Our chart this week takes a look at the effect of the Spring Budget 2024 on the public finances.
This week’s chart summarises the changes announced in the Spring Budget 2024, analysing the changes in the budgeted fiscal deficit for 2024/25 and the forecast fiscal deficit for 2028/29 since the forecasts that accompanied the Autumn Statement 2023 last November.
As the chart illustrates, the budgeted deficit for 2024/25 of £85bn anticipated in November has been revised up to £87bn, comprising forecast revisions reducing the deficit of £10bn, followed by tax cuts of £14bn increasing the deficit, offset by tax rises of close to zero and other changes of £2bn reducing the deficit.
The chart also shows the changes to the final year of the forecast period, with the forecast of deficit £35bn at the time of the Autumn Statement 2023 reduced by £1bn from forecast revisions, increased by £13bn to fund tax cuts, reduced by £6bn from tax rises and £2bn from other changes to reach a new forecast for the deficit in 2028/29 of £39bn.
The good news for the Chancellor was the improvement in the public finances in the earlier years of the forecast, with interest rate expectations coming down from last year. This resulted in an improvement in the forecasts of £16bn in 2024/25 and £14bn in 2028/29, offset by the effect of lower inflation expectations on tax and other receipts of £2bn and £13bn respectively to result in net forecast revisions of £10bn and £1bn respectively. The lower inflation assumption has a bigger impact over time as there is a compounding effect on tax and other receipts.
This allowed the Chancellor to announce a two-percentage point cut in national insurance pushing up the deficit by £10bn in 2024/25 and £11bn in 2028/29, together with freezes in fuel and alcohol duties, changes in the high-income child benefit charge, an increase in the VAT threshold from £85,000 to £90,000, and a four-percentage point cut in capital gains tax on property sales from 28% to 24%. The latter change is expected to increase tax receipts by a few hundred million pounds a year as it is expected to encourage more property sales, with higher volumes offsetting lower tax on each sale. Overall, these other tax cuts push up the deficit by £4bn in 2024/25 and £2bn in 2028/29.
The forecast revisions weren’t enough to allow the Chancellor to cover the cost of cutting taxes, and so he also announced some tax rises. These include the introduction of a duty on vaping and an increase in tobacco duty, an extension of the energy profits levy to March 2029, and changes in the tax treatment of ‘non-doms’. These have a relatively small effect in 2024/25 but build up to a reduction in the deficit around £6bn a year by 2028/29.
Other changes of £2bn in 2024/25 comprised £1bn in other policy measures and £1bn in indirect benefits to the economy from the Chancellor’s announcements in 2024/25, while the £2bn in 2028/29 reflected £1bn from improvements in tax collection, £1bn in other measures, and £2bn from indirect benefits to the economy, offset by £1bn from interest on increased borrowing, and £1bn to be invested in public sector productivity.
In summary, these are relatively tiny changes in the outlook for the public finance in the context of £1.2trn of public spending each year and public sector net debt that is still on track to exceed £3.0trn by the end of the forecast period in March 2029.
Even relatively small changes in economic assumptions, in spending plans, or in tax policies could have a significant impact on the fiscal forecasts, especially those for 2028/29.
For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.
While tax cuts will likely headline next week’s Spring Budget, debt markets will be questioning plans to reduce the deficit by constraining public spending.
Last week’s chart of the week looked at the pre-Budget forecast for debt and the very low level of headroom the Chancellor had against his primary fiscal rule of seeing debt falling by the final year of the forecast period.
Our chart this week is on the ‘P&L’ side of the equation, illustrating how the Chancellor’s plan at the time of the Autumn Statement 2023 was to bring down the deficit by constraining growth in public spending to less than the level of growth in tax and other receipts.
The starting point is the deficit of £85bn for the financial year ending March 2025 (2024/25) forecast by the Office for Budget Responsibility last November, with spending (excluding interest) expected to increase by less each year than receipts (net of interest): by £13bn and £21bn respectively in 2025/26, £10bn and £19bn in 2026/27, £5bn and £24bn in 2027/28, and £7bn and £21bn in 2089/29, to reach a projected deficit of £35bn in 2028/29.
If achieved, this would see the deficit reduce to the equivalent of 1.6% in 2027/28 and 1.1% of GDP in 2028/29, the first time the deficit would come in below 2% of GDP since 2002/03, a quarter of a century earlier.
Although the increases in taxes and other receipts may seem substantial, they are broadly in line with the projected growth in the size of the economy, with ‘fiscal drag’ from the freezing of several key tax allowances mitigating the effect of tax cuts announced last November. Meanwhile, planned spending increases are relatively small in the context of the overall public finances, equivalent to real terms rises in public spending excluding interest of 1.1%, 0.8%, 0.4% and 0.5% respectively.
This relatively low level of increase in spending may seem surprising in the context of demographic changes that are pushing up spending on pensions, health and social care, a deteriorating international security situation, the severe financial difficulties facing many local authorities, and the pressure many other public services are under, not to mention the need to increase investment in infrastructure if the economy is to return to growth.
The Institute for Fiscal Studies has questioned whether the Chancellor’s spending plans are realistically achievable, given that they imply significant cuts in the budgets of unprotected departments over the course of the forecast period. These are unlikely to be deliverable in practice.
A modest boost to public finances reported in the current financial year, together with moderating interest rate expectations, are expected to provide the Chancellor with capacity to cut taxes while still meeting his fiscal rules. But debt investors will be wondering how much an incoming government – irrespective of which party wins power – will actually be able to raise taxes to fully cover expected spending-plan revisions. Not raising taxes sufficiently in the first Budget after the election would likely lead to the next government needing to borrow even more at a time when the Bank of England is flooding debt markets with gilts as it unwinds quantitative easing.
For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.
My chart for ICAEW this week looks ahead to the Spring Budget and asks how much headroom the Chancellor will have available for tax cuts or higher spending while still meeting his fiscal targets.
The Chancellor is currently getting ready for his Spring Budget on Wednesday 6 March 2024, with rumours, leaks and misinformation swirling around ahead of what will be a keenly watched event – quite probably the last fiscal event before the general election.
As our chart illustrates, the Office for Budget Responsibility (OBR) at the time of the Autumn Statement last November projected that the ratio of underlying debt to GDP would increase in the current financial year (2023/24) and further over the first four years of the forecast period, before starting to fall in the final year (2028/29).
Underlying debt is defined as public sector net debt (PSND) excluding Bank of England liabilities (PSNDexBoE). This alternative metric avoids distortion in the headline measure of debt caused by £170bn of Term Funding Scheme loan receivables not netted against related Bank of England liabilities that will reduce PSND as these loans are repaid, even though net financial assets and liabilities are not changing.
The projected increases are +4.1% from 84.9% at March 2023 to 89.0% at the end of 2023/24, +2.6% to 91.6% in 2024/25, +1.1% to 92.7% in 2025/26 and +0.5% to 93.2% in 2026/27, before staying flat in 2027/28 and then falling -0.4% to 92.8% in March 2029.
The fall in 2028/29 projected by the OBR in November provided the Chancellor with £13bn of fiscal headroom in the final year of the forecast. In theory this meant he could have planned to spend more, or cut taxes, by up to £13bn in 2028/29 and still met his primary fiscal target, which is for underlying debt/GDP to be declining in the final year of the fiscal forecast period.
Building such a relatively small amount of headroom into a forecast – less than four days of total government spending – is perhaps surprising given the high degree of uncertainty in predicting future receipts, spending and borrowing, not to mention GDP. These numbers can all move by tens of billions between forecasts, as the economic situation changes and policy and budgetary decisions are made.
GDP can be especially variable, with the Office for National Statistics making frequent revisions to its estimates, sometimes many years later. Several commentators also believe the numbers for planned public spending from April 2025 onwards are unrealistic and that there will be a need to revise these numbers upwards in subsequent fiscal events.
Although there has been a modest boost to the public finances in the reported numbers for the first 10 months of the current financial year, underlying debt/GDP at January 2023 was 88.1%, on track to end the financial year at close to the 89.0% in the November OBR forecast.
The news that the UK had entered recession in the last quarter of 2023 will not have been positive for the Chancellor in his search for additional headroom but, despite this, it is believed that the forecasts will improve sufficiently to allow him some capacity to either increase the total amounts allocated to public spending, or announce tax cuts, while still keeping with his fiscal targets. Of these options, tax cuts are considered much more likely.
Either way, underlying debt/GDP will be expected to be higher in five years’ time – potentially even higher than in previous forecasts. From a fiscal target perspective, what is important is whether the ratio is falling in the fifth year of the forecast period, not the overall change in the level between now and then.
For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.
Prior month revisions boost public finances despite worse than expected self assessment receipts, as a think tank says tax cuts in the Budget will be sandwiched between tax rises in the years before and after.
The monthly public sector finances for January 2024 reported a provisional surplus for the month of £17bn, slightly less than expected, while at the same time revising the year-to-date deficit down.
The figures, released by the Office for National Statistics (ONS) yesterday, show a cumulative deficit for the first 10 months of the financial year to £97bn, £3bn less than in the same period last year. The year-to-date variance against the Office for Budget Responsibility (OBR)’s Autumn Statement forecast improved from £5bn last month to £9bn this month.
Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “Lower self assessment tax receipts than expected in January were offset by revisions to numbers from previous months to improve the overall financial picture.
“This small improvement helps only a little with an extremely weak fiscal position facing the Chancellor as he approaches the Budget, with questions already being asked about whether existing plans to cut public spending in the near term are realistically achievable. Rumours that the Chancellor is thinking about further reductions in public spending to fund tax cuts will therefore need to be balanced with his ability to maintain credibility with debt markets.”
The Resolution Foundation reported that likely net tax cuts in the coming financial year of around £10bn are sandwiched between £20bn of tax rises that have already been implemented in the current financial year – including threshold freezes and the corporation tax rate rise from 19% to 25% – and £17bn in net tax rises that have been pre-announced up to 2027/28 (primarily from threshold freezes and stamp duty land tax).
The think tank’s pre-Budget analysis estimates that the cut in national insurance announced in November plus around £10bn in potential new tax cuts to be announced in the Budget would result in a net reduction in taxes of just under £10bn for 2024/25 after taking account of threshold freezes and other tax changes.
The Resolution Foundation analysis does not take account of the normal pattern that sees governments typically raise taxes in the first Budget after a general election, which is even more likely this time around given what many commentators believe are unrealistic spending assumptions for 2025/26 onwards.
Month of January 2024
Self assessment tax receipts were lower than expected in January 2024, with the fiscal surplus of £17bn for the month coming in at £9bn better than last year but £2bn less than the OBR’s Autumn Statement projection.
Taxes and other receipts amounted to £120bn, up 4% compared with January 2023, while total managed expenditure was £103bn, down 5%.
Public sector net debt as of 31 January 2024 was £2,646bn or 96.5% of GDP, £41bn lower than 31 December but £107bn higher than at the start of the financial year.
Ten months to January 2024
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first five sixths of the 2023/24 financial year to January 2024 was £97bn, £3bn less than the £100bn deficit reported for the first ten months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £901bn and total managed expenditure of £998bn, up 6% and 5% compared with April 2022 to January 2023.
Inflation benefited tax receipts for the first 10 months compared with the same period in the previous year, with income tax up 11% to £224bn and VAT up 6% to £165bn. Corporation tax receipts were up 17% to £85bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023.
Meanwhile,national insurance receipts were up by just 1% to £148bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, as well as the cut in national insurance implemented in January.
Council tax receipts were up 6% to £36bn, but stamp duty on properties was down by 25% to £11bn and the total for all other taxes was flat at £137bn as economic activity slowed. Non-tax receipts were up 10% to £95bn, primarily driven by higher investment income and higher interest charged on student loans.
Total managed expenditure of £998bn in the ten months to January 2024 can be analysed between current expenditure excluding interest of £846bn, interest of £105bn and net investment of £47bn, compared with £949n in the same period in the previous year, comprising £810bn, £114bn and £25bn respectively.
The increase of £36bn or 4% in current expenditure excluding interest was driven by a £28bn increase in pension and other welfare benefits (including cost-of-living payments), £18bn in higher central government pay and £10bn in additional central government procurement spending, less £13bn in lower subsidy payments (principally relating to energy support schemes) and £7bn in net other changes.
The fall in interest costs for the ten months of £9bn or 8% to £105bn comprises a £23bn or 50% reduction to £23bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £14bn or 21% increase to £82bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.
The £21bn increase in net investment spending to £47bn in the first ten months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 19% increase in gross investment to £101bn, less a £4bn or 8% increase in depreciation to £54bn.
Public sector finance trends: January 2024
The cumulative deficit of £97bn for the first 10 months of the financial year is £9bn below the OBR’s November 2023 forecast of £106bn for that same period. The OBR is forecasting deficits of £6bn and £12bn in February and March to result in a full year forecast of £124bn, or £115bn if the £9bn forecast variance persists.
Balance sheet metrics
Public sector net debt was £2,646bn at the end of January 2024, equivalent to 96.5% of GDP.
The debt movement since the start of the financial year is £107bn, comprising borrowing to fund the deficit for the ten months of £97bn plus £10bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.
Public sector net debt is £831bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,108bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.
Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£677bn on 31 January 2024, comprising £1,584bn in non-financial assets and £1,047bn in non-liquid financial assets minus £2,646bn of net debt (£303bn liquid financial assets – £2,949bn public sector gross debt) and other liabilities of £662bn. This is a £62bn deterioration from the -£615bn reported for 31 March 2023.
Revisions
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The latest release saw the ONS revise the reported deficit for the nine months to December 2023 down by £6bn from £119bn to £113bn as estimates of tax receipts and expenditure were updated for better data and the correction of errors in HMRC reporting, while the debt to GDP ratio at the end of December 2023 was revised up by 0.5 percentage points from 97.7% to 98.2% as GDP estimates were updated.
The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £129bn for 2022/23.
Two quarters of shallow negative GDP growth may be just enough for the UK to be in a mere ‘technical’ recession, but seven successive quarters of negative GDP growth per capita present a more worrying picture.
The Office for National Statistics (ONS) released its latest statistics on quarterly GDP on 15 February 2024, reporting that GDP in the fourth quarter of 2023 (October to December) had fallen by 0.3% compared with the previous quarter, which in turn was 0.1% below the quarter before that. This was sufficient for the UK to meet one of widely accepted definitions of a recession: two successive quarters of economic contraction.
Many economists have chosen to describe this as a ‘technical’ recession given how shallow the fall in growth has been over the past two quarters, very different from the scale of contraction seen in ‘proper’ recessions such as that experienced during the financial crisis (when GDP fell in the order of 6% over four successive quarters). The ‘technical’ label also emphasises how relatively small subsequent revisions to the quarterly statistics could easily lift the UK out of recession again.
Perhaps more worrying for all of us living in the UK are how changes in GDP per capita have been negative over the past seven quarters, as illustrated by our chart this week. GDP per person can often be more important to individuals than the overall change in GDP given how living standards are, by definition, experienced on a per capita basis.
According to the official chained volume measure of GDP per head, economic activity per capita grew by 0.2% in the first quarter of 2022 (over the previous quarter) but has declined since then: by -0.2%, -0.2% and -0.0% respectively in the second, third and fourth quarters of 2022, and then -0.1%, -0.2%, -0.4% and -0.6% in the first, second, third and fourth quarters of 2023.
Overall, this is equivalent to a reduction of 1.5% in GDP per head between the fourth quarter of 2021 and the fourth quarter of 2023, although one additional note of caution is that the per capita numbers are based on population projections that are even more susceptible to revision than estimates of the size of the economy. Despite that, these numbers are not a sign of an economy doing well.
The per capita numbers put the reported GDP growth rates for the same eight quarters of +0.5%, +0.1%, -0.1%, +0.1%, +0.2%, +0.0%, -0.1%, and -0.3% respectively (equivalent to cumulative GDP growth of +0.4% between 2021 Q4 and 2023 Q4), into perspective, highlighting just how weak the performance of the UK economy has been over the past two years.
Just as the recession is being described as ‘technical’, there are good arguments for describing positive growth in GDP as also ‘technical’ when per capita growth is negative at the same time, reflecting how much stronger economic growth needs to be for living standards to improve.
The chart shows how the 30 countries tracked by the IMF fit between emerging market and developing economies, most of which are growing faster than the global averages, and advanced economies, which tend to grow less quickly.
The biggest drivers of the global forecast are the US, China and the EU, with both the US and China expected by the IMF to grow less strongly on average over the next two years than in 2023. This contrasts with an improvement over 2023 (which involved a shrinking economy in Germany) by the advanced national economies in the EU over the next two years – apart from Spain, which is expected to fall back from a strong recovery in 2023.
Growth in emerging and developing countries is expected to average 4.1% over the two years, led by India (now the world’s fifth largest national economy after the US, China, Germany and Japan), followed by the Philippines, Indonesia, Kazakhstan growing faster than China, followed by Malaysia, Saudi Arabia, Egypt, Iran, Thailand and Türkiye.
Nigeria, Poland and Pakistan are expected to grow slightly less than world economic output, followed by Mexico.
Russia, Brazil and South Africa are expected to grow less strongly, while Argentina is expected to grow the least, with a forecast contraction in 2024 expected to be followed by a strong recovery in 2025.
The strongest-growing of the advanced economies in the IMF analysis continues to be South Korea, followed by the US, Canada, Spain, Australia, France, the UK, Germany, the Netherlands and Italy, with Japan expected to have the lowest average growth. Overall, the advanced economies are expected to grow by an average of 1.6% over the next two years.
For the UK, forecast average growth of 1.0% over the next two years is expected to be faster than the 0.5% estimated for 2023, but at 0.6% in 2024 and 1.6% in 2025 we may not feel that much better off in the current year.
Of course, forecasts are forecasts, which means they are almost certainly wrong. However, they do provide some insight into the state of the world economy and how it appears to be recovering the pandemic.
Not shown in the chart are the estimate for 2023 and the breakdown in 2024 and 2025, so for those who are interested, the forecast percentage growth numbers are as follows:
The Office for National Statistics has updated its national population projections, lifting its expectations for 2025 by one million to just under 70 million people living in the UK and for 2050 by four million to 78 million.
My chart for ICAEW this week takes the latest principal population projections for the UK published by the Office for National Statistics (ONS) on 30 January 2024 and illustrates how the number of people in the UK has increased since 1975 and is projected to increase to 2075.
According to the ONS, there were 56m people living in the UK in June 1975 and our chart shows how this increased by 2m from births exceeding deaths (18m births – 16m deaths) and by 1m from net inward migration to reach 59m in June 2000, an average annual population growth rate of 0.2%.
The first quarter of the current century is expected to see the population increase to just under 70m by the middle of 2025, from a combination of 3m births less deaths (18m births – 15m deaths) and net inward migration of 8m, an average of just over 300,000 per year. This is equivalent to an average annual population growth rate of 0.7%.
From there, the population is projected to increase by approximately 8m to 78m in 2050, an average annual growth rate of 0.4%. This is driven by an assumption that immigration will continue to exceed emigration in the long-term by 315,000 a year, contributing 8m to the increase, while projected deaths are expected to marginally exceed births (18m deaths – 18m births) over the same period. The latter is also affected by the assumed level of immigration, with the ONS estimating that if net migration was zero then the population would fall by 3m over the 25 years to 2050 (18m deaths – 15m births).
The chart concludes with the projection for the following quarter-century from 2050 to 2075, with deaths exceeding births by 3m (21m deaths – 18m births) to partially offset an 8m projected increase from net inward migration to reach 83m in 2075, an average annual population growth of 0.3%.
These numbers are higher than the previous projection published by the ONS in January 2023 by 1m in 2025, 4m in 2050 and 8m in 2075, partly as a consequence of updating the baseline numbers to reflect the 2021 Census, but mainly because of higher assumptions for net inward migration. The ONS doubled the expected number of net inward migrants over the three years to June 2025 from approximately 300,000 per year to around 600,000 per year, and increased its long-term assumption from 245,000 net inward migrants per year to 315,000.
The challenge for policymakers is in balancing the needs of the economy and the public finances for more workers in order to pay for the pensions and health care costs of a rapidly growing number of pensioners, and fee-paying international students to subsidise the domestic university system, with political pressures to control immigration. Perhaps unsurprisingly this had led to a degree of unpredictability in immigration policy.
The challenge for the ONS is trying to reflect in its projections a highly unpredictable immigration policy, which in this case has resulted in it increasing its assumptions for net inward migration just as the government introduces a series of new restrictions that should significantly reduce the incoming flow of migrants.
The irony is that the ONS might have been better off just leaving its previous projections in place – but then that’s life in the forecasting game.
My chart for ICAEW this week illustrates how Ireland has displaced Luxembourg in contributing the most to the EU Budget on a per capita basis.
The European Union’s Budget for the 2024 calendar year amounts to €143bn, with national governments contributing €137bn and EU institutions generating the balance of €6bn. At a current exchange rate of £1:€1.17 this is equivalent to a budget of £122bn comprising national contributions of £117bn and other income of £5bn.
My chart illustrates how much national governments contribute to the EU budget on a per capita basis, ranging from Ireland contributing the most to Bulgaria the least. Ireland’s recent economic success has seen it overtake Luxembourg as the country with the highest GDP per capita, and hence the highest per capita contributor to the EU Budget.
The average contribution for the EU’s population works out at just over €302 (£258) per person per year or €25.20 (£21.50) per person per month, based on a total population of 453m living in the 27 EU member countries.
The chart shows how Ireland’s contributions are equivalent to €53.20 per person per month, followed by Luxembourg on €50.70, Belgium on €44.10, Netherlands on €39.00, Denmark on €37.80, Finland on €31.30, Germany on €29.70, Slovenia on €28.90, France on €28.60, Austria on €28.50, Sweden on €25.20, Italy on €24.40, Malta on €23.20, Spain on €21.80, Estonia on €21.70, Cyprus on €20.70, Czechia on €20.30, Lithuania on €20.00, Portugal on €17.80, Latvia on €16.90, Hungary on €16.20, Poland on €15.70, Greece on €15.40, Slovakia on €15.00, Croatia on €13.10, Romania on €12.00, and Bulgaria on €10.50.
Total contributions of €137bn amount to approximately 0.8% of the EU’s gross national income of €17.7trn. They comprise €25bn from 75% of customs duties and sugar sector levies, a €24bn share of VAT receipts, €7bn based on plastic packaging that is not recycled (providing countries with an economic incentive to reduce it), and €82bn calculated as a proportion of gross national income.
While the UK ‘rebate’ no longer exists, these numbers in the chart are net of the equivalent but proportionately smaller ‘rebate’ totalling €9bn that continues to go to Germany, Netherlands, Sweden, Austria and Denmark. The EU Commission had proposed removing it during the negotiations for the 2021 to 2027 multi-year financial framework but was unsuccessful in persuading these five countries to give it up.
The chart only shows the gross contributions paid by national governments – it doesn’t show the amount that comes back to each country through EU spending, whether in the form of economic development funding and agricultural subsidies, through science, technology, educational or other programmes, or through the economic benefits of hosting EU institutions. This will reduce the effective net contribution for most of the richer nations, while poorer member states will benefit by more coming from the EU than they are paying in.
The numbers also do not include €113bn (£97bn) of spending through the NextGenerationEU programme that is funded by direct borrowing by the EU. This is equivalent to additional spending of €20.80 per person per month that will need to be repaid over the next few decades – hopefully through the benefits of higher economic growth.
Year-to-date deficit of £119bn is £5bn lower than latest Office for Budget Responsibility forecast – but is still £11bn worse than this time last year.
Public sector finances for December 2023, released by the Office for National Statistics (ONS) on Tuesday, reported a provisional deficit of £8bn – less than expected – while at the same time revising the year-to-date deficit down by £5bn. This brought the cumulative deficit for the first three-quarters of the financial year to £119bn, £11bn more than in the same nine-month period last year.
Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments: “Today’s numbers show a cumulative deficit of £119bn for the first three-quarters of the financial year, the fourth highest on record. This should be close to the total at the end of the tax year, as income from self-assessment tax receipts in January is likely to offset deficits in February and March. At £5bn less than the Office for Budget Responsibility’s latest forecast, the Chancellor will be pleased by this marginal improvement in fiscal headroom just when he needs it most.
“However, the Chancellor will still be concerned by the tough economic landscape, with disappointing retail sales data for the final quarter of 2023 and an unexpected rise in inflation last month, and what that might mean for the fiscal forecasts. He is under significant pressure to cut taxes ahead of the general election, but will be all too aware of the need for greater investment in public services and infrastructure if he is to be able to lay the foundations for economic growth in the next Parliament. The risk of local authorities going bust will also be on his mind as he seeks to generate positive economic vibes going into the general election campaign.”
Month of December 2023
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of December 2023 was £8bn, made up of tax and other receipts of £89bn less total managed expenditure of £97bn, up 6% and down 3% respectively compared with December 2022.
This was the lowest December deficit since 2019, principally because interest on Retail Prices Index-linked debt fell from £14bn in December 2022 to close to zero in December 2023.
Public sector net debt as at 31 December 2023 was £2,686bn or 97.7% of GDP, up £15bn during the month and £146bn higher than at the start of the financial year.
Nine months to December 2023
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first three quarters of the financial year to December 2023 was £119bn, £11bn more than the £108bn deficit reported for the first nine months of 2022/23.
This reflected a year-to-date shortfall between tax and other receipts of £776bn and total managed expenditure of £895bn, both up 6% compared with April to December 2022.
Inflation benefitted tax receipts for the first nine months compared with the same period in the previous year, with income tax up 10% to £178bn and VAT up 7% to £150bn. Corporation tax receipts were up 18% to £76bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £132bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year.
Council tax receipts were up 6% to £33bn, but stamp duty on properties was down by 27% to £10bn and the total for all other taxes was down by 3% to £112bn as economic activity slowed. Non-tax receipts were up 11% to £84bn, primarily driven by higher investment income and higher interest receivable on student loans.
Total managed expenditure of £895bn in the nine months to December 2023 can be analysed between current expenditure excluding interest of £761bn, interest of £97bn and net investment of £37bn, compared with £841bn in the same period in the previous year, comprising £722bn, £103bn and £16bn respectively.
The increase of £39bn or 5% in current expenditure excluding interest was driven by a £24bn increase in pension and other welfare benefits (including cost-of-living payments), £15bn in higher central government pay and £8bn in additional central government procurement spending, less £6bn in lower subsidy payments (principally relating to energy support schemes) and £2bn in net other changes.
The fall in interest costs for the nine months of £6bn to £97bn comprises an £18bn or 39% fall to £28bn for interest accrued on index-linked debt from a lower rate of inflation, partially offset by a £12bn or 21% increase to £69bn for interest not linked to inflation from higher interest rates.
The £21bn increase in net investment spending to £37bn in the first nine months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £11bn or 42% reflects high construction cost inflation, among other factors, which saw a £14bn or 20% increase in gross investment to £85bn, less a £3bn or 7% increase in depreciation to £48bn.
Public sector finance trends: December 2023
The cumulative deficit of £119bn for the first three-quarters of the financial year is £5bn below the Office for Budget Responsibility (OBR)’s November 2023 forecast of £124bn for the nine months to December 2023. The OBR is also forecasting a full year forecast of £124bn as it expects self-assessment tax receipts in January to offset projected deficits in February and March 2024.
Balance sheet metrics
Public sector net debt was £2,686bn at the end of December 2023, equivalent to 97.7% of GDP.
The debt movement since the start of the financial year is £146bn, comprising borrowing to fund the deficit for the nine months of £119bn plus £27bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.
Public sector net debt is £871bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,330bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.
Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 31 December 2023, comprising £1,584bn in non-financial assets and £1,049bn in non-liquid financial assets minus £2,686bn of net debt (£296bn liquid financial assets – £2,982bn public sector gross debt) and other liabilities of £662bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.
Revisions
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The latest release saw the ONS revise the reported deficit for the eight months to November 2023 down by £5bn from £116bn to £111bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of November 2023 was revised down by 0.1 percentage points from 97.5% to 97.4%.
The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £130bn for 2022/23.
The section in which Martin was quoted reads as follows:
Martin Wheatcroft FCA, an external adviser on public finances to ICAEW, says it is not just badly run councils – that either speculated and lost or mismanaged funds – that now face the distinct possibility of financial failure: “Many ‘normal’ local authorities are now looking vulnerable too, as they struggle to balance their budgets in the face of rising demand, rising costs and constrained funding.”
In particular, Wheatcroft says adult social care is a significant challenge for many local authorities, as an ageing population sees demand increasing each year as the number of pensioners grows. Meanwhile, the knock-on impact of the minimum wage increase of 9.8% from April will further add to the challenges facing councils in the coming financial year.
“With local authority core funding only going up 6.5% in the coming financial year, local authorities are having to look for further cuts in other already ‘cut to the bone’ public services to try and balance their books,” Wheatcroft adds.
Last month, the Department for Levelling Up, Housing and Communities released a call for views on greater capital flexibilities that would allow councils to either use capital receipts to fund operational expenditure or to treat some operational expenditure as if it were capital, without the requirement to approach the government.
The intention is to encourage local authorities to invest in ways that reduce the cost of service delivery and provide more local levers to manage financial resources. The consultation is open until the end of January.
Under the current rules, councils are restricted from using money received from asset sales or from borrowing to fund operating costs due to capital receipts being considered a ‘one-off‘, while borrowing creates a liability that has to be repaid.
Wheatcroft adds: “The government’s announcement of greater capital flexibilities may help stave off some of the problems for a while but is likely to further weaken local authority balance sheets in doing so.”
![Table with fiscal numbers for the ten months to Jan 2020, Jan 2021, Jan 2022, Jan 2023 and Jan 2024, all in £bn.
Receipts: 685 | 647 | 754 | 849 | 901
Expenditure: (588) | (746) | (686) | (722) | (761)
Interest: (44) | (33) | (55) | (103) | (97)
Net investment: (26) | (51) | (35) | (16) | (37)
[subtotal] Deficit: (61) | (270) | (123) | (108) | (119)
Other borrowing: 3 | (67) | (85) | (8) | (27)
[total] Debt movement: (58) | (337) | (208) | (116) | (146)
Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686
Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%](https://martinwheatcroft.com/wp-content/uploads/2024/02/Public-sector-finance-trends-2024-01.jpg)
![Table showing fiscal numbers for the nine months to Dec 2019, 2020, 2021, 2022 and 2023.
Receipts: 597 | 560 | 653 | 733 | 776
Expenditure: (588) | (746) | (686) | (722) | (761)
Interest: (44) | (33) | (55) | (103) | (97)
Net investment: (26) | (51) | (35) | (16) | (37)
[subtotal] Deficit: (61) | (270) | (123) | (108) | (119)
Other borrowing: 3 | (67) | (85) | (8) | (27)
[total] Debt movement: (58) | (337) | (208) | (116) | (146)
Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686
Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%](https://martinwheatcroft.com/wp-content/uploads/2024/02/Public-sector-finance-trends-2023-12.jpg)