Category: #icaewchartoftheweek

The Chancellor’s Spring Statement next week has been trailed as not being a fiscal event. Consequently we don’t expect to see any changes to the tax system next week, although we there may be some changes to government spending plans – possibly to address cost pressures in health and defence. 

The benefit of just one fiscal event a year is it will give the Treasury and HMRC more time to work on developing tax policies. This is to be welcomed, given that a typical fiscal event in recent years has involved over 50 different tax policy changes. A reduction in the number of such changes and better thought-through policies will be good news for individuals and businesses. 

That is not to say that tax policy changes aren’t desperately needed. As our chart this week illustrates, there are now up to eleven (!) different tax bands on personal income depending on where you live and whether you have children or not.  How we got to this sorry state of affairs is a complicated story, but it should not be beyond the wit of policy makers to get us out of it. 

So the best thing about the Spring Statement next week may not be the absence of tax policy changes, but rather the eventual prospect of better tax policies in the future.

This week’s chart is on the subject of public spending, which in 2018 is expected to reach £22 trillion globally.  

This is 35% of forecast global GDP for this year of £63tn. As expected, accounting for nearly 75% of the global economy, the largest spenders are North America, Europe, China and Japan.  Perhaps more surprisingly (although not to our regular readers), Africa (population 1,243m) with 3% of the global economy, spends just £0.46 trillion: only 2% of global public spending and just 7% of the £6.74tn spent by central and local governments across Europe (population 544m). 

Public spending in the USA amounts to some 35% of GDP, in line with the global average. This compares with an average of 42% in Europe, 29% in Asia-Pacific and 32% for the rest of world.  

Within Europe, the UK is expected to spend 39% of its GDP on public services, less than the 45% planned by Germany, the 49% for Italy and the 56% for France, but more than its tax revenues. 

Over a third of economic activity in the world is controlled by just a few thousand politicians and public servants.  How effectively they spend that money on behalf of their citizens is something that the statistics don’t currently tell us.

With recent news focusing on overseas aid for the wrong reasons, we thought it might be interesting to look at the UK’s international development spending in our chart of the week.

In 2016 the UK Government spent £13.4bn on international development and aid programmes. According to the Office for National Statistics, the UK Government met its target of 0.7% of Gross National Income (GNI) in 2016 by just £6m.

This is a contribution of £204 on behalf of each person living in the UK in 2016, or around £17 per person per month. £8.5bn or £130 per person went to individual countries or regional groupings, with £45 spent via multilateral programmes and £85 directly. The balance of £4.9bn or £74 per person, was spent via international agencies, such as the World Bank’s International Development Association or the EU’s development programmes. 

The UK’s contributions to international aid programmes go on a range of health, humanitarian, environmental and development projects. An example is the £153m (£2.33 per person) for the Global Fund to Fight AIDS, Tuberculosis and Malaria.

Whatever your perspective on international development, the UK is a generous nation in its contribution to development programmes and support of humanitarian aid around the world.

This week the UK Cabinet is meeting to discuss future trading relationships after the UK’s departure from the European Single Market and Customs Union at the end of 2020. 

The result of these discussions could have a significant impact on the economy, as they will affect not only trade with Europe, but also with other countries around the world. 

We would expect the briefing materials for the Cabinet will include an analysis similar to our chart of the week which shows the volume of trade between the UK and the rest of the world, based on numbers reported by the Office for National Statistics.

For example, trade with the USA of £166bn comprises exports of goods and services of £100bn a year and imports of £66bn, while trade with European countries of £613bn comprises exports from the UK of £265bn and imports of £348bn.  

Overall European countries (including Norway and Switzerland) constitute 54% of the UK’s international trade, followed by the Americas with 18%, Asia-Pacific with 17% and other EMEA countries with 8%.  

This chart, or rather its Cabinet equivalent, will no doubt form a key element to the discussions. What ministers decide to make of it will hopefully become clearer in the weeks and months to come.

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!