#icaewchartoftheweek – Page 26

ICAEW chart of the week: Balance of payments

Chart: Balance of payments 2018. Current account -£93bn (trade -£38bn, primary income -£29bn, secondary income -£26bn), capital account -£3bn, financial account +£96bn (investment +£77bn, errors and omissions +£19bn).

Although most of the focus on the balance of payments is on trade, i.e. imports and exports of goods and services, it is not the only element in the balance of payments equation, as the #icaewchartoftheweek illustrates.

Based on the 2019 Pink Book published by the Office for National Statistics last week, the balance of payments between the UK and the rest of the world in 2018 comprised a current account deficit of £93bn and a capital account deficit of £3bn, balanced by net inward investment of £77bn and errors and omissions of £19bn.

The current account deficit remains high by historical standards and was equivalent to 4.3% of GDP in 2018, up from 3.5% of GDP in 2017.

The current account deficit incorporates a trade deficit of £38bn, with imports of £680bn exceeding exports of £642bn. This reflects a surplus in services of £104bn that was more than outweighed by a deficit in goods of £142bn.

The primary income deficit of £29bn reflected £242bn in outflows – mainly investment income paid to foreign investors – less £213bn coming into the UK, while the secondary income deficit of £26bn reflects contributions to international institutions (including the EU), international development assistance, remittances and other net transfers.

Capital flows of £3bn reflect both sales of non-financial assets, and capital grants to other countries.

Inward investment of £178bn comprised direct investment in UK businesses of £28bn and £151bn of equity and debt investments, less a net £1bn movement in other forms of investment. Outward investments amounted to £101bn, with direct investments in foreign businesses of £29bn and £204bn in other movements (including currency changes), less net sales of £132bn of equity and debt investments.

Unfortunately, getting the balance of payments to actually balance is quite difficult and so the ONS has plugged the difference between the current, capital and financial accounts with £19bn in ‘errors and omissions’. The ONS will continue to revise the statistics over time, with the aim of improving the accuracy of the components reported.

Although the precise numbers will continue to be refined, the overall picture presented by the ONS is unlikely to change. The UK continues to buy more than it sells, pays out more to foreign investors than is earned from foreign investments, and transfers money to the rest of the world; with finance provided by foreign investors.

For more information about the Balance of Payments, visit UK Balance of Payments, The Pink Book: 2019.

ICAEW chart of the week: UK businesses

UK businesses: average revenue / person. No employees (4.8m people) £63k. Employers (22.7m people) £170k.

The #icaewchartoftheweek is on the 5.9m UK businesses reported by the Department for Business, Energy & Industrial Strategy (BEIS) to have been in operation at 1 January 2019, generating a total of £4.1tn in revenue each year.

According to the annual statistics published a couple of weeks ago, there are 4.5m businesses with no employees, generating an average revenue of £63k for the 4.8m person involved (this includes partnerships). This contrasts with the 1.4m businesses with employees with 22.7m people engaged at an average revenue of £170k per person.

Unsurprisingly, the 3.2m sole traders, freelancers, partnerships and personal companies not registered for VAT or PAYE (a total of 3.5m people engaged, generating an average revenue of £34k per person) have much lower average revenues than the 1.2m that are (1.3m, generating an average of £141k). Most part-time freelancers and self-employed contractors included in the former will have no need to register for VAT, while the latter will include VAT-registered consultants and other highly-paid individuals that are self-employed or employed via their own companies.

Most of the 1.4m employers are small businesses (up to 99 staff), employing 9.9m people with an average revenue of £149k per person (not shown in the chart). These include 141,135 businesses with only 1 employee (0.3m people generating an average of £83k), 751,205 businesses with 2-4 employees (2.1m, £158k), 399,365 with 5-19 employees (3.7m, £136k) and 96,505 businesses with 20-99 employees (3.8m, £162k).

There are 12,055 medium sized businesses with 100-249 employees (1.9m people in total, generating an average of £205k), while 7,685 large businesses employed 10.9m people at an average revenue of £182k per person.

There are some important caveats. Firstly, the numbers employed may include some double counting, as people can be involved in more than one business in different capacities. In addition, it is important to note that revenue is not the same as profit, and the numbers do not analyse the cost-structure of different sizes of business.

To see the underlying data, visit https://www.gov.uk/government/statistics/business-population-estimates-2019.

ICAEW chart of the week: First half fiscal deficit

H1 2018-19 -£33.2bn fiscal deficit + £4.5bn growth + £1.8bn RBS dividends - £3.0bn lower revenues - £10.4bn higher spending = -£40.3bn fiscal deficit for H1 2019-20.

The ONS published the fiscal numbers for the first half of the UK Government’s 2019-20 financial year this morning, with the #icaewchartoftheweek illustrating the changes in comparison with the first half of last year.

If revenues had increased in line with economic growth then the deficit would have reduced by £4.5bn (net of the effect of inflation on both revenues and expenditures). Unfortunately, tax receipts have been relatively weak, coming in £3.0bn below growth, with higher national insurance and council tax receipts being more than offset by lower corporation tax, income tax, inheritance tax, fuel duties, excise duties, and stamp duty.

The Government’s preferred measure of the deficit (which excludes government-owned banks) did benefit from £1.8bn in dividends from the Royal Bank of Scotland.

Expenditures were £10.4bn higher than the first half of last year, reflecting more spending on public services (including the NHS), Brexit preparations, a growth in the size of the civil service, and a £3bn or so increase in capital investment.

This means that there is a shortfall of £40.3bn between receipts of £395.5bn and expenditures of £435.7bn in the first half of this financial year, compared with £33.2bn for the same period last time, when receipts were £384.2bn and expenditures totalled £417.4bn. (The first half deficit last year was originally reported as £19.9bn. This was subsequently revised down to £19.3bn before £13.9bn in accounting changes, including irrecoverable student loans.)

Fortunately for the Chancellor, the deficit tends to be much lower in the second half of the year given the boost from self-assessment tax declarations in January. Despite this the deficit could exceed £50bn this year if trends continue, a big disappointment for those who had hoped to continue on the path to eliminating the deficit.

With warning signs over the economy flashing, these numbers do not provide an auspicious backdrop for the Budget on Wednesday 6 November when the Chancellor is hoping to announce a number of major tax cuts.

For further information go to:

ONS – Public sector finances, September 2019

OBR – Commentary on the Public Sector Finances: September 2019.

ICAEW chart of the week: Bank of England banknotes

Chart: 396 x £5: £2.0bn | 1,052 x £10: £10.5bn | 2,006m x £20: £40.1bn | 344m x £50: £17.2bn.

The confirmation last week of the new design for the Bank of England £20 banknote prompted the #icaewchartoftheweek to look at the value of banknotes in circulation.

There are just over 2bn paper £20 notes in circulation together worth £40.1bn, more in both number and value terms that the polymer £5 note (396m worth £2.0bn), polymer £10 note (1,052m worth £10.5bn) and the paper £50 note (over 344m worth £17.2bn). This amounts to a total of £69.8bn, not including £4.3bn in high value notes issued to Scottish and Northern Irish banks that in turn print their own banknotes.

On average there are approximately 6 five pound, 17 ten pound, 32 twenty pound and 5 fifty pound notes in circulation for each person living in the UK.

Replacing the existing £20 note with a new polymer design featuring a young J M W Turner will be a much bigger exercise than it was for the £5 and £10 polymer replacements, albeit it is unclear as to how many will be missing in action, having been lost down the back of sofas, hidden away in cupboards, or otherwise misplaced over the 12 and a half years that the current version has been in circulation.

The Bank of England has said the new polymer £20 note will start to be circulated on 20 February 2020. However, it has yet to announce a firm date for the final withdrawal of the current paper £20 note, likely to be in early 2021. Fortunately, Bank of England banknotes remain exchangeable forever.

For more information, visit www.bankofengland.co.uk/news/2019/october/the-new-20-note-unveiled or www.bankofengland.co.uk/statistics/banknote.

ICAEW chart of the week: Ireland Budget 2020

Chart: Revenue €75.7bn, exchequer balance -€1.6bn, spending €80.2bn.

The #icaewchartoftheweek is on the Irish Government’s ‘no surprises’ Budget for 2020, which was announced to the Dáil yesterday by Paschal Donohoe T.D., the Minister for Finance and Public Expenditure and Reform.

Featuring no significant new tax or spending announcements, the main focus was on preparing for Brexit, with an additional €0.2bn allocated for staff, infrastructure and IT systems. There is also a Brexit contingency of €1.4bn, with €1.0bn earmarked to be used if there is a no deal Brexit and a further €0.4bn available in reserve, not including EU support.

This is the main driver in increasing the exchequer (central government) balance from a forecast of -€1.0bn in 2019 to the -€1.6bn in 2020, reflecting revenue of €75.7bn less spending of €80.2bn, plus adjustments of €2.9bn.

Income tax (€23.9bn), VAT (€15.5bn), social contributions (€13.3bn) and corporation tax (€10.5bn) together provide 83% of central government revenue, with the remaining €12.5bn coming from excise duties (€5.9bn), stamp duties (€1.6bn), customs. duties (€1.2bn), capital gains tax (€1.0bn), motor tax (€0.9bn), capital acquisitions tax (€0.5bn) and non-tax revenue (€1.2bn).

Social protection (€21.9bn), health (€18.3bn) and education (€11.2bn) make up 73% of total voted expenditure of €70.0bn, with €19.4bn going to other departments, including housing, planning and local government (€4.3bn), justice (€3.0bn), transport (€2.7bn), agriculture (€1.6bn), children and youth services (€1.6bn), reform (€1.3bn), defence (€1.0bn) and business (€1.0bn).

Non-voted expenditure of €10.2bn includes debt interest of €4.8bn, EU contributions of €3.5bn and €1.4bn in Brexit contingency, together with other costs of €0.5bn.

Not shown are local government revenues and expenditures of €9.4bn and €9.9bn respectively, a net balance of -€0.5bn and €0.3bn higher than in 2019. The €0.9bn increase in negative central and local government balances combine with €0.3bn from non-commercial state bodies, €1.4bn from higher equity and loan transactions and other net movements of €0.1bn to turn an expected general government surplus in 2019 of €0.7bn to a deficit of -€2.0bn (also not shown).

Despite the deficit, the Irish Government expects to reduce general government gross debt from €203.6bn at the end of 2019 to €198.5bn at the end of 2020, equivalent to 97.4% of gross national income (GNI) and 56.5% of gross domestic product (GDP).

While the Budget 2020 lived up to its description of having no surprises and addressing the ‘known knowns’ of Brexit, the bigger worry for the Irish Government will be the ‘known unknowns’ of a potential global downturn, trade wars and a potentially even more damaging Brexit than anticipated, even before considering any ‘unknown unknowns’.

ICAEW chart of the week: Welsh Government Budget

Chart: Welsh Government Budget 2019-20. Funding £20.6bn, Spending £20.6bn

This week’s #icaewchartoftheweek is on the subject of the Welsh Government’s Budget for the current financial year.

Officially a £19.4bn Budget to cover £16.3bn in Resource spending and £3.1bn in Capital investment, there is a further £1.2bn of spending funded by EU grants and other income to make a total of £20.6bn overall for 2019-20.

The largest element of funding comes from Whitehall in the form of a £13.7bn block grant, together with £1.3bn from the National Insurance Fund and £1.1bn in business rates. The block grant is lower than it used to be as the Welsh Government is now entitled to a £2.1bn share of income taxes and £0.3bn in other devolved taxes, which is supplemented by £0.2bn in borrowing and £0.7bn in other resources, before taking account of £0.7bn or so in grants from the EU and £0.5bn in other income.

The Welsh NHS takes the majority of the £8.6bn health and social care budget, with the balance supplementing local council budgets for social care, while grants of £5.5bn to local government, include the redistribution of the £1.1bn of business rates income.

The education budget of £2.7bn does not include the main schools’ funding streams (which in Wales is provided by local authorities), but it does include a substantial proportion of post-16 education funding, including £0.8bn in student loans, £0.4bn in student support grants and £0.4bn for further education.

Around half of the £1.4bn economy and transport budget is on capital investment in infrastructure, while the £0.8bn of spending by other departments comprises £0.6bn on environment, energy and rural affairs, and £0.2bn on international relations and the Welsh language. Central services and administration expenditure of £0.9bn includes £86m for the Welsh Assembly, Ombudsman and Audit Office, while the Welsh Government has £0.6bn in unallocated reserves that it can deploy if needed.

While the Chancellor has indicated that there will be more money in 2020-21, that is a still half a year away, and the use of the term ‘First Supplementary Budget’ could be an indication that the Welsh Government might be looking to submit a further budget request before the end of the financial year!

ICAEW chart of the week: fiscal changes

Chart: Fiscal methodology changes and error corrections. £23.6bn 2018-19 deficit before changes, £41.4bn changes after changes.

The public sector finances were subjected this week to some big methodology changes by the Office for National Statistics (ONS), as illustrated by the #icaewchartoftheweek.

At the same time, the ONS took the opportunity to fix some errors in the reported fiscal numbers, including a correction of £2.6bn in 2018-19 relating to double counting by HMRC within corporation tax revenues. This is an error that turns out to have been occurring for the last 7 years, raising questions over the quality of controls over fiscal reporting within government.

There were also a number of other revisions to the numbers amounting to £1.5bn, increasing the reported deficit for 2018-19 from £23.6bn to £27.7bn before methodology changes.

The treatment of student loans in the fiscal measures has been misleading for many years, and the ONS have finally dealt with the ‘fiscal illusion’ this created (as the OBR describes such flaws in the National Accounts).

The new treatment increases the deficit in 2018-19 by £12.4bn, with a charge of £8.6bn for loans that are never expected to be recovered (just under half of the total loans extended in the year), the removal of £2.3bn in interest on student loans also not expected to be collected, and £1.5bn from the loss experienced on the sale of part of the student loan portfolio during last year.

The treatment of pension funds has changed too, with a £1.3bn increase in the deficit relating to how the Pension Protection Fund and local authority and other public sector pension funds are recorded.

Overall, the fiscal deficit for 2018-19 has been increased to £41.4bn, a 75% increase in the headline number from that previously reported.

Not shown in the chart is the effect on public sector net debt. This was not affected by the student loans change, but was reduced at 31 March 2019 from £1,802bn to £1,773bn as a consequence of eliminating £29bn owed to local authority and other pension funds, without reflecting the associated liability to public sector employees. We disagree with this elimination, which we think understates the headline measure for the national debt.

Despite this, the overall effect of these changes is to improve the reporting of the public finances. A positive step forward, even if there remains a long way to go.

Further information:

– UK public sector finances, 24 September 2019 (ONS)

– Commentary on the public sector finances (OBR)

ICAEW chart of the week: a trillion dollar deficit

Chart: A trillion dollar deficit. Revenue $3.6tn, Spending $4.6tn.

The #ICAEWchartoftheweek this week is on the US federal government budget. This is forecast by the Congressional Budget Office (CBO) to end the current financial year this month at just under a trillion dollars in deficit, with the budget shortfall in the year ended 30 September 2020 projected to exceed a trillion dollars for the first time.

Revenue in 2020 is expected to amount to $3,620bn. The largest contributions are from federal income taxes of $1,800bn and payroll taxes of $1,281bn, followed by a modest $245bn from corporate taxes and $294bn in other revenues.

This is projected to be $1,008bn less than planned spending by the federal government in 2020 of $4,628bn. Social security is expected to cost $1,097bn, while spending on Medicare, Medicaid and other health programmes are expected to cost $1,163bn net of receipts. Income security (welfare) programmes are expected to cost $302bn, while the balance of mandatory expenditure includes spending on military veterans and federal civilian and military retirement plans.

Discretionary spending of $1,400bn comprises $737bn on defense and $663bn on everything else apart from interest. This includes elementary and secondary education, housing assistance, international affairs, and the administration of justice, as well as outlays for highways and other programmes. Net interest is expected to cost $390bn.

The shortfall in revenues compared with spending will be funded by borrowing, with federal external debt expected to increase from $16.7tn to $17.8tn at the end of September 2020.

Federal revenues and spending are estimated to amount to 16.4% and 21.0% of GDP respectively in 2020, with the deficit equivalent to 4.6% of GDP. The CBO projects that the average federal deficit between 2020 to 2029 will be 4.7% of GDP, significantly higher than the 2.9% average over the last fifty years, resulting in federal debt growing from 79% of GDP in 2019 to 95% of GDP over the coming decade.

Of course, the federal budget does not give the full picture for the public finances in the US, with most state governments choosing (or being legally required) to run budget surpluses.

As with many developed economies, the public finances in the US are under increasing pressure with an increasingly long-lived population driving higher costs for social security, health and social care. With lower levels of economic growth (albeit currently much higher than in the UK or Europe) and a growing level of debt, there are concerns about the resilience of the US public finances if there were to be an economic downturn or another financial crisis in the medium term.

As summer turns into fall, it may be that a turn in economic seasons is on the way too. After all, winter is coming.

The full Congressional Budget Office report is available on cbo.gov.

ICAEW chart of the week: Spending Round 2019: an ‘end to austerity’?

Spending Round 2019 £330.8bn + inflation £6.1bn + reclass £1.6bn + increases £13.8bn = £352.3bn

On 4 September 2019, the Chancellor of the Exchequer announced the UK Government’s plans for departmental spending for the next financial year, 2020-21; as illustrated by the #ICAEWchartoftheweek.

This was unusual, as the announcement was not accompanied by a Budget setting out how those plans would be funded, nor by updated economic forecasts to indicate the expected effect on the overall public finances. This is also the second year running that the three-year Spending Review has been delayed and replaced by a one-year plan.

The primary announcement was for an increase of £13.8bn in departmental current spending in the next financial year (2020-21), a 4.1% real-terms increase over the current financial year. This was £11.7bn more than had been previously included in public finance forecasts and increases ‘Resource DEL excluding depreciation’ to £352.3bn.

There is an extra £4.1bn for health, £1.0bn for social care, £2.2bn for education, £1.3bn for law & order, £0.7bn for defence and security, £0.6bn for devolved administrations, and £1.3bn in other increases. The latter includes £0.4bn for transport, £0.2bn for the Nuclear Decommissioning Authority, £0.1bn for international development, £0.1bn for the next census, £0.1bn for the Department for Work & Pensions, £68m for air quality, biodiversity and animal health, £54m to tackle homelessness, and £46bn for the Birmingham Commonwealth Games.

The Chancellor also announced that departmental capital spending would increase by £3.9bn or 5.0% in real terms. This is £1.7bn more than had previously been announced and increases ‘Capital DEL’ to £81.9bn. There is £2.2bn for transport infrastructure (including HS2, other rail projects and road building), £1.9bn in additional international development investment, £0.5bn for the defence equipment programme, and £0.5bn for Scotland, Wales and Northern Ireland, partially offset by £1.2bn in lower reserves and other changes.

Although department current spending is expected to rise by 4.1%, and capital spending by 5.0%, the overall increase in total managed expenditure in 2020-21 is a 2.4% rise to £865.2bn, with annually managed expenditure (‘AME’) relatively flat in real-terms. With the cost of pensions rising ahead of inflation, this implies further cuts in the welfare budget, and so this may not be the full ‘end to austerity’ claimed by the Chancellor.

The uncertain economic outlook also causes concern. A recession, whether or not induced by Brexit, could have adverse consequences for the public finances, raising the worrying prospect of a return to austerity in the three-year Spending Review now scheduled for next year.

ICAEW chart of the week: Schools budget up £14bn, or is it £1.2bn?

English schools budget 2020-21 +£2.6bn, 2021-22 +£4.8bn, 2022-23 +£7.1bn

The Prime Minister’s announcement of a ‘£14bn package’ of more money was welcome news for English schools as they prepare to re-open their doors after the summer holidays.

Unfortunately, as is common with government announcements, there is a tendency to add several years together to give a bigger headline, exacerbated this time by the inclusion of inflation to make the headline even bigger!

In reality the announcement is a lot less exciting, as illustrated by the #ICAEWchartoftheweek. The announced increase in the 5-16 schools’ budget in three years’ time of £7.1bn (from £45.1bn in 2019-20 to £52.2bn in 2022-23) turns out to be £3.6bn, or an average of £1.2bn a year after taking account of inflation and the expected growth in the number of school pupils of around 2% over that time.

This is still very good news for schools trying to manage within constrained budgets, but (as the IFS and others have reported) the increase will still be insufficient to restore real-terms per pupil funding to the levels seen before the financial crisis. A 12% increase in pupil numbers since 2009-10 has seen budgets squeezed as funding has been constrained to inflation-only increases for most of the last decade.

Ironically, the Chancellor wasn’t able to take advantage of the same trick in his announcement the following day of £400m for further education and sixth forms, despite the fact that this was proportionately a bigger increase. The announcement was only for one year, so he couldn’t add multiple years together to create a bigger headline, and HM Treasury no doubt held the line about not adding in inflation.

Either way, these announcements are indication of how the fiscal approach is changing after a decade of austerity and struggling public services. This week’s Spending Review will give us a few more clues about the direction of public spending, although if (as rumoured) the Budget is postponed then we may not find out what the plans for taxes and borrowing to fund these increases until the Spring.