ICAEW chart of the week: Migration

The latest migration statistics for the year to June 2022 come with a health warning from the ONS that its ‘experimental and provisional’ numbers for people movements during a pandemic may not be representative of long-term trends.

Column chart showing migration flows for the year to June 2022:

Non-EU inflows: Work +151,000, Study +277,000, Settlement schemes +138,000, Other reasons +138,000

Non-EU outflows: -195,000, Net = +509,000

EU inflows: Work +88,000, Study +71,000, Other reasons +65,000.

EU outflows: -275,000, Net = -51,000

UK inflows: Work +47,000, Study +8,000, Other reasons +81,000

UK outflows: -90,000, Net = +46,000.

On 24 November 2022 the Office for National Statistics (ONS) published its latest ‘experimental’ statistics on net migration, provisionally reporting that net long-term migration to the UK amounted to 504,000 in the year to June 2022. This compares with estimates for net inward migration of 173,000 in the year to June 2021 and 88,000 in the year to June 2020. 

This is equivalent to approximately 0.7% of the UK’s total population and is more than double the net inward migration assumption of 237,000 for the same period used by the ONS in its most recent principal long-term projection for the UK population.

The ONS cautions that the middle of a pandemic may not be representative of long-term trends, given possible pent up demand following restrictions in movements in the previous two years.

The ONS also points out the large jump in the number of non-EU students coming to study in the UK, which boosts immigration numbers in the current year. This should in theory reverse in three to four years’ time when many (but not all) of these students return to their home countries or move elsewhere.


As the chart illustrates, immigration from countries outside the EU in the year to June 2022 comprised 151,000 people coming to work in the UK, 277,000 coming to study, 138,000 under settlement schemes and a further 138,000 coming for other reasons. Around 195,000 people from outside the EU were estimated to have left during the year, giving a net inward migration number for non-EU citizens of 509,000. This compares with 157,000 during the year ended 30 June 2021 and 51,000 in the year before that.

The numbers from outside the EU coming to work has increased from 92,000 in the year to June 2021 and 81,000 in the year to June 2020, offsetting some of the reduction in those coming from the EU to work. Those coming to study have increased by an even greater proportion (from 143,000 and 136,000 in the preceding two years respectively), although this may represent pent-up demand from the pandemic when it was much more difficult for students wishing to start courses in the UK. However, the ONS does comment that the new graduate visa that permits students to stay and work in the UK for up to three years after completing their studies may have encouraged more students to come. 

The 138,000 arriving under settlement schemes in the year to June 2022 included an estimated 89,000 Ukrainians who were resettled in the UK under the Ukrainian scheme, approximately 21,000 Afghans under the Afghan resettlement scheme and an estimated 28,000 of the 76,000 Hong Kong residents granted British national overseas (BNO) visas during the year. 

The ONS does not give a full breakdown of the other reasons why people are coming to the UK, which principally relate to those joining family, those planning to stay temporarily but for longer than a year, refugees granted asylum during the year and any other reason not classified by the ONS. The numbers exclude 35,000 people that arrived by small boats during the period, although those who are granted asylum will show up in the statistics in subsequent periods.


Inward migration from the EU has gone into reverse since the ending of free movement on 31 December 2020, with net outward migration of 51,000 for the year to June 2022 compared with net inward migration of 12,000 and 26,000 in the two preceding years. 

As the chart illustrates, the 88,000 people coming from the EU to work, 71,000 to study and 65,000 coming for other reasons – a total of 224,000 people – were more than offset by the 275,000 who left the UK. Those coming to the UK include Irish citizens who do not need visas to live and work in the UK, in addition those coming from other EU countries who now need to apply for visas before they can come to live and work in the UK. 


There was a net inflow of 46,000 UK citizens, as an estimated 136,000 who returned home exceeded the estimate of 90,000 who emigrated from the UK. Of those coming back to the UK, 47,000 came to work, 8,000 to join family and 81,000 for other reasons. This compares with net inflows of 4,000 and 11,000 in the two preceding years.

Health warnings

The ONS provides a range of health warnings for this data set, labelling the numbers as ‘experimental and provisional’, as well as relating to an unusual year for international migration. The numbers were affected by the coronavirus pandemic, the settlement schemes for Ukrainians, Afghans and Hong Kong residents, and by the ending in the preceding year of free movement for EU citizens wishing to come to the UK and for UK citizens to live and work in the EU.

From an economic perspective, Chancellor Jeremy Hunt will no doubt be pleased at the additional workers that have arrived in the UK at a time of labour shortages, as well as the success of the university sector in attracting international students, some of whom are likely to stay at the end of their courses to work. Many of those arriving to join family or for other reasons will also join the workforce, further helping to grow economic activity.

With a national workforce that would shrink otherwise and many businesses calling for more freedom to recruit from overseas, the Chancellor may well be hoping for higher levels of migration to continue – even if some of his ministerial colleagues are likely to be less than positive about this possibility.

This chart was originally published by ICAEW.

ICAEW chart of the week: Autumn Statement

The public finances have been a rollercoaster ride over the last few months, as illustrated by this week’s chart showing how the forecast for the fiscal deficit in 2026/27 has changed since the Spring Budget.

Step chart showing changes in the forecast deficit for 2026/27:

Spring Budget forecast: -£32bn
Higher interest charges: -£47bn
Economic forecast changes: -£28bn
Mini-Budget measures: -£45bn
Mini-Budget reversals: +£29bn
Autumn Statement measures: +£43bn
= Autumn Statement forecast: -£80bn

Former Chancellor and now Prime Minister Rishi Sunak expressed some optimism back in March when he presented his Spring Budget, commenting how he remained committed to achieving a current budget surplus despite the huge amounts spent supporting individuals and businesses through the pandemic, and the support he was then offering to help with energy bills as they started to soar.

My chart this week illustrates how the fiscal situation has deteriorated significantly as rising interest rates, accelerating inflation, and an economy entering recession have adversely affected the public finances. Together with the additional energy support measures announced by then Prime Minister Liz Truss in September, the shortfall between receipts and expenditure is expected to be £270bn higher over a five-year period to 2026/27 than was forecast by the Office for Budget Responsibility back in March.

In 2026/27 itself (the year ending 31 March 2027), interest charges are expected to be £47bn higher than previously forecast, while tax receipts and other forecast changes are expected to require an extra £28bn in additional funding (of which £25bn relates to lower tax receipts). 

In theory this would result in a deficit of £107bn, which is why it was surprising that then Chancellor Kwasi Kwarteng decided to announce unfunded tax cuts amounting to £45bn a year by 2026/27. Although Kwarteng was hoping his planned tax cuts would help stimulate the economy, if they hadn’t then the deficit could have risen to more than £150bn, an unsustainable level that caused financial markets to take fright – even if they and we didn’t have the official numbers at that point.

Reversals to the mini-Budget followed as Chancellor Jeremy Hunt and Prime Minister Rishi Sunak attempted to reassure markets of their fiscal credibility, with £43bn in tax and spending changes to plug some of the gap. These comprise tax rises amounting to around £23bn a year (more than offsetting the £16bn of tax cuts retained from the mini-Budget), together with £20bn in lower levels of public spending than previously planned.

Together the forecast changes and government decisions give rise to a forecast deficit of £80bn in 2026/27, significantly higher than previously forecast. This is not a comfortable place for the public finances, with the Chancellor having to abandon the government’s previous commitment to achieving a current budget surplus in addition to, as expected, deferring the point at which he expects to see the underlying debt-to-GDP ratio start to fall from three to five years into the future.

Both tax and spending measures primarily involve fiscal drag, freezing tax allowances so that more people are brought into paying tax or paying tax at higher rates, and severely constraining public spending. Although it might be theoretically possible to hold the line on both tax and spending constraint for the next five years, there are likely to be some adjustments needed in the Spring Budget as pressures on public services mount, while the most difficult decisions have been postponed until after the next general election.

This week’s chart is not a pretty picture.

This chart was originally published by ICAEW.

ICAEW chart of the week: Overseas travel

My chart this week is about visits abroad by UK residents, illustrating how people have started to travel again following restrictions during the pandemic.

Column chart showing number of foreign trips by UK residents by calendar quarter.

2017: 15.9m, 23.7m, 28.7m. 18.9m
2018: 16.6m, 24.6m, 29.9m, 19.4m
2019: 18.2m, 25/8m, 30.0m, 19.2m
2020: 13.9m, 0.9m, 6/2m, 2.8m
2021: 0.9, 1.2m, 8.1m, 9.0m
2022: 9.4m, 20.4m

Visits abroad by UK residents have picked up following the depths of the pandemic but have yet to recover to pre-pandemic levels.

According to the Office for National Statistics, the number of visits abroad by UK residents by quarter amounted to 15.9m, 23.7m, 28.7 and 18.9m in 2017; 16.6m, 24.6m, 29.9m and 19.4m in 2018; 18.2m, 25.8m, 30.0m and 19.2m in 2019; 13.9m, 0.9m, 6.2m and 2.8m in 2020; 0.9m, 1.2m, 8.1m and 9.0m in 2021; and 9.4m and 20.4m in the first two quarters of 2022.

Although substantially higher than at the height of COVID-19 travel restrictions, trips abroad during the first half of 2022 were still substantially lower than before the pandemic. 

The 20.4m visits during the second quarter of 2022 comprised 15.1m to countries in the European Union, 1.3m to other European countries, 1.0m to North America and 3.0m to other countries around the world. Of these trips, 13.4m were for holidays, 5.1m were to visit friends or relatives, 1.4m for business and 0.5m were for other reasons. 

These numbers compare with 25.8m visits in the second quarter of 2019, comprising 18.9m to the EU, 1.4m to other European countries, 1.6m to North America and 3.9m to the rest of the world. This comprised an estimated 16.8m holidays, 6.0m visits to friends or relatives, 2.5m business trips and 0.5m other.

The amount spent by travellers in the second quarter of 2022 was estimated to be £15.8bn, an average of approximately £775 per visit. This compares with an average of around £630 in the second quarter of 2019, reflecting a weaker pound, inflation and the mix of travellers and countries visited.

Trips abroad during the key summer quarter of July to September 2022 has yet to be released by the ONS, so we wait to see whether there will be anywhere near the peak of 30.0m visits recorded in Q3 of 2019.

This chart was originally published by ICAEW.

ICAEW chart of the week: IFS forecast deficit

My chart this week illustrates how tax cuts, higher interest charges and energy support packages contribute to the Institute for Fiscal Studies forecast of big increases in the fiscal deficit over the next few years.

Column chart showing changes between the OBR March 2022 forecast deficit and the IFS post-miniBudget forecast (after top-rate tax reversal)

2022/23: £99bn (OBR forecast) +£75bn (energy support packages) +£20bn (interest and other) = £194bn (IFS forecast)

2023/24: £50bn + £43bn (energy) +£56bn (interest and other) + £27bn (tax cuts) = £176bn

2024/25: £37bn + £11bn (energy) + £29bn (interest) + £30bn (tax cuts) = £107bn

2025/26: £35bn + £29bn (interest and other) + £37bn (tax cuts) = £101bn

2026/27: £32bn (OBR) + £28bn (interest and other) + £43bn (tax cuts) = £103bn (IFS).

The Institute for Fiscal Studies (IFS) published its annual Green Budget pre-Budget report on Tuesday 11 October. My chart this week summarises how the government’s energy support packages, higher interest rates and planned tax cuts contribute to a big jump in the fiscal deficit for the next few years up until the financial year ending 31 March 2027 (2026/27).

The chart starts with the Office for Budget Responsibility’s March 2022 Economic and Fiscal Outlook forecast for the deficit of £99bn in 2022/23, £50bn in 2023/24, £37bn in 2024/25, £35bn in 2025/26 and £32bn in 2026/27.

Forecasts from the IFS suggest that the deficit will almost double to £194bn in the current financial year, principally as a consequence of the £75bn cost-of-energy support packages announced by the government in May and September 2022, together with £20bn from higher interest and other forecast changes. The £7bn in lost tax revenue from cancelling the national insurance rise from November onwards and £1bn from cutting stamp duty is offset by £8bn in anticipated receipts from the energy windfall tax introduced by Rishi Sunak in May. 

In the next financial year 2023/24, the IFS has forecast a £126bn increase in the forecast deficit from the OBR’s £50bn back in March to £176bn. This comprises an estimated £43bn cost of the domestic energy price guarantee, an extra £56bn from the effect of higher interest costs and other forecast changes, and £27bn in lower receipts as a consequence of the tax cuts announced by Chancellor of the Exchequer Kwasi Kwarteng on 23 September and partially reversed on 4 October. 

The IFS emphasises that the forecast for the cost of domestic energy price guarantee is highly uncertain given how volatile energy prices are; it could vary up or down by tens of billions of pounds. There is also nothing in the forecast for an extension of the temporary energy support package for businesses that is due to expire on 31 March 2023, despite the potential that this may be required if energy prices remain elevated.

Higher interest charges are driven by a number of factors, including higher Bank of England base rates over the next few years, an increase in the yields on government borrowing when debt is refinanced, the effect of higher inflation on gilts linked to the retail prices index and the higher level of debt consequent on running bigger deficits. Other forecast changes principally relate to the effect of higher inflation on receipts and spending.

The effect of the tax cuts in 2023/24 has been estimated by HM Treasury to reduce receipts by £18bn from the cancellation of the national insurance rise, £11bn from cancelling the previously legislated increase in corporation tax from 19% to 25% from 1 April 2023, £5bn from implementing the cut in the income tax base rate from 20% to 19% a year early, £1bn from cutting stamp duty, £1bn from permanently setting the annual investment allowance for businesses to £1m and £1bn from rolling back IR35, net of £10bn generated by the energy profits levy.

In 2024/25, the forecast assumes energy prices continue to reduce, resulting in a cost for the final six months of the energy price guarantee to £8bn to add to the £37bn forecast by the OBR back in March. Higher interest and other forecast changes should add £29bn, while the government’s tax cuts should add a further £30bn, resulting in a new forecast for the deficit that year of £107bn. Similarly in 2025/26, the OBR’s spring forecast of £35bn has been revised up to £101bn, comprising £29bn from higher interest and other forecast changes and £37bn from tax cuts. 

In 2026/27, the IFS forecasts the deficit to be £103bn, with the OBR March forecast of £32bn being increased by £28bn for higher interest charges and other forecast changes and £43bn from the effect of tax cuts. The latter comprises £19bn from the cancellation of the health and social care levy, £18bn from the cancellation of the corporation tax rise to 25%, £2bn from the cut in stamp duty, £2bn from a VAT-free shopping scheme for tourists, and £2bn in other tax measures.

While the huge cost of the government’s energy support packages is the largest contributor to the increase in the deficit in the first two years of the forecast, it is the persistent effect of higher interest rates combined with tax cuts that is the bigger concern for the IFS. Based on its calculation, it suggests that public spending cuts of £62bn a year might be necessary to achieve a falling ratio of debt to GDP by the fifth year of the forecast period – a not insignificant sum.

This chart was originally published by ICAEW.

ICAEW chart of the week: Gilt prices

Our chart this week looks at how the price of the 1½% UK Treasury Gilt 2047 has changed over a nine-week period, falling from £84.73 for a £100 gilt on 2 August to £51.88 on 27 September, before recovering to £60.65 on 4 October.

Column chart showing weekly price for the 1% UK Treasury Gilt 2047

2 Aug: £84.73 (yield 2.31%)
9 Aug: £83.14 (2.41%)
16 Aug: £80.50 (2.57%)
23 Aug: £75.15 (2.92%)
30 Aug: £73.14 (3.06%)
6 Sep: £68.35 (3.41%)
13 Sep: £66.96 (3.52%)
20 Sep: £65.54 (3.63%)
27 Sep: £51.88 (4.89%)
4 Oct: £60.63 (4.05%)

Recent events in the government bond markets have been featuring on the front pages since the mini-Budget. As our chart illustrates, gilt prices – that had already been falling as interest rates increased – dived to their lowest level for many years following the Chancellor’s announcement of unfunded tax cuts at the same time as an unprecedented intervention in energy markets.

The chart is based on the Tuesday closing price of a long-dated gilt, the 1½% UK Treasury Gilt 2047 (GB00BDCHBW80), which is due to mature on 22 July 2047. Originally a 30-year gilt issued in 2016, 2017 and 2018 at a weighted average price of £93.90 and a weighted average accepted yield of 1.8%, there are around 249m £100 gilts with a total nominal value of £24.9bn traded on the London Stock Exchange.

Debt investors that purchased at that price would have made a tidy profit if they had sold when the price peaked at £125.41 on 9 March 2020 (when the yield was 0.51%) but the price has fallen over the last couple of years as interest rates have risen, dropping to £84.73 at the close of business on Tuesday 2 August, providing a yield of 2.31% to a debt investor intending to hold this gilt over the remaining 25 years until it matures. 

Worsening inflation expectations since then have caused the yields demanded by investors to rise, resulting in the price falling by 14% over a four-week period to £83.14 on 9 August, £80.50 on 16 August, £75.15 on 23 August and £73.14 on 30 August, as the yield rose to 2.41%, 2.57%, 2.92% and 3.06% respectively. The slide continued in September as the price fell by a further 10% to £68.35 on 6 September, £66.96 on 13 September and £65.54 on 20 September as the yield rose to 3.41%, 3.52% and 3.63%, bring the cumulative fall since the first Tuesday in August to 23%. 

The price plunged to £51.88 in the wake of the mini-Budget, causing the yield to spike to 4.89%, a 21% fall in one week that brought the cumulative fall over eight weeks to 39%. The Bank of England’s intervention managed to stabilise the gilt market, with the price increasing by 17% to £60.65 over the week to Tuesday 4 October. This has brought the yield back down to 4.05% and reduces the cumulative fall in price over nine weeks between 2 August and 4 October to 28%.

The turmoil in the gilt markets has shone a light on the risks associated with investing in what is often described as a ‘very safe’ investment in gilt-edged government securities issued by one of the world’s largest economies. While the creditworthiness of the British government remains unquestioned, recent events have demonstrated just how quickly debt markets can move in response to changing economic conditions and prospects.

Whether you are invested in bonds directly, or indirectly through your pension, recent events have confirmed, in an all-too-dramatic way, the truism that stock prices can – and do – go down as well as up. 

This chart was originally published by ICAEW.

ICAEW chart of the week: Provisional tax bands 2023/24

My chart this week illustrates how five or seven different personal tax bands are expected in the coming financial year, despite the top rate of income tax being abolished.

Column chart showing tax rates for 2023/24 by income level, based on the mini-Budget. 

£0 -> 100% take home pay
£12,570 -> 12% national insurance, 19% income tax, 69% take home pay

Box for withdrawal of child benefit
£50,000 -> 12% NI, 31% income tax, 57% take home pay
£50,270 -> 2% NI, 52% income tax, 46% take home pay

Box for no children / lower earning parent
£50,270 -> 2% NI, 40% income tax, 58% take home pay

End of boxes

£60,000 -> 2% NI, 40% income tax, 58% take home pay
£100,000 -> 2% NI, 60% income tax, 38% take home pay (withdrawal of personal allowance)
£125,140 -> 2% NI, 40% income tax, 58% take home pay

Amid market chaos it might be forgotten that the ‘mini’ Budget was primarily about reforming the personal tax system. In abolishing the 45% top rate of income tax from 6 April 2023 onwards, the Chancellor simplified the tax system by removing the personal tax band that currently applies to earnings above £150,000.

Despite that simplification, our chart this week highlights how the personal tax system remains quite complicated, much more than might be assumed based on just two rates of income tax (19% and 40%), two rates of national insurance (12% and 2%) and recent alignment in income tax and national insurance thresholds.

In practice, our chart is an oversimplification, as it does not attempt to incorporate welfare benefits and hence the full complexity of how people are ‘taxed’ as their incomes rise – for example the 55% taper rate at which universal credit is withdrawn from those on the lowest incomes. It also does not attempt to reflect the tax treatment on non-earned income such as dividends, interest and capital gains, nor the intricacies of how pension contributions or other tax reliefs are dealt with. 

Nor does it show the different rates of income tax applicable in Scotland, which currently has three more tax bands than elsewhere in the UK and is likely to continue to do so once the Scottish Budget establishes tax rates for next financial year.

Our chart assumes the thresholds for personal income tax and national insurance remain frozen as currently planned, illustrating how there is no tax to pay on the first £12,570 of earned income – the first band in the UK’s personal tax system.

From this point upwards, income tax of 19% (a 1% cut from the current rate) and employee national insurance of 12% (a reduction from the 13.25% in force until next month) are expected to apply in 2023/24, a combined rate of 31% that reduces take-home pay to 69% of each extra pound earned.

These rates apply to earnings up to £50,000, when a strange quirk of the tax system comes into play if you are a parent with a child or children receiving child benefit. Assuming child benefit is uprated by inflation in April, then the amount clawed back between £50,000 and £60,000 from the higher-earning parent is likely to be equivalent to somewhere in the region of an extra 12% (for one child) or 20% (for two children). The quirk is the misalignment between the £50,000 at which child benefit starts to be withdrawn through the tax system and the £50,270 point at which the 40% higher rate of income tax rate and 2% lower rate of national insurance of £50,270 come into force. 

This creates a small band where the higher-earning parent of one child faces a combined tax rate of 43%, followed by a band between £50,270 and £60,000 where a combined rate of 52% applies. Not shown in the chart is the even higher rates of tax for two children – 39% income tax + 12% national insurance and 60% income tax + 2% national insurance – or even higher for three or more children receiving child benefit.

For those without children, or for the lower-earning parent, there is a more straightforward jump as income exceeds £50,270, with an extra 21% taken as the income tax rate rises from 19% to 40%, partially offset by a 10 percentage-point reduction in national insurance from 12% to 2%.

Those without children and lower-earning parents should retain 58% of each pound of earnings over £50,270, as will higher-earning parents on incomes above £60,000. 

For earnings above £100,000 the personal allowance is withdrawn, creating an extra tax band between £100,000 and £125,140 where there is a marginal income tax rate of 60%, which with 2% of employee national insurance means retaining 38% of each additional pound earned within this band. The new top band is above £125,140, where income tax reverts to 40%, which combined with 2% of national insurance results in 58% being retained for each extra pound earned.

With the current 45% top rate of tax abolished, there is no further band for earnings above £150,000, meaning that all incomes above £125,140 are taxed at a combined rate of 42%, at least before taking account of tax reliefs that might apply.

There have been suggestions that the Chancellor intends to attempt to simplify personal tax bands further, perhaps by abolishing the 60% tax rate between £100,000 and £125,140 by allowing higher earners to retain the personal allowance rather than have it withdrawn. A less expensive option would be to align the child benefit withdrawal threshold with that for the higher income tax rate, getting rid of the mini-tax band for higher-earning parents on incomes between £50,000 and £50,270.

We will no doubt discover whether the government’s new-found zeal to simplify the tax system will continue, or if they will revert to the longer-term trend of adding in new complications to the tax system whenever a little extra money needs to be found.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK public debt

We take a look at what makes up UK public debt and who it is owed to, before the Chancellor borrows hundreds of billions more in his emergency fiscal event.

Hybrid step chart showing gross debt of £2.7trn comprising £1,355bn of British government securities (of which £800bn is fixed-interest gilts, £40bn is treasury bills and £515bn is index-links gilts), £1,060bn owed to Bank of England depositors, £210bn for National Savings & Investments and £75bn in other debt. 

After deducting £300bn of cash and liquid financial assets, net debt is £2.4trn, which can be analysed as £930bn owed to UK banks and other, £635bn to UK institutional investors, £215bn to UK individuals, and £620bn to foreign investors.

We take a look at what makes up UK public debt and who it is owed to, before the Chancellor borrows hundreds of billions more in his emergency fiscal event.

Our chart this week is on public debt, illustrating how public sector gross debt is currently in the region of £2.7tn and public sector net debt is in the order of £2.4trn.

HM Treasury owes £2.1trn to holders of British government securities, of which approximately £745bn is owed to the Bank of England and £1,355bn to external investors. These securities are tradable on the London Stock Exchange, comprising fixed-interest bonds (‘gilts’) with an average maturity of 14 years, retail price index-linked gilts with an average maturity of 18 years and treasury bills that mature and roll over within six months or less.

The next largest public sector borrower is the Bank of England, which owes around £1,060bn to its depositors. This mostly comprises deposits created under its quantitative easing programme to support the economy, in the order of £850bn to finance fixed-interest gilt purchases, £20bn to finance corporate bond purchases and around £190bn to finance Term Funding Scheme loans.

The public is directly owed £210bn in the form of National Savings & Investments premium bonds and savings certificates.

The balance of £75bn comprises £25bn in Network Rail loans, £15bn in local authority external debt (local authorities owe £120bn in total, but £105bn is owed to central government) and £35bn in other sterling and foreign currency debt. These numbers do not include £21bn in central government leases and £10bn in other debts that have recently been added to the official measure for government debt following changes in methodology.

After deducting £300bn in cash and other liquid assets, this means public sector net debt stands at around £2.4trn, of which in the order of £930bn is owed to UK banks and other financial institutions, £635bn to UK institutional investors (pension funds and insurance companies), £215bn to UK individual investors, and £620bn to foreign investors, including foreign central banks and governments as well as private sector investors.

The chart illustrates how, despite the efforts of HM Treasury’s Debt Management Office to lock in fixed interest rates for long periods, the government is exposed to significant interest rate and inflation exposure, with the Bank of England having – in effect – swapped a significant proportion of government debt from fixed-rate gilts into variable rate central bank deposits through its quantitative easing programmes.

The consequence is that the majority of public debt is exposed to changes in interest rates or, in the case of index-linked gilts, to changes in retail price inflation, driving interest costs higher and higher each time the Bank of England raises its benchmark central bank deposit rate.

This provides a difficult backdrop for the Chancellor’s plans to borrow substantial sums to cut taxes, cap energy prices for households and businesses and increase defence spending. Most of the extra borrowing will be financed by issuing new British government securities at a time when the Bank of England is starting to put its quantitative easing programme into reverse and so selling some of its stock of fixed-interest gilts back into the market. 

There is no need for an official forecast to be confident of two things: public debt, and the cost of public debt, are both going up.

This chart was originally published by ICAEW.

ICAEW chart of the week: Receipts and spending by age

My chart this week looks at how receipts and spending vary by age, a key driver for public finances that new Chancellor Kwasi Kwarteng will need to factor into his fiscal plans.

Column chart - showing receipts by age group per person per month above the line and spending below the line.

0-9: £150 (receipts) - £550 (public services and interest), £290, (pensions and welfare), £270 (health and social care), £380 (education)

10-19: £210 - £620, £320, £110, £750

20-29: £1,150 - £440, £120, £160, £110

30-39: £1,930 - £430, £150, £180, £30

40-49: £2,200 - £430, £170, £200, £20

50-59: £1,960 - £450, £190, £300, £10

60-69: £1,240 - £480, £340, £370, -

70-79: £800 - £640, £1,170, £600, -

80+: £600 - £730, £1,400 - £1,270

Average: £1,220 - £510, £365, £310, £155

Kwasi Kwarteng’s first Budget will be an emergency one, not only setting out his plans for the financial year commencing on 1 April 2023, but also re-opening the budget for the current financial year. It will be dominated by the emergency support package for individuals and businesses already announced, alongside starting to deliver on Prime Minister Liz Truss’s commitments to cut taxes and ‘shrink the state’.

The new Chancellor is likely to find that cutting public spending is not going to be easy given the increasing financial commitments made by successive governments since the Second World War on education, pensions, health and social care, the areas that now dominate public spending. He supported adding to those commitments only a couple of years ago when then Prime Minister Boris Johnson decided to expand eligibility for social care, and former Chancellor Rishi Sunak re-committed to the ‘triple-lock’ that guarantees increases in the state pension every year.

As our chart this week illustrates, receipts and spending vary significantly across age groups, with spending on education higher on the young, who pay very little in taxes, and spending on pensions, health and social care much higher for older generations who contribute less than the average, especially after reaching retirement age. This contrasts with the profile for those of working age who pay the most into the system while on average taking the least out.

Derived from an analysis from the Office for Budget Responsibility’s fiscal risks and sustainability report published in July, the chart shows how – before the emergency Budget scheduled for 21 September – budgeted tax and other receipts for the current financial year 2022/23 are equivalent to £1,220 per person per month, based on forecast receipts of £988bn and a population of 67.5m. This is below budgeted public spending of £1,340 per person per month (£1,087bn/67.5m people/12 months), with the deficit of £120 per person per month (£99bn in total) funded by borrowing.

Average receipts per person per month by age group are estimated to be in the order of £150, £210, £1,150, £1,930, £2,200, £1,960, £1,240, £800 respectively for those aged 0-9, 10-19, 20-29, 30-39, 40-49, 50-59, 60-69, 70-79 and 80+ respectively. These numbers include £115 per person per month of non-tax receipts spread evenly across everyone. 

Spending on public services and interest in the order of £510 per person per month, or £550, £620, £440, £430, £430, £450, £480, £640, £730 by age group, is less variable across age groups because it much of this spending is incurred on behalf of everyone, including £125 in interest, £73 on defence and security and £53 on policing, justice and safety for example.

Spending on pensions and welfare of £365 per person per month is less evenly spread, with £290 and £320 per month spent on those in their first two decades and £440, £430, £430 and £450 on those in their twenties, thirties, forties and fifties respectively. This increases to average spending per person per month of £480, £640 and £730 on those in their sixties, seventies and eighties or over. 

Health and social care spending of £310 is biased towards older generations, with per person per month spending of £270, £110, £160, £180 and £200 for the first five decades of life contrasting with the £300, £370, £600 and £1,270 spent on average on those in their fifties, sixties, seventies and eighties or over. 

As you would expect, education spending of £155 per person per month on average is mostly spent on the young, with around £380 per person per month spent on the under-10s, £750 spent on those between 10 and 19, £110 spent on those in their twenties, and £30, £20 and £10 respectively spent on those in their thirties, forties and fifties.

The reason this chart is so critical is because demographics are not in a steady state, with the ONS projecting that there will be an additional 3.3m pensioners in 20 years’ time, a 27% increase. This will have significant cost implications for this and future governments over a period when the working-age population – who pay most of the taxes to fund public spending – is projected to grow by just 4% in total. 

While a declining birth rate might relieve some of the pressure on education spending over the next 20 years, spending on the state pension, the NHS and on social care will grow significantly if the commitments made by the current and previous governments to provide for income in retirement, universal free health care and an increasing level of social care provision are to be met, at the same time as running public services to the standard required.

Kwasi Kwarteng’s predecessors have been able to cover the expanding share of public spending going on pensions and health and social care without raising taxes above 40% of the economy by cutting spending on public services, in particular the defence budget, which has declined from in the order of 10% of GDP to around 2% over the last half century. However, with defence already at the NATO minimum, and many public services under significant pressure to improve delivery, there is much less scope to find savings than there has been in the past.

This poses a very big challenge for the Chancellor as he puts together his medium-term fiscal plans. Economic growth needs to be much higher than it has been in recent years, not only to cover the cost of tax cuts that he hopes will generate that growth, but also to generate the extra tax receipts needed to fund pensions and health and social care as more people live longer lives.

This chart was originally published by ICAEW.

ICAEW chart of the week: before the emergency fiscal event

My chart this week looks at how the budgeted deficit was supposed to play out according to the Spring Statement back in March, ahead of an emergency fiscal event expected within the next few weeks.

Step chart:

(£144bn) 2021/22 provisional deficit

+£84bn COVID-19 measures not repeated

+£18bn Economic growth net of inflation

-£27bn Higher interest costs

-£30bn Tax and spending changes


(£99bn) 2022/23 budgeted deficit

The new Chancellor will be looking at a range of possible large scale interventions to support individuals and businesses as they face unprecedented cost-of-living and cost-of-doing-business crises this winter. Several commentators have suggested that the combination of tax cuts trailed by new Prime Minister Liz Truss and a massive emergency support package could add more than £100bn to the deficit, more than doubling the budgeted deficit of £99bn established back in March 2022 just before the start of the financial year.

My chart illustrates how the deficit was expected to change from a provisional outturn of £144bn for the deficit in the year ended 31 March 2022, when taxes and other receipts were £914bn and total managed expenditure amounted to £1,058bn.

Last year’s totals included £84bn in COVID-19 related measures (£14bn of tax cuts and £70bn of spending measures) that are not repeated this year, with further spending this year – including continuing to treat COVID-19 patients and tackling NHS backlogs that stem from the pandemic – folded into departmental budgets set during the three-year Spending Review back in October 2021.

Economic growth net of inflation was expected to reduce the deficit by a further £18bn, comprising £21bn in extra receipts from forecast economic growth of 2.2% less £3bn (£41bn on spending, £38bn on receipts) from forecast inflation of 4.1%. The latter uses the GDP deflator measure for the ‘whole economy’ and was estimated at a point when consumer price inflation was expected to reach 8.0% this year.

Inflation also drove much of the jump in interest costs of £27bn in comparison with the previous year, principally because of interest accrued on inflation-linked gilts, but also as a consequence of higher interest rates.

Tax and spending changes amounted to £30bn, comprising £31bn in additional spending less a net £1bn in tax changes. The former comprises a £21bn or 2.0% increase in public spending principally stemming from the 2021 Spending Review, together with £10bn of support for household energy bills announced by former chancellor Rishi Sunak back in February and March 2022. Tax rises were expected to add £20bn to the top line, of which £18bn stems from the rise in national insurance rates from April pending the introduction of the health and social care levy next year. However, this was offset by £19bn in tax cuts and other movements, including a £6bn tax cut from increasing national insurance thresholds, £2bn from cutting fuel duty by 5p, and £1bn from freezing the business rates multiplier.

These changes result in a budgeted deficit of £99bn, being forecast tax and other receipts of £988bn less public spending of £1,087bn.

These amounts exclude £15bn in additional help for energy bills since the budget was finalised in March 2022, partially offset by £5bn from the windfall tax on energy companies announced at the same time. Adjusting for these two items, however, is relatively small beer compared with the large-scale fiscal announcements made by new Chancellor Kwasi Kwarteng. This is before the Office for Budget Responsibility works its magic in updating the fiscal forecasts for changes in the economic situation, taking account of higher inflation and interest rates, and lower economic growth or even an economic contraction.

The worsening economic outlook continues to overshadow the public finances, providing perhaps one of the worst foundations for any incoming Chancellor since the Second World War.

This chart was originally published by ICAEW.

ICAEW chart of the week: Energy price cap update

My weekly chart for ICAEW returns for a less than cheerful update on the energy price cap, highlighting how the massive 54% price rise back in April pales into insignificance in comparison with the recently announced 80% rise in October and the prospect of further big rises in the first half of 2023.

Column chart showing historical price caps for Q4 2020-Q1 2021, Q2-Q3 2021, Q4 2021-Q1 2022, Q2-Q3 2022, the recently announced price cap for Q4 2022, and industry forecasts for Q1, Q2, Q3 and Q4 2023.

Average typical price cap: £1,042, £1,138, £1,277, £1,971, £3,549 (Q4 2022), £5,390, £6,620, £5,590, £5,890.

Gas price/kWh: 3.0p, 3.3p, 4.1p, 7.4p, 14.8p (Q4 2022), 23.2p, 30.8p. 27.9p, £27.8p.

Electricity price/kWh: 17.2p, 19.0p, 20.8p, 28.3p, 51.9pm (Q4 2022), 80.5p, 91.8p, 78.3p, 79.8p.

Standing charge: £184, £188, £186, £265, £273 (Q4 2022), £275, £280, £280, £259.

Sources: Ofgem, Cornwall Insights, ICAEW calculations. Average direct debit prices based on 'typical' annual household usage of 2,900 kWh of electricity and 12,000kWh of gas.

My chart this week is on Ofgem’s cap on domestic electricity and gas prices, which increased from an annual average of £1,042 back in October 2020 for a ‘typical’ household using 2,900kWh of electricity and 12,000kWh of gas paying by direct debit, to £1,138 in April 2021, £1,277 in October 2021 and £1,971 in April this year.

Unless the new prime minister intervenes, the energy price cap will rise to £3,549 on 1 October, significantly more than was anticipated in our chart back in January on this topic . Divided by 12, this gives a monthly average bill of £296 (compared with £164 currently and £106 last winter), although as energy usage in winter is higher for most households the £400 or £66 per month rebate between October 2022 and April 2023 announced by the government earlier this year will not go very far.

The change to quarterly price caps from 2023 onwards means that households face a further rise in January, making the winter even more expensive given that research from Cornwall Insight suggests energy prices will continue to rise, to a likely cap of in the region of £5,390 on 1 January 2023 and potentially to as much as £6,620 on 1 April 2023, before falling to £5,900 on 1 July and £5,890 on 1 October 2023.

The energy price cap is technically a series of regional caps on the price per kilowatt-hour (kWh) for electricity and gas, and on the daily standing charge payable by domestic users. Larger or less energy-efficient households using more electricity or gas will pay a lot more than the amounts shown here, while smaller and more energy-efficient households will pay less. There are higher prices for those using prepayment meters (£3,608 from 1 October) and those paying by cash or cheque (£3,764 from 1 October).

The chart illustrates how the average annual standing charge was £184 in Q4 2020 and Q1 2021, £188 in Q2 and Q3 2021, £186 in Q4 2021 and Q1 2022 and £265 in the current price cap, the large increase principally to cover the costs of dealing with the 40 or so energy suppliers that went bust over the past year. The average standing charge will increase to £273 in October and then is expected to stabilise at around that level, potentially at £275, £280, £280, and £250 respectively for the four quarters in 2023, although this depends on how Ofgem chooses to allocate the costs that make up the cap between fixed and variable elements in the pricing structure.

The average per kWh price for electricity has increased from 17.2p (Oct 2020-Mar 2021) to 19.0p (Apr-Sep 2021) to 20.8p (Oct 2021-Mar 2020) to 28.3p currently and will rise to 51.9p in October. If Cornwall Insight’s predictions come to fruition, the price is likely to rise to somewhere around 80.5p per kWh in January and potentially to 91.8p in April, before falling to 78.3p in July and rising slightly to 79.8p in October 2023. The potential peak of 91.8p is more than five times the level back in October 2020 and is likely to be an even higher multiple for the many households who were on fixed price deals that were often significantly below the level of the price cap.

The average per kWh price for gas has increased from 3.0p (Oct 2020-Mar 2021) to 3.3p (Apr-Sep 2021) to 4.1p (Oct 2021-Mar 2020) to 7.4p currently and will rise to 14.8p in October. The gas price is likely to rise to 23.2p per kWh in January and potentially to 30.8p in April, followed by 27.9p and 27.8p in the final two quarters of 2023. The possible peak of 30.8p would be more than 10 times the level of 3.0p back in October 2020.

The price cap about to come into force of £3,549 is based on annually equivalent wholesale energy costs of £2,491, network costs of £372, operating costs of £214, social and environmental contributions of £152, other costs of £88 and a profit margin of £63, before adding on £169 of VAT at a rate of 5%. These are equivalent to £208, £31, £18, £13, £7, £5, and £14 in a ‘typical’ bill of £296 per month.

The sheer scale of these price rises will make energy unaffordable for millions of families across the UK at the same time as many other prices are rising sharply. This will mean real hardship for those on low and middle incomes without significant additional financial support from government, whether in the form of extra rebates on energy price rises or support through the benefit system. Other options include reforming the pricing mechanism for electricity generated by non-gas sources such as renewables or providing the energy suppliers with a long-term borrowing facility to enable the expected price rises to be spread out over a number of years.

Either way, the incoming prime minister faces some very difficult choices in how to respond, not only to the cost-of-living crisis but also to an emerging cost-of-doing-business crisis that could see many businesses forced to close as their energy prices (not covered by the domestic price cap) become unsustainable.

In January, I said: “There may be trouble ahead.” Unfortunately for all of us, trouble has arrived.

This chart was originally published by ICAEW.