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.

OBR: deficit could reach £273bn or more

15 April 2020: a report from the Office for Budget Responsibility (OBR) indicates that the fiscal deficit could increase to £273bn in 2020-21, but it cautions that this is only one of many plausible scenarios.

The OBR has produced its first analysis of the potential economic and fiscal impact of the coronavirus, based on a three-month lockdown followed by restrictions for a further three months. 

At the same time, the International Monetary Fund has warned that the global economic contraction underway is likely to be the worst since the Great Depression, dwarfing the financial crisis twelve years ago.  

In its ‘coronavirus reference scenario’, the OBR indicates that the UK economy could fall by 35% in the second quarter of 2020, before bouncing back to leave the economy 13% smaller in 2020 than in 2019. 

The consequence would be an increase in the deficit for the fiscal year ending 31 March 2021 to £273bn or 14% of GDP, while public sector net debt could be £384bn higher than budgeted for, reaching £2.2tn or 95% of GDP by the end of the fiscal year.

The OBR says that the economic impact of the coronavirus will derive much less from people falling ill or dying, than from the public health restrictions and social distancing required to limit its spread, severely reducing demand and supply at the same time. That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending.

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. 

The OBR analysis assumes that increased public spending, tax cuts and holidays, loans and guarantees, and actions taken by the Bank of England, designed to support household incomes and to limit business failures and layoffs, will help prevent greater economic and fiscal damage in the long term. However, it warns that the longer the disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ with adverse consequences for future deficits and for fiscal policy.

The International Monetary Fund (IMF) now predicts that the global economy will contract by 3.0% in 2020, much worse than the 0.1% contraction seen during the financial crisis in 2009 and a cut of 6.3% from its previous prediction in January. The IMF prediction is based on a shallower, but longer recession than the OBR’s scenario for the UK. Overall, the IMF believes that the cumulative output loss in 2020 and 2021 from the pandemic could be as much as $9tn.

Alison Ring, Director, Public Sector for ICAEW, commented: “The analysis published by the OBR is not a forecast, but the scenario it presents is pretty startling; making clear that whatever actually happens, the damage to public finances from the coronavirus pandemic will be extremely severe.

“While the OBR suggests that the economy and tax receipts could recover relatively quickly, the additional debt burden will weigh on the public finances for many years for come.”

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

This article was originally published by ICAEW.

Treasury announces extra £9.5bn for public services

14 April 2020: the Chancellor has increased the coronavirus emergency response fund to £14.5bn to cover the escalating costs of dealing with the pandemic.

Easter Monday saw Rishi Sunak announce an extra £9.5bn for the NHS and public services, adding to the £5bn already included in the emergency package announced with the Spring Budget on 11 March 2020.

This brings additional funding for the NHS and public services to £14.5bn, comprising £6.6bn for health services, £3.5bn to keep the railways running, £1.6bn for local authorities, and £0.9bn for food packages and other support for clinically vulnerable people, together with £1.9bn for the devolved administrations in Scotland, Wales and Northern Ireland.

Altogether, this brings the estimated cost of fiscal measures announced by the Government in response to the coronavirus pandemic to somewhere in the region of £95bn. In addition to the £14.5bn for the NHS and public services, £27bn has been announced in business rates discounts and small business grants, £5bn in enhancements to Universal Credit and housing benefit and £750m for charities. The costs of the employee furlough and self-employed income replacement schemes will depend on take-up, with estimates that these could cost around £40bn and £9bn respectively for their initial three-month terms.

This does not include the effect of collapsing tax revenues and higher welfare spending on the public finances, nor any potential costs from the £330bn of loans and guarantees being advanced to support business. As a consequence, the fiscal deficit this financial year is now almost certain to exceed £200bn, compared with the baseline of £55bn set out in the Spring Budget just over a month ago.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “This is probably not going to be the last announcement of additional funding for the NHS and public services this year given the extraordinary challenges posed by the coronavirus pandemic. 

“It is positive that the Chancellor has made it clear that money will be made available to front-line services as needed, an important signal for budget holders conditioned by a decade of austerity to manage resources carefully, rather than to spend whatever it takes to achieve a critical objective.

“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 article was originally published by ICAEW.

ICAEW chart of the week: UK card activity

9 April 2020: Debit and credit cards were used 19.7bn times in 2019, with £722bn spent.

Debit and credit card activity in the UK 2019: 19.7bn transactions for £722bn. Debit cards 15.6bn for £503bn, credit cards 4.1bn for £219bn.

This #icaewchartoftheweek is on the subject of credit and debit usage in the UK, with UK Finance (the trade body for the banking and financial sector) reporting that £722bn was spent on UK and overseas cards in 2019. This comprised 19.7bn transactions at an average of just under £37 per transaction.

Average spending on credit cards at £53 per transaction was higher than the average of £32 spent on each debit card transaction. As a consequence, credit cards were around 30% of the total spend, but 21% of total transactions.

The number and value of contactless transactions both increased by 16% compared with 2018, as more and more people chose to use this form of payment. The average contactless spend was £9.35 on 8.6bn occasions, in contrast with the £81 spent on each of the 2.7bn online transactions in 2019, and the average of £50 incurred in 8.4bn non-contactless transactions.
 
Overall spending on credit and debit cards in 2019 was only 0.2% higher than in 2018, even though the number of transactions was up by 7.3%. This provides an indication of the weakness in the UK economy before recent events.
 
Of course, what we all want to know if what is happening right now. With the country in lockdown, the number and value of transactions are likely to fall significantly. We will be poring over that data as soon as it is made available!

ICAEW chart of the week: retail sales

3 April 2020: the #icaewchartoftheweek is on the subject of retail sales, with UK supermarkets experiencing a 20.5% growth in sales in the four weeks ending on Saturday 21 March 2020 according to Nielsen.

Supermarket sales: £9.2bn 4 weeks to 23 Mar 2019 + £1.2bn 3 more shopping trips +£0.7bn 1 more item per basked = £11.2bn 4 weeks to 21 Mar 2020.

This is dramatic for the sector, with sales in the last week in that period up 43% over the equivalent week last year.

Although newspaper headlines are full of stories about panic buying, the statistics themselves provide a more nuanced perspective. Shoppers each made an additional three visits to supermarkets over the four-week period at the same time as adding an extra item to each basket (up from 10 to 11 items on average), with the average spend per basket increasing from £15 to £16.

Although some of those extra £1s will have gone on stocking up on toilet rolls and pasta, in practice the majority of this additional spending will have simply replaced food and drink previously bought elsewhere, as pubs, restaurants, works canteens and school lunches have all ceased to operate over the course of the last few weeks.

A boom time for supermarkets, but terrible for most of the rest of the retail sector.

This chart was originally published by ICAEW.