ICAEW chart of the week: Pre-Spending Review departmental spending

The chart this week looks at the core departmental resource budgets that are central to next Wednesday’s long-awaited Spending Review.

The Spending Review and Autumn Budget on Wednesday 27 October will see the Chancellor set out departmental budgets for the next three financial years from 1 April 2022. The #icaewchartoftheweek shows the core departmental resource budgets for the current financial year, excluding COVID-19 related spending, capital investment, and annually managed expenditure such as the state pension and welfare provision.

With budget settlements for health, schools and defence already pencilled in, there may be a need for cuts in some departments if the Chancellor is to be able to free up cash to direct it where it is most needed. 

The Chancellor has already announced that the spending envelope will increase core departmental resource budgets of £385bn as shown in the chart to £408bn in 2022-23, £422bn in 2023-24 and £441bn in 2024-25. 

This might be seen as implying generous budget increases are on offer, but £18bn of the £23bn increase in the coming financial year has already been allocated to the Department for Health & Social Care (DHSC). This reflects £13bn of additional funding from the recently announced health and social care levy in addition to already planned increases in health spending, taking the DHSC budget to £164.8bn in 2022-23, rising to £171.4bn and £175.9bn in the following two years.

A further £2bn has been allocated to English schools next year (taking it from £49.8bn to £52.2bn within the Education’s overall £70.8bn budget) while the Ministry of Defence’s current budget of £31.6bn is expected to receive a flat budget settlement in 2022-23 before rising in subsequent years. With just under a billion in consequential increases to the devolved administrations under the Barnett formula, that leaves a mere £2bn available for non-schools education and all the other departments. 

With local government and departments such as Justice under severe financial pressure, the implication is that some departments may receive cuts in their core budgets to free up extra cash for those more in need.

Other departmental budgets of £70.5bn in 2021-22 include the Home Office £13.7bn, Local Government £8.5bn, Justice £8.4bn, the Foreign, Commonwealth & Development Office (FCDO) £7.4bn, the Department for Work & Pensions (DWP) £5.7bn, HMRC £4.9bn, the Department for Transport (DfT) £4.7bn, the Department of Environment, Food & Rural Affairs (DEFRA) £4.2bn, the Department for Business, Energy & Industrial Strategy (BEIS) £2.6bn, the Single Intelligence Account (SIA) £2.2bn, the Department for Levelling Up, Housing & Communities (DLUHC) and the Department for Digital, Culture, Media & Sports £1.7bn. This is followed by a series of smaller departments such as the Cabinet Office £0.7bn, Law Officers £0.7bn, the Department for International Trade (DIT) £0.5bn and HM Treasury £0.3bn as well as non-ministerial departments and other public bodies.

The chart does not include capital budgets, which are expected to rise from £99.8bn in the current year to £107.3bn, £109.1bn and £112.8bn in 2022-23, 2023-24 and 2024-25 respectively. Here, the Chancellor has greater room for manoeuvre and it would not be surprising for the Budget Statement next month to focus on capital investment programmes across the country rather than the more challenging budget settlements for current expenditure that most departments are likely to receive.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK public debt profile

Our chart this week shines a spotlight on the UK’s public debt, focusing on the Government’s debt strategy ahead of the fast approaching Spending Review.

A big worry for the Chancellor of the Exchequer in putting together the Budget and Spending Review this month is the possibility that higher inflation and interest rate rises will hit the public finances, restricting the amounts he has available to meet his policy objectives. Our chart this week illustrates just how exposed the UK’s public debt is to changes in inflation and interest rates.

UK public debt profile - column chart

UK public sector net debt before QE: Index-linked £470bn + Variable-rate £490bn + Fixed-rate £1,580bn - Cash and liquid assets £340bn = £2,200bn

Quantitative easing: £980bn (£735bn overlaps with fixed-rate and £245bn overlaps with variable-rate.

UK public sector net debt after QE: Index-linked £470bn + Variable-rate £1,225bn + Fixed-rate £845bn - Cash and liquid assets £340bn = £2,200bn

Sources: Office for National Statistics, Debt Management Office, ICAEW calculations and estimates.

UK public sector net debt was marginally over £2.2tn at the end of August 2021, comprising in the order of £2,540bn in gross debt less £340bn in cash and liquid assets. As ICAEW’s chart of the week illustrates using approximate numbers, this can be broadly divided into fixed-rate, variable-rate and index-linked debt, reflecting the Government’s debt strategy as executed by the UK Debt Management Office and by National Savings & Investments.

What the chart highlights is how quantitative easing (QE) has changed the profile of UK public debt significantly. This tool has been used by the operationally independent Bank of England to ease monetary policy by pumping money into the economy in response to the financial crisis a decade ago and the coronavirus pandemic more recently, but has the effect of switching fixed-rate government securities into variable-rate central bank deposits, contributing to falling interest costs even as public sector net debt has risen from less than £0.5tn in 2007 before the financial crisis to £1.8tn in March 2020 before the pandemic and £2.2tn currently.

Fixed-rate debt of £1,580bn comprises approximately £1,490bn in government bonds or gilts repayable over periods generally ranging from five to 30 years, together with £75bn in other central and local government loans net of intra-government holdings (which we have assumed are mostly fixed-rate in nature) and up to £15bn in fixed-rate savings certificates sold to individual investors by National Savings & Investment.

Variable-rate debt of £490bn comprises around £185bn of variable-rate National Savings & Investments deposits and certificates, £60bn in short-term Treasury bills, and £245bn in Bank of England liabilities relating to QE (see below). The balance of £470bn is in the form of index-linked gilts, where the amounts owed increase in line with the retail prices index (RPI).

This is before deducting £340bn in cash and liquid assets, comprising around £150bn of official reserves (much of which is currency deposits with foreign central banks) and £115bn, £40bn and £35bn in bank, building society and other liquid financial asset holdings held by central government, local government and other parts of the public sector respectively.

In practice, the sterling work of the UK Debt Management Office (DMO) to create a balanced portfolio of public debt has been upended by the Bank of England’s Monetary Policy Committee, albeit with the agreement of successive Chancellors. The spread of inflation-, variable- and fixed-rate exposure combined with extended maturities to manage refinancing requirements over longer periods has been offset by £980bn of QE purchases and lending that has replaced £735bn (or around half) of the fixed-rate gilts in issue at nominal value with central bank deposits that pay interest at the Bank of England base rate – reducing the net fixed rate exposure to £845bn. This is in addition to the QE-related liabilities of £245bn already included in variable-rate debt, of which £110bn was used to finance Term Funding Scheme low-cost business loans, £20bn to fund corporate bond purchases, and £115bn to finance premiums on gilt purchases (in effect prepaying some of the interest that would have gone to external investors over time if the gilts had not been purchased by the Bank of England).

The consequence is a public debt portfolio that is currently being financed much more cheaply than anyone ever expected, but which is much more sensitive to changes in inflation and interest rates than was ever planned.

With inflation now expected to rise to in the order of 5% (or even higher) over the next few months, and suggestions that the Bank of England may start to increase the base rate in early 2022, the gains the public finances have experienced from ultra-low borrowing costs look as if they will start to go into reverse. This is likely to put additional pressure onto the public finances at a time of elevated economic uncertainty, making for even tougher choices for the Chancellor on both tax and spending in the Spending Review and Autumn Budget in a couple of weeks’ time.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK public sector employment

Our chart this week is on public sector employment, the cost of which is one of the largest components of the Spending Review in a few weeks’ time.

Chart showing UK public sector employment between June 2001 and June 2021.

See text below for description of trends.

One of the key drivers for any budget or business plan is the number of full-time equivalent employees (FTEs) and it is no different in the public sector, where staff costs in the order of £150bn constitute just under 40% of departmental resource budgets of £385bn in 2021-22 (excluding depreciation and COVID-related spending).

The chart illustrates how public sector employment has grown, fallen and grown again over the last 20 years. It starts with the largest employer in the country – the NHS – where the workforce has increased from 1,025,000 FTEs in June 2001 to 1,626,000 FTEs in 2021. This 59% increase in staffing is substantially greater than the 14% increase in the size of the UK population from 59m to 67m over the same period, reflecting how the combination of more people living longer but less healthy lives and more successful treatments for cancer (for example) have resulted in substantially more for the NHS and its workforce to do.

Education FTEs are up 16% from 997,000 twenty years ago to 1,113,000 this year, is more in line with the growth in the size of the population, although most of the increase happened before the financial crisis, with FTEs working in education still below the peak of 1,210,000 in March 2012.

Public administration is down from 20 years ago, with 966,000 FTEs in June 2021 compared with 998,000 two decades previously. FTEs increased to a peak of 1,081,000 in June 2005 before falling gradually to 1,010,000 in June 2010, followed by more significant falls following the financial crisis. Most of the net fall represents fewer public servants in local government since the financial crisis , with civil servants in central government only slightly below where they were 20 years ago at 465,000 FTEs in June 2021 compared with 492,000 in June 2001. The total would have been much lower but for a post-Brexit surge in the size of the civil service, which has grown by 20% from its nadir of 384,000 FTEs in June 2016.

Police and armed forces FTEs have fallen from 436,000 in June 2001 to 417,000 in June 2021, mainly due to a steady decline in the armed forces from 219,000 to 159,000 FTEs over that period. Police numbers (including civilian support staff) increased from 222,000 FTEs 20 years ago to a peak of 284,000 in September 2009, fell to 235,000 FTEs in December 2016, and then started to increase again over the course of the last two years to reach 258,000.

Other public sector workers, including community health and social workers and employees of public corporations such as the BBC, Channel 4, Crossrail and Ordnance Survey have fallen from 973,000 to 655,000 FTEs, having reached a peak of 1,322,000 in March 2008 following the nationalisation of a number of banks. Most of the fall since then is a consequence of transfers to the public sector, including housing associations, Royal Mail, Direct Line, Lloyds Banking Group and Northern Rock.

Overall, public sector employment grew from 4,429,000 FTEs in June 2001 to a peak of 5,292,000 FTEs in December 2009 before falling to 4,777,000 FTEs in June 2021, comprising net changes of +601,000 in the NHS, +116,000 in Education, -32,000 in public administration, -19,000 in the police and armed forces and -318,000 in other public sector employees.

Of course, staff numbers are only part of the equation as the 4,777,000 FTEs currently employed have to be multiplied by an average salary of around £34,000 a year to reach the more than £160bn estimate for total staff costs across the public sector. This is the average of total pay – the median full-time salary is lower than this at somewhere in the region of £26,000.

Pay is one of the key drivers, with a pay freeze for many public sector workers announced last year helping to constrain the growth in the wage bill. With the cost of living on the march upwards, it seems unlikely that the Chancellor will be able to justify as strict a pay freeze this year, although he will still be looking to constrain wage settlements as much as possible. Wage settlements in the private sector are also likely to be higher this year, another worry for the Treasury given the £230bn or so the public sector spends every year on external procurement.

The recent upward trend in public sector employment is a big challenge for the Spending Review, particularly the continual growth in NHS staff as more people live longer lives, in addition to commitments to recruit more police officers and to improve other public services. Higher wage settlements in both the public and private sectors could significantly affect the number of people the government can afford to employ to meet its policy objectives.

ICAEW chart of the week: capital investment before the Spending Review

Given that capital budgets are often the first to be cut when money is tight, will the planned growth in capital investment survive the Spending Review later this month?

Capital investment before the spending review

Departmental capital budgets from 
2019-20 through 2025-26: £70bn, £92bn, £100bn, £107bn, £109bn, £113bn, £117bn

Local and other capital budgets: £14bn, £10bn, £7bn, £7bn, £11bn, £10bn, £10bn.

Sources: HM Treasury and Office for Budget Responsibility, Spring Budget 2021. Excludes covid and student loans.

Our chart this week is on public sector capital investment, illustrating how central department capital budgets increased from £70bn two years ago to £92bn last year and £100bn this year, with further increases planned up to £117bn in 2025-26. This path was originally set by former Chancellor Philip Hammond who believed boosting capital investment, particularly on infrastructure, would help address the productivity gap that has constrained economic growth over the last decade. Chancellor Rishi Sunak has broadly adopted the same approach of increasing capital budgets in the first half of the 2020s, but with the rather snappier objective of ‘levelling up’ opportunity across the country.

Local and other capital budgets in the public sector are actually significantly higher than those shown in the chart (£14bn, £10bn, £7bn, £7bn, £11bn, £10bn and £10bn in 2019-20 through 2025-26), but that is primarily because a substantial proportion of both local government and public corporation capital investment is funded through central government capital grants, which are already included within departmental capital budgets. The balance, funded by local taxation and non-tax revenues, has actually fallen in the last few years, especially as many local authorities have tightened their belts as social care and other costs have outstripped council tax receipts.

The Treasury announced last month that the envelope for the Spending Review would adopt the capital spending profile already set out in the Spring Budget in March as shown in our chart, with core capital department expenditure limits (Core CDEL) of £107bn in 2022-23, £109bn in 2023-24 and £113bn in 2024-25. It seems likely that the government will stick ahead with these capital plans, unlike the profile for departmental current spending (Core resource department expenditure limits or Core RDEL, not shown in the chart) which increased by £15bn, 12bn and £14bn respectively to £408bn in 2022-23, £422bn in 2023-24 and £441bn in 2024-25 to address the increasing demands being placed on health care as more people live longer and to address the social care crisis. 

While this extra current spending is to be funded by the new health and social care levy, there remain huge pressures on many other public services as well as concerns about the risks to tax receipts from an uncertain economic recovery. The temptation to raid capital budgets to top up current spending, as occurred in the years following the financial crisis, will be there. After all, the benefits of capital investment can often take many years to arrive, while the stresses experienced by public services are much more immediate. In addition, under government fiscal rules, capital expenditure counts towards reported expenditure (total managed expenditure or TME) and the public sector deficit, which perhaps makes it more difficult to treat investment for the long-term differently from day-to-day operating expenditure. 

Assuming the Chancellor sticks to the plan, then the big story of the Spending Review from a capital expenditure perspective will be in the allocation between departments. Transport (£18bn in 2021-22), Business, Energy & Industrial Strategy (£16bn) and Defence & Intelligence (£15bn) are the largest spenders, and each will be fighting hard for more money, especially Defence where governmental ambitions to be a ‘tier 1’ military power have always outstripped the amount of money supplied. Other departments likely to be seeking additional capital funding include the Department for Levelling Up, Housing and Communities on behalf of local authorities in England (£9bn in 2021-22) and the devolved administrations (together £9bn).

Will the Chancellor be able to steer a course through what appear to be some turbulent economic waters to deliver on the government’s infrastructure ambitions?

This chart was originally published by ICAEW.

ICAEW chart of the week: German federal budget 2022

As Germany heads to the polls this weekend to elect a new federal parliament, the topic of the public finances has moved to centre stage. Our chart this week looks at the federal budget for 2022 and the current plan to sharply reduce the deficit from 2023 onwards.

German federal budget 2022

2021: revenue €307bn + borrowing €240bn = expenditure €488bn + investment €59bn

2022: revenue €343bn + borrowing €100bn = expenditure €391bn + investment €52bn

2023: revenue €398bn + borrowing €5bn = expenditure €352bn + investment €51bn

2024: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

2025: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

Source: Bundesministerium der Finanzen: 'Draft 2022 federal budget and fiscal plan to 2025'

The coronavirus pandemic has been accompanied by relaxations in both European and German constitutional limitations on the size of the federal deficit for 2020, 2021 and 2022, with Chancellor Angela Merkel of the Union parties (the Christian Democratic Union (CDU) together with Bavaria’s Christian Social Union (CSU)) and Finance Minister and chancellor-candidate Olaf Scholtz of the Social Democratic Party (SPD) setting out a plan earlier this year to reduce federal borrowing significantly by 2023.

As the #icaewchartoftheweek illustrates, the plan is to continue to run a sizeable deficit of €100bn in 2022 with tax and other revenue of €343bn being offset by €391bn in expenditure and €52bn in investment spending. This is a smaller deficit than the €240bn forecast for the current year (revenue €307bn – expenditure €488bn – investment €59bn) and the €131bn recorded in 2020 (not shown in the chart: revenue €311bn – expenditure €392bn – investment €50bn), both of which contained significant amounts of emergency spending in response to the pandemic. 

The hope is that revenues will recover in 2023 to €398bn at the same time as expenditures and investment return to pre-pandemic levels of €352bn and €51bn respectively to leave only a €5bn shortfall to be covered by borrowing. The forecast deficit for both 2024 and 2025 is €12bn, comprising revenue of €396bn in both years, less expenditure of just under €396bn in 2024 and just over €396bn in 2025 and investment in both years of €51bn. It is important to note that this is the budget for the federal government only and excludes the share of joint taxes going to Germany’s states (Länder) as well as expenditures funded from state and local taxation.

The challenge for the three principal candidates for the chancellorship: Olaf Scholtz of the SPD, Armin Laschet of the Union parties and Annalena Baerbock of the Green party, is in how to make promises to spend more on their respective priorities while maintaining the low levels of borrowing required by the constitution outside of fiscal emergencies. 

Major flooding earlier this year has put climate change at the top of the electoral agenda, with the need to increase investment to achieve net zero a key theme of party platforms. Together with promises to invest more in infrastructure and the need to cover the cost of more people living longer, higher defence spending and other financial commitments, there are significant questions about whether the path to near-budget balance can be achieved. Given the economic uncertainty, the prospect of returning to the pre-pandemic policy of paying down government debt seems unlikely, although that policy helped reduce general government debt from a peak of 82% of GDP in 2010 following the financial crisis. Despite the additional borrowing because of the pandemic, general government debt is still below that level at somewhere in the region of 75% of GDP – putting Germany in a much better fiscal position than many of its European neighbours, including the UK.

One candidate to be the next finance minister is Christian Lindner of the liberal Free Democratic Party (FDP), a possible partner in either a ‘traffic-light coalition’ of SPD (red), Greens (green) and FDP (yellow) or a ‘Jamaica coalition’ of the Union parties (black), Greens (green) and FDP (yellow) although this will of course depend on how the parties perform in the election on Sunday 26 September. Alice Weidel and Tino Chrupalla, joint leaders of the hard-right Alternative for Germany (AfD), and Janine Wissler & Dietmar Bartch, joint leaders of the Left Party (Die Linke), are considered unlikely to find their way into the federal cabinet in most scenarios.

Unlike in the UK, where a new prime minister customarily takes up residence in 10 Downing Street the next day, there is unlikely to be an instant change in national leadership. Chancellor Angela Merkel and most of her existing Union/SPD ‘Grand coalition’ cabinet are likely to stay in caretaker positions for several weeks or potentially months as fresh coalition negotiations between the parties elected to the Bundestag are concluded.

This chart was originally published by ICAEW.

ICAEW chart of the week: School-age demographic change

This week’s chart illustrates how the number of 10 year-olds in the UK is expected to fall sharply over the rest of the decade, just as the number of 18 year-olds is expected to peak in 2030.

School-age children

10 year-olds

2022: 855,000
2023: 831,000
2024: 813,000 
2025: 807,000
2026: 808,000
2027: 783,000
2028: 759,000
2029: 730,000
2030: 702,000

18 year-olds

2022: 741,000 
2023: 752,000
2024: 781,000
2025: 797,000
2026: 824,000
2027: 817,000
2028: 826,000
2029: 841,000
2030: 855,000

The Office for National Statistics UK Population Estimate for July 2020 reports that there were 855,000 children in the cohort who will be 10 years old next year when most of them will be entering their final year of primary school. A falling birth rate since 2012 means that the numbers of 10-year-olds will fall by 18% over the following eight years to 702,000 in 2030, with a consequent drop in the number of primary school places that will be needed in the coming decade: 

  • 2022: 855,000 10 year-olds
  • 2023: 831,000
  • 2024: 813,000 
  • 2025: 807,000
  • 2026: 808,000
  • 2027: 783,000
  • 2028: 759,000
  • 2029: 730,000
  • 2030: 702,000

At the same time, the number of 18 year-olds will grow significantly reaching a peak in 2030 when that cohort of 855,000 will be 18, 15% more than the 741,000 of 18 year-olds in 2022. 

  • 2022: 741,000 18 year-olds 
  • 2023: 752,000
  • 2024: 781,000
  • 2025: 797,000
  • 2026: 824,000
  • 2027: 817,000
  • 2028: 826,000
  • 2029: 841,000
  • 2030: 855,000

The chart was prepared using the numbers of children estimated to be in the UK in 2020 adjusted for time growing up, but without adjustment for migration or the (fortunately) relatively small number of deaths that would be expected to occur over the course of the decade. 

Prior to Brexit and the pandemic, there was a net inflow of around 5,000 a year adding to each age group which, if repeated, would have the effect of reducing the rate of decline in 10 year-olds and increasing the size of the peak in 18 year-olds in 2030. However, with migration potentially having gone into reverse during the pandemic, it is unclear whether net immigration will be as high as it was before.

Either way, one of the first orders of business for new Education Secretary Nadhim Zahawi will be to review the plans to reduce primary school and expand secondary school provision over the next few years, as well as addressing the pressure there will be on universities, colleges and apprenticeships as the bulge of births in the mid-noughties flows through the education system over the coming decade.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK government borrowing

While government borrowing requirements have almost halved from its peak in the last financial year, it is still higher than the financial crisis a decade ago.

UK government borrowing chart

2007-08: Refinancing £29bn + New gilts issued £29bn
2008-09: £18bn + £126bn
2009-10: £16bn + £211bn
2010-11: £39bn + £127bn
2011-12: £49bn + £130bn
2012-13: £53bn + £112bn
2013-14: £51bn + £102bn
2014-15: £64bn + £62bn
2015-16: £70bn + £58nm
2016-17: £70bn + £78bn
2017-18: £79bn + £36bn
2018-19: £67bn + £31bn
2019-20: £99bn + £39bn
2020-21: £98bn + £388bn
2021-22: £79bn + £174bn (current year forecast)

Our chart this week is on the topic of government borrowing, which continues at an astonishing pace compared with pre-pandemic times. The UK Debt Management Office has been tasked with raising £253bn from the sale of government securities, comprising £174bn in new finance and £79bn to cover the repayment of existing debts as they fall due. That’s an average of £21bn a month, more than twice the £9.4bn raised in IPOs on the London Stock Exchange in the whole of 2020. 

Admittedly, this is a slower pace than the even more astonishing fundraising in 2020-21 that saw £486bn in gilts issued (almost half a trillion pounds), with £98bn raised to repay existing debts and £388bn used to cover the costs of the pandemic and the shortfall in tax receipts it caused. 

Despite that, the £253bn needed from the sale of gilts this year is still more than was raised in the 2009-10 financial year during the depths of the financial crisis, the previous peacetime peak. This partly reflects a higher refinancing requirement than a decade ago, one of the legacies of the financial crisis. The legacy of the pandemic will be even higher refinancing requirements into the future, keeping the debt markets busy for decades to come. 

The chart does not provide the full story of the UK’s public debt raising, as the Bank of England purchased £450bn of fixed-interest gilts in the market over the last couple of years as part of its quantitative easing operations, in effect swapping the fixed rates of interest payable on the government bonds concerned for the variable rate that is payable on central bank deposits. This has arguably helped the gilt market finance the purchase of such large amounts of government debt and helped keep the cost of government borrowing at extremely low levels but at the cost of significantly increasing the exposure of the public finances to changes in interest rates.

While the government’s financing requirements should be lower in the next few years as the economy recovers, substantial sums will still need to be raised, potentially in much less favourable market conditions. Rising inflation, higher interest rates, and potentially the unwinding of QE, would all combine to increase the cost of borrowing substantially. The days of issuing 30-year gilts at yields of less than 1% may not be with us for much longer.

For more information about the UK’s public debt portfolio, visit the Debt Management Office.

Government gilt sales in 2007-08: £29bn in new gilts + £29 for refinancing; 2008-09: £126bn + £18bn; 2009-10: £211bn + £16bn; 2010-11: £127bn + £39bn; 2011-12: £130bn + £49bn; 2012-13: £112bn + £53bn; 2013-14: £102bn + £51bn; 2014-15: £62bn + £64bn; 2015-16: £58bn + £70bn; 2016-17: £78bn + £70bn; 2017-18: £36bn + £79bn; 2018-19: £31bn + £67bn; 2019-20: £39bn + £99bn; 2020-21: £388bn + £98bn; 2021-22: £174bn (forecast) + £79bn.

This chart was originally published by ICAEW.

ICAEW chart of the week: Pensions triple lock

The triple lock has helped the state pension grow faster than inflation or earnings over the last decade, but will the Chancellor break it for next year’s pension increase?

Pensions triple lock

Basic state pension in 2011-12: £5,512 + Triple lock £1,843 = £7,155 in 2021-22. Compares with increase based on earnings of £1,108, on CPI of £1,144 or 2.5% a year of £1,487.

New state pension (extrapolated back) in 2011-12: £6,932 + triple lock £2,408 = £9,339. Compares with increase based on earnings of £1,443, CPI of £1,492 and 2.5% a year of £1,940.

Based on a projected 8.3% annual increase in average earnings in 2021, the basic state pension would by £593 to £7,748 and the new state pension would increase by £775 to £10,114.

ICAEW’s chart of the week illustrates just how much of a boost the triple lock has been to the state pension since its introduction a decade ago compared with what would have happened if it had risen in line with one of the components of the triple lock formula alone.

It also illustrates how much pensioners might get in April next year if the government continues with the current formula and doesn’t adjust for the distortions in the official statistics caused by the pandemic. With average earnings for the three months to July 2021 projected to be in the order of 8.3% higher than a year previously, the incremental cost would be significant given that the state pension is the second biggest line item in the government’s spending bill at over £105bn a year.

With the statistic distorted by effects of the pandemic, the Chancellor may decide to adopt an ‘adjusted’ percentage to eliminate the effects of the furlough scheme and lockdowns, likely to be somewhere in region of 3.5% to 5%, or potentially he could opt to use the annualised average rise over two years that is expected to be closer to 3.5%. Or he could abandon the triple lock completely and choose another basis for determining how much pensioners will have to live on next year.


The basic state pension, payable in full to those with 30 years of national insurance credits, increased from £5,312 (£102.15 per week) in 2011-12 to £7,155 (£137.60 per week) in 2021-22, an increase of £1,843 (£35.45 a week). This contrasts with the increases that would have been seen if pensions had been uprated over that period in line with average earnings (£1,108 or £21.30 per week), CPI (£1,144 or £22.00 per week) or 2.5% (£1,487 or £28.60 per week). By selecting the highest of the average earnings or inflation and with a floor of 2.5%, the result has been to uplift the basic state pension above the legally required increase in line with earnings.

This does not mean that pensioners have received this level of increase for the whole of their pension, as many of those who retired before 2016 are entitled to an additional state pension linked to their national insurance contributions (also known as the state earnings related pension or SERPs) that has been uprated each year over the last decade in line with CPI.

Since 6 April 2016, the basic and additional pensions have been replaced for those retiring after that date by the new state pension, which requires 35 years of national insurance credits to receive the full amount. This provides a higher income for most pensioners than the basic plus additional state pension system but less for those with higher career earnings who – the theory goes – should also have company or private pensions to support them in retirement. 

The chart illustrates the effect of the triple lock on the new state pension as if it had been in place since 2011-12, with the triple lock increase of £2,408 (£46.35 per week) to reach the current level of £9,339 (£179.60 per week) contrasting with average earnings (£1,443 or £27.75 per week), CPI (£1,492 or £28.70 per week) or 2.5% (£1,940 or £37.30 per week).

The ratchet effect of the triple lock will be put to the test for the coming state pension rise, as the statistic used to measure the rise in average earningsstood at 8.8% as at June 2021 and is expected to be somewhere in the region of 8.3% (plus or minus) when July 2021 statistic is announced later this month. As the chart indicates this would result in a £593 (£11.40 per week) increase in the basic state pension to £7,748 (£149.00 per week) and a £775 (£14.90 per week) increase in the new state pension to £10,114 (£194.50 per week).

The distortion in the average earnings statistic is because of the combination of fewer lower paid employees in the workforce a year ago altering the make-up of the working population used to measure pay rises and the furlough scheme where many employees received a temporary pay cut of 20% if their employers didn’t make up the difference. However, there is some genuine wage inflation going on, with the ONS estimating that the ‘underlying’ annual rise in average earnings for the three months to June 2021 was somewhere between 3.5% and 4.9%.

The Chancellor is expected to announce his decision on the triple lock at the fiscal event on 27 October, although there is a chance that he might make an announcement later this month in order to avoid getting pensioners’ hopes up when the average earnings rise is released on 14 September – only to then dash them a few weeks later.

This chart was originally published by ICAEW.

ICAEW chart of the week: Olympinflation

Our chart this week shows how the Summer Olympics has grown from 43 medal events and 241 competitors in Athens in 1896 to 339 medal events attracting 11,326 competitors in the Tokyo Summer Olympics this year.

Olympinflation chart comprising columnsfor number of medal events and a line for competitors:

Medal events: 43 in 1896 to 95 in 1904 to 102 in 1912 to 156 in 1920 to 109 in 1928 to 129 in 1936 to 149 in 1852 to 150 in 1960 to 172 in 1968 to 198 in 1976 to 231 in 1984 to 257 in 1992 to 271 in 1996 to 300 in 200 to 302 in 2008 to 306 in 2016 to 339 in 2021.

Competitors from 241 in 1896 up to 3,089 in 1924 down to 1,332 in 1932 up to 3,936 in 1936 up to 4,955 in 1952 down to 3,314 in 1956 up to 7,134 in 1972 down to 5,179 in 1980 up to 10,651 in 2000 down to 10,625 in 2004 up to 10,942 in 2008 down to 10,768 in 2012 up to 11,326 in 2021.

Our chart this week shows how the Summer Olympics has grown from 43 medal events and 241 competitors in Athens in 1896 to 339 medal events attracting 11,326 competitors in the Tokyo Summer Olympics this year.

The arrival of the Summer Olympics has turned many of us into experts in obscure sports that never normally crossed our minds, as well as thrilling us with seeing the world’s top athletes compete to be the best in the sports we love. The sheer scale of sporting activity is immense as it turns a global audience into athletic couch potatoes over a period of two weeks every four years – or five on this particular occasion with the delay to 2021 because of the pandemic. Despite the absence of spectators, so far the Games have been gripping as tiny margins have determined who gets gold, silver or bronze or who comes home without a medal, but still the privilege of being an Olympian.

Our chart this week illustrates how the Summer Olympics has grown in scale over time. The Tokyo Summer Olympic Games continued the upward path in the number of medal events, with 339 medal events in 50 sporting disciplines from 33 sports and 11,326 competitors from 206 nations. This compares with 43 medal events in 10 disciplines from 9 sports in the first Summer Olympiad in 1896, involving just 241 competitors from 14 nations.

New sports this year include karate, skateboarding, sports climbing, surfing and (the return of) baseball/softball, providing new opportunities for competitors to show their talents to the world, and for the rest of us to add to our fleeting knowledge of what it takes to ride a skateboard in an organised format or the technicalities of riding a wave to score points. These add to the existing sports of aquatics, archery, athletics, badminton, basketball, boxing, canoeing, cycling, equestrian, fencing, field hockey, football, golf, gymnastics, handball, judo, modern pentathlon, rowing, rugby sevens, sailing, shooting, table tennis, taekwondo, tennis, triathlon, volleyball, weightlifting and wrestling.

The Olympics will be over all too soon, leaving us bereft and demanding more. Fortunately, the Paralympics will be starting on 24 August with 540 medal events in 22 sports to keep us glued to our screens this summer.

Chart of the week will be taking its customary break during August and will return in September, while the Summer Olympics will hopefully be taking a shorter than usual three-year break to return to schedule with the Paris 2024 Summer Olympics.

This chart was originally published by ICAEW.

ICAEW chart of the week: Tokyo Olympics cost update

Cost overruns have been a recurring feature of the modern Olympic movement, but the pandemic has blown the doors off the budget for the Tokyo games.

Tokyo Olympics cost update - column chart:

Budget v1 £5.2bn
Budget v2 £9.0bn
Budget v3 £9.0bn
Budget v4 £9.4bn (venues £4.7bn, Games £2.9bn, marketing and general £1.6bn)
Budget v5 £11.0bn (venues £5.4bn, Games £4.0bn, marketing and general £1.6bn) + Outside the Games costs £12.5bn = 
Estimate of £23.5bn (Organising Committee £4.7bn, Tokyo Metropolitan Government £10.2bn, Government of Japan £8.6bn)

Hosting an Olympics is a costly affair, with headlines about budget overruns a regular occurrence in recent decades. The Tokyo Olympics is no exception, with the latest official budget for the rescheduled 2020 Olympic Games rising to ¥1.7tn ($15.4bn or £11.0bn) compared with an original budget of $7.5bn or £5.2bn. 

Of course, nobody expected the original budget from Tokyo’s bid in 2013 to be the final result, but annual budgets since 2017 have shown a gradual rise in both the cost of running the Olympic Games and the cost of the venues. This would be unsurprising to those that remember the 2012 London Olympics, where the costs significantly exceeded the estimated overheads set out in the original bid.

The version two budget established in December 2017 of £9.0bn, comprising £4.7bn for venues, £2.4bn for running the Games and £1.9bn for marketing, communications and general expenditures was substantially maintained in version three with offsetting increases and decreases in different parts of the budget. Additional income allowed the organisers to add in a contingency to increase the budget to £9.2bn by 2019, with the budget for venues still £4.7bn, running the Games up to £2.9bn (including the contingency) and marketing and general expenditures down slightly to £1.6bn.

The pandemic drove a big jump in the version five of the budget, put together six months after the 2020 Games were supposed to have taken place. The budget for venues (permanent, temporary and energy costs) went up to £5.4bn, up from £4.7bn in previous budgets, while the version five budget for running the Games (transport, security, technology and operations) of £4.0bn is a third more than the 2019 estimate of £2.9bn and more than 60% higher than the 2017 estimate of £2.4bn, with marketing and general expenditures still at £1.6bn.

Not shown in the chart is the expected revenue that was anticipated to fund the Tokyo Organising Committee’s share of costs of £4.7bn, comprising £0.6bn from the International Olympic Committee (the IOC, which owns the global broadcasting rights), £2.8bn from sponsorship and licencing, £0.6bn from ticket sales and £0.7bn in other revenues. With tickets being refunded to spectators who can no longer attend, this leaves a hole in the Organising Committee’s finances that will need to be funded either by the IOC or by the Tokyo Metropolitan Government.

The chart also illustrates how the official budget for the Olympics is not the full story, with the Tokyo Metropolitan Government and the Japanese Government incurring a further £12.5bn or so in costs outside the Games, in addition to their already substantial contributions to the cost of venue construction. There are some disputes about these numbers as their spending include ‘legacy’ investments in public infrastructure that could be argued should not be counted, in addition to costs with a direct causal linkage, such as policing and security costs away from Olympic venues. The £12.5bn amount is based on AP reporting of a Japan Board of Audit report from 2019, but recent reports in the Japanese press have suggested the costs to the metropolitan and national governments of hosting the Olympics could end up being even larger.

While the pandemic was not foreseeable back in 2013 when Tokyo was awarded the 2020 Olympics, the budgetary tale highlights the importance of building in headroom for changes as well as considering contingencies when setting budgets. For example, there was insurance cover to deal with the risk of an event like the pandemic leading to a cancellation of the Games, but the insured amounts were insufficient to cover the full losses of a complete cancellation. This is no doubt one (but not the only) reason why the organisers are going ahead despite everything that has happened.

Fortunately for those of us who like watching sport on our screens, the Olympic Games and the Paralympic Games are going ahead after all and it is the performance of the athletes that will be our main focus for the next few weeks. We wish them the best of luck!

This chart was originally published by ICAEW.