Category: #icaewchartoftheweek

Our final #ICAEW #chartoftheweek for 2018 is on the subject of Santa plc, the UK subsidiary of Santa Claus, Inc (“Santa”).

As many of you will know, Santa is one of the world’s largest gift delivery firms with a rather magical business model. After several hundred years of never recording a loss (admittedly never a profit either), Santa has built up one of the highest levels of goodwill that we are aware of, with a consistent track record of growing revenues.

A shining star of the elf-sector of the economy.

As our chart illustrates, Santa is expected to deliver presents worth £13.2bn in 2018, with an average value of around £475 dropped down each chimney. Around 20% of these will have been purchased online, up from around 6% a decade ago as Santa’s cloud-based modernisation programme continues to drive market dynamics.

However, markets and high street stores continue to be the main acquisition pipeline for inventories in the lead up to Christmas, with narrow delivery timescales continuing to be a major operational challenge for Rudolph and the rest of the logistics team.

I do hope that you will have a wonderful break and a prosperous 2019. 

With the festive season upon us and despite tales of High Street gloom, our chart this week is about the £381bn that consumers in England, Wales and Scotland are expected to spend in 2018 on the high street and online. A weekly average of £7.3bn via the multiplicity of payment routes that are possible.

As our chart illustrates, the pattern of spending through the year is significantly skewed to the holiday season, with retail sales excluding fuel in the five weeks ending in December expected to reach almost £48bn. This is a massive £11.1bn higher than if consumer spending was spread evenly through the year.

It is important to understand that the chart is based on an extrapolation from last year’s pattern and is not a forecast. If consumers choose to tighten their belts this year then sales could come in substantially below this level. Such a scenario would add to the woes of a number of retailers, many of whom generate most of their profits in the weeks running up to the end of the year.

So if you are out looking for that last minute present for someone special, just remember that this is a great opportunity to make your retailer happy too!

Yesterday’s Scottish Budget was slightly overshadowed by events in Westminster, but if you live north of the border the £42.5bn that the Scottish government plans to spend next year will possibly be of more interest.

As our #ICAEWchartoftheweek shows, the largest elements of the budget are £14.3bn for health and £11.9bn for local government, followed by a total of £11.8bn spending on education, transport, justice and other, and £4.5bn on NHS and teacher pensions.

£15.3bn, or just over a third of the total, is funded by devolved taxes – with £11.7bn coming from income tax. The remainder is the block grant of £19.9bn, a share of national insurance and other UK-wide taxes of £2.3bn, £4.5bn in funding for NHS and teacher pensions, plus borrowing of £0.5bn for capital projects.

The big news was the decision to maintain the higher rate threshold at £43,430, diverging from £50,000 in other parts of the UK. A penny less of income tax on earnings up to £14,549 and a penny more on all earnings over £24,944, means that there are now 12 tax bands for employment income, compared with 9 south of the border.

This is partly because Holyrood doesn’t control national insurance in the way that it does income tax, creating extra bands where the thresholds do not line up.

The constitutional crisis of the last few days has raised the (theoretical) prospect of the Attorney General being imprisoned in the Tower of London for contempt of Parliament, which made us decide to look at crime and punishment.

Our chart of the week looks at how spending on public order and safety – i.e. on the police, courts, prisons and fire services – has changed over the last twenty years.

In cash terms spending has increased by 77% from £18bn in 1998-99 to £32bn in 2017-18, but of course this doesn’t take account of inflation, population increases or economic growth.

We have consequently adjusted for changes in GDP to make the numbers more comparable. On this basis, the 1.8% of GDP spent on public order in 1998-99 would have been £37bn if kept constant as a share of GDP.

The share of national income spent on public order grew by 23% between 1998-99 and 2009-10, before declining by 30% to 2017-18. Overall a drop of 15% from two decades ago.

We await the Spending Review to find out how much will be spent in future however we can only hope that this will start to bring crime levels back down again; an outcome that will no doubt be pleasing to the Attorney General as he stares across the yard at the White Tower.

We thought we might look at one of the UK government’s key risk management tools in our chart this week – the UK’s foreign reserves. 

These principally comprise financial investments in the sovereign debt of other countries, together with foreign central bank deposits, investments in the IMF, gold holdings, and foreign currency loans and deposits with UK and international banks. 

As the chart shows, the UK government’s gross foreign reserves have increased from $52bn (£31bn) ten years ago to $164bn (£129bn), a 316% increase over the last decade. This is not the full story, as the government has a policy of hedging to protect against a proportion of its exposure to currency and interest rate movements. 

As a consequence, derivative and other financial liabilities have also increased, meaning that net reserves have increased at a slower rate – from $24bn (£15bn) to $52bn (£41bn), a 173% increase. This is part of a deliberate strategy by the government to increase its financial firepower and so be better prepared for the next financial crisis, investing £6bn last year for example. 

As the UK sails into potentially choppy economic waters over the next few years, this may prove to be quite important.

To join the conservation visit https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-542059546.

This week’s chart is about export credit guarantees and the associated risk carried on government balance sheet. We compared the exposure of the UK government to guarantees provided by UK Export Finance to the equivalent exposure of the German federal government. 

It is important to stress that businesses can and do access other forms of government support such as loans, as well as commercial insurance, letters of credit and other risk management tools. After all, UK exporters do have access to the most sophisticated insurance market in the world.

What this does show is the relative willingness of the UK and German governments to take on risk in order to achieve a policy objective – support to exports. Of course, some of the difference is down to the relative size of the economies. Germany’s economy is over 40% larger than the UK’s.

A fairer comparison for the £12bn UK’s exposure to export credit guarantees might be to an economy-adjusted £53bn rather than the actual £76bn (€86bn) reported by the Federal Ministry of Finance’s export credit guarantee division. 

However you measure it, it is clear that the German government has assumed a much higher level of risk to support its exporters that the UK government.

Something to think about.

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-71709483.

The recent budget contained 53 announcements on spending and 33 announcements on tax. 

As our chart this week shows, the headline was an extra £7bn for the NHS in 2019-20, rising to £28bn in 2023-24. £84bn over the forecast period and an increase of 1.77% in public spending. 

Only nine other spending announcements exceeded £0.5bn. Additional funds for Universal Credit, social housing, social care, defence, High Streets, City-regions, road maintenance and school buildings added a further 0.33%. Altogether £4.8tn for the period to March 2024. 

The other 40 measures which together added £1.9bn or 0.04% to the total were all below that level. 24 of them were for £25m or less – each a miniscule share of total spending. 

It is unusual to identify such small amounts within the top level of the budgeting process for the government of the sixth biggest economy in the world. They could easily have been covered by existing departmental budgets, or by HM Treasury’s central contingency. 

Except of course the Budget is as much political theatre as it is a fiscal event. Who would want to deprive the Chancellor of the opportunity to announce an increase of total spending by 0.0002% for urban tree planting or 0.0001% for digital skills boot camps?

To join the conversation go to https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1336743052.

Our chart this week takes a look at the OBR’s latest forecast for public sector net debt over the next five years.

While the Chancellor said debt is expected to fall, it is important to understand that this does not mean that debt will go down. Reported debt is actually forecast to be 5% higher in 2024, from about £1,810bn at 1st April 2019 to £1,896bn at 31 March 2024.

What will go down is the ratio of debt to GDP, because the economy is expected to grow faster than debt over the period. Inflation alone is expected to add 10% to GDP with 8% from economic growth.

The increase in public sector net debt would be closer to 13% if not for loans provided under the Bank of England’s Term Funding Scheme, with loans of £127bn to high street banks to be repaid in 2020-21 and 2021-22. This will partially offset the extra £213bn the government expects to borrow over the next five years.

This is not the full story. With more than £400bn needed to repay existing debt as it falls due the government has to borrow a total of £623bn over the period

The moral of this story – is that words and numbers are not always what they appear. In the strange world of the public finances, debt can go up – and down – at the same time.

To join the conversation: https://ion.icaew.com/talkaccountancy/b/weblog/posts/icaew-chart-of-the-week-1246452697

The Chancellor was in a positive mood yesterday as he presented a budget to deliver the commitment to increase NHS spending without large tax increases.

The reason was an improvement in the OBR’s fiscal forecasts. As illustrated by our chart of the week on the 2018 budget, forecast receipts have been revised up by around 1%, and previously planned spending revised down by 0.6%, to give an additional £13bn a year in this and the next two years, rising to £16bn and £19bn in the two years after that. 

This is not due to significant changes in the economy. Lower unemployment and some additional revenues from higher oil prices have delivered an extra £1bn. A long period of very low interest rates and court wins on tax rules has also helped, but much of the improvement is from things not turning out as badly as forecast back in 2016. 

This has let him sprinkle a little extra cash to ease some of the pressure on public services, not to mention spending a penny or two on improving public conveniences. 

With the mantra of government changing from ‘austerity’ to ‘fiscal discipline’ it is clear that we are not out of the woods yet, especially with £1.8tn in net debt and £4.3tn in total liabilities weighing on the public finances for a long time to come.

With the budget less than a week away our two chapters in this year’s IFS Green Budget are proving highly relevant. 

While the Chancellor will benefit from prudence in previous forecasts, the underlying position remains extremely challenging. Total public liabilities are £4.3tn or 214% of GDP, while an increasingly long-lived population places ever greater demands on the state. 

One area where spending pressure may be unavoidable is Defence where a higher level of perceived threat, may result in higher spending. The Defence Select Committee has even suggested an extra £20bn a year may be needed. 

The burden would be less if all NATO members met the 2% defence and security spending commitment. This would lead to an extra £83bn of spending across NATO. The UK meets this threshold: spending £43bn, or 2.1% of GDP. Persuading our allies to meet this target would boost our collective defence with no extra funding by the UK taxpayer. 

Less likely to gain traction is President Trump’s suggestion that NATO members spend 4% of GDP. This implies a £38bn increase in defence spending by the UK and proportionately much greater increases by most NATO members. 

Watch this space and stay in touch with the Budget with ICAEW at https://www.icaew.com/technical/economy/uk-budget-2018.