ICAEW chart of the week: borrowing to exceed half a trillion pounds

29 May 2020: Government looks to financial markets to fund large-scale fiscal interventions in the economy.

The #icaewchartoftheweek shines a light on the massive expansion in borrowing being undertaken by the UK Government as it seeks to plug an expanding gap between tax receipts and spending and fund a huge amount of loans to banks and businesses in order to try and keep the economy from collapsing.

At the Spring Budget on 11 March, HM Treasury issued a financial remit to the Debt Management Office and National Savings & Investment amounting to £162bn, comprising £98bn to fund the repayment of existing debts, £55bn to fund a planned shortfall between tax receipts and public spending (the deficit), and £9bn to fund public lending to individuals and businesses.

Since then the fiscal situation has transformed, with the Office for Budget Responsibility (OBR) suggesting that the deficit could increase by as much as £243bn to £298bn in 2020-21, while lending activities could increase by a further £168bn to £177bn. Public sector net debt at 31 March 2021 might increase by £411bn from the Spring Budget forecast of £1,819bn to £2,230bn.

The good news is that the cost of this borrowing is relatively small, with yields on ten-year gilts as low as 0.20%.

To find about more about the global and UK fiscal crisis read the ICAEW Fiscal Insight on coronavirus and public finances.

ICAEW Fiscal Insight: Coronavirus and the public finances

28 May 2020: ICAEW has today published a Fiscal Insight on coronavirus and the public finances, setting out how a huge economic shock combined with unprecedented fiscal interventions are driving a global and UK fiscal crisis.

The Fiscal Insight describes how the global economy is experiencing a major recession with severe consequences for public finances around the world. Whole sectors of the economy have been closed down, while governments have borrowed heavily to finance large-scale fiscal interventions in order to mitigate the damage.

In the UK, there has been a dramatic transformation in the fiscal position with public spending expected to exceed £1tn for the first time, with a fiscal deficit approaching £300bn and net debt rising from £1.8tn to in excess of £2.2tn.

Rebuilding the public finances will be challenging, with sustainable public investment key to driving the economic recovery and a long-term fiscal strategy essential to repairing public finances.

ICAEW Fiscal Insight cover page. Click on image or link to reach the contents.

April public finances awash with red ink

27 May 2020: fiscal deficit of £62.1bn in April exceeds budget of £55bn for the whole of 2020-21.

The latest public sector finances for April 2020 published by the Office for National Statistics (ONS) reported a deficit of £62.1bn in April and a revision of £14.0bn to the deficit in the financial year to March 2020; a total of £76.1bn in costs and revenue losses reported since the previous monthly release.

Public sector net debt increased to £1,887.6bn or 97.7% of GDP, an increase of £118.4bn or 17.4 percentage points compared with April 2019.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues since the lockdown. The deficit of £62.1bn for the month of April is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget only a couple of months ago.

Table 1 summarises the results for April 2020, while Table 2 sets out the revised results for the financial year to 31 March 2020.

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

Alison Ring, director of public sector for ICAEW, commented:

“The volume of red ink in April’s public finances is astonishing.

The scale of the damage from the coronavirus pandemic is only just starting to become apparent, particularly when you consider that the deficit in April alone is more than previous forecasts for the whole of 2020-21.

A full-year deficit of £300bn as suggested by the Office for Budget Responsibility looks increasingly plausible, with the only silver lining the ultra-low interest rates payable on the borrowing needed to finance it.”

This article was originally published by ICAEW.

ICAEW chart of the week: Money for nothing

22 May 2020: The UK Government is being paid to borrow money, with first negative yield gilt

Cash invested £1,026.35 (nominal value £1,000, premium and interest £26.35). Cash returned £1,026.25 (7 coupon payments £26.25, principal repayment £1,000). Net return -£0.10, yield -0.003%.

The news this week that the UK Government issued debt with a negative interest rate is the subject of the #icaewchartoftheweek. This shows how purchasers of the 0¾% Treasury Gilt 2023 at an auction on Wednesday 20 May accepted a negative yield of -0.003% on their investment.

At an average price of £102.388 for each £100 gilt or £1,023.88 for ten gilts, someone buying gilts at the auction would have paid £1,026.35 to the Government for each £1,000 of nominal value purchased, once £2.47 for interest already accrued payable with the bid is included. 

That investor will receive less money back, with 7 semi-annual coupon payments of £3.75 before repayment of the principal of £1,000 on 22 July 2023 adding up to £1,026.25, a net loss of 10p.

This is a return of just under -0.01% over 38 months on the £1,026.35 invested, equivalent to an annualised yield of -0.003%.

This is only just negative, and the UK Government still needs to pay to borrow for longer periods, with yields on 10-year and 30-year gilts still in positive territory at around +0.24% and +0.63% respectively.

Although this gilt auction is a milestone, being the first fixed-rate government bond with a duration over two years to be issued at a negative yield in the UK, this is not a new phenomenon in the world of government borrowing. For example, with 10-year and 30-year government bonds currently yielding -0.49% and -0.07% respectively, Germany’s €156bn of projected borrowing this year should end up reducing its interest bill!

Whether this presages a similar situation in the UK is unknowable, so we are not yet at the stage of money for nothing.

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: charities

15 May 2020: The topic for the #icaewchartoftheweek is the charity sector, with data originally sourced from the Charities Commission indicating that a total of £77.5bn was generated by the 142,790 registered charities in England & Wales that reported receiving income in 2017-18.

£77.5bn gross income in 2017-18 from 142,790 charities. Income £50m+ (191) £28.4bn. £10m-£50n (1,048) £20.9bn. £1m-£10m (5,974) £18.2bn. £250k-£1m (11,302) £5.5bn. £0-£250k (124,275) £4.5bn.

As in many parts of the economy, a small number of very large organisations generate a significant share of the total, with £28.4bn or 37% being received by just under 200 charities with annual incomes in excess of £50m. At the other end of the scale, 124,000 or so charities with incomes less than £250,000 generated £4.5bn or 6% of the total.

According to the National Council for Voluntary Organisations (albeit based on a different dataset), the public remains the biggest source of income for charities and other voluntary organisations, making up 45% of total income, followed by government (31%), other parts of the voluntary sector (10%), investment income (8%), businesses (5%) and the National Lottery (1%).

However, the situation has changed dramatically this year. Despite the growth in online donations, other forms of fundraising have been significantly curtailed with most charity shops and cultural facilities closed and street collections and physical events no longer possible.

The Government has announced £750m in emergency funding for certain charities, but this will not be enough to make up for the loss of income across the whole sector, with total income for charities in 2020 likely to fall by many billions of pounds. It is particularly difficult for charities focused on supporting the most vulnerable in society, where more rather than less funding is needed in challenging circumstances.

As a consequence, many charities will quite rightly be concerned about whether they will still be operating in 2021.

ICAEW chart of the week: US deficit

8 May 2020: Public finances around the world are being severely affected by the coronavirus pandemic, with the United States being no exception.

US federal deficit 2002 $159bn, $374bn, $413bn, $319bn, $248bn, $163bn, $455bn, 2009 $1,417bn, 2010, $1,294bn, $1,299bn, $1,089bn, $680bn, $483bn, $439bn, $587bn, $666bn, $779bn, $984bn, 2020 $3.7tn, 2021 $2.1tn.

The US Congressional Budget Office had already forecast that the federal deficit would exceed $1tn this year, but on 24 April 2020, it updated its predictions to suggest that the US federal deficit could reach $3.7tn or 18% of GDP in 2020. It is also predicting a deficit of $2.1tn or 10% of GDP in 2021.
 
These are substantially larger than the deficits experienced a decade ago during the financial crisis, reflecting a combination of a massive shock to the US economy and a series of large scale fiscal interventions on an unprecedented scale.
 
The CBO prediction is heavily caveated given the prospect of further fiscal interventions and the potential for a second wave of infection in the fall, so watch this space for further developments in the increasingly topical subject of accounting for governments.

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: UK gilt issues

1 May 2020: The unsung heroes at the Debt Management Office (DMO) have swung into action as the UK Government has started to burn through cash at an astonishing rate, as illustrated by the #icaewchartoftheweek.

Chart. Cash raised 2019-20: £10bn, £10bn, £10bn, £13bn, £8bn, £12bn, £12bn, £12bn, £10bn, £13bn, £12bn, £15bn. Cash raised 2020-21: April £58bn.

The DMO, the low-profile unit within HM Treasury responsible for the national debt, raised an astonishing £58bn from selling gilt-edged government securities in April, compared with an average of £11bn obtained each month in the financial year to March. The size and frequency of gilt auctions went from an average of £2.6bn from one auction a week in 2019-20 to £3.2bn from four auctions a week in April.

The scale of the challenge became apparent in March as the Government announced a series of eye-watering fiscal interventions, with the DMO going overdrawn by £18.5bn to keep the Government supplied with cash in advance of ramping up gilt auctions in April.

Fortunately, the DMO is able to finance the Government at ultra-low rates of interest at the moment, with auctions oversubscribed and yields on 10-year gilts at just over 0.3% during the course of April. If maintained, the incremental cost of the additional £384bn in public sector net debt in 2020-21 set out by the Office for Budget Responsibility in its coronavirus reference scenario would be less than £2bn a year.

A legacy of debt for future generations to deal with, but – at least for now – a relatively cheap burden to service.

This chart of the week was originally published by ICAEW.

PAC launches local authority property investments inquiry

27 April 2020: the Public Accounts Committee has launched a formal inquiry into the risks from English local authority investments in commercial property, and how these are monitored by the Ministry for Housing, Communities and Local Government.

The inquiry will investigate concerns about gaps in commercial skills and whether risks are being properly monitored, as well as the potential for big losses following the coronavirus.

The National Audit Office (NAO) reported in February that English local authorities had invested £6.6bn in commercial property over the three years to 31 March 2019, an increase of 1,340% compared with the previous three years.

With many of these investments funded by borrowing, the PAC is concerned about what the coronavirus pandemic might be doing to local authority finances, especially on the £2.5bn invested by councils outside of their local areas.

The Public Accounts Committee (PAC) plans to question officials from the Ministry for Housing, Communities and Local Government (MHCLG) on gaps in commercial skills in local government, and the extent to which MHCLG formally monitors commercial activity and long-term exposure to risk. The PAC will also ask officials about the Ministry’s response to COVID-19, and what impact the pandemic has had on local government finances.

Commenting on the launch of the investigation Alison Ring, Director, Public Sector at ICAEW, said: “The Public Accounts Committee is right to ask questions about the significant increase in balance sheet risk being taken on by a small but growing number of local authorities and how those risks are being managed both locally and by central government. The coronavirus pandemic will have resulted in significant losses in many local authority commercial property portfolios, adding to the pressure on their finances at a difficult time.

“The PAC also needs to consider the structural issues that have driven local authorities to establish debt-financed ‘mini sovereign wealth funds’ that predominantly invest in one particular asset class, rather than spreading risk across multiple types of investment. 

“Central government also needs to consider how local authorities can be encouraged to invest in infrastructure and other productive assets that will support economic growth and benefit local taxpayers in the long-term, in addition to managing financial investment risks effectively. This will be particularly important if the economy is to recover fully after the end of the pandemic.”

The PAC has put out a call for evidence asking for submissions by Wednesday 6 May 2020.

For further insights during the coronavirus pandemic, please see the ICAEW designated COVID-19 hub.

This article was originally published by ICAEW.

ICAEW chart of the week: UK electricity usage

24 April 2020: A dramatic decline in electricity usage confirms the scale of the economic downturn and the impact that will have on tax receipts.

Chart showing 7-day moving average electricity usage between 1 Feb and Apr 22 falling below the 5-year average.

The coronavirus pandemic is having a huge impact on all of us, including in our usage of electricity as illustrated by the #icaewchartofthemonth.

For example, the seven-day moving average electricity generated as of 21 April 2020 was 531 GWh, 23% lower than the 690 GWh supplied on average in the previous five years. This is a dramatic fall, reflecting the closure of much of our high streets, most offices and many factories across the country.

Admittedly, some of the decline will be down to weather, with April in particular being much warmer than usual. However, the collapse in demand since the Great Lockdown began is dramatic, demonstrating just how much has changed in just a few weeks.

A silver lining to the current situation is a significant reduction in carbon emissions, with zero electricity generated from coal or oil power plants in recent weeks. Gas-fired power stations are currently providing only around 20% of UK energy supply, with wind, solar and hydropower together providing in the order of 50% each day. Nuclear provides a further fifth, with the balance coming from biomass (around 5% or so) and imports from France, Belgium and Netherlands (a further 5%, much of which is either from nuclear power plants or from renewable sources in any case). This is very positive news for the environment, even if a bit of a headache for the National Grid electricity system operator in managing a very different mix of generation than normal.

Unfortunately, we will have to wait quite a while to see how this translates into economic statistics, with the OBR amongst others suggesting that the economy could contract by as much as 35% in the second quarter of 2020. This will have major implications for tax receipts and government borrowing, which are rapidly moving in opposite directions.

This chart was originally published by ICAEW.

ICAEW chart of the week: deficit and debt

17 April 2020: The #icaewchartoftheweek is on the ‘coronavirus reference scenario’ put together by the Office for Budget Responsibility (OBR).

Fiscal deficit 2020-21: £55bn Budget 2020 + £130bn lower receipts +£88bn higher spending = £273bn. Net debt: £1,819bn Budget 2020 +£384bn more borrowing = £2,203bn.

It suggests that the deficit for the current fiscal year could end up somewhere in the region of £273bn, around five times as much as the official Spring Budget forecast of £55bn, while public sector net debt could exceed £2.2tn by 31 March 2021, £384bn more than previously expected.
 
This scenario, which the OBR stresses is not a forecast, is based on a three-month lockdown followed by restrictions for a further three months, resulting in a 35% contraction in the economy in the second quarter of 2020, before bouncing back relatively quickly to leave the economy 13% smaller in 2020 than in 2019.
 
Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.
 
This is only of one many potential scenarios, but what is clear is that whatever actually happens, the damage to the public finances from the coronavirus pandemic will be extremely severe.
 
We can (and will) worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.

This chart was originally published by ICAEW.