Category: #icaewchartoftheweek

With the UK preparing to agree its future trading relationships with both the EU and the rest of the world, our chart this week takes a look at the global economy. 

It illustrates the scale of EU and EEA single market that will continue to be the UK’s largest trading partner, it also shows the scale of the US economy, with expected GDP of £15.0tn in 2018, followed by China (GDP £10.3tn) and Japan (GDP £3.6tn).  All important current and future trading partners for Britain. 

As practical accountants we have converted GDP into sterling using current exchange rates, rather than the notional purchasing power parity (PPP) exchange rates beloved of economists. This shows the extent to which Britain continues to punch well above its weight. Despite a population of only 67 million – 0.87% of the world – the UK accounts for 3.3% of the global economy. 

Future UK trade is also likely to focus on the rapidly growing ASEAN region in South East Asia (GDP £2.7tn); India (GDP £2.2tn); and Brazil (GDP £1.6tn), all likely to grow their share of the global economy significantly in coming years. 

The UK has a lot to play for in its forthcoming trade talks, but it is also a significant trading partner and a large market in its own right.

The NAO report last week on the Private Finance Initiative (PFI) and the collapse of Carillion has led us to focus on PFI in this week’s chart. 

That PFI financing is more expensive than government borrowing for new infrastructure is a well rehearsed line. 

Actually more important, was the NAO’s main finding that the Treasury has not carried out a formal assessment of whether these additional financing costs have been worth it or not. 

While the NAO did highlight some particular instances of poor value for money, we still don’t really know if  PFI contracts have been a success overall. Especially in comparison with the potential cost overruns and inefficiencies that often dog traditional public sector projects. 

The £199bn (2017) still to pay on the portfolio of 716 PFI deals is a fairly small part (5%) of the state’s £3.7trn liabilities.  Few new PFI contracts are being signed, so future PFI payments are likely to reduce significantly over the next decade or so.  

Today’s portfolio should reduce by around a quarter by the time of the next general election in 2022, and by around half in a decade from now. 

Despite this, the level of political controversy over PFI is unlikely to go away, but that is politics rather than accountancy!

After a short interlude while I was in Harare, meeting some of our stakeholders in Zimbabwe here is a delayed Chart of the week from last week. 

Here at home, the news has been all about the demise of Carillion, so this chart looks at the proportion of UK public spending going to external suppliers 

According to its 2016 accounts, £1.7bn of Carillon’s revenue was from the UK Government. Together with its extensive work for local government customers, its total revenue from public bodies can’t be too far off £3bn a year. 

Its collapse is a big deal. It will provide a major headache for many government departments and local authorities. It is an even bigger deal for the many suppliers, employees and pensioners who will lose substantial sums of money, as well as the cost to government of cleaning up the mess. 

The UK public sector expects to disburse a total of £858bn this financial year. Of this, £314bn (37%) goes to external suppliers of goods and services (including capital procurement of £69bn). Despite the scale of Carillion’s operations, the £3bn it has been receiving each year from the public purse is still less than 1% of the sums going to external suppliers; and only 0.3% of the total. So while this is a crisis, hopefully it should be a manageable one.

With the Chancellor and Brexit Secretary both in Germany today to discuss future trade terms, this week also sees the start of one of the more complicated budgeting processes in the world: the European Union’s multi-year financial framework for 2021 to 2027.

This time there are two additional challenges to agreeing the budget.  The first is the finance team at the EU Commission is having to start the process without any idea what the eventual financial relationship between the EU and the UK after 2020 will turn out to be.  The second is the question of who either has to contribute more, or will receive less when the UK is no longer a major net contributor to the EU budget. 

The approximately €9bn net UK contribution each year represents around 7% of the overall EU budget. Financially this is probably not the largest challenge for the EU finance team – in theory it could be plugged by asking each member state to pay an extra amount equivalent to less than 0.2% of their domestic budgets. 

The politics are of course much harder than the arithmetic.  Will contributor countries, especially Germany, be willing to pay more? Or will eastern European countries such as Poland, Romania and Bulgaria be happy with receiving less?

Happy New Year – I hope 2018 proves to be a successful, healthy and prosperous year for all!

As has become usual at this time of year, this week’s news in the UK is dominated by the debate on the adequacy of funding for the National Health Service. Helpfully, the OECD published an extensive report last year (http://www.oecd.org/health/health-at-a-glance-19991312.htm) which enables us to compare the UK’s healthcare funding with other developed nations. 

The UK is the 17th largest spender on healthcare amongst the 35 OECD members, spending £244 per person per month. This is 9.7% of GDP compared with 10.5% in the Netherlands, 10.3% in Canada, 9.4% in Finland and 8.9% in Italy.

For that sum, the UK is 22nd in life expectancy, 24th in infant mortality and 18th in probability of dying prematurely due to a non-communicable disease.  Direct comparisons are not straightforward, but in terms of funding the UK is not an outlier.  The UK spends more than the OECD average of £233, albeit less than similarly wealthy countries such as France (£268), Australia (£274) and Germany (£323).

So given overall healthcare spending in the UK is not significantly lower than in many other countries, while more money is always going to be helpful, it looks like this problem also requires other solutions.

We are wrapping up our series of charts of the week with a look at Santa’s balance sheet. 

This chart takes Father Christmas’s financial position immediately before the start of his deliveries to around 27.6m households across the UK on Christmas Eve. Based on survey data (thanks to the Centre for Retail Research) we have estimated that Santa should have around £12.7bn in gifts to distribute this year. Assuming one sack per chimney, each of Santa’s sacks is estimated to hold an average of £460 in presents, based on £244 in gift purchases per adult living in the UK. 

Under Santa’s innovative financing model, and in accordance with the relevant UK Statements of Recommended Practice (SORPs), this means that there is £12.7bn in deferred income to record on the liabilities side of the balance sheet. Based on data from UK Finance on card transactions, the majority of this will be purchased using payment cards, with just under a quarter of the total paid for using credit cards. 

However you finance your festive season, we will leave you with our best wishes for a Happy Christmas (or other festival as appropriate) and for a prosperous 2018. Chart of the week will return in the New Year!

As the year draws to a close, many of us will be taking stock of this year and thinking about what we will do next year.  In that spirit, today’s #ICAEWchartoftheweek looks at the £809bn of public spending planned for the coming financial year starting 1 April 2018. 

£809bn is equivalent to an average of £1,013 per person each month when divided by the projected population next year of 66.6m. 

Analysed in this way, many individual elements of public spending do not appear unreasonable. For example, the £44 per person per month planned to be spent on public order and safety can be broken down into £26 each month on policing, £7 on the court system, £6 on prisons, £4 on fire services and £1 on border controls. 

Even the £194 per person per month going on health, of which around £175 goes on the NHS, costs us less on average than you might think. 

The problem is that just like domestic finances, the different costs of  government activities all add up.  And just like domestic finances, spending more than you earn, inevitably leads to problems. 

Especially when you think about just how large a sum of money is represented by £1,000 a month for each and every person living in the UK and how few of us pay over £1,000 a month in taxes.

With this week’s Brexit talks turning into a rollercoaster ride, our ICAEW Chart of the week looks at the money element of he deal.

Our report ‘Analysing the EU exit charge’ published in May had a high scenario, which including contributions in a transition period for 2019 and 2020, estimated that a net amount of up to £30bn could be payable: £82bn gross amount before the UK’s rebate, less £52bn in rebates and amounts coming back to the UK.

Press reports are talking about a net settlement in the region of £45bn, the difference to our £30bn figure is two items that we included in our analysis: £5bn for the rebate due for the year before leaving, and the realisation of the UK’s £10bn investment in the European Investment Bank (EIB).

The area that doesn’t tally with our analysis is the EIB. The EU has claimed the UK would only be entitled to the repayment of its original capital contributions of £3bn, rather than the full value of the UK’s share at the date of exit. This seems to us like a tactic to bring the UK to the negotiating table – we would be surprised if the UK were not to receive full value.

Perhaps the most important thing to realise is that this is only the first of several negotiations…

Today’s ICAEW chart of the week looks at the overall impact of last week’s budget on the tax system.  Usually the first budget after an election is a tax-raising budget – so how did the chancellor do?

There were 34 tax measures set out in the 2017 Autumn Budget ‘Red Book’.  Of these, 21 are expected to increase tax receipts over the next five years (from 2018-19 to 2022-23), while 13 are expected to reduce tax receipts. 

Unusually for a first budget the government’s overall tax receipts are expected to fall rather than rise, however in practice the changes are actually very small in terms of the overall public finances. In the context of government income expected to average £813bn a year, over the next five years, the budget’s tax increases are equivalent to an increase of 0.22% of a year’s receipts, while tax cuts amount to 0.39%.  A net reduction of just 0.17%.

This contrasts with the approximately 2% downward revision to total receipts over the forecast period from poorer economic forecasts.

What is clear is that in terms of financial impact,  the Chancellor largely left the tax system as it is…

To comment on the ICAEW chart of the week, visit the ICAEW Talk Accountancy blog by clicking here.

Ross Campbell, Director for Public Sector at ICAEW, writes:

“A slightly delayed Chart of the Week from ICAEW follows from this week’s budget. 

The chart shows how various factors have combined to turn George Osborne’s July 2015 forecast of a £10bn surplus by 2019-20 into a £35bn deficit for Philip Hammond.

In many ways, the change in the forecasts for 2019-20 tells the underlying story of this Budget. The economy was already showing signs of weakness that had already taken away the prospects for a budget surplus, even before the Office for Budget Responsibility revised their figures down by a further £9bn.

The chart also shows how much of the additional spending announced in the Budget has been focused into this particular year, perhaps with a view to providing a small fiscal stimulus in the first year following Brexit?

With the Office for Budget Responsibility concluding that it is unlikely that the government will be able to eliminate the Budget until well into the 2020s, this Budget was always going to be difficult.

And although it is positive that there has been an improvement in the forecast for the deficit in the current financial year, the overall picture going forward is another timely reminder of the importance of investment to improve productivity and economic growth.”

To comment, visit the ICAEW Talk Accountancy Blog by clicking here.