ICAEW chart of the week: OBR climate change scenarios

Our chart this week is on the OBR Fiscal Risks Report, highlighting how delaying action to achieve net zero could double the cost to the public finances compared with acting more quickly.

Chart show public debt change in 2150-51 as % of GDP for different scenarios: Investment switch and motoring tax -12%, early action high productivity +10%, early action scenario +21%, early action low productivity +32%, late action scenario +43%, unmitigated climate change +38%. The final column for unmitigated climate change also has the public debt change in 2100-01% of +161%.

With two ‘once in a century’ events in less than two decades adding more than £1tn to public debt, it is unsurprising that the OBR’s Fiscal Risks Report published earlier this week places much more emphasis than previous reports on the potential for catastrophic risks, whether that be from further pandemics, major wars, climate change or cyberattacks.

The report focuses on three particular risks: the coronavirus pandemic, the cost of debt, and climate change, with the latter being the subject of the #icaewchartoftheweek. 

The OBR distinguishes fiscal risks from climate change between those stemming from global warming itself (physical risks) and those relating to the move to a low-carbon economy, including the policies to achieve that (transition risks). In unmitigated climate change scenarios, the physical risks dominate, whereas the more that is done to mitigate global warming by reducing emissions, the more important transition risks become. 

The chart illustrates two main scenarios explored by the OBR – an early action scenario where the UK and other governments around the world push forward with plans to achieve net zero by 2050 and a late action scenario where the UK government delays taking actions to decarbonise the economy. The chart also shows three variants on the early action scenario depending on whether decarbonisation boosts or damages productivity or where investment is switched from other areas and motoring taxes retained. 

In the early action scenario, the OBR estimate that public sector debt would rise by 21% of GDP by 2050-51 (equivalent to £469bn in current prices) as a consequence of lost fuel duties and other taxes of 19%, additional spending of 6%, indirect economic effects of 6% and interest on borrowing of 4% less 14% from carbon taxes imposed to incentivise the shift to net zero. 

The high productivity variant is similar in terms of costs and carbon tax receipts, but with indirect economic effects contributing additional tax receipts with a consequent reduction in borrowing costs over 30 years, resulting in net additional debt of 10% of GDP. The low productivity variant assumes the reverse with lower tax receipts and a smaller economy combining to increase the net increase in public debt to 32% of GDP. The other variant identified by the OBR has the effect of reducing public debt, where investment in decarbonisation is funded by cutting other public investment plans and existing motoring taxes are shifted onto electric cars to retain that source of income to the exchequer.

A key finding in the report is that delaying action would cost a lot more than moving early with public sector debt rising by 43% in 2050-51, more than double the early action scenario, as it would require a more radical intervention costing more and resulting in more adverse economic effects.

Ironically, the OBR estimates that doing nothing would have a smaller impact on net debt by 2050-51 than the late action scenario as decarbonisation costs would not be incurred. However, the OBR estimates that unmitigated climate change would have a significant impact for the rest of the century, with public debt potentially rising to 289% of GDP by 2100-01 if action is not taken to prevent temperatures rising around the world.

For more information read the OBR Fiscal Risks Report.

This chart was originally published by ICAEW.

Local authorities need to invest in finance teams

Alison Ring, ICAEW director for public sector, tells Room 151 that local audit reform is not enough on its own.

Alison Ring, ICAEW director for public sector, recently contributed an article to Room 151, an online news, opinion and resource service for local authority section 151 and other senior officers.

Reforms mean local government will soon see a new audit regulator, but investing in local government finance teams and better reporting are priorities too.

The government’s decision to set up a dedicated local audit unit within the new Audit, Reporting and Governance Authority (ARGA) addresses one of the key recommendations of the Redmond Review – that there be a ‘system leader’ for local audit, bringing together many of the different aspects of audit regulation currently dispersed across a variety of bodies, including ICAEW.

Nevertheless, ARGA has a big challenge on its hands.

Problems

The National Audit Office reported recently that 55% of local authorities in England missed the deadline to obtain an audit opinion on their 2019-20 financial statements, despite an extension of four months to take account of the pandemic. While there were significant practical issues facing both local authority finance teams and audit firms that contributed to these delays, they are symptomatic of wider problems in the local audit market and in the preparation of local authority financial statements.

Local audit in England relies on a small pool of eight firms to audit hundreds of NHS trusts and local authorities within a short time frame each year. Audit firms struggle to find sufficient qualified and experienced individuals to deliver local authority audits, an issue that will only grow as the existing cohort of experienced auditors approaches retirement over the coming decade.

Even with the additional £15m in funding provided this year by the government, audit firms highlight how the risk profile of many councils has increased in recent years as reserves have declined and balance sheets have weakened, with many councils borrowing to invest in commercial activities. The impact of the coronavirus pandemic has damaged the financial position of councils even further.

At the same time, more intensive regulation has – quite rightly – put pressure on audit teams to improve the quality of their work, but that has cost implications too, with firms expressing concern about the viability of their local audit practices. There is a real risk that one, or more, firms could withdraw from the market, reducing competition and putting even more pressure on the remaining firms.

There are also significant barriers to entry, starting with a requirement for audit partners to qualify as a key audit partner in addition to being a registered auditor, a requirement specific to the local audit market and not applicable to other sectors requiring equal or much greater sector-specific knowledge and expertise.

This is an obstacle to new firms considering bidding for local audit contracts, even where they have audit partners with experience that would make them eligible to apply and the ability to train and recruit staff with the necessary capabilities. The limited number of key audit partners in each individual firm also makes it more difficult to manage multiple audits within the short time frames needed to achieve audit deadlines.

Stabilising the local audit market and working with the government to ensure there is a viable pool of expertise available to carry out quality audits will be one of the first items on the ARGA agenda.

Priorities

However, audit reform is only part of the story. There is also a need to invest in local authority finance teams and in making the local authority finance profession an attractive career choice. Local authorities need to place a higher priority on the importance of producing high-quality financial statements that meet best practice and how doing so can increase financial understanding among both officers and councillors. Success in this area would also benefit local taxpayers’ understanding of and ability to scrutinise spending decisions, improving accountability and transparency.

There also needs to be investment in the quality of the underlying financial records and the supporting working papers provided to external auditors – a cause of delays in some audits. Not as sexy as many of the budget proposals that go to councillors for approval, but we know that poor financial controls and a lack of financial understanding by decision-makers and those to whom they are accountable can cost a lot more in the long run.

Unfortunately, far too many local authorities appear to treat their annual financial statements and the audit as a compliance exercise, something to be ‘got through’ rather than an opportunity to give a full account of how well they have stewarded public resources on behalf of residents.

Poorly formatted and difficult to read, too many council financial reports and accounts are seemingly designed for depositing in the round filing cabinet, rather than taking their place alongside flagship reports. Such reports are often of much less importance and priority than the hundreds of millions of pounds of public money spent on delivering local services or, in some cases, that have been wagered in speculative commercial investments.

I believe that the new regulator will need to look beyond the audit firms and engage with local authorities and their finance teams to demand and encourage improvements. Although audit firms can, and do, insist on changes to financial statements where they fail to comply with accounting standards or are actively misleading, they can’t insist local authorities follow best practice or that they invest in making the financial statements understandable to elected representatives and to the public. There is a role for the new regulator to bring up reporting quality across the sector.

It is important to realise that the proposed new standardised statement of service information and costs won’t be enough on its own. Readers need to be able to understand the wider financial position of each local authority, such as the level of usable reserves and balance sheet risks—and that requires investment in the entire annual report and accounts to make the financial information presented more understandable.

High standard

The overall package of reforms is positive: a new system leader for local audit and a rationalisation of the regulatory environment; a new audited statement of service information and costs to enable budgets and spending to be compared; a review of audit requirements for smaller bodies; auditors to provide an annual report to full council; an independent member with financial expertise on council audit committees; and a willingness to look again at audit deadlines.

But we should not forget that external audit comes at the end of the process and that solving the problems in the local audit market will only go so far.

Ultimately these reforms will only be successful if the financial statements subject to audit are of a high standard in the first place. That means greater investment in finance teams and—most importantly—council leaders and officers placing a higher priority on the quality and understandability of the financial information they produce.

This article was originally published in Room 151, an online news, opinion and resource service for local authority section 151 and other senior officers covering treasury, strategic finance, funding, resources and risk, and subsequently published by ICAEW.

ICAEW chart of the week: UK population of 67.1m

This week’s chart covers the pre-census population estimate of 67.1m for June 2020 just released by the Office for National Statistics. Do more deaths, fewer births and returning migrants mean the 2021 number will be smaller?

Map of UK with nations and regions in different shades and labels with populations: Scotland 5.5m, North East 2.7m, Yorkshire and the Humber 5.5m, East Midlands 4.8m, East of England 6.3m, London 9.0m, South East 9.2m, South West 5.7m, West Midlands Region 5.9m, Wales 3.2m, North West 7.4m, Northern Ireland 1.9m.

ICAEW’s chart of the week is based on the UK population estimate for June 2020 released by the Office for National Statistics (ONS) on 25 June 2021, which estimates that there were 67.1m people living in the UK last summer. This is the last estimate before the March 2021 census that should provide a more accurate count of the population – potentially leading to revisions to this and previous estimates over the last few years.

The population estimate comprises 56.5m people in England, 5.5m in Scotland, 3.2m in Wales and 1.9m in Northern Ireland. Within England there were 9.0m in London, 9.2m in the South East, 6.3m in the East of England, 4.8m in East Midlands, 5.5m in Yorkshire & the Humber, 2.7m in the North East, 7.4m in North West (including 2.8m in Greater Manchester), 5.9m in the West Midlands (including 2.9m in the West Midlands city-region), and 5.7m in the South West.

The median age for the population was 40.4 years old, with 19.8m aged between 0 and 24, 21.8m from 25 to 49, 19.7m from 50 to 74 and 5.8m aged 75 or more.

The ONS reports that the population increased by 284,000 or 0.43% from 2019 comprising a ‘natural’ increase of 32,000 (701,000 births less 669,000 deaths), net migration of 247,000 (immigration of 622,000 less emigration 375,000) and other movements of 5,000. This is a fall from the 361,000 increase seen in the previous year, primarily because of the coronavirus pandemic from mid-March 2020 to June 2020, when deaths increased and migration went into reverse.

The big question is whether the population may actually shrink when the 2021 census is reported, with deaths from the second and third waves of the pandemic, a further decline in the birth rate and a potential outflow of migrants combining to reduce the population for the first time since 1982.

This chart was originally published by ICAEW.

ICAEW chart of the week: Banknotes in circulation

Our chart illustrates how banknotes in circulation have grown during lockdown despite a decline in cash usage. Will the new £50 note launched on Wednesday cause a further rise?

Chart showing steady growth in banknotes in circulation from £26bn in 2001 to £69bn in 2017, followed by three flat years including £70bn in 2019, before a jump to £80bn in 2021. The latter comprised £18bn in £50 notes, £45bn in £20 notes, £15bn in £10 notes and £2bn in £5 notes.

At 28 February 2021, there were 357m paper £50 notes worth £18bn, 2,237m polymer and paper £20 notes worth £45bn, 1,540m polymer £10 notes worth £15bn and 407m polymer £5 notes worth £2bn – a total of £80bn in circulation. This excludes around £8bn in Scottish and Northern Irish banknotes and in the order of £5bn in coins.

With around 60m people in England and Wales (as Scotland and Northern Ireland have their own banknotes), this is equivalent to approximately six £50 notes, 37 £20 notes, 26 £10 notes and seven £5 notes per person. Of course, not all of these are in purses, wallets or stuck down the back of sofas – many live in cash drawers and safes at high street banks, retailers and other businesses, as well as a certain proportion that have migrated around the world.

There has been some speculation about the reasons for the jump in cash holdings during the pandemic, which appears counterintuitive given the significant decline in cash usage as contactless and online payments have become more popular. Part of this may be hoarding in the context of a national emergency, while others have speculated that criminal enterprises have struggled to launder cash at a time when many retail businesses have been closed. Another potential driver is the crossover between the old and new £20 notes, with the polymer £20 launched in February 2020 while the paper note it replaced is still in circulation. With the announcement that both £20 and £50 paper notes will be withdrawn in September 2022, there is likely to be a flood of cash coming back to the Bank of England next year.

The new Turing £50 note completes the changeover from paper to polymer, joining the Churchill £5, the Austen £10 and the Turner £20 polymer notes. The Adam Smith £20 note and the Boulton-Watt £50 note are the last paper notes still in circulation.

Speaking at Bletchley Park, where Turing carried out his famous codebreaking work, Bank of England Governor Andrew Bailey said: “Our banknotes celebrate some of our country’s most important historical figures. That’s why I am delighted that Alan Turing features on the new polymer £50 note. Having undertaken remarkable codebreaking work here at Bletchley Park during the Second World War, he went on to pioneer work on early computers, as well as making some ground-breaking discoveries in the field of developmental biology. He was also gay and was treated appallingly as a result. Placing him on this new banknote is a recognition of his contributions to our society, and a celebration of his remarkable life.”

More information on banknotes is available from the Bank of England.

This article was originally published by ICAEW.

Fiscal deficit of £24.3bn in May as COVID spending trends downward

COVID-related spending continues to drive borrowing even as receipts approach pre-pandemic levels, with debt up by £24.9bn to £2,195.8bn or 99.2% of GDP in May 2021.

The latest public sector finances released on Tuesday 22 June reported a deficit of £24.3bn for May 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. An improvement from the £43.8bn reported for the same month last year during the first lockdown, it was still significantly higher than the £5.5bn reported for May 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.1bn from £300.3bn to £299.2bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Cumulative receipts in the first two months of the financial year of £128.6bn were £15.9bn or 14% higher than a year previously, but this was still £0.7bn or 0.5% below the level seen a year before that in April and May 2019. At the same time cumulative expenditure of £165.8bn was £20.9bn or 11% lower than the first two months of 2020-21, but £37.2bn or 29% higher than the same period two years ago.

Ultra-low interest rates continued to benefit the interest line, which at £9.1bn in April and May 2021 was £0.1bn or 1% lower than April and May 2020 and £1.5bn or 14% lower than April and May 2019.

Net public sector investment was slightly lower than last year with £7.1bn invested in April and May 2021, down £0.8bn or 10% from a year before but up £0.9bn or 15% from two years ago.

This combined to produce a cumulative deficit for the first two months of the 2021-22 financial year of £53.4bn, £37.7bn or 41% below that of the same period a year previously, but up £37.3bn or 232% from the total for April and May 2019.

Public sector net debt increased to £2,195.8bn or 99.2% of GDP, an increase of £58.4bn since March, reflecting £5.0bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses. Debt is £259.1bn or 13% higher than a year earlier and £427.2bn or 24% higher than in April and May 2019.

Alison Ring, ICAEW Public Sector Director, said: “With numbers for the second month of the financial year now in, we can see tax receipts are starting to approach pre-pandemic levels, while borrowing continues to increase despite COVID-19 spending starting to decrease. 

“The public finances remain in a fragile state, and ongoing debates about education spending, adult social care and the pensions triple-lock highlight the difficult decisions facing Rishi Sunak as he seeks to balance pressures on our public services with still growing levels of public debt. The prospects of the Chancellor raising taxes in the Autumn Budget appear to be increasing.”

Images showing a table of the fiscal numbers for 2 months to May 2021 and variances against the prior year and two years. Click on link at end of this post to the ICAEW website which has a readable version of the table.
Images showing a table of the fiscal deficit by month, including receipts, expenditures interest and net investment. Click on link at end of this post to the ICAEW website which has a readable version of the table.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £31.7bn to £29.1bn and the deficit for the twelve months ended 31 March 2021 from £300.3bn to £299.2bn.

This article was originally published by ICAEW.

ICAEW chart of the week: The global vaccination challenge

This week’s chart looks at how much progress there has been in vaccinating an estimated global population of 7.8bn people, and how much is left to be done.

Chart showing vaccination status across Europe, North America, China, India, Rest of Asia, Africa and South America. (See text below for details). According to Our World in Data as of 15 June 2021, 727m people are fully vaccinated, 884m are partly vaccinated and 3,847 are not yet vaccinated, based on a target of 70% of a world population of 7,795m.

With a vaccination target of 70% needed to prevent the further spread of the virus, we need to vaccinate just under 5.5bn people. So far, only 727m (9% of the global population) have been fully vaccinated, mostly in China (223m), North America (169m) and Europe (158m).

Only relatively small numbers have been fully vaccinated in India (47m), the rest of Asia (73m), South America & Oceania (46m) and Africa (11m). A further 884m (11%) have been partly vaccinated, comprising China (399m), India (156m), Europe (111m), rest of Asia (73m), North America (67m), South America & Oceania (59m) and Africa (19m).

This leaves 3,847m people (49%) yet to be vaccinated, with 1,128m in Asia excluding China and India, 909m in Africa, 763m in India, 386m in China, 255m in Europe, 227m in South America and 179m in North America.

At the current run rate of around 33m vaccinations a day and assuming two doses are needed for each person, it should in theory take around 260 days or just under nine months to deliver the 8.5bn remaining doses needed. With some vaccinations requiring only one dose and expanded manufacturing capacity, the potential is that the world could be vaccinated even sooner than that.

In practice, it will not be so easy. The current level of vaccinations is being driven by China, which is vaccinating around 16m of its population a day at the moment, and whether many countries in the rest of Asia and Africa can get up to proportionately similar levels is not certain. Many countries will struggle to afford the vaccines they need and the 1bn doses just announced by the G7 will only go so far. Logistically, there are some big challenges in getting vaccines into arms in many parts of the world.

That is why some are saying that it will take until the end of 2022 to fully vaccinate the 70% of people needed to protect against the virus. Let’s hope that they are just being cautious, and the momentum can be maintained to get the world vaccinated even sooner than that.

Source: Our World in Data COVID-19 dataset extracted on 15 June 2021 – Mathieu, E., Ritchie, H., Ortiz-Ospina, E. et al. A global database of COVID-19 vaccinations. Nat Hum Behav (2021).

This chart was originally published by ICAEW.

ICAEW chart of the week: Rail journeys

This week’s chart tracks railway usage, illustrating how passenger journeys in Great Britain dropped by 77.7% from 1,739m trips in 2019-20 to 388m in the year to 31 March 2021.

Bubble chart showing railway passenger journeys. 1872: 407m - 1920: 2,186m - 1982: 630m - 2019-20: 1,739m - 2020-21: 388m.

The current number of journeys is the lowest since records began in 1872, when 407m trips were taken at the start of the heyday of rail. Passenger numbers grew until 1920 and a peak of 2,186m journeys, before the advent of the motor car saw trips decline gradually over the following 60 or so years until the nadir of 630m journeys in 1982. Since then, passenger journeys have grown rapidly up to 2016-17 (1,727m journeys) before levelling off, followed by the huge decline in the most recent financial year.

Passenger numbers have started to rise again in the last few months but the big question is whether they will return to their pre-pandemic level or if there will be a permanent decline, with fewer commuters as working patterns change and fewer business and shopping trips as online retail takes over?

The cost of running empty trains has been significant for the now ‘nationalised’ railway, with train operators converted from franchise businesses into management-contract concessions alongside the already publicly owned rail infrastructure owner Network Rail. Emergency payments to train operators in 2020-21 amounted to just over £7bn, adding to the cost of an already taxpayer-subsidised railway system in Great Britain.

The difficulty for the new Great British Railways organisation that will take charge of the railways over the next couple of years will be in finding ways to bring passengers back so that neither subsidies nor prices have to go up permanently.

This chart was originally published by ICAEW.

NAO: UK ‘lacked playbook’ for emergencies like the pandemic

National Audit Office says the UK government acted at unprecedented speed to respond to the virus, but needs to build resilience and management capabilities if it is to cope better with future emergencies.

The National Audit Office (NAO) issued a report on ‘Initial learning from the government’s response to the COVID-19 pandemic’ on 13 May 2021. This attempts to identify key lessons for the government to take if it is to improve the UK’s ability to respond to future emergencies.

The report sets out six themes where the NAO believes that the government could learn from the experience of the covid-19 pandemic, which has involved measures with estimated lifetime costs of £372bn so far.

Risk management

  • Identifying the wide-ranging consequences of major emergencies and developing playbooks for the most significant impacts.
  • Being clear about risk appetite and risk tolerance as the basis for choosing which trade-offs should be made in emergencies.

Transparency and public trust

  • Being clear and transparent about what the government is trying to achieve, so that it can assess whether it is making a difference.
  • Meeting transparency requirements and providing clear documentation to support decision-making, with transparency being used as a control when other measures, such as competition, are not in place.
  • Producing clear and timely communications.

Data and evidence

  • Improving the accuracy, completeness and interoperability of key datasets and sharing them promptly across delivery chains.
  • Monitoring how programmes are operating, forecasting changes in demand as far as possible, and tackling issues arising from rapid implementation or changes in demand.
  • Gathering information from end-users and front-line staff more systematically to test the effectiveness of programmes and undertake corrective action when required.

Coordination and delivery models

  • Ensuring that there is effective coordination and communication between government departments, central and local government, and private and public sector bodies.
  • Clarifying responsibilities for decision-making, implementation and governance, especially where delivery chains are complex and involve multiple actors.
  • Integrating health and social care and placing social care on an equal footing with the NHS. Balancing the relative merits of central, universal offers of support against targeted local support.

Supporting and protecting people

  • Understanding to what extent the pandemic and government’s response have widened inequalities, and taking action where they have.
  • Providing appropriate support to front-line and other key workers to cope with the physical, mental and emotional demands of responding to the pandemic.

Financial and workforce pressures

  • Placing the NHS and local government on a sustainable footing, to improve their ability to respond to future emergencies.
  • Ensuring that existing systems can respond effectively and flexibly to emergencies, including provision for spare or additional capacity and redeploying staff where needed.
  • Considering which COVID-19-related spending commitments are likely to be retained for the long term, and what these additional spending commitments mean for long-term financial sustainability.

The report does not contain any new substantive recommendations as it in effect brings together insights from 17 individual reports conducted by the NAO into different aspects of the government’s response to the pandemic. However, it is helpful in identifying some of the common strands emerging from the NAO’s work, such as the importance of effective cross-government working.

Perhaps the most significant finding is that the government lacked a playbook for many aspects of its response, with pre-existing pandemic contingency planning not including plans for identifying and supporting a large population advised to shield, employment schemes, financial support to local authorities and managing mass disruption to schooling.

Alison Ring, director for public sector at ICAEW, commented: “The NAO is careful to balance the negatives it saw in the government’s response to coronavirus with positives such as the design and roll-out at speed of large-scale interventions under huge pressure. However, it is clear that the NAO believes that the UK was underprepared for a high-impact low-likelihood event like the pandemic, and the lack of detailed plans in key areas hampered the government’s response.

“While accepting that no plan can cover all the specific circumstances of every potential crisis, the NAO nevertheless believes that more detailed contingency planning can improve the government’s ability to respond to future emergencies.” 

For more information, the full report is available from the NAO website.

This article was originally published by ICAEW.

ICAEW chart of the week: Household savings

Will there be a rush to spend the £7,000 in household net cash savings built up over the course of the pandemic?

Bar chart showing per household net cash savings by month. Apr 2019: -£25, £45, £0; Jul 2019: -£25, £105, £100; Oct 2019: £5, £55, -£65; Jan 2020: -£55, £35, £555; Apr 2020: £1,020, £1,235, £640; Jul 2020: £455, £465, £295; Oct 2020: £315, £275, £475; Jan 2021: £460, £370, £165; Apr 2021: £280.

The #icaewchartoftheweek is on household savings built up over the course of the pandemic, illustrating how households have saved an average of £7,000 over the last fourteen months. A big question for the economic recovery is whether households will splash the cash once restrictions are lifted, providing a consumer-led boost to the economic recovery?

According to Bank of England statistics released on 2 June 2021, since the start of the pandemic in March 2020 up to April 2021 households have saved or repaid debts in the order of £195bn or an average of £14bn a month. This compares with £4.8bn or £0.4bn a month in the 11 months to February 2020, when cash savings were mostly offset by borrowing on consumer credit or mortgages.

With approximately 27.8m households in the UK according to the Office for National Statistics, this means that families have saved an average of just over £7,000 or £500 per month since the first lockdown in March 2020, compared with approximately £175 or £15 a month in the eleven months prior to the pandemic.

This reflects many lost opportunities for spending, with fewer holidays and nights out possible because of lockdown restrictions. Uncertainty about future economic prospects is likely to have also played a part, with many individuals cutting back on discretionary spending ‘just in case’.

Of course, there is no such thing as an average household. More prosperous families will have saved up a lot more than the £7,000 average and so are likely to have the capacity to spend a lot more if they want to, while many individuals will have run down savings or borrowed to survive through a difficult period.

For those fortunate families who are in a better financial situation, the big economic question is whether they will take the money they have saved from not going on holiday or going out over the course of the last year and put it into their pensions or other forms of investment – or will they choose to splurge on enjoying themselves once restrictions are fully lifted?

The (almost) £200bn question.

This chart was originally published by ICAEW.

Source detail

Source data from Bank of England, Money and Credit – April 2021 (published 2 June 2021) divided by an estimated 27.8m households in the UK per the Office for National Statistics.

Household net cash savings = Seasonally adjusted changes in household M4 bank and building deposits plus changes in National Savings & Investments holdings (together ‘cash savings’), less seasonally adjusted changes in consumer credit and less seasonally adjusted changes in mortgage debt.

Total for 11 months to Feb 2020: cash savings £62.6bn less increases in consumer credit £11.5bn less increase in mortgage debt £46.3bn = £4.8bn or £175 per household.

Total for 14 months to April 2021: cash savings £235.2bn plus net repayments of consumer credit £23.1bn less increase in mortgage debt £63.5bn = £194.8bn or £7,005 per household.

April fiscal deficit drops to £31.7bn as new financial year gets underway

The latest public sector finances reported a deficit of £31.7bn for April 2021, as COVID-related spending continued to weigh on the public finances.

Although an improvement from the £47.3bn deficit reported for the same month last year during the first lockdown, the figures are still significantly higher than the £10.6bn reported for April 2019.

The Office for National Statistics also revised the reported deficit for the year ended 31 March 2020 down by £2.8bn from £303.1bn to £300.3bn, still a peacetime record. The ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number and estimates will be refined further over the next few months.

Receipts in April 2021 of £64.6bn were £7.8bn or 14% higher than a year previously, but this was still £1.1bn or 2% below the level seen a year before that in April 2019. At the same time, expenditure of £83.3bn was £9.3bn or 10% lower than April 2020, but £18.7bn or 29% higher than two years before.

Ultra-low interest rates continued to benefit the interest line, which at £5.3bn in April 2021 was £0.2bn or 4% lower than April 2020 and £1.5bn or 22% lower than April 2019.

Net public sector investment, as planned, has continued to grow with £7.7bn invested in April 2021, up £1.7bn or 28% from a year before and £2.8bn or 57% from two years ago.

This combined to produce a deficit for the first month of the 2021-22 financial year of £31.7bn, £15.6bn or 33% below that of the same month a year previously, but £21.1bn or 199% higher than April 2019.

Public sector net debt increased to £2,171.1bn or 98.5% of GDP, an increase of £33.6bn over the course of April, reflecting £1.9bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses and tax deferral measures. Debt is £304.6bn or 16% higher than a year earlier and £410.2bn or 23% higher than in April 2019.

The net cash outflow (the ‘public sector net cash requirement’) for the month was £34.5bn.

Commenting on the figures, ICAEW’s Public Sector Director Alison Ring said: “It is difficult to read too much into the first month’s numbers in a new financial year, but the Chancellor is likely to be relieved that the gap between receipts and spending is narrower than that seen last year during the first lockdown. But the public finances are not out of the woods, with tax receipts still below pre-pandemic levels and COVID-related spending continuing to drive up borrowing. 

“The focus over the next few months is likely to be on the next Spending Review, which will decide on future public spending and investment with the long-awaited social care funding strategy now anticipated to be announced later this year. However, the need to address the long-term unsustainability of the public finances shouldn’t be forgotten.”

Image showing receipts, expenditure, interest, net investment, deficit, other borrowing, changes in net debt, and net debt for April 2021 public sector finances, together with variances against April 2020 and April 2019. For a readable version of the table click on the link to the ICAEW article at the end of this post.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the twelve months ended 31 March 2021 from £303.1bn to £300.3bn.

For further information, read the public sector finances release for April 2021.

This article was originally published by ICAEW.