ICAEW chart of the week: Public sector segments 2022/23

Our chart this week illustrates just how centralised the UK is by looking at the disparity between receipts and expenditure between central and local government.

Step chart for the financial year 2022/23, showing receipts of £1,018bn (first column) less expenditure £1,155bn (middle column) and deficit £137bn (last column). Central government: £931bn receipts - £919bn expenditure = £12bn surplus before intra-government transfers. Local government: £59bn receipts - £204bn = £145bn shortfall before transfers. Other public sector: £28bn receipts - £32bn expenditure = £4bn shortfall before transfers.

Most people living in the UK would be surprised to discover just how big a gap there is between the council taxes and other income received by local councils, police and fire authorities, and the amount that they spend on public services.

Our chart of the week illustrates this disparity by looking at public sector segments in 2022/23 and how receipts and expenditure match up, before taking account of intra-government transfers.

Fiscal reporting in the National Accounts is broken down into five segments, of which the two largest are central government and local government. The former includes UK government departments, the devolved administrations in Scotland, Wales and Northern Ireland, and several hundred government agencies and other public bodies. Local government principally consists of local authorities across the UK, the Greater London Authority and regional combined authorities in England, police and fire authorities in England and Wales, and local public transport bodies (the largest of which is Transport for London). The other three segments are public corporations (comprising publicly owned businesses plus social housing), funded pension schemes (mostly local authority schemes as central government schemes are generally unfunded), and the Bank of England.

The latest provisional numbers for the financial year ended 31 March 2023 reported that the UK public sector generated £1,018bn in receipts and incurred expenditure of £1,155bn, giving rise to a deficit of £137bn – a shortfall that has been funded by central government borrowing.

Central government raised £931bn in 2022/23 and spent £919bn, a net £12bn surplus before intra-government transfers. Local government received £59bn and spent £204bn, a shortfall of £145bn. And the three remaining fiscal segments together generated £28bn in receipts, and recorded £32bn in expenditure, a net shortfall of £4bn.

By excluding transfers in this way, the chart highlights just how centralised the UK state is, with local government dependent on central government largesse to pay for 69% of its spending in 2022/23. 

Local authorities received £41bn in council taxes and £18bn in non-tax receipts, with intra-government transfers amounting to £141bn, comprising £127bn in revenue grants and £14bn in capital grants. Transfers included a redistribution of £25bn in business rates, which although collected by local authorities are national taxes whose disposition is determined by central government. The rest came from a combination of block grants, subsidies, and specific grants (some of which councils need to bid for) as part of a complex and complicated web of funding arrangements for local authorities that makes them highly dependent on the decisions of government ministers.

After transfers there was a reported deficit of £137bn in central government and £4bn in local government, while £8bn in net transfers converted a £4bn shortfall between receipts and expenditure in the three other segments into a net £4bn surplus.

The big picture is of the most centralised state among medium and large economies in the developed world, with local authorities almost entirely dependent on the largesse of central government to fund the essential public services they deliver.

Distributing power to the devolved administrations in Scotland, Wales and Northern Ireland has started to see a share of national taxes dispersed (such as income tax in Scotland and Wales) and some limited tax-raising powers. This contrasts with the debate about devolution in England, which has primarily focused on structures with the partial creation of a regional tier of local government in the form of combined authorities, rather than on more fundamental questions of whether this very centralised system of funding for local authorities needs reform.

This chart was originally published by ICAEW.

ICAEW chart of the week: Japan demographics

We look at how Japan’s population is ageing and falling fast, presenting some major challenges for the public finances of the third largest national economy in the world.

Column chart showing Japan's population at twenty-year intervals from 1963 to 2063, analysed into five age groups: Ages 0-19, Ages 20-39, Ages 40-59, Ages 60-79, Ages 80+. 1963 – 36m, 32m, 19m, 8m and 1m – 96m total 1983 – 35m, 36m, 31m, 15m and 2m – 119m total 2003 – 25m, 35m, 35m, 27m and 5m – 127m total 2023 – 20m, 26m, 35m, 31m and 12m – 124m total 2043 – 15m, 22m, 26m, 31m and 16m – 110m total 2063 – 12m, 17m, 22m, 24m and 18m – 93m total

Our chart this week is on the demographics of Japan, looking at how its population grew rapidly from 96m in 1963 to 119m in 1983 and then 127m in 2003, before falling to 124m this year, to a projected 110m in 20 years’ time, and to 93m in 40 years’ time.

Our analysis starts with the 96m people who lived in Japan in 1963 and shows how increased longevity saw the population increase to 119m in 1983 (an increase of 24m from 36m births and 2m migrants less 14m deaths), before increasing to 127m in 2003 (a further 8m increase from 25m births less 17m deaths). 

The population has been relatively stable since then, peaking at 128m in 2010 (not shown in the chart), before dropping to 124m this year as the number of births (20m over the last 20 years) fell below the number of deaths (25m). This was offset by a small amount of net inward migration, with the non-Japanese component of the population amounting to 3m in 2023.

Fewer younger people means that the number of births is expected to be even smaller over the next 20 years to 2043 at around 15m, at the same time as deaths are expected to increase in line with an older population. According to the latest medium-variant projections of Japan’s National Institute of Population and Social Security Research, the population is projected to drop by 14m to 110m in 2043 (15m births + 3m migrants – 32m deaths) before falling by a further 17m to 93m in 2063 (12m births + 3m migrants – 32m deaths).

The primary purpose of the chart is to illustrate how the age profile has shifted and continues to change as Japan gets older. Grouped into five age segments: 0-19, 20-39, 40-59, 60-79 and 80+, the population was, is, and is projected to be as follows:

1963 – 36m, 32m, 19m, 8m and 1m – 96m total
1983 – 35m, 36m, 31m, 15m and 2m – 119m total
2003 – 25m, 35m, 35m, 27m and 5m – 127m total
2023 – 20m, 26m, 35m, 31m and 12m – 124m total
2043 – 15m, 22m, 26m, 31m and 16m – 110m total
2063 – 12m, 17m, 22m, 24m and 18m – 93m total

The contrast in the age profile in the 20th century compared with 21st century Japan is dramatic, with the proportion of population aged 60 or over increasing from 9% in 1963 to 35% today and to a projected 45% in 2063, at the same time as the share aged under 40 has fallen from 72% in 1963 to 37% in 2023 and to a projected 31% in 2063.

Also not shown in the chart is Japan’s median age, which was 26 in 1963, 33 in 1983, 42 in 2003 and 49 this year, before being projected to reach 53 in 2043 and 56 in 2063 – more than double that of a century earlier.

These demographic shifts have and will continue to present a major fiscal challenge for the Japanese government. The continued growth in size of older generations (who typically consume the most in public services and welfare), accompanied by a shrinking working-age population (the group that typically pays most of the taxes that fund public services and welfare), will not be an easy dynamic to manage. At the same time, Japan already has one of the largest national debts of any country at in excess of 250% of its GDP.

One action Japan could take is to increase the pace of net inward migration even more than it already has, given it is currently at a much lower level than in many other developed countries such as the UK. This would have the benefit of bringing in more tax-paying individuals of working age and potentially assist in driving up the birth rate, slowing the rate of fall in the size of the population. However, there would be significant political challenges to overcome for such a route to be successful.

The good news for Japan is that it can still borrow at very low interest rates, with the effective interest rate payable on 10-year government bonds currently at 0.4%, much lower than in many comparable countries with much lower levels of external debt. This is both a threat, in that interest rates could go up significantly in the future, but also an opportunity in that the Japanese government is able to invest in adapting itself for a very different future.

This chart was originally published by ICAEW.

ICAEW chart of the week: Consumer price inflation

Our chart illustrates how ‘core inflation’, energy price rises, and food, alcohol and tobacco price inflation contributed to a lower than expected fall in the overall rate of inflation in April 2023.

Column chart breaking down annual CPI from Jan 2022 through April 2023 between energy prices (8% of index), food, alcohol and tobacco (16% of index) and core inflation (76% of index). CPI all items - 5.5%, 6.2%, 7.0%, 9.0%, 9.1%, 9.4%, 10.1%, 9.9%, 10.1%, 11.1%, 10.7%, 10.5%, 10.1%, 10.4%, 10.1%, 8.7%. Energy prices - 23.2%, 22.7%, 27.6%, 52.1%, 52.8%, 57.3%, 57.8%, 52.0%, 49.6%, 59.0%, 55.6%, 52.8%, 52.8%, 51.2%, 49.0%, 40.5%, 10.8%. Food, alcohol and tobacco - 4.0%, 4.6%, 5.6%, 6.0%, 7.5%, 8.2%, 10.4%, 10.8%, 11.8%, 13.2%, 12.7%, 12.9%, 13.2%, 14.3%, 15.0%, 16.0%. Core inflation - 4.4%, 5.2%, 5.7%, 6.2%, 5.9%, 5.8%, 6.2%, 6.3%, 6.5%, 6.5%, 6.3%, 6.4%, 5.8%, 6.2%, 6.2%, 6.8%.

The annual rate of consumer price inflation (CPI) fell from 10.1% in March 2023 to 8.7% in April 2023, but this fall was not considered very good news by economists, policymakers or the financial markets. 

The response to April’s inflation statistics has been dramatic, with financial markets now predicting that the Bank of England could increase its base interest rate to as much as 5.5%, instead of sticking at the 4.5% rate announced in May that many commentators had previously suggested might be the peak needed to bring inflation under control.

The reasons why there are these concerns can be illustrated by our chart this week, which analyses CPI into three component sub-indices: energy price inflation, food, alcohol and tobacco, and core inflation. Our chart highlights how core inflation and the annual rate of food, alcohol and tobacco price rises both unexpectedly increased in April 2023, partially offsetting the anticipated slowdown in energy price inflation as the huge rises in domestic energy costs that took effect in April 2022 fell out of the year-on-year comparison. 

Energy price inflation, comprising both domestic energy and fuels such as petrol and diesel, currently represent just 8% of the overall consumer price inflation index, but the rises over the past 15 months have been so large they have contributed significantly to the overall headline CPI rate. Annual energy price inflation in January 2022 was already high at 23.2% as the constrained energy supply drove prices high while the global economy started to recover from the pandemic. This was followed by 22.7% in February 2022 and 27.2% in the year to March 2022, before jumping to 52.1% in April 2022. The annual rate of increase in energy prices remained high over the following months rising to 52.8%, 57.3% then 57.8% in July, 52.0%, 49.6% to a peak of 59.0% in October. The rate of increase decelerated to 55.6%, 52.8% and then 51.2% in January, to 49.0% and 40.5% in February and March 2023, before dropping to 10.8% in April 2023 when compared with the higher base of April 2022.

Food, alcohol and tobacco prices represent about 16% of the CPI index and were 4.0% higher than a year previously in January 2022. Since then the annual rate of increase has gradually increased each month, to 4.6%, 5.6% and then 6.0% in April 2022, to 7.5%, 8.2% and 10.4% in July 2022, and then to 10.8%, 11.8% and 13.2% in October 2022. The annual rate of increase moderated to 12.7% and 12.9% in November and December, before returning to 13.2% in January 2023. The annual rate of price increases accelerated to 14.3% in February, 15.0% in March and to 16.0% in April.

Not shown in the chart is the sub-subindex of food and non-alcoholic beverages, which was running at 19.1% in the year to March 2023 and 19.0% in the year to April 2023, with the jump in April coming from alcohol and tobacco prices, which rose from 5.3% in March to 9.1% in April.

Perhaps more worrying than the jump in alcohol and tobacco prices is what is happening to ‘core inflation’, which is defined as CPI excluding energy, food, alcohol and tobacco. Representing just over three quarters (76%) of consumer spending, annual core inflation was running at 4.4% in January last year, rising to 5.2%, 5.7% and then 6.2% in April 2022, 5.9%, 5.8% then 6.2% in July, 6.3%, 6.5% then 6.5% in October, 6.3%, 6.4% then 5.8% in January, 6.2%, 6.2% and then 6.8% in April 2023.

By excluding more volatile components of the CPI index, core inflation is generally more stable than overall CPI. By hovering within the 5.7% to 6.5% range for the past year, the hope was that core inflation was – while pretty high – at least not out of control. The unexpected rise to 6.8% in April is worrying for the Bank of England, which is concerned that inflation could become embedded into the UK economy at a rate much higher than its 1%-3% mandated target range.

The good news is that planned cuts to domestic energy prices in July, together with other price rises last summer falling out of the year-on-year comparison, should feed through to a much lower headline rate of inflation over the next few months, reducing the pressure on wage settlements and other input costs that are currently driving up prices across the whole economy.

Despite that, the markets believe that further interest rate rises may still be necessary on top of the actions already taken by the Bank of England, potentially risking overtightening that could worsen the cost-of-living crisis and the squeeze on businesses.

This chart was originally published by ICAEW.

ICAEW chart of the week: International migration 2022

As the ONS reports that just over 600,000 more people came to live in the UK in 2022 than left to live elsewhere, this week’s chart looks at the numbers behind the comings and goings.

Step chart showing immigration of +1,163,000 in 2022 (first column) less emigration of -557,000 (second column) = net migration +606,000 (third column). The first column is broken down into +248,000 settlement and asylum, +316,000 workers and dependents, +404,000 students and dependents, +64,000 to join family and +131,000 other reasons.

Net inward migration of 606,000 in the year ended 31 December 2022 was boosted by a quarter of a million Ukrainians, Hong Kongers and asylum seekers according to ONS experimental statistics on international migration to and from the UK.

The Office for National Statistics (ONS) released provisional numbers for international migration on 25 May 2023, providing its estimate of long-term arrivals and departures from the UK for the 2022 calendar year, with 1,163,000 immigrants arriving in the UK and 557,000 emigrants, a net migration number of 606,000.

These numbers exclude tourists and other travellers planning to stay for less than a year, as well as UK residents going abroad on holiday or likewise planning to be away for less than a year. However, the numbers include students and others coming for more than a year who don’t plan to stay in the UK after they finish their courses or their work visas expire.

Traditionally these statistics have been prepared using arrival and departure surveys completed by a sample of travellers when they arrive or depart from UK airports and ports, but these have been found to be inaccurate in recent years. The ONS has started to address this by using other administrative sources to improve the quality of their analysis, in the meantime slapping this dataset with ‘experimental’ and ‘provisional’ labels to emphasise how less than definitive it is.

As our chart of the week illustrates, 248,000 immigrants arrived through settlement schemes or to claim asylum, 316,000 came for work reasons, 404,000 for study, 64,000 to join family, and 131,000 for other reasons. 

All of the 248,000 immigrants who arrived through settlement schemes or to claim asylum came from outside the EU. They comprised 114,000 Ukrainian refugees, 52,000 British Overseas Nationals from Hong Kong, 6,000 through other resettlement schemes (principally Afghanistan), and 76,000 asylum seekers. Some 3,000 asylum seekers were believed to have left the country in 2022, but the ONS does not have sufficient data to identify the number of Ukrainian refugees or other settlers who may have returned or moved elsewhere.

Of the 316,000 who came for work reasons, 235,000 were from outside the EU (of which 127,000 came to work and 108,000 were dependents), 62,000 came from EU countries, and 19,000 were UK citizens. Unfortunately, the ONS has not been able to analyse the number of EU or UK citizens who left for work reasons (either to start a new job elsewhere or because their UK-based job came to an end), but they have estimated that 56,000 non-EU non-UK workers and dependents left the UK in 2022 (29,000 workers and 27,000 dependents).

Study was the biggest immigration category in 2022, as the higher education sector continued to recruit international students as part of a big export drive. 404,000 people arriving during 2022. This comprised 361,000 from outside the EU (of which 276,000 came to study and 85,000 were dependents), 39,000 students from the EU and 4,000 being UK citizens who lived elsewhere before coming to the UK to study. The ONS reports that 153,000 non-EU citizens left the UK in 2022 after courses were completed (136,000 students and 17,000 dependents), but doesn’t report equivalent numbers for EU and UK citizens. 

The number of non-EU students and dependents arriving has risen quite significantly over the last couple of years (from 121,000 in 2019 and 113,000 in 2020 to 301,000 in 2021) and so the net impact should reduce significantly in 2024 and thereafter as courses complete. The net number could turn negative if the recently announced restrictions on masters students bringing dependents (masters courses often being the first step towards PhD study) causes incoming numbers to fall below the level of departures.

The majority of the 64,000 arriving to join family came from outside the EU, with 51,000 arriving from non-EU countries, 8,000 from the EU, and 5,000 being UK citizens. Again, the ONS does not have data on EU and UK citizens leaving to join family or returning after a long-term stay with family, but it does report 42,000 non-EU citizens in this category left the UK in 2022.

‘Other’ arrivals comprise a combination of genuine other reasons for people choosing to settle in the UK as well as data collection issues, with the ONS finding it difficult to identify the reasons why many EU and UK citizens arrive or leave the UK. Of the 131,000 immigrants classified as other, 29,000 came from outside the EU, 42,000 came from EU countries and around 60,000 were returning UK nationals.

While the headlines about the migration numbers have not necessarily been that favourable to the government, the Chancellor may be more cheerful than many of his colleagues given the recent improvement in the IMF’s short-term economic outlook for the UK, partly as a consequence of migrants arriving to fill domestic labour shortages, as well as the contribution to the economy of a growing number of fee-paying students.

This chart was originally published by ICAEW.

ICAEW chart of the week: VAT threshold

The mystery of just why so many businesses sit just below the VAT registration threshold will be a big topic of debate at ICAEW’s VAT at 50 conference on Monday 22 May.

Line chart showing number of businesses plotted against £1,000 turnover intervals. An orange line shows how the number of traders curves down as turnover increases, before increasing sharply before the VAT threshold (a vertical line in the chart at £85,000) and dropping almost vertically. A purple line shows a relatively straight decline to the right of the VAT threshold, with some bumps along the way. A teal-coloured dotted trendline curves through the chart, with businesses all above the trendline to the left of the VAT threshold, and below the trendline to the right up until £130,000.

Our chart this week celebrates the 50th anniversary of the introduction in the UK of Value Added Tax (VAT), the indirect tax on commercial transactions that now generates around 20% of tax receipts. 

One of the big mysteries in the tax system is why so many small businesses and sole traders cluster just below the VAT threshold of £85,000.

As illustrated by our chart, the number of businesses below the threshold gradually falls from almost 31,000 in the turnover band between £50,000 and £50,999 to just under 17,000 in the turnover band between £77,000 and £77,999, before diverging above the trendline to increase up to just over 20,000 in the £84,000 to £84,999 turnover band – immediately below the threshold for registering for VAT. This is almost twice as many as the just over 10,000 traders in the £85,000 to £85,999 turnover band, the first band legally required to register for VAT. 

One explanation may be that there is some gaming (or possibly even misreporting) going on, with business owners approaching the threshold for VAT deciding to spread their business activities across multiple legal entities or keeping ‘cash-in-hand’ transactions off the books to avoid, or evade, adding VAT of 20% in most cases onto their prices.

However, perhaps a more worrying concern is if these businesses are not getting around the rules, but instead deliberately choosing to keep their businesses small given the competitive disadvantage that goes with adding VAT to prices charged to consumers, and the hassles and hazards involved with becoming a tax collector on behalf of the government. 

This is a big issue for a UK economy experiencing weak economic growth. Not only is government income at stake, but also the wider benefits of more prosperous small businesses to the overall economy and what that means for the national economy.

Of course, many businesses do register despite being below the threshold, with around 1.1m traders in 2018/19 with turnover less than £85,000 signed up to VAT.

Other countries take a different approach, with much lower registration thresholds across most of Europe. Domestic thresholds range from nil in Spain, Italy and Greece, NOK40,000 (approximately £3,000) in Norway, €22,000 (£19,000) in Germany and €37,500 (£33,000) in Ireland, up to €50,000 (£43,000) in Slovenia. Switzerland is an exception with a higher registration threshold than the UK at CHF100,000 (£89,000). 

In general, this means that a much greater proportion of actively trading businesses across Europe are registered for VAT compared with the UK, where there are estimated to be more than 3m or so traders with annual revenue of between £10,000 and £84,999 who have not registered for VAT – more than £100bn in total revenue.

Some believe that raising the threshold would provide a boost to the economy, given that many businesses would be more willing to grow (or declare) more of their revenue, while others believe the better option would be to reduce the threshold to capture many more businesses. The former would likely result in lower tax receipts overall, by allowing businesses just above the existing threshold to stop collecting VAT. The latter should in theory generate much more in tax receipts, perhaps as much as £20bn a year, in addition to removing one of the distortions that the tax system creates in this part of the economy.

The irony is that a relatively high VAT threshold in the UK designed to encourage and support small businesses may be one of the factors holding back economic growth. And with an unchanged threshold combined with inflation of more than 10% over the past year, this may be an even bigger drag on the economy/incentive to cheat than it has been in the past.

Click here to find out more about VAT at 50, ICAEW’s celebration (if that is the right word) of the 50th anniversary of VAT, and what the future holds for our most beloved of indirect taxes.

This chart was originally published by ICAEW.

ICAEW chart of the week: Food prices

An inflation rate of 10.1% in the year to March 2023 conceals a huge variation in individual price rises, as illustrated by this week’s chart on food prices.

Column chart showing annual inflation for a sample of individual food and non-alcoholic drink items across six different categories, according to the Office for National Statistics prices comparison tool for March 2023. A horizontal line shows the average food price inflation over that period of +17%. Each category is ordered from lowest price rise to highest, with only the highest labelled. Snacks and sweets: 18 items (9 below line, 9 going above) the highest of which is plain biscuits +26%. Meat and fish: 12 items (7 below, 5 going above), pork chops +28%. Frozen: 10 items (3 below, 7 going above), chicken nuggets +35%. Deli and dairy: 30 items (10 below, 1 going to the line, 19 going above), hard cheese +44%. Store cupboard: 41 items (23 below, 18 going above), olive oil +49%. Fruit and veg: 28 items (16 below, 12 going above), cucumber +52%.

One of the problems in measuring inflation is that a weighted average of thousands of different prices is very different from our individual experience of inflation. Not only are we unique in terms of the basket of goods and services that we buy, but we also tend to notice some price changes more than others – making our personal experience very different from everyone else’s.

Nowhere is this more pronounced than in our regular trips to the shops to buy groceries, where we can see higher prices both on the shelves and when we come to pay at the till. This can be much more visible to us than bills paid by direct debit, for example, where money just disappears from our bank account and we need to make an effort to work out what is going on.

The Office for National Statistics has recently launched a shopping prices comparison tool that allows you to choose a basket of goods and see how retail prices have increased across different types of purchases: food and drink, clothing and footwear, restaurants and bars, health, household items, recreation and culture, services, and transport. Even there, the prices they quote are averages from many different retail outlets, specific products, and brands – and so won’t exactly match what is happening to your individual basket.

For our chart this week, we have chosen to look at food prices, choosing a basket that in total has increased by 17% over the past year, rising from £422.40 if you had bought everything on the list in March 2022 to £495.43 in March 2023. We have allocated these into six different categories to give a bit more flavour (pun intended) to what is going on.

There is a huge amount of variation between different foodstuffs, with our chart illustrating how in the snacks and sweets category the average price of 200-300g of plain biscuits has increased by 26% (from 98p to £1.24), while in meat and fish, pork loin chops have gone up by 28% (from £6.35 per kg to £8.12 per kg). In the frozen category, chicken nuggets are up 35% (from £1.79 to £2.41), while in deli and dairy, hard cheese has gone up the most on average, by 44% (from £6.92 per kg to £9.98 per kg). Olive oil tops our store cupboard classification, up 49% (from £3.87 to £5.78 on average between 500ml and 1 litre), but the king of food price inflation is the humble cucumber, up a massive 52% over a one year period from 55p to 84p each.

Not highlighted in the chart are the smallest price rises in each category, with peanuts up 5% (from £1.23 to £1.29 for 150-300g), lamb loin chop/steaks up 4% (from £15.49 to £16.13 per kg), frozen vegetable burgers up 11% (£1.99 to £2.21), sliced ham up 9% (£2.41 to £2.64 for 100-200g), low-sugar/non-chocolate breakfast up 6% (£2.08 to £2.20), and sweet potato up a mere 2% (from £1.17 to £1.19 per kg).

The Bank of England continues to tighten the screws on inflation, raising its base rate to 4.5% on 11 May 2023, and the projections are that inflation overall should start to reduce quite rapidly over the next few months. 

However, as ICAEW Economies Director Suren Thiru recently said in a TV interview on BBC Breakfast, inflation is now becoming embedded into the everyday things that we buy. This makes the challenge for the Bank of England to bring inflation back down to its target range of 1% to 3% that much harder.

This chart was originally published by ICAEW.

ICAEW chart of the week: Royal Household finances

His Majesty’s Coronation prompts us to peek into how the monarchy is funded and where the money goes.

Step chart showing components of £96.2m in income (first column) less £112.3m in expenditure (second column) = a net loss of £16.1m in 2021/22. Top half of the chart is Core Sovereign Grant £51.8m + commercial income £9.9m less core operating costs (£41.5m) + property maintenance (£16.1m) with a surplus of £4.0m transferred to reserve. Bottom half of the chart comprises Additional Sovereign Grant £34.5m less Buckingham Palace Refurbishment (£54.6m) with the shortfall covered by a transfer from reserve (£20.1m).

Our chart this week is on the finances of the Royal Household, based on its most recent financial statements for the financial year ended 31 March 2022 (2021/22), a period in which Her Majesty Queen Elizabeth II was in charge. 

Income during the year was £96.2m, comprising a core Sovereign Grant of £51.8m and an additional Sovereign Grant of £34.5m (a total of £86.3m), together with commercial income of £9.9m. Expenditure amounted to £112.3m, comprising core operating costs of £41.6m, core property maintenance of £16.1m, and Buckingham Palace refurbishment costs of £54.6m. 

The net loss was £16.1m, consisting of £20.1m transferred from reserves to cover amounts spent in the year refurbishing Buckingham Palace in excess of the additional Sovereign Grant for that year, less £4m transferred to reserves from the surplus by which the core Sovereign Grant and commercial income exceeded core operating costs and property maintenance.

The Sovereign Grant is funded out of the profits of the Crown Estate, a portfolio of property and other investments that were originally handed over to the state in 1760 by King George III in exchange for ending his responsibility to contribute towards the costs of running the civil government. This arrangement included a contribution from the Civil List to the Royal Household towards the costs of his official duties as head of state, separate from personal expenditure funded from his private resources as Duke of Lancaster (and as Duke of Cornwall, given there was no Prince of Wales at that point).

The Civil List continued through the reigns of George IV and William IV and was made permanent in 1837 when Queen Victoria took the throne, at least until 2012 when it was replaced by the Sovereign Grant. This consolidated into one budget the previously separate departmental grant-in-aid payments for royal travel, communications, and maintenance of official royal palaces in addition to the Civil List payments to cover official duties, although it excludes the costs of police and military security, armed forces ceremonial duties, and royal events such as the Coronation.

The Crown Estate’s contribution was initially set at 15% of its net income, with a cap on the level of reserves that the Royal Household can build up, as well as a floor that prevents the grant from falling if profits go down. This is being supplemented on a temporary basis by an additional 10% from 2017-18 onwards to fund a 10-year £369m refurbishment of Buckingham Palace.

The Royal Household generates commercial income from property rentals and from The Royal Collection Trust (a charity, which in turn generates income from visitors to Buckingham Palace and Windsor Castle), as well as from recharges to the King and other members of the Royal Family for their personal usage of the royal palaces, including their accommodation. Contributions from The Royal Collection Trust were waived during the pandemic, including most of 2021/22. 

Expenditure during 2021/22 of £112.3m comprised £54.6m on the refurbishment of Buckingham Palace, £41.6m in core operating costs and £16.1m on property maintenance. 

Core operating costs of £41.6m consisted of £23.4m in staff costs, £4.5m in official travel, £3.2m for utilities, £2.9m for digital services, £1.3m for housekeeping and hospitality, £2m in depreciation, and £4.3m in other spending.

Property maintenance expenditure relates to Buckingham Palace, St James’s Palace, Clarence House, Marlborough House Mews, Hampton Court Mews, Windsor Castle, Windsor Home Park, and parts of Kensington Palace, but does not include the Palace of Holyroodhouse (which is maintained by Historic Environment Scotland). 

Not shown in the chart is the balance sheet, with net assets of £63.6m comprising property improvements, plant and machinery and other fixed assets of £29.1m, cash of £45.1m and other current assets of £4.1m, less £16m in payables, plus £1.3m in net defined benefit pension scheme asset. Reserves comprise £15.7m in relation to the core Sovereign Grant, £15.1m to the Buckingham Palace refurbishment, £2.4m in retained surpluses, and £30.4m in other reserves. The balance sheet does not include the royal palaces and other royal properties themselves, which are held in trust for the nation by the King.

Lower net income from the Crown Estate over the course of the pandemic mean that the core and additional Sovereign Grants have been frozen at the same level in both 2022/23 and 2023/24, although they are expected to increase in 2024/25.

As the accounts illustrate, most of the cost of the monarchy goes towards the cost of maintaining and refurbishing the royal palaces, which are held in trust for the nation. It may be surprising to discover that the King pays to use the royal apartments, and so if the UK ever were to become a republic, it is likely that the net cost of a future ‘Presidential Household’ would likely be higher without those contributions. Unless we decided to give some of the palaces – and their associated maintenance costs – back to the Royal Family.

Either way, the amounts involved represent a tiny proportion of UK public spending, which exceeded £1trn in 2021/22 or £15,400 per person (£1,280 per month). 

On a per capita basis, the Royal Household received £1.27 per person in core and additional Sovereign Grant in 2021/22 and generated 15p in commercial income, a total of £1.42 in the year (or 12p a month). It spent £1.65 per person (14p per month), comprising core operating costs of 61p, property maintenance of 24p, and Buckingham Palace refurbishment expenditures of 80p.

To find out more, read the Sovereign Grant Report.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public finances 2022/23

The public finances continue to be battered by economic shocks as this week’s chart on the past five years of red ink illustrates.

Column chart with five financial years illustrating tax and other receipts (top bar) less total managed expenditure (middle bar) = deficit (bottom bar). 2018/19 outturn: £813bn - £837bn = -£44bn 2019/20 outturn: £827bn - £888bn = -£61bn 2020/21 outturn: £793bn - £1,106bn = -£313bn 2021/22 outturn: £920bn - £1,041bn = -£121bn 2022/23 provisional: £1,016bn - £1,155bn = -£139bn

The monthly public sector finances for March 2023 released on Tuesday 25 April contained the first cut of the government’s financial result for 2022/23, with our chart this week illustrating trends over the past five years in receipts, expenditure and the deficit.

As our chart highlights, tax and other receipts increased from £813bn in 2018/19 to £827bn in 2019/20, before falling to £793bn during the first year of the pandemic. They recovered to £920bn in 2021/22 before rising with inflation to a provisional estimate of £1,016bn for the year ended 31 March 2023.

Total managed expenditure (TME) increased from £857bn in 2018/19 to £888bn in 2019/20, before exceeding £1trn for the first time in 2020/21 as the pandemic caused expenditure to rise significantly. TME fell in 2021/22 to £1,041bn as pandemic-released spending was scaled back, before rising this year to £1,155bn as inflation, higher interest rates and energy support packages more than offset the pandemic related spending that was not repeated in 2022/23.

The deficit of £44bn in 2018/19 was the lowest it had been since the financial crisis, following an extended period of spending restraint over a decade. The purse strings were loosened a little in 2019/20 as previous government plans to eliminate the deficit were abandoned, with the deficit rising to £61bn. The huge cost of the pandemic saw the deficit rise to £313bn in 2020/21 as the borrowing rose to meet the huge costs of dealing with the pandemic, before falling back to £121bn in 2021/22.

There were hopes that the situation would improve further, with the government in October 2021 budgeting for a deficit of £83bn. Unfortunately, rampant inflation and the energy crisis following Russia’s invasion of Ukraine mean that the government does not currently expect to reduce the deficit to below £50bn until 2027/28 at the earliest. And that is with what some commentators believe are unrealistic assumptions about the government’s ability to reduce spending on public services beyond the cuts already delivered.

Provisional receipts in 2022/23 were 25% higher than the outturn for 2018/19, which in the absence of economic growth has principally been driven by inflation of around 15% over that period combined with an increase in the level of taxation and other receipts from around 37% to approaching 41% of the economy. Total managed expenditure is provisionally 35% higher than in 2018/19, although this includes substantial amounts of one-off expenditures on the energy support packages and index-linked debt interest that should moderate, at least assuming inflation reduces in the coming financial year.

Not shown in the chart is what these numbers mean for public sector net debt, which has increased by £753bn over the past five years from £1,757bn at 1 April 2018 to a provisional £2,530bn at 31 March 2023. This comprises £678bn in borrowing to fund the deficits shown in the chart, and £75bn to fund lending by government and working capital requirements.

Our chart this week may be well presented, but it is not a pretty picture.

This chart was originally published by ICAEW.

ICAEW chart of the week: debit and credit card transactions

Volumes have been the main driver of the increase in value of debit and credit card transactions since 2022, as average spend on debit cards fell and the average transaction on credit cards rose by less than inflation.

Step chart showing volume and value per transaction changed between £73.9bn in card transactions in January 2022 and £83.5bn in Jan 2023. Debit card transactions: £57.7bn in Jan 2023 +£7.7bn volume (+13.4% to 1,971m) -£0.7bn (-1.1% to £32.82) = £64.7bn in Jan 2023. Credit card transactions: £16.2bn in Jan 2023 +£1.6bn volume (+9.9% to 321m) +£1.0bn (+6.0% to £58.58) = £18.8bn in Jan 2023.

UK Finance, the industry body for the banking and finance industry, released its latest data on UK card transactions on 20 April 2023. This provides an insight into UK debit and credit card transactions between January 2022 and 2023, and our chart this week takes a look at the year-on-year change in transaction amounts.

The monthly total value of transactions on UK-issued debit and credit cards increased from £73.9m in January 2022 to £83.5bn in January 2023, putting card transactions on course to exceed £1trn over the course of 2023. This includes online and telephone purchases, as well as in-person retail transactions and spending overseas.

Our chart illustrates how the value of debit card transactions increased from £57.7bn in January 2022 to £64.7bn, analysed between £7.7bn from a 13.4% increase in the volume of transactions to 1,971m, less £0.7bn from a 1.1% fall in the average value of each debit card purchase to £32.82. 

In the context of inflation in excess of 10%, a decline in the average value of debit transactions may seem counterintuitive. This is partly because of the continued displacement of cash as a method of payment, especially for low value purchases – contributing to growth in the volume of transactions, but a decline in average purchase amounts. Consumers scaling back their spending in response to the cost-of-living crisis is also likely to be a factor.

The value of credit card transactions rose from £16.2bn to £18.8bn, reflecting £1.6bn from a 9.9% increase in the number of transactions to 321m plus £1.0bn from a 6.0% increase in the average value of each transaction to £58.58.

The largest component of credit card transactions were purchases, which increased from £14.6bn to £17.1bn, up £1.4bn from a 9.9% increase in the volume of purchases to 319m, and £1.1bn from a 6.7% increase in the average value of each purchase to £53.60. Cash advances increased from £187m to £207m (from a 6.6% increase in the number of cash advances to 1.5m and a 3.6% increase in average advance to £135), while balance transfers increased from £1.4bn to £1.5bn (from a 4.0% increase in the number of balance transfers to 0.7m and a 4.9% increase in average transfer to £2,133).

Similar to debit cards, the decline in the average value of each credit card purchase after inflation is likely to be affected by the ongoing switch from cards to cash, as well as a scaling back of purchases by some consumers. There may also have been a shift in purchasing patterns for some households, from fewer larger purchases to more frequent smaller ones.

Not shown in the chart is the amount owed by credit card holders, which was 9.1% higher at £60bn at the end of January 2023 compared with £55bn a year previously. This is lower than the £61.3bn owed at the end of December 2022 as the £20.1bn repaid (just under a third of the total) exceeded the £18.8bn added. According to UK Finance, 51.3% of credit card balances attract interest, with the remainder primarily comprising those who pay their balances in full each month and those on interest-free balance transfers.

Debit and card usage is expected to continue to rise, with UK Finance previously forecasting that cash usage will fall from around 15% of all retail purchases in 2021 to around 6% by 2030. Others have suggested that physical cash could be eliminated altogether, saving the exchequer and businesses from the costs of creating, handling and disposing of cash.

For many, transitioning to a cashless society will be welcome – heralding the end of the need of jingling coins and purses and wallets bulging with banknotes. For others, including the million or so consumers who prefer or are reliant on cash for most of their day-to-day shopping, this may not be so positive.

This chart was originally published by ICAEW.

ICAEW chart of the week: Africa

I take a look at Africa this week and how its current population of 1.5bn, 18% of the world’s total, is distributed across the continent.

Map of Africa's 1.5bn people with countries coloured into five regions, overlayed by semi-transparent scaled bubbles with the population of each region. Teal: Western Africa 435m. Orange: Northern Africa 221m. Green: Central Africa 178m. Purple: Southern Africa 198m. Blue: Eastern Africa 428m.

My chart this week illustrates how Africa’s population of 1,460m can be divided into five regions. These comprise Western Africa with 435m people, Northern Africa with 221m, Central Africa with 178m, Southern Africa with 198m, and Eastern Africa with 428m. 

These regions are based on the African Union’s official regions for its 55 member states, which differ from the regions used by the United Nations. They include Réunion (1.0m) and Mayotte (0.3m), two French overseas territories in the Indian Ocean that are not members of the African Union, as well as St Helena (5,000), an overseas territory of the UK in the Atlantic. It also includes an estimated 5.8m people living in African Union applicant Somaliland that are included within the number for Somalia.

Excluded are 175,000 or so people living on the African continent in Ceuta and Melilla (Spain), around 2.2m and 250,000 respectively in the Atlantic Ocean on the Canary Islands (Spain) and Madeira (Portugal), and several hundred people in the Indian Ocean within France’s Southern Territories.

The table below breaks down the total by country within each region, highlighting how the four largest countries by population each have more than 100m people, led by Nigeria with 223.8m (15.3% of Africa’s total), Ethiopia with 126.5m (8.7%), Egypt with 112.7m (7.7%) and the Democratic Republic of the Congo with 102.3m (7.0%). 

The next largest are Tanzania with 67.4m (4.6%), South Africa with 60.4m (4.1%), Kenya with 55.1m (3.8%), Uganda with 48.6m (3.3%), Sudan with 48.1m (3.3%), Algeria with 45.6m (3.1%), Morocco with 37.8m (2.6%), Angola with 36.7m (2.5%), Ghana with 34.1m (2.3%), Mozambique with 33.9m (2.3%), Madagascar with 30.3m (2.1%) and Côte d’Ivoire with 28.9m (2.0%).

Table showing populations by each region: Western Africa 435m: Nigeria 223.8m, Ghana 34.1m, Côte d'Ivoire 28.9m, Niger 27.2m, Mali 23.3m, Burkina Faso 23.3m, Senegal 17.7m, Guinea 14.2m, Benin 13.7m, Togo 9.1m, Sierra Leone 8.9m, Liberia 5.4m, Gambia 2.8m, Guinea-Bissau 2.2m, Cabo Verde 0.6m, St Helena (UK) 0.0m. Northern Africa 221m: Egypt 112.7m, Algeria 45.6m, Morocco 37.8m, Tunisia 12.5m, Libya 6.9m, Mauritania 4.9m, Western Sahara 0.6m. Central Africa 178m: DR Congo 102.3m, Cameroon 28.6m, Chad 13.2m, Congo 6.1m, Central African Republic 5.7m, Gabon 2.4m, Equatorial Guinea 1.7m, São Tomé and Principe 0.2m. Southern Africa 198m: South Africa 60.4m, Angola 36.7m, Mozambique 33.9m, Malawi 20.9m, Zambia 20.6m, Zimbabwe 16.7m, Botswana 2.7m, Namibia 2.6m, Lesotho 2.3m, Eswatini 1.2m. Eastern Africa 428m: Ethiopia 126.5m, Tanzania 67.4m, Kenya 55.1m, Uganda 48.6m, Sudan 48.1m, Madagascar 30.3m, Somalia 18.1m, Rwanda 14.1m, South Sudan 11.1m, Eritrea 3.7m, Mauritius 1.3m, Djibouti 1.1m, Réunion (FR) 1.0m, Comoros 0.9m, Mayotte (FR) 0.3m, Seychelles 0.1m.

The population of Africa is expected to grow significantly over the rest of the century, with the UN’s medium variant projecting a population of 1.7bn (20% of the projected global total) in 2030, 2.1bn in 2040 (23%), 2.5bn (26%) in 2050, 2.9bn (28%) in 2060, 3.2bn (31%) in 2070, 3.5bn (34%) in 2080, 3.7bn (36%) in 2090 and 3.9bn (38%) in 2100. This is despite a rapidly declining birth rate, with many more Africans living much longer lives than preceding generations.

Africa is currently relatively poor compared with advanced economies, with the total GDP for its 55 countries and 1.5bn people close in size to the UK’s single country GDP for 67.5m people of around £2.5trn a year at current exchange rates. This is around 3% of the global economy in each case. 

The UK’s share of the global economy is likely to decline over the rest of the century as Africa and other developing economies grow at a much faster pace. For Africa the combination of a rapidly growing population and economic development should see it become substantially more significant to the global economy than it is today.

This chart was originally published by ICAEW.