Commenting on the public sector finances for February 2019, published today by the ONS, Martin Wheatcroft FCA, advisor to ICAEW on public finances, said:
“The short-term improvement in the public finances means that Philip Hammond has capacity to increase spending on under-pressure public services, while potentially also cutting taxes to provide an economic boost.
However, he, like the rest of us, is waiting to see what happens with Brexit. A ‘Brexit dividend’ from securing an eventual deal – with businesses investing, consumers more confident and an uptick in the market – would help in reducing the public finance deficit further.
In the meantime, the Chancellor continues to give himself as much room as possible to be able to support the economy in the event of a no-deal Brexit.”
One of the primary purposes of the Spring Statement last week was to establish the Government’s financing for the coming financial year. As our ICAEW chart of the week illustrates, the plan is to raise £145bn from investors during 2019-20.
The largest element of this will come from the sale of government securities to professional and institutional investors, with the Debt Management Office (DMO) given a remit to issue £118bn in new gilts and treasury bills. Its current plan is to issue £85bn in conventional (fixed-interest) gilts, £22bn in index-linked gilts and £4bn by increasing short-term treasury bills outstanding, leaving £7bn yet to be determined.
This should be complemented by £11bn in fundraising by National Savings & Investments, the state-owned savings bank that offers premium bonds and savings products direct to the public.
A further £16bn is expected to be raised from the sale of financial assets. This includes £10bn from the final tranche of Northern Rock and Bradford & Bingley mortgages and other securities acquired during the financial crisis, £3.6bn from sales of RBS shares, and £2.7bn from selling a portion of the student loan portfolio.
The total of £145bn raised from investors will be used to plug the £29bn shortfall between planned spending and taxes and other income (£840bn versus £811bn) as well as funding net lending of £17bn. The latter includes £19bn to be lent to students, £4bn in Help to Buy loans and £5bn in other loans, offset by repayments of £5bn and cash flow timing effects of £6bn.
This leaves a balance of £99bn that will be used to repay debts as they fall due during the course of the year, many of which were taken out during the financial crisis a decade ago.
In normal circumstances the work of the DMO and National Savings in funding the government goes on behind with the scenes, without any drama – even with the current significant economic and political uncertainties currently facing the UK.
For the unsung heroes at the DMO and National Savings this means continuing to labour in obscurity – just how they like it.
Following the Spring Statement earlier today, we have updated our ICAEW chart of the week to reflect the changes in the official forecasts made by the Office for Budget Responsibility.
Rumours that the Chancellor would benefit from a ‘windfall’ in the form of higher than expected tax revenues turned out to be true, but only to a very modest extent. Overall, there was an average revenue uplift of £3.5bn per year over the forecast period, before taking into account some small tax increases of £0.8bn per year (most of which is for probate fees and the immigration health surcharge).
We were therefore quite right not to get carried away, as our updated ICAEW chart of the week is hardly changed from the previous version (see below).
The forecast for taxes and other income for 2019-20, the financial year about to start, has been increased by £1.6bn from the previous forecast presented with the Autumn Budget 2018. This comprises a revision to the revenue forecasts by the OBR of £1.0bn and a further £0.6bn from the consequence of government decisions (principally tax increases).
As a consequence, the new forecast for current receipts of £811.4bn for 2019-20 is still £5.9bn below the position that Philip Hammond inherited.
Of course, the big concern overshadowing the Spring Statement was Brexit, with the Chancellor caveating pretty much everything he said, in particular on his proposed plans for future spending.
This small upward revision (0.1%) in projected revenues was no doubt better for the Chancellor than a downward revision, but it won’t have done much to improve his mood after all.
See below for the original blog post:
The Spring Statement is this Wednesday, and there have been rumours that the Chancellor may benefit from a ‘windfall’ in the form of higher than expected tax revenues.
However, before getting carried away in giddy excitement by this prospect, we thought it might be worthwhile for our ICAEW chart of the week to look at what has happened to the Office for Budget Responsibility’s financial projections since Philip Hammond became Chancellor.
These projections cover multiple years, but for this purpose we have chosen to look at the forecast for taxes and other income for coming financial year. Back in 2016, the Chancellor inherited a forecast of £820.9bn for government revenue in 2019-20, although there have been some accounting and classification changes since then that means this is equivalent to a baseline forecast of £816.7bn (after also taking into account some modest net tax increases).
As the latest forecast from the Autumn Budget last year is for current receipts to be £809.8bn in 2019-20, there is still a £6.9bn shortfall compared with the position that Philip Hammond inherited.
Of course, the Chancellor and the OBR had very good reasons to be cautious in 2016. The UK had just voted to leave the European Union and it was unclear as to what this might mean for the economy (plus ça change), while productivity growth remained stubbornly weak. A small upward revision in March 2017 was followed by another downward revision in the November 2017 forecast, driven by even more pessimistic views on productivity.
These forecast downgrades in 2016 and 2017 have underpinned a generally gloomy Hammond Chancellorship, but he was marginally more cheerful in the last two fiscal events as upward revisions to the forecasts gave him some room to increase spending without adding further to borrowing.
Will the OBR be able to put a smile on the Chancellor’s face on Wednesday with a further upward revision to projected revenues? We look forward to finding out.
The ICAEW chart of the week this time is on the size of the UK economy over the last couple of decades.
According to the Office for Budget Responsibility, economic activity in the UK is forecast to add up to £2,126bn for the year ending 31 March 2019, an average increase of 3.1% a year over the £1,564bn reported a decade earlier.
Excluding inflation of 1.66% per annum, this means economic growth has averaged 1.44% over the last ten years since the financial crisis. This is significantly lower than economic growth in the decade before the the financial crisis of 2.32%, as well as the average of 2.45% seen in the 30 years up to 1998-99.
Some economists are suggesting that low rates of growth may be a ‘new normal’ and that we should not expect a return to previous levels. If so, there will be significant implications for how the government manages the public finances, with reduced future revenues available to fund growing public liabilities and financial commitments such as the state pension.
Another reason perhaps to re-evaluate the ‘pay-as-you-go’ assumption that underpins the government’s long-term strategy for the public finances?
Who else remembers the great bonfire of the Quangos? It doesn’t seem too long ago that the government was busy abolishing or privatising as many Quangos (quasi-autonomous governmental organisations) as they could track down. A determined effort to cut back the tangled weeds of bureaucracy that had grown up over decades of government expansion.
However, in recent years this particular garden appears to have gone untended and the weeds seem to be making a comeback!
This week’s ICAEW #chartoftheweek highlights how according to gov.uk there has been a 14% increase in the number of government bodies over the last four years, with the website listing 541 government departments, government agencies and other public bodies, high profile groups, and public corporations in January 2019.
Of course, counting up the number of organisations listed on the main government website is unlikely to give a full picture of what is going on. After all, public bodies can range in size from small advisory committees up to large agencies with multi-billion pound budgets, often containing a number of subsidiary organisations not included in the main list. However, despite that, it does look like that Quangos are making a resurgence, with a range of new bodies set up in the last few years.
As any gardener will tell you, it is important not to leave weeding for too long if you don’t want your garden to become overrun and unmanageable. Time to get the wellies on and head outdoors again?
Commenting on the public sector finances for January 2019, published today by the ONS, Martin Wheatcroft FCA, advisor to ICAEW on public finances, said:
“The challenge for Government departments is in trying to fight their corner for more money at the same time as dealing with a great deal of Brexit-linked uncertainty. The public finances have already started to be impacted by falling growth and the content of next month’s Spring Statement by the Chancellor will depend on whether or not a deal is concluded within the next three weeks.
Although the Prime Minister has announced that the end of austerity, Phillip Hammond will have to navigate the Spring Statement, the Comprehensive Spending Review and the Budget in the context of a weakening global economy.
Will the Chancellor take the politically tough decision to raise taxes to increase funding for public services, borrow more to provide an economic stimulus, or will austerity have to continue for a little longer?”
For some reason the UK’s international trade arrangements with other countries are a continuing topic of debate, and so we turn to imports and exports for this week’s ICAEW #chartoftheweek.
According to provisional numbers from the Office for National Statistics published last week, imports of goods and services are estimated to have been in the order of £660bn in 2018, while exports were around £630bn, a net trade deficit of £30bn. This comprises a deficit on goods of £140bn (imports of £490bn versus exports of £350bn) and a surplus on services of £110bn (imports of £170bn compared with exports of £280bn).
The largest proportion of the UK’s trade is with the EU, comprising around 55% of imports and 45% of exports. Within the EU, Germany is the (imports of £85bn and exports of £58bn), followed by the Netherlands (£48bn and £36bn), France (£43bn and £40bn), Ireland (£24bn and £31bn), Spain (£32bn and £17bn), Belgium (£30bn and £19bn) and Italy (£26bn and £20bn).
The US, still the largest economy in the world, is the UK’s largest individual trading partner, with the UK importing goods and services in the order of £75bn from, and exporting £117bn to, the US in 2018. The next largest trading partner outside the EU is China, with imports of £58bn and exports of £30bn.
With the UK scheduled to depart the EU in less than 40 days’ time, there is still a great deal of uncertainty as to what the UK’s post-Brexit trade arrangements will be – and hence the potential effect on international trade from April onwards.
This week’s #ICAEWchartoftheweek is on the UK rail industry’s finances for 2018-18, the subject of a recent report by the Office of Rail and Road.
Although the ORR tries to explain the way money flows through the industry (see below), with payments to and from the different players, we thought we would try and provide a high level overview that summarises the £20.5bn needed in total by the railways last year.
Broadly the train operating companies and Network Rail together generated £12.4bn in revenue, of which £9.8bn came from passenger fares. This is 60% of the total, with taxpayers contributing the balance of £8.1bn (40%) in the form of subsidies, public borrowing and losses by the state-owned Network Rail.
This was used to fund £10.8bn in train company and Network Rail operational costs, £7.7bn in Network Rail capital expenditure and rolling stock leases, and £2.0bn in Network Rail debt interest. (This does not include the £1bn or so incurred in 2017-18 by the Department for Transport on the new HS2 line between London and Birmingham.)
With fares continuing to rise ahead of inflation, high levels of passenger dissatisfaction, and precarious finances, the railways are likely to continue to depend on government support for the foreseeable future.
A scathing report on the UK Defence Equipment Plan released last week by the Public Accounts Committee provides the subject matter for the #ICAEWchartoftheweek. This follows on from a National Audit Office review of the Ministry of Defence’s plans to spend £186bn on equipment between 2018 and 2028 and the prospect of £7bn to £15bn of overruns.
We looked at this as part of the IFS Green Budget 2018 in a chapter on defence finances. This highlighted how the long-term decline in defence and security spending is at an end as it gets close to the 2.0% minimum NATO commitment, as well as the challenges in improving financial management within the MoD.
As our chapter concluded, the strategic choice for the UK is to match its aspirations for a global military role to the amount it is willing to spend on defence. We are still waiting for the Spending Review to see what the Government decides.
The good news from the ONS last week is that the unemployment rate is down and the employment rate is up.
But, while the trends are encouraging, the statistics are a little confusing. After all, why does unemployment of 4.0% plus employment of 75.8% not add up to 100%?
We delve into the mysterious world of UK workforce statistics for the #ICAEWchartoftheweek.
Let’s start with the unemployment rate, which excludes 19.26m ‘economically inactive’ individuals from the calculation. These comprise 11.73m in retirement, 2.27m students, 2.05m homemakers, 1.98m long-term ill and 1.23m not working for other reasons.
The employment rate calculation includes most of these, but not 11.90m people aged 65 or more (1.28m of whom are in work). On this basis the rates do add up to 100%, with employment of 75.8%, unemployment of 4.2% and economically inactive of 21.0%.
One mystery solved, but another is why the ONS don’t publish the share of those in work out of the total population? We estimate this to be 48.9%, meaning that less than half of all people living in the UK are actually in employment.
This seems to us to be extremely important to know given the increasing pressures being placed on the public finances as more people live longer.
