Martin Wheatcroft

With this week’s Brexit talks turning into a rollercoaster ride, our ICAEW Chart of the week looks at the money element of he deal.

Our report ‘Analysing the EU exit charge’ published in May had a high scenario, which including contributions in a transition period for 2019 and 2020, estimated that a net amount of up to £30bn could be payable: £82bn gross amount before the UK’s rebate, less £52bn in rebates and amounts coming back to the UK.

Press reports are talking about a net settlement in the region of £45bn, the difference to our £30bn figure is two items that we included in our analysis: £5bn for the rebate due for the year before leaving, and the realisation of the UK’s £10bn investment in the European Investment Bank (EIB).

The area that doesn’t tally with our analysis is the EIB. The EU has claimed the UK would only be entitled to the repayment of its original capital contributions of £3bn, rather than the full value of the UK’s share at the date of exit. This seems to us like a tactic to bring the UK to the negotiating table – we would be surprised if the UK were not to receive full value.

Perhaps the most important thing to realise is that this is only the first of several negotiations…

Today’s ICAEW chart of the week looks at the overall impact of last week’s budget on the tax system.  Usually the first budget after an election is a tax-raising budget – so how did the chancellor do?

There were 34 tax measures set out in the 2017 Autumn Budget ‘Red Book’.  Of these, 21 are expected to increase tax receipts over the next five years (from 2018-19 to 2022-23), while 13 are expected to reduce tax receipts. 

Unusually for a first budget the government’s overall tax receipts are expected to fall rather than rise, however in practice the changes are actually very small in terms of the overall public finances. In the context of government income expected to average £813bn a year, over the next five years, the budget’s tax increases are equivalent to an increase of 0.22% of a year’s receipts, while tax cuts amount to 0.39%.  A net reduction of just 0.17%.

This contrasts with the approximately 2% downward revision to total receipts over the forecast period from poorer economic forecasts.

What is clear is that in terms of financial impact,  the Chancellor largely left the tax system as it is…

To comment on the ICAEW chart of the week, visit the ICAEW Talk Accountancy blog by clicking here.

Ross Campbell, Director for Public Sector at ICAEW, writes:

“A slightly delayed Chart of the Week from ICAEW follows from this week’s budget. 

The chart shows how various factors have combined to turn George Osborne’s July 2015 forecast of a £10bn surplus by 2019-20 into a £35bn deficit for Philip Hammond.

In many ways, the change in the forecasts for 2019-20 tells the underlying story of this Budget. The economy was already showing signs of weakness that had already taken away the prospects for a budget surplus, even before the Office for Budget Responsibility revised their figures down by a further £9bn.

The chart also shows how much of the additional spending announced in the Budget has been focused into this particular year, perhaps with a view to providing a small fiscal stimulus in the first year following Brexit?

With the Office for Budget Responsibility concluding that it is unlikely that the government will be able to eliminate the Budget until well into the 2020s, this Budget was always going to be difficult.

And although it is positive that there has been an improvement in the forecast for the deficit in the current financial year, the overall picture going forward is another timely reminder of the importance of investment to improve productivity and economic growth.”

To comment, visit the ICAEW Talk Accountancy Blog by clicking here.

Ross Campbell, ICAEW Director for Public Sector, writes:

“As talks about the EU exit charge and trade deals continue, this week’s ICAEW Chart of the Week is on the topic of international trade.  

The UK ran a substantial £92bn surplus in its trade in services in 2016, with exports of £245bn exceeding imports of £153bn.

However, this was more than offset by a £135bn deficit in its trade in goods, with exports of £302bn more than exceeded by imports of £437bn.  Overall the net trade deficit amounted to £43bn.  This looks like a large number, but at 2% of GDP it should be seen in the context of the UK economy of over £2 trillion. 

What the chart does illustrate is the significance of the UK’s trading relationship with the rest of Europe.  EU and EFTA countries take 48% of the UK’s exports and provide 58% of our imports. After the EU and EFTA, the UK’s three largest trading partners were the USA, China and Japan.

We’ll cover how the trade deficits forms part of the overall current account deficit in a future chart.  But our main point is that international trade is a key part of the economy and the UK currently buys more from overseas than it sells. 

Given our history as a trading nation and the need in our current circumstances to forge new trading relationships, perhaps its time for a bit more support for our export drive?”

To comment, visit the ICAEW Talk Accountancy blog.

This Chart of the Week follows on from our promise to look into how we might construct an estimate of the financial implications of terminating the current PFI deals.

It’s not a straightforward exercise – while the debt liabilities with PFI are well recorded, without access to all of the contracts, we have had to make an educated guess at the sub-contract breakage costs and the compensation for lost profit based on our knowledge of standard SoPC terms, which may not apply to all contracts.  In doing so we believe we have erred on the side of caution, so the bill for an authority termination could potentially be higher.

We have better data for the debt associated with PFI however, so we are reasonably confident that the amount that would need to be refinanced is of the right order of magnitude. 

While an additional £89bn does not represent a large proportion of the outstanding National Debt of nearly £1.8 trillion, it would be a further step in the wrong direction for the already highly leveraged UK state and add to the challenge the Chancellor faces in meeting his fiscal mandate.  It would also increase the government’s refinancing requirement over the next five years to approximately £740bn – nearly three quarters of a trillion pounds – where the government is exposed to the risk of changes in interest rates. 

With the era of very low interest rates and inflation drawing to an end I am struck, that much like with comedy, when it comes to debt-raising, ‘timing is everything’.

For further information and to comment, visit the ICAEW Talk Accountancy blog.

This week’s chart of the week from ICAEW looks at the revenue side of the public finance equation.

As the second Budget of the year approaches, the Chancellor faces a dilemma. With productivity and economic growth sluggish, will he try to find more money for public services by increasing taxes or attempt to stimulate the economy by lowering them?

Chancellors often use the first Budget following an election to increase taxes.  The problem on this occasion is that it will be difficult politically to increase one of the “Big 3” taxes (income tax, VAT and NI) that  generate 60% of the government’s  income.

However, it is also difficult to see how the Chancellor could raise significant sums from any of the next five biggest taxes that together generate a further 21% of total income. All of business rates, council tax and fuel duties are constrained by political pressures. Further hikes in  stamp duty are also unlikely, and the Government has committed to reducing corporation tax, from 19% this year to 17% in 2020.

With few opportunities to raise anything significant from other taxes, this leaves borrowing as the alternative. The good news is that the government is on course to come in several billion pounds below its borrowing target for this financial year.

Ross Campbell, Director for the Public Sector for the ICAEW, writes:

“With the budget rapidly approaching this week’s chart sets out the main components of planned public spending this year. Just over half (53%) is planned to go on the “welfare state”, comprising health and social care as well as pensions and welfare benefits.

With interest taking a further 6%, that leaves £330bn or 41% of the total to spend on delivering public services.

With an estimated population of just over 66 million people living in the UK, the total planned spending of £802bn in 2017/18 is equivalent to approximately £1,010 per person per month – the first time monthly spending has exceeded £1,000 per head.

The Chancellor approaches the Autumn Budget in a difficult position. There are requests for additional resources from the NHS, for social care, for the roll-out of Universal Benefit, for schools and colleges, for the armed forces, for roads and rail, for housing and for the police and border control.  Combined with higher interest costs as interest rates and inflation rise, this means that spending is likely to rise.

He may have some room for manoeuvre for the rest of the current financial year, as tax revenues appear to be holding up and costs remain relatively under control so far. However, constraining spending growth in future years is probably going to be harder. For example, the Spring Budget envisaged total spending in 2018-19 of £817bn, an increase of just 1.8% compared with this year. With inflation now running at 3% and so many pressures on spending to contend with, this particular number will be one to watch when we get to the Autumn Budget.”

To comment, please visit the ICAEW Talk Accountancy blog.

Ross Campbell, Director for the Public Sector for the ICAEW, writes:

“After a pause last week while I was behind the Great (fire)wall of China, the ICAEW chart of the week resumes with a look at how the Government has got on with tackling the UK’s current expenditure deficit.

Steady progress was made between 2009-10 and 2016-17 with the numbers mostly going in the right direction and the deficit falling from £152bn to £45bn.  While this is progress it is however still important to remember that we are still spending more than we earn as a nation – a situation that is not sustainable in the long run.

The impact of the chancellor’s decision to ease up on public consolidation in the March 2017 budget is also striking – with the deficit increasing again to £58bn in 2017-18 it has turned dealing with the deficit into a 15 year (or three parliament) problem. Continuing to run a deficit means borrowing money every year to pay the running costs.  With the National Debt at an all time high for peacetime and UK facing a worsening macro-economic position, the cost of that borrowing is only going to put further pressure on public expenditure.

It is time to deal with the deficit once and for all.”

To comment, visit the ICAEW Talk Accountancy Blog.

Ross Campbell, Director for the Public Sector for the ICAEW, writes:

“This week’s chart continues the Brexit theme by looking at where the money that we pay to the EU is spent.

It shows how Germany, the UK, France and Italy are the largest contributors, with roughly 79bn euros going into the EU pot, while they receive only about 44bn euros of that back.  The majority of their net contributions go toward post-2000 EU members, principally in eastern Europe, while pre-2000 countries such as the Netherlands, Sweden, Denmark and Austria which also pay in more than they get back are substantially balanced by countries such as Spain, Greece, Portugal and Belgium who are net recipients.

Only a relatively small proportion of the UK’s net contribution goes toward the cost of running EU institutions, agencies and programmes. Instead most of the net contribution actually ends up being spent further east, on economic development programmes in Poland, the Czech Republic, Romania, Hungary and Bulgaria. Consequently the focus on how much the UK is going to contribute to agencies such as Europol or the European Space Agency, or to programmes such as Erasmus, is really missing the point – these are small amounts compared to economic development funding for eastern Europe.

It is worthwhile observing that these countries are now NATO allies and all of them made commitments to increase defence spending on the basis of national budgets that assumed continued funding from the UK via the EU. It is also worth observing that with increased tensions between NATO and Russia – it may well be in the UK’s strategic interest to continue to support increased defence spending in eastern Europe.”

To comment, visit the ICAEW Talk Accountancy blog.