Spring Budget 2020: Hey big spender, spend a little infrastructure with me

12 March 2020: Rishi Sunak’s first Budget as Chancellor of the Exchequer provided a sharp change in direction for the public finances – something that will please and surprise many, according to ICAEW’s Public Sector team.

Spring Budget 2020 combined a short-term fiscal stimulus to fight the coronavirus with higher spending on public services and new infrastructure investment to increase borrowing significantly. Fortunately, ultra-low interest rates will keep financing costs down on the more than £330bn in borrowing planned to finance these plans (not including short-term fiscal stimulus measures), with public sector net debt expected to exceed £2.0tn by 2025.

This Budget is particularly important as it sets the spending envelope for the three-year Spending Review expected to be published later this year. With a higher base for spending following the Spending Round 2019 announced by the previous Chancellor in October, this signals an end to the austerity policies of recent administrations. 

Key headlines for 2020-21:

  • Fiscal deficit up from £40bn to £55bn (2.4% of GDP), before coronavirus measures.
  • No significant tax changes beyond corporation tax remaining at 19%.
  • £14bn extra current spending and £5bn extra investment before coronavirus measures.
  • £12bn in tax and spending measures to respond to the coronavirus.
  • Gross financing requirement of £162bn, including £98bn to cover debt repayments.
  • No reflection of uncertain adverse economic effect of the coronavirus on tax revenues.

Key headlines for the four subsequent years to 2024-25:

  • Fiscal deficit of £62bn (2.5% of GDP) on average over the subsequent four years.
  • Tax policy measures to generate an additional £7bn per year.
  • Extra current spending of £27bn a year and extra investment of £19bn a year.
  • Gross financing requirement of £595bn (£149bn a year) including £315bn to cover repayments.
  • Significant economic uncertainty with coronavirus, global economic conditions and changes in UK trading relationships with the EU and other countries.

The existing plans already incorporated a significant ramp-up in infrastructure and other investment spending with public sector net investment forecast to increase from 2.2% of GDP in 2019-20 to 3.0% by 2022-23. The challenge for the Government will be to deliver and ‘get things done’, especially as capital investment by government departments is expected to increase by 25% in 2020-21 and by a further 35% over the subsequent four years. Will there be sufficient construction capacity and project management expertise to deliver such a rapid expansion and still deliver value for money for taxpayers?

The Budget also contained some important developments in the framework for the public finances, with a specific commitment to review the investment criteria in the Government’s ‘Green Book’ to ensure regions outside London and the South East benefit from the additional infrastructure spend proposed in the Budget. The focus on looking at the effect on investments on the public balance sheet was also welcome with new approaches planned for how to appraise public spending.

One surprise in the Budget announcement was that the OBR did not revise the economic forecasts down as much as had been expected. This was partly because of the economic benefits of higher public spending and investment, but also reflected an improved outlook for productivity. The benefit of this for the Chancellor was that he was able to announce additional current spending on public services, while still remaining within the fiscal rules set out in the Conservative party manifesto.

Unfortunately, the scale of the impact of the coronavirus on the economy is still unclear and so the forecasts for tax revenues may need to be revised downwards, potentially significantly, in the Autumn Budget later this year.

Commenting on Spring Budget 2020, Alison Ring, Director, Public Sector, at ICAEW said: “The Chancellor has announced a major loosening of the taps on spending and investment in his first Budget, with a combination of a short-term fiscal stimulus to fight the coronavirus, higher spending on public services, and a major programme of new infrastructure investment.

Those wondering where all the funding for this planned spending will come from may be surprised to discover that the Chancellor has not followed the custom of post-general election tax rises, but instead has decided to take advantage of ultra-low interest rates to borrow more than £330bn over the next five years. Public sector net debt is expected to exceed £2.0tn by 2025, although the Government hopes that this will then be falling as a ratio to the size of the economy.

Nevertheless, it is a Budget that many will be pleased with, even if a little surprising coming from the traditional champions of small government.”

This article was originally published by ICAEW.

ICAEW chart of the week: Raising taxes is hard to do

6 March 2020: How can the Chancellor raise taxes in the forthcoming Spring Budget?

Tax receipts 2019-20 £751bn. Top six taxes £615bn (82%): income tax £196bn. VAT £155bn, NI £143bn, corporation tax £54bn, council tax £36bn, business rates £31bn.

Traditionally, the first Budget after an election raises taxes and this would be a logical step given plans to increase public spending and investment in infrastructure. But which taxes could the Chancellor increase?

As the #icaewchartoftheweek illustrates, the top six taxes generate over 80% of tax receipts. But the Conservative manifesto rules out increases in the headline rates of income tax, national insurance and VAT, while increasing the corporation tax rate would be difficult given the planned cut from 19% to 17% has already been suspended. Most local authorities are already planning to increase council taxes as much as they can while increasing business rates would be really difficult.

We await the Budget to see what the Chancellor decides to do. Some money could be generated from increasing or introducing smaller taxes but for larger sums, the main place to look would be from reforming tax reliefs and exemptions, such as the rumoured abolition of Entrepreneurs’ Relief. However, it would be a brave Chancellor that decided to go after larger sums, for example by extending the scope of VAT.

Of course, the Chancellor might decide to cut taxes instead, hoping to boost a sluggish economy and so generate greater sums through higher levels of growth. Either way, borrowing is likely to increase – fortunately at extremely low interest rates.

This chart was originally published by ICAEW.

A tax system with 1,190 tax reliefs is difficult to hold accountable

2 March 2020: A recent report by the National Audit Office (NAO) highlighted that there were 1,190 tax reliefs as of October 2019, confirming just how complicated the British tax system is.

The NAO is the independent audit body responsible for scrutinising public spending on behalf of parliament. In a report on how HM Treasury and HMRC manage tax expenditures (tax reliefs that are used to pursue social or economic objectives), the NAO focused on the 362 tax reliefs that fall into this category. HMRC has reported that 111 of these reliefs had a combined annual cost of £155bn in 2018-19.
 
The NAO was critical of both HM Treasury and HMRC in how they monitor tax expenditures, following on from previous criticism by the Public Accounts Committee in 2018 that HMRC did not know whether a large number of tax reliefs were delivering value for money.
 
The report highlights how some tax reliefs significantly exceeded their original cost estimates, with HMRC not fully investigating large changes in costs. While HMRC has started to assess tax reliefs, only 15 formal evaluations have been completed since 2015, representing just 7% of the total value. In particular, HMRC has only evaluated five of the 23 tax expenditures estimated to individually cost in excess of £1bn a year.
 
A major issue highlighted by the report is a lack of sufficient assessments of whether the behavioural changes or other benefits intended by changes to the tax system are being achieved. Guidance from the IMF states that tax expenditures require the same amount of government oversight as public spending and this is not currently the case in the UK.
 
Poorly designed tax reliefs can skew behaviour in ways that were not originally intended or create opportunities for exploitation or abuse. One example is intangibles relief, which was meant to support innovation. Instead it created multiple opportunities for tax avoidance where taxes were reduced with no true benefit in innovation. 
 
There can also be unintended consequences for the accuracy of company accounts, with financial statement disclosures distorted by the desire to meet the requirements to obtain a particular tax relief.
 
While the NAO comments that HM Treasury and HMRC have started to improve, it recommends the development of a formal framework for designing and administering tax expenditures, and the introduction of a robust methodology for assessing value for money on a regular basis.
 
This call echoes the Barber Review on Public Value in 2017, which called for delivery of better outcomes for citizens, noting that the Treasury has historically placed greater emphasis on inputs rather than outcomes. It commented that a public service is more valuable if taxpayers and citizens believe in it, are willing to fund it, and commit to supporting its outcomes more widely.
 
Alison Ring, Director, Public Sector for ICAEW, commented: “Although this is a fairly technical report from the NAO, it goes right to the heart of the compact between citizens and government. How can we build trust in the tax system if the tax authorities are unable to fully justify the benefits of tax expenditures and confirm that intended outcomes are being delivered?”

Responding to the report, a government spokesperson said: “We want tax reliefs which deliver value for taxpayers and minimise the risk of any avoidance and evasion activity. We will consider the NAO’s recommendations so that we can continue to improve our management of reliefs.”

The NAO report is publicly available here.

This blog post was first published on the ICAEW Insights Hub.

ICAEW chart of the week: UK international reserves

21 February 2020: UK international reserves of £41bn analysed by currency.

UK international reserves: £149bn assets - £108bn liabilities = £41bn net. Euro £12bn, US dollars £13bn, Other currencies £6bn, Gold £10bn.

The UK’s official holdings of foreign government debt, central bank deposits, IMF Special Drawing Rights (SDRs) and gold are the subject matter for the #icaewchartoftheweek, being the foreign currency assets and liabilities used in monetary operations.

The UK Government and the Bank of England together held £149bn in foreign currency assets as of 31 December 2019, equivalent to approximately two months’ public spending or just under 7% of gross national income. However, these assets were offset by £108bn in foreign currency liabilities, comprising £59bn in net financial derivatives (currency forwards, interest rate and cross-currency swaps), £23bn due on repo transactions and £26bn in other liabilities.

Even though the official reserves are an extremely important tool used to help ensure the smooth operation of financial markets, provide confidence in the UK’s financial stability and (if needed) support the value of sterling, the net balance of £41bn is relatively small, with £12bn invested in the Euro, £13bn in the US dollar and £6bn in the Yen and other currencies, together with £10bn of gold.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public sector employment

Headcount / FTEs - Health and social work: 1,925,000 / 1,657,000; Education 1,500,000 / 1,105,000; Public administration 1,056,000 / 897,000; HM Forces and Police: 402,000 / 391,000; Other 505,000 / 464,000.

The #icaewchartoftheweek is about public sector employment, illustrating how just under 5.4m people work for public bodies in the UK or around 4.5m full-time equivalents (FTEs). This is 16.5% of the total UK workforce of 32.8m as of last September on a seasonally-adjusted basis.

The largest employer in the public sector is the NHS, with a headcount of 1.7m out of the 1.9m who work in the health and social work sector (1.5m FTEs). Included in the million or so people who work in public administration is the 451,000-strong Civil Service (419,000 FTEs) with most of the remaining 605,000 working for local authorities and non-departmental public bodies (FTEs 478,000).

Total public sector headcount has started to increase again in recent years with NHS and non-NHS headcount up 6.8% and 0.6% respectively over a nadir of 5.2m three years ago (up 2.5% overall), compared with an increase of 3.8% and a fall of 12.1% respectively over the previous seven years (down 7.8% overall between September 2009 and December 2016).

With increasing demand on the NHS from more people living longer and the ‘end of austerity’ we should expect to see further increases in public sector employment over the next few years.

ICAEW chart of the week: Inflation

Chart: RPI 4% in Jan 2018, 2.5% in Jan 2019, 2.2% in Dec 2019. CPI: 3%, 1.8%, 1.3%. CPIH: 2.7%, 1.8%, 1.4%.

The #icaewchartoftheweek is on inflation this week, with the Office for National Statistics reporting that consumer price inflation fell to 1.3% in December 2019 – its lowest level for over three years and towards the lower end of the Bank of England’s target range of 1% to 3%.

Accompanied by very low levels of economic growth, this has prompted speculation that the Bank of England may cut interest rates at some point this year to try and stimulate the economy. They may also be hoping that plans to boost infrastructure spending will help kick-start the economy and encourage a tad more inflation at the same time.

The Chancellor is currently consulting on plans to converge the statistically flawed Retail Prices Index with CPIH (CPI including housing) over the coming decade. This will be good news for commuters and some students, given RPI’s use in calculating fare increases and interest payments. However, it will be less good for many pensioners and holders of government debt who currently benefit from higher rates.

ICAEW chart of the month: UK international trade

Imports £718bn: EU £369bn, EFTA £34bn, USA £87bn, Other Americas £26bn, Asia-Pacific £138bn, Other £64bn. Exports £673bn: EU £297bn, EFTA £29bn, USA £133bn, Other Americas £29bn, Asia-Pacific £108bn, Other £77bn.

With recent changes in ICAEW communications, the ICAEW Public Sector team has started an #icaewchartofthemonth to complement the #icaewchartoftheweek.

The first #icaewchartofthemonth was published on the ICAEW’s Insights Hub (icaew.com/insights) on Friday 31 January 2020 and is on the UK’s international trade. It highlights how important the £718bn in imports and £673bn in exports in the year to 30 September 2019 are to the economy of the UK.

As the UK Government starts to negotiate new trade arrangements with countries around the world, the EU will be the highest priority. Imports into the UK of £369bn represent 51% of total imports and exports to the 27 EU countries of £297bn are 44% of total exports. This is followed by the USA, where imports of £87bn and exports of £133bn represent 12% and 20% respectively.

Trade relationships with countries in the Asia-Pacific region will also be very important, in particular China (imports £60bn and exports £39bn), Japan (£17bn and £15bn) and the 10-country Association of South East Asian Nations (£22bn and £19bn).

https://www.icaew.com/insights/features/2020/jan-2020/uk-international-trade

ICAEW chart of the week: Q4 retail sales

Chart: 2018 Q4 retail sales £121.3bn + inflation (1.4%) £1.7bn + sales growth (0.9%) £1.1bn = £124.1bn 2019 Q4 retail sales.

Concerned about the state of the UK economy? Then the latest retail sales numbers will not have helped, with fourth quarter sales in the UK mainland just 0.9% higher after inflation over a year earlier, as illustrated by the #icaewchartoftheweek.

With population growth still estimated to be running at around 0.6% a year, this implies that retail sales per capita in Q4 (at around £635 per month) were just 0.3% higher after inflation than the same period in 2018.

Sales in Q4 of £124.1bn comprised £41.3bn on food, drink and tobacco, £21.3bn on clothing and footwear, £19.6bn on household goods, £11.5bn on automotive fuel and £30.4bn on other non-food purchases. On a per capita basis, this is equivalent to approximately £210 per person per month on food, drink and tobacco, £110 on clothing and footwear, £100 on household goods, £60 on automotive fuel and £155 on other non-food purchases.

This low level of growth on a year earlier reflects a slow-down in retail activity in the fourth quarter of 2019, with the Office for National Statistics reporting that Q4 sales were 0.9% lower than the third quarter on a seasonally-adjusted basis.

This will feed into fourth quarter GDP, which will not be good news for the Chancellor as he puts together what is being rumoured to be a radical first Budget in March – a weak economy will reduce his room for manoeuvre to reform the tax system while boosting public spending at the same time.

ICAEW chart of the week: Regional capex

Chart: Difference from average identifiable public sector Capex per per year of £967. See table at end of post.

The #icaewchartoftheweek this week is on the subject of public sector capital expenditure across the UK in the light of speculation that the Spring Budget in March will feature a significant boost to capital spending in the North of England.

We thought it might be interesting to look at the most recent data; albeit the usual caveats apply to the numbers given the lack of formal systems in government to fully track expenditure by region and the differences between capital expenditure in the fiscal numbers (shown in the chart) and the capital expenditure reported in the (as yet unpublished) Whole of Government Accounts for 2018-19.

According to the ONS, there was £64.2bn in capital expenditure that can be identified by nation and region of the UK, an average of £967 for the 66.4m people living in the UK in 2018-19.

It is perhaps not surprising that there is more capital spending in London than the per capita average given that the millions of commuters and visitors that add to the 8.9m local population every day. However, the scale of the difference is substantial with £13bn invested in 2018-19, an average of £1,456 per person – £489 more than the UK average.

Of course, variations in capital expenditure are to be expected across a country of the size of the UK given the different natures and needs of each region and nation. For example, Scotland’s much higher level of per capita public capital expenditure (£7.2bn / 5.4m people = £1,325 per person) needs to be seen in the context that it comprises a third of the land area of the entire UK, but only has 8% of the population.

The region that incurs the least capital expenditure on a per capita basis is the East Midlands, where £3.0bn was spent in 2018-19, an average of £621 per person (£346 less than the average) for each of the 4.8m people living there. This is followed by Yorkshire and The Humber (£694 per person), the South West (£723) and the West Midlands (£799).

Most of the other regions are close to the average, including (perhaps surprisingly given some of the headlines), the North East and the North West.

One question that does come to mind – if Government’s intention is to rebalance regional inequalities by investing more in the ‘Northern Powerhouse’ and the ‘Midlands Engine’, will it have anything to spare for the ‘Great South West’ too?

2018-19
Capex
Population		Per
capita		Difference
from average
North East£2.4bn2.7m£906-£61
North West£7.0bn7.3m£955-£12
Yorkshire and The Humber£3.8bn5.5m£694-£273
East Midlands£3.0bn4.8m£621-£346
West Midlands£4.7bn5.9m£799-£168
East of England£5.7bn6.2m£924-£43
London£13.0bn8.9m£1,456+£489
South East£8.6bn9.1m£945-£22
South West£4.0bn5.6m£723-£244
Wales£3.0bn3.1m£956-£11
Scotland£7.2bn5.4m£1,325+£358
Northern Ireland£1.8bn1.9m£949-£18
United Kingdom£64.2bn66.4m£967–

Source: ONS, Country and regional public sector finances 2018-19: identifiable capital expenditure.

ICAEW chart of the week: A Single Market of 529m people

A chart comprising a colour-coded grid of 529 squares each representing 1m people in the Single Market.

2020 is likely to be an interesting year for many reasons, but in Europe all eyes will be on UK and EU negotiators as they attempt to agree a new trading relationship following the ending of the UK’s membership of the European Union at the end of this month.

As illustrated by the #icaewchartoftheweek, the UK is currently the third largest of the 32 members of the ‘European Single Market’, a trade bloc that comprises the 28 European Union member states and the four European Free Trade Association (EFTA) members.

The UK appears be aiming for a more distant trading relationship than that it currently enjoys as a EU member or that enjoyed by the 4 EFTA nations (three of which are members of the European Economic Area and the fourth – Switzerland – which has a series of bilateral agreements to give it access to the Single Market). Despite that, there are still a wide range of potential outcomes ranging from no agreement through to a much closer set of trading arrangements across multiple industries.

From a trade perspective, nothing much will change on 31 January when the UK formally ends it membership of the EU as the UK will continue to participate fully in the Single Market (as well as the EU Customs Union) until the end of the year. It will only be on 1 January 2021 that any new trade arrangements will come into force, changing the way that people and businesses operate across borders.

For now, it is very difficult to predict what exiting the Single Market will mean for the 67m people in the UK or the 462m people remaining in the Single Market. However, one prediction that can be made is that there will be plenty of opportunities for wild – and no doubt contradictory – headlines as the negotiators set to work!

Germany83.2mBulgaria6.9m
France67.2mDenmark5.8m
UK67.1mFinland5.5m
Italy60.2mSlovakia5.5m
Spain47.1mNorway5.4m
Poland38.0mIreland4.9m
Romania19.3mCroatia4.1m
Netherlands17.3mLithuania2.8m
Belgium11.5mSlovenia2.1m
Czechia10.7mLatvia1.9m
Greece10.7mEstonia1.3m
Sweden10.4mCyprus0.9m
Portugal10.3mLuxembourg0.6m
Hungary9.7mMalta0.5m
Austria8.9mIceland0.4m
Switzerland8.6mLiechtenstein0.04m