independent bodies (+16.8%), FCDO (+16.0%), digital, culture, media & sport (+11.8%), and intelligence (+9.1%), albeit mostly from relatively small bases in each case. The 3.8% average real terms increase in health & social care capital investment is much less proportionately, but much larger in cash terms.

Perhaps just as important as the monetary amounts provided to departments as the Chancellor opened his proverbial cheque book, is the certainty that a three-year budgetary settlement provides. This will help departments plan ahead with confidence and hopefully help them obtain better value for the money they spend on our behalf.

This chart was originally published by ICAEW.