My chart for ICAEW this week looks at how a declining fertility rate means the global population is now anticipated to reach a peak of ‘just’ 10.3bn in 2084, according to the UN.
The Population Division of the UN Department of Economic and Social Affairs (UN DESA) recently published its latest population projections for the 21st century. Its central projection is for the world’s population to increase from 8.2bn next year to a peak of 10.3bn in 2084 in 2084 before falling slightly to 10.2bn at the end of the century.
This means that the population will have increased by 2.0bn between 2000 and 2025 and is projected to increase by 1.5bn over the next 25 years to 9.7bn in 2050 and by 0.6bn to 10.3bn in 2075, before gradually starting to fall from 2084 onwards.
My chart illustrates how this change differs by region, with the population of Africa expected to grow throughout the century from 1.5bn in 2025 to 3.8bn in 2100. South and Central Asia, which has seen its population grow from 1.7bn in 2000 to an anticipated 2.3bn next year, is expected to see further growth to 2.9bn in 2075 before then falling to 2.8bn in 2100, while the population of the Asia-Pacific region is expected to increase from 2.1bn in 2000 to 2.4bn in 2025, is expected to fall gradually from 2030 onwards to 1.5bn in 2100.
The population of the Americas is expected to grow slightly from 1.1bn in 2025 (up from 0.8bn in 2000) to 1.2bn before falling back to 1.1bn by 2100, while Europe and Middle East’s population is expected to increase from 0.9bn in 2025 (up from 0.8bn in 2000) to close to 1.0bn in 2050 and for the rest of the century.
UN DESA says the main driver of global population increase over the next 60 years until it peaks is the momentum created by growth in the past, with increases in the number of women of reproductive age until the late 2050s offsetting a declining fertility rate – currently one child fewer on average than in the 1990s (2.25 live births per woman currently compared with 3.31 in 1990). They also project that the number of people aged 65 will reach 2.2bn in 2080, surpassing the number of children under 18 in that year.
The declining fertility rate is one reason that the UN are projecting that the world’s population in 2100 will be 700m or 6% smaller than they were anticipating a decade ago, despite life expectancy starting to increase again after falling during the COVID-19 pandemic.
For some countries and areas, the declines in population are expected to be quite significant over the remainder of the century, such as the populations of China and Japan, which are expected to reduce from 1,416m to 633m and from 123m to 77m between 2025 and 2100 respectively. Meanwhile India is expected to grow from a population of 1,464m in 2025 to a peak of 1,701m in 2061 before falling to 1,505m in 2100.
Many other countries and areas have already or will shortly see their populations start to decline, except for about 52 countries and areas up until 2054, and 62 up until 2100, where immigration will be the main driver of population growth. The latter includes the UK, where the population is expected to rise from 70m in 2025 to a peak of 76m in 2073 before falling to 74m in 2100, and the US, expected to grow from 347m in 2025 to 421m in 2100.
According to the analysis by the UN, there are around 100 countries and areas (out of the 237 included in their analysis) with relatively youthful populations over the next half century that have a window of opportunity to accelerate their economic development. This ‘demographic dividend’ occurs when the share of the population of working ages is increasing faster than the overall population and a substantial and sustained decline in fertility increases the numbers available to work, assuming the countries concerned can put in the investment needed to take advantage of this opportunity.
My chart for ICAEW this week looks at how negative economic growth per capita over the last five years may have contributed to the recent change in government.
My chart this week is on the change in quarterly GDP over the past five years, analysing the change between GDP as calculated by the Office for National Statistics (ONS) of £549bn in the first quarter of 2019 and £688bn in the first quarter of 2024, a net increase of £139bn.
Inflation, at 4% a year on average over the past five years, was the largest contributor to the change, being £120bn out of £139bn of the increase. An increase in population of more than 0.6% a year added a further £22bn, but this was offset by £3bn from negative economic growth per capita of 0.1% on average over the past five years.
Breaking down the £19bn change resulting from economic growth (0.5% a year on average), between population change and economic growth per capita in this way highlights how net inward migration has been one of the most significant drivers of the UK economy over the past five years.
While there are multiple reasons why the electorate decided to vote in a new government in the recent UK general election, the £41 reduction in quarterly GDP per capita over the past five years after adjusting for inflation – and the associated drop in living standards – to £9,994 per person in 2024 Q1 is likely to have been one of them.
The good news is that the next five years may be better, with monthly GDP up by 0.40% over the course of April and May 2024. This can be broken down between an estimated population growth of 0.16% and an increase in monthly GDP per capita over the two months of 0.24%, a positive sign, especially in the light of the latest ICAEW Business Confidence Monitor reporting that business confidence has risen to its highest level in over two years.
My chart for ICAEW this week ‘celebrates’ US Independence Day by setting out the latest congressional projections for federal debt.
Two hundred and forty-eight years ago, on 4 July 1776, the United States of America declared its independence from Great Britain, inheriting debts used to finance the revolutionary war but without any tax raising powers to fund repayment of the amounts owed. This was addressed by the adoption of the US Constitution in 1789, which enabled Secretary of the Treasury Alexander Hamilton to raise taxes, start repaying those initial debts, and issue new debt to finance a fledgling nation.
My chart this week illustrates how the US federal government has continued to borrow since then, with the Congressional Budget Office (CBO) reporting that US federal debt held by the public was $26.2tn or 97.3% of GDP in September 2023, on track to reach $28.2tn or 99.0% of GDP on 30 September 2024, before rising to a projected $50.7tn or 122.4% on 30 September 2034.
Debt on 4 July this year is estimated to be close to $27.8tn.
The projected rise in debt held by the public over the coming decade is based on extrapolating the gap between federal revenues and spending of around $160bn a month in the current financial year, based on tax and spending legislation enacted at 12 May 2024 together with the CBO’s own assessment of the administration’s financial plans (for example over student loan relief) and assumptions around factors such as interest rates and economic growth.
However, the CBO is keen to stress that these numbers are not a forecast. They say: “The baseline projections are meant to provide a benchmark that policymakers can use to assess the potential effects of changes in policy; they are not a forecast of future budgetary outcomes. Future legislative action could lead to markedly different outcomes. But even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline projections, not only because of unanticipated economic conditions, but also because of the many other factors that affect federal revenues and outlays.”
The challenge for the US is that despite almost 250 years of taxation with representation, that representation finds it difficult to raise taxes to bring debt down, often choosing to cut taxes and increase borrowing instead.
Whether that will change, or whether debt markets force it to change, remains a big unknown in the experiment commenced by George Washington and Alexander Hamilton all those years ago.
This week’s chart for ICAEW is on manifesto costings, illustrating the scale of each party’s promises and how they expect to fund them.
My chart for ICAEW this week summarises the financial commitments in the manifestos of the five UK-wide political parties, together with how they propose to fund their plans.
The Labour Party
The Labour Party manifesto costings are the most cautious financially, with plans to find £9bn in 2028/29 from a combination of tax rises and tackling tax avoidance and evasion and £1bn or so in spending reductions to provide most of the funding for its spending commitments of £11bn.
The additional tax revenue proposed by Labour includes £5.2bn from increasing taxes on non-doms and tackling tax avoidance and evasion, £1.5bn from VAT and business rates on private schools, £1.2bn from extending windfall tax on oil and gas, and £0.6bn from increasing the tax rate on private equity carried interest. Spending reductions include £0.7bn from cutting spending on consultants, £0.4bn from increased collaboration between police forces, and £0.2bn from scrapping the Rwanda plan and ending the use of hotels for asylum seekers.
Labour’s proposals for new spending comprise approximately £6bn for public services and £5bn a year in capital investment. The former includes £1.8bn for the NHS, £1.0bn for schools and young people (including £0.3bn for primary school breakfast clubs), £0.9bn for HMRC to tackle tax avoidance and evasion, £0.7bn for improving public service delivery and capability, £0.4bn for 13,000 neighbourhood and community PCSOs, and £0.2bn for asylum and border control. The latter includes £1.7bn for Great British Energy, £1.5bn for green investment programmes, £1.1bn for home insulation, and £0.3bn in incentives for green energy suppliers.
Labour’s proposals add up to £1bn in extra borrowing in 2028/29, although Labour suggest that they could add £3.5bn to borrowing in 2028/29, implying a further £2.5bn could be available for other priorities.
The Conservative Party
The Conservative Party’s plans are more ambitious, with plans to raise £5bn a year by 2028/29 from tackling tax avoidance and evasion and £21bn from spending cuts and efficiency savings, which they intend to use to fund tax cuts of £16bn and extra spending of £9bn.
Proposed spending cuts by the Tories comprise £11bn from cutting planned spending on welfare (principally disability benefits), £5bn from other cuts (£1.6bn R&D, £1.5bn regional development, £0.9bn from cutting ‘low value’ degrees, £0.4bn from visa changes, and £0.6bn in other measures), and £5bn from efficiency savings (£2.9bn civil service headcount, £1.1bn from quangos, £0.6bn consultancy and £0.4bn NHS managers).
Proposed tax cuts include £10bn per year by 2028/29 to halve employee national insurance, £1.7bn to abolish self-employed national insurance, £2.2bn to increase pensioner tax allowances, £1.2bn to reform the high-income child benefit charge, and £0.6bn to reduce stamp duty for first time buyers.
Unlike Labour, there is no additional investment in HMRC to help achieve the planned reduction in the tax gap, but there is £4.5bn in 2028/29 to increase defence spending to 2.44% of GDP (on its way to 2.5% by 2030/31), £2.0bn for national / community service, £1.4bn for the NHS, £0.8bn for 8,000 more police officers, and £0.7bn for apprenticeships.
The Liberal Democrats
The Liberal Democrats are more hopeful in that they believe they can find £7.2bn from tackling tax avoidance and evasion to supplement proposed tax rises of £19.7bn (£5.2bn capital gains tax, £4.3bn bank levies, £4.0bn aviation taxes, £2.1bn oil and gas, £2.1bn digital services tax, £1.4bn on share buybacks and £0.6bn other). The party also plans to find £5.8bn from spending cuts (£4.3bn asylum, £0.9bn free schools, and £0.6bn consultants).
The Lib Dems plan use this additional funding to spend an extra £32bn on public services in 2028/29 (£9.8bn NHS and social care, £6.7bn on defence, borders and international aid, £6.6bn on education and childcare, £4.1bn to tackle child poverty, £2.9bn for the devolved administrations, £1.0bn for farmers and the environment and £0.6bn for transport.
The balance of £20.7bn a year on average over five years for capital investment is expected to be funded mainly by additional borrowing, including £8.4bn to tackle climate change and protect the environment, £6.2bn for social housing, £1.9bn on school buildings, £1.9bn for the devolved administrations, £1.2bn on transport infrastructure, and £1.1bn for hospitals and other health facilities.
The Reform Party
The Reform UK costings in the ‘Our Contract with You’ are on a much bigger scale than everyone apart from the Green Party, with proposals to raise taxes by £14bn and cut spending by £136bn (10% of total public spending, or more once costs such as the state pensions are excluded) in order to fund an £88bn programme of tax cuts and £53bn a year in spending commitments.
The proposed spending cuts include a blanket £50bn a year in efficiency savings from cutting public service spending by 5% “without touching front line services”, £35bn from ceasing to pay interest to commercial banks on central bank deposits, £20bn from scrapping net zero, £15bn from cutting welfare benefits, £6bn from foreign aid, £5bn from reducing immigration and £5bn from stopping HS2 completely. The tax rises comprise a £10bn tax on renewable electricity generators and a £4bn immigration surcharge on employers, together with unquantified amounts from a 4% online delivery tax and a cut in entrepreneur’s relief to 5% that are netted off within the numbers below.
Reform UK plans to use these sums to cut personal taxes by £70bn (raise income tax threshold to £20,000, abolish VAT on energy bills, cut stamp duty, allow VAT reclaims for tourists, halve inheritance tax rate to 20% and raise threshold to £2m), cut business taxes by £18bn (reduce corporation tax to 15% and to zero for profits under £100,000, increase the VAT threshold to £150,000, abolish business rates for high street SMEs and create SME enterprise zones with zero tax when creating jobs).
Spending commitments include £17bn health and social care (a three-year basic rate tax holiday for NHS and social care staff, 20% tax relief on private healthcare and insurance, write-off medical student fees over 10 years and private treatment vouchers), £14bn for defence and veterans (2.5% of GDP with an aspiration to meet 3% after 2030), £8bn for children and families (including £5,000 transferrable marriage allowance and front loading of child benefit for ages 1-4), £5bn for police and courts (recruiting 40,000 new officers over five years), £5bn for education (including 20% tax relief on private school fees – and no VAT), and £4bn for agriculture, fishing and coastal communities
The Green Party
The Green Party has the most ambitious set of proposals, with tax rises of £151bn and cost savings of £12bn together with £63bn in additional borrowing to fund incremental spending of £226bn in 2028/29. It has an expansive agenda that involves nationalising water and the Big 5 energy companies, investing large sums in the green transition, and spending a significant amount more on health and welfare.
Its proposed tax increases comprise £72bn in higher personal and wealth taxes, £70bn from a carbon tax and around £9bn from business taxation, with £12bn in savings from cancelling the Trident replacement and roadbuilding programmes. Its proposals include aligning capital gain tax rates and investment income with income tax, increasing national insurance above the upper earnings limit from 2% to 10%, restricting pension tax relief to the basic rate, reforming inheritance tax, and introducing a 1% wealth tax on individuals with assets above £10m and 2% above £1bn. It also wants to replace council tax and business rates with land value taxes.
If achieved, this would allow it to pay for £145bn in additional current spending of £145bn in 2028/29 and £81bn in extra capital investment. The former includes £46.4bn for health and social care, £27.2bn welfare, £20.1bn overseas aid, £13.2bn education, £11.9bn transport, £4.5bn nature, food and farming, and £21.7bn for other priorities. The latter includes £56.7bn for green investment, £10.5bn for social housing, £6.6bn for health and education, and £6.8bn for other capital expenditures.
Upcoming Spending Review does not feature
None of the parties addresses the ‘elephant in the room’ represented by the upcoming three-year Spending Review for 2025/26 to 2027/28 that is expected by the Institute for Fiscal Studies and others to identify up to £20bn per year of additional funding requirements to maintain public services at their current level.
Overcoming the current weak state of the public finances is likely to be first order of business for whichever party wins the election.
My chart for ICAEW this week is on the labour market, breaking down the employment status of the 55.1 million adults aged 16 or over in the UK.
Our chart illustrates the employment status of the 55.1m adults in the UK on the basis of the latest statistics reported by the Office for National Statistics (ONS), published on 11 June 2024 for the three months from February to April 2024. The ONS is well ahead of the Labour Party’s proposals to extend the franchise in that it has long classified individuals aged 16 or 17 as ‘adults’ for the purposes of its labour market statistics.
According to the latest numbers, there are 34.5m economically active individuals in the UK, comprising 22.6m private sector employees, 6.0m public sector employees, 4.4m self-employed and 1.5m unemployed.
A further 20.6m adults are not economically active, comprising 11.2m individuals aged 65 or more (most of whom are retired), 3.0m aged 16-64 who are sick, 2.5m students, 1.7m homemakers, 1.1m who have taken early retirement, and 1.1m others who are either not active for other reasons, or where the reason they are not active is not clear.
The 2.5m student number excludes 1.2m students and pupils with part-time jobs, who are included within the economically active category.
The inactive total includes 1.7m adults aged 16-64 who don’t meet the criteria to be officially classified as unemployed but say that they would like a job, comprising 0.3m or so students, 0.4m homemakers, 0.7m sick and 0.3m other.
The inactive numbers between age 16 and 64 have been broadly stable over the past few years (plus or minus 0.1m) with the exception of the number who are sick. This has increased from 2.3m (2.1m long-term sick and 0.2m temporarily sick) in the same period in 2020 – at the start of the pandemic – to 3.0m (2.8m long-term sick and 0.2m temporarily sick) today. This is a 32% increase in the number of long-term sick, a major issue both for the economy and the NHS.
The 33.0m people in work include 1.5m who are aged 65 or over, but unfortunately the ONS doesn’t provide a breakdown between those in work who are aged 65 (and therefore still shy of the state retirement age) and those who are aged 66 or more who could retire but have chosen or need to continue working.
Public sector employees comprise 2.0m in the NHS, 1.5m in education, 1.2m in public administration (including 0.5m in the civil service), 0.4m in the police and armed forces, 0.2m in other health and social work, and 0.7m in other areas.
According to the ONS, the employment rate is 74.3%, being the total of those in work between 16 and 64 (33.0m total – 1.5m over 65 = 31.5m) divided by the total number aged between 16 and 64 (31.5m in work + 1.5m unemployed + 9.4m inactive = 42.4m).
In contrast, the unemployment rate of 4.4% is calculated including those aged 65 or more but excluding those who are inactive, dividing the just over 1.5m who are officially unemployed (of whom 48,000 are 65 or more) by the just under 34.5m total number of economically active individuals
My chart for ICAEW this week celebrates the launch of King Charles III banknotes by looking at the number and value of Bank of England banknotes in circulation, highlighting the continued popularity of the £20 note.
My chart this week is in honour of the new King Charles III banknotes that have just started to enter circulation. These will match the design of the existing Sir Winston Churchill £5 notes, Jane Austen £10 notes, JMW Turner £20 notes, and Alan Turing £50 notes, but with the King’s image replacing that of the late Queen Elizabeth II.
As the chart illustrates, the Bank of England reports that there were £82.4bn of its banknotes in circulation on 29 February 2024, comprising 384m £5 notes worth £1.9bn, 1,277m £10 notes worth £12.8bn, 2,646m £20 notes worth £52.9bn, and 295m £50 notes worth £14.8bn.
The chart excludes £4.6bn in high value notes issued to Scottish and Northern Irish banks that in turn print their own banknotes.
The new King Charles III banknotes (or ‘Charlies’ as they may come to be called) were issued for the first time on 5 June 2024 in relatively small numbers. The Bank of England says that they are only going to put them into circulation as old banknotes wear out or to meet demand, which could take a long time given that polymer banknotes are much more hardwearing than old paper banknotes.
On average there are approximately 6 x £5, 20 x £10, 40 x £20 and 4 x £50 in circulation for each person living in the UK. Although many of these will be sitting in cash registers and bank vaults, there are still a large number sitting in drawers or down the back of sofas, or even – perhaps surprisingly in today’s ‘cashless’ world – in wallets and purses.
Of course, these are not the only currencies that will feature the King, with Canada recently announcing that Charles’ image will feature on the next Canadian $20, with New Zealand expected to follow in due course. However, Australia has decided to not to put the King on the next Australian $5, the last remaining Australian banknote to still retain an image of the late Queen.
Fortunately, Bank of England banknotes remain exchangeable forever, so if you damage any of your existing banknotes, you can always just pop down to Threadneedle Street to ask for a replacement. Although probably not immediately, as the queues for the new Charlies are likely to be quite long.
Our chart looks at the projected state school population in England over the next six years, with an anticipated 10% fall in state nursery and primary school pupils implying school closures and mergers are on the way.
According to Department for Education statistics, there were an estimated 8,425,000 school pupils under the age of 16 in England at the start of the current academic year in 2023. Of these, 4,593,000 were in maintained nursery and state primary schools, 3,193,000 were in state secondary schools, 131,000 were in state special schools, 13,000 were in alternative provision, and 496,000 were in independent and other non-maintained schools.
Our chart this week shows how the first two categories are projected to change over the next six years, starting with a projected 10% fall in pupil numbers in state nursery and primary schools from 4,593,000 in the current academic year to 4,113,000 in the academic year starting in 2029.
Meanwhile the number of state secondary school pupils under the age of 16 at the start of the academic year is expected to increase from 3,193,000 in this academic year to peak at 3,244,000 next year before gradually declining to 3,146,000 in 2029, a fall of 3% from the peak.
Driven by a falling birthrate, the 10% projected fall in state nursery and primary school pupils is likely to be a major issue across England and a political hot potato for the next government. Larger primary schools may be able to cut the number of classes (ironically increasing class sizes) to mitigate reduced income from falling rolls, but this may not be enough. Smaller schools with just one class per year will find it more difficult to find savings.
Closures and mergers are likely, as are a rise in ‘save our local school’ campaigns as academy trusts and local authorities seek to find savings in response.
The 3% decline from the peak in secondary school pupil numbers will also present major challenges, especially as the fall in numbers is unlikely to be spread evenly across all state secondaries. Some will see smaller falls or even rises in their school rolls, while others will see a much greater drop in their intakes. Again, reducing the number of classes in each year is a likely response for those affected, but some closures and mergers are almost inevitable.
These projections are subject to some uncertainty, despite the core numbers being based on children who have already been born that are likely to stay in the English education system for the entirety of their school careers. The level of migration is a key assumption and could lead to even lower pupil numbers if recently implemented restrictions on the eligibility of immigrants to bring dependents with them are effective. The projections also assume a relatively stable number of pupils going to private schools, which may need to be adjusted in the light of Labour’s proposals to add 20% VAT to school fees.
These statistics are prepared on a full-time equivalent basis, but these are deemed to be the same as total pupil numbers for each age group, apart from the under 5s. Many nursery pupils and primary school reception class students only attend on a part-time basis, with 974,000 under 5s converting into 874,000 full-time equivalents (FTEs) in the current academic year. These numbers exclude most under 5s who attend private nurseries, receive other forms of childcare, or stay at home.
In theory, falling school rolls should reduce pressures on the education budget while at the same potentially increasing per-pupil funding, depending on how much is cut from the school budget. However, with the Spending Review now scheduled for after the general election likely to result in upward revisions to the Spring Budget 2024 medium-term spending plans, any such savings are likely to be swallowed up.
My chart for ICAEW this week shows that while headline inflation slowed to 2.3% in April, a core inflation figure of 3.9% means the fight against inflation is far from over.
We return to the topic of consumer price inflation (CPI) this week following the news that it has returned to within its target range of 2% plus or minus 1% for the first time since July 2021.
Our chart illustrates how a 16.7% fall in energy prices between April 2023 and April 2024, have partially offset core inflation of 3.9%, food price rises of 2.8% and alcohol and tobacco prices rises of 8.1%, to result in annual CPI of 2.3%.
It also shows how each of these components of inflation have changed over the last 12 months. Core inflation has slowed from an annual rate of 6.8% in April 2023 to 3.9% in April 2024, food price inflation from 19.3% to 2.8%, and alcohol and tobacco price inflation from 9.1% to 8.1%. Meanwhile, energy prices have fallen over the last year with the annual rate of change going from +10.8% in April 2023 to -16.7% in April 2024.
These components of the inflation index combine to see CPI slow from an annual rate of 8.7% in April 2023 to 2.3% for the 12 months to April 2024, positive news for the Bank of England. It has spent the last few years writing letters to the Chancellor, explaining why inflation is off target and the actions the Bank is taking to bring inflation back on target.
The challenge for the Bank of England’s Monetary Policy Committee is when to take the foot off the brake and start cutting interest rates. The indications are that this won’t be in June as some had hoped, with policymakers concerned about the persistence of services inflation (5.9% in the year to April 2024, a component of core inflation not shown in the chart) and the level of wage rises (5.7% in the year to March 2024), neither of which are consistent with inflation staying within its target range.
Our chart zooms across the Atlantic this week to take a look at Canada’s federal budget for 2024/25.
Canada’s budget 2024 sets out the financial plans of the government of Canada for the year from 1 April 2024 to 31 March 2025 (2024/25).
Like UK budgets, Canada’s budget 2024 is accompanied by financial projections for the four subsequent years to 2028/29. However, unlike the UK, Canada’s fiscal budget is prepared on an accruals basis, with a balance sheet including both financial and non-financial assets and liabilities, and a budgetary surplus or deficit that is equivalent to the accounting profit or loss in a private sector set of financial statements.
Canada’s approach contrasts with the statistics-based system of national accounts that most other countries use for setting fiscal targets, including the UK. This is despite the UK adopting International Financial Reporting Standards (IFRS) in its consolidated (Whole of Government Accounts), departmental and other public body financial statements, and an accruals-based resource accounting system derived from IFRS for internal budgeting and performance management.
Our chart this week shows how Canada’s federal budgetary balance is expected to be in deficit by C$40bn in both 2023/24 and 2024/25, before reducing over the rest of the forecast period to reach C$20bn in 2028/29, equivalent to 1.4%, 1.3% and 0.6% of GDP in 2023/24, 2024/25 and 2028/29 respectively. Or £24bn, £24bn and £12bn if converted at the 1 April 2024 exchange rate of C$1.70 to £1.00.
Budget 2024 assumes an average increase in nominal GDP of 4.0% a year between 2024 and 2028, reflecting a combination of economic growth of 1.8% on average and projected GDP inflation of 2.1%. Economic growth is expected to reflect a 0.9% annual increase in labour supply (1.6% from growth in the working-age population less 0.6% from lower labour force participation, 0.1% from higher unemployment, and 0.1% from fewer hours worked) and 0.9% from improved productivity.
Total revenue is forecast to grow by 7.1% from C$465bn (£274bn) in 2023/24 to C$498bn (£293bn) in 2024/25 before rising by an average of 4.2% a year to C$586bn (£345bn) in 2028/29. This is equivalent to 16.1%, 16.6% and 16.7% of GDP in 2023/24, 2024/25 and 2028/29 respectively.
Around two-thirds of revenue comes from federal income tax, amounting to a budgeted C$225bn in 2024/25. A further 15% comes from other taxes, with the C$76bn in 2024/25 comprising C$54bn from goods and services tax (GST, the Canadian version of VAT), C$6bn from customs import duties, C$13bn from excise taxes and other duties, and C$2bn from other federal taxes.
Other revenue is budgeted to amount to C$86bn in 2024/25 or 17% of total revenue, comprising C$30bn in employment insurance premiums, C$13bn from pollution pricing, C$9bn in revenues from Crown enterprises (net of Bank of Canada losses), C$3bn in foreign exchange revenues (principally returns on international reserves), and C$31bn in other income (including interest on tax receivables).
Total expenditure including net actuarial losses is expected to increase by 6.5% from C$505bn in 2023/24 to C$538bn (£316bn) in 2024/25 and then by an average of 3.0% a year to C$606bn (£356bn) in 2028/29. This is equivalent to 17.5%, 17.9% and 17.2% of GDP in 2023/24, 2024/25 and 2028/29 respectively.
Expenditure can be categorised between government programmes, welfare benefits, transfers to provinces, territories and municipalities, and interest and actuarial losses.
In 2024/25, spending on government programmes is budgeted to amount to C$225bn (C$123bn in operating expenses and C$102bn in transfer payments), while major transfers to persons are expected to be C$135bn (comprising C$80bn in elderly benefits, C$28bn in child benefit payments and C$27bn in employment insurance benefits).
Major transfers to provinces, territories and municipalities in 2024/25 of C$121bn comprise contributions of C$57bn for health care, C$25bn in equalisation payments to provinces, C$24bn for social programmes (social care, social assistance, post-secondary education, early years development, early learning and child care), C$5bn for territories, and C$2bn for community building, net of a C$7bn reduction in payments to Quebec (which acquired a greater share of taxes in the 1960s and 1970s), plus C$15bn in proceeds from pollution pricing returned to Canadians either directly or via provinces and territories.
Not shown in the chart is the projected balance sheet, with net liabilities expected to increase from an estimated C$1,216bn (£715bn) on 31 March 2024 to a budgeted C$1,255bn (£738bn) on 31 March 2025 and a projected C$1,372bn (£807bn) on 31 March 2029. The forecast balance sheet for 31 March 2025 comprises C$117bn (£69bn) in non-financial assets and financial assets of C$719bn (£423bn) less total liabilities of C$2,091bn (£1,230bn).
Net liabilities are expected to increase more slowly than the size of the economy, resulting in the ratio of net liabilities to GDP falling from 42.1% to 41.9% to 39.0% over the same period.
The budget document also reports on the Canadian government’s long-term financial projections, with federal net liabilities expected to reduce to 9.0% of GDP by 2055-56 despite a projected increase in the budgetary deficit back up to 1.1% of GDP. This partly reflects an assumption that net immigration will continue at 0.9% a year, offsetting the effects of more people living longer and a fertility rate of 1.5 births per woman.
Perhaps unsurprisingly, affordable housing is the first area of focus for Budget 2024, with the federal government aiming to increase the number of new homes by 3.87 million by 2031, a net 2 million on top of the 1.87 million already expected to be built.
My chart for ICAEW this week suggests that the public sector is less productive than it was, but difficulties in measuring productivity make it hard to say for sure.
According to the Office for National Statistics, public sector productivity has not recovered following the pandemic and is now lower than it was in 1997, despite technological advances since then.
My chart highlights how public sector productivity fell between 1997 and 2010 as spending and investment increased – a fall of 3.3% or 0.25% a year on average over 13 years – before climbing during the austerity years until 2019 – an improvement of 7.5% or 0.8% a year over nine years. The pandemic led to productivity collapsing as public services were severely disrupted before partially recovering, with productivity flat between 2022 and 2023 – overall a net drop of 6.3% or 1.6% a year on average over four years.
Overall, this means public sector productivity as measured by the ONS has fallen by 2.6% or 0.1% a year on average over the last 26 years. It is important to note that these changes do not cover all of the public sector – in some areas such as defence spending, productivity (value of outputs / cost of inputs) is assumed to be a constant 1, reflecting how difficult and subjective it would be to attempt to measure our military preparedness for war.
Despite that, the picture shown by this metric aligns with our more general understanding of what happened in these periods. The decline in productivity between 1997 and 2010 as the then Labour government improved pay and conditions for public sector employees makes sense, while the austerity policies of the Coalition and Conservative governments between 2010 and 2019 constrained the cost of delivering public services. And the pandemic resulted in many public services being closed or curtailed, and we know that many public services – particularly the NHS and schools – are still struggling to recover from the pandemic.
The chart provokes questions about how well this statistic values outputs given that while it is very easy to measure inputs, it is less easy to assess the value produced. For example, larger class sizes might give rise to an apparent productivity improvement as measured (more children taught for the same input of teaching time), but this may not capture any deterioration in quality that may result.
Not only is the quality of outputs difficult to measure in calculating productivity, but it also doesn’t measure outcomes, often much more important than outputs. In the health context this is whether the patient survives rather than how many operations were performed, for education it means how well-equipped our young people are for the world rather than how many hours they spent in a classroom, and for the criminal justice system how few crimes are committed rather than how many criminals are prosecuted.
Public sector productivity is an important metric, even if an imperfect one. It is helpful to understand how well public service activities are being delivered from a cost perspective – and how there is a need for improvement. But it doesn’t tell us whether those activities are improving our well-being, growing our economy, improving our environment, or building our resilience as a nation.
