ICAEW chart of the week: Tax Day

26 March 2021: ICAEW’s chart this week is in honour of Tax Day, the newest fiscal event in the government calendar where reforms of the tax system under consideration are opened up to consultation.

Chart showing components of tax receipts of £732bn in 2021-22 and changes to the £928bn projected in 2025-26.

Numbers for chart elements included in the text below.

The #icaewchartoftheweek starts with the Spring Budget forecast tax receipts of £732bn for the coming financial year from 1 April 2021 and how these are expected to increase to £928bn in 2025-26 through a combination of economic growth, inflation and higher receipts principally from corporation tax, income tax, VAT and business rates. 

The chart illustrates how the ‘big three’: income tax (£198bn in 2021-22), VAT (£151bn) and national insurance (£147bn) together comprise 67.8% of the total tax take, with corporation tax (£40bn), council tax (£40bn), fuel duties (£26bn), business rates (£24bn), alcohol & tobacco duties (£22bn), stamp duty (£12bn) generating a further 22.4%. The next 5 taxes – environmental levies (£10bn), capital gains tax (£9bn), insurance premium tax (£7bn), vehicle excise duties (£7bn) and inheritance tax (£6bn) – generate 5.3%, while all other taxes (£33bn) comprise the balance of 4.5%.

With the Chancellor constrained by a commitment not to raise the main rates of income tax, VAT and national insurance, the principal focus of both the Spring Budget and Tax Day has been on improving the tax take from existing taxes, for example by looking at tax reliefs and tackling tax avoidance, and on raising more money from smaller taxes.

This is reflected in the Office for Budget Responsibility projections for tax receipts that accompanied the Spring Budget, which indicate that receipts from most taxes are expected to rise broadly in line with economic growth (generating £80bn in higher tax receipts) and inflation (£46bn) between 2021-22 and 2056-26. This reflects anticipated economic recovery from the pandemic as well as a boost from stimulus measures announced by the Chancellor in addition to existing plans to increase public investment.

The biggest incremental change is an expected increase in corporation tax receipts of £38bn over and above economic growth and inflation. Some of this rise is recovery to a more normal level, as businesses will be able to reduce their tax bills in the coming year by offsetting losses incurred during the pandemic and using the temporary ‘super deduction’ of 130% of qualifying capital expenditure, but the principal driver is an increase in the corporation tax rate on larger businesses from 19% to 25% in 2023.

The next highest increases are from income tax (+£16bn) and VAT (+£9bn) where a combination of fiscal drag from freezing tax allowances (income tax) and registration thresholds (VAT) will bring more transactions into the scope of both taxes and hence generate more revenue. Both taxes are also the focus of efforts to make taxes easier to pay and to tackle tax avoidance as addressed in several of the Tax Day consultations. 

The other significant increase is in business rates (+£7bn), although this mostly reflects pandemic related reliefs in the coming financial year that are not expected to continue into subsequent financial years. In practice, there are some questions as to whether this increase will be deliverable, with the Tax Day consultation on business rates suggesting that levels are too high and a reduction could help bricks and mortar businesses survive against online competition and so ‘save the high street’. The dilemma for the Chancellor is that if he were to cut business rates as some hope, then what tax lever he would need to pull to make up for that lost revenue?

Much of the focus of this first Tax Day has been on the efficiency and effectiveness of the tax system and how it can be made to work better. Perhaps future Tax Days will tackle some of the bigger questions surrounding the role of taxation in the long-term sustainability and resilience of the public finances – and whether some bigger tax levers might need to be pulled at some point in the future?

This chart was originally published by ICAEW.

ICAEW chart of the week: global military spending

19 March 2021: The UK’s Integrated Review is the inspiration for this week’s chart, illustrating the 20 countries around the world that spend the most on their militaries.

Chart showing global military spending in 2019 led by USA (£526bn) and China (£200bn) followed by 18 other countries - see text below the chart for details.

The UK Government launched its Integrated Review of Security, Defence, Development and Foreign Policy on 16 March 2021, setting out a vision for the UK’s place in the world following its departure from the European Union and in the context of increasing international tensions and emerging security threats.

At the core of the Integrated Review is security and defence, and ICAEW’s chart of the week illustrates one aspect of that by looking at military spending around the world. 

The chart shows spending by the top 20 countries, which together comprise in the order of £1.2tn of estimated total military spending of around £1.4tn to £1.5tn globally in 2019 – an almost textbook example of the 80:20 rule in action.

More than a third of the total spend is incurred by just one country – the USA – which spent in the order of £526bn in 2019 converted at current exchange rates. The next biggest were China and India at £200bn and £50bn respectively, although differences in purchasing power mean that they can afford many more soldiers, sailors and aircrew for the same amount of money. This is followed by Saudi Arabia (£45bn), Russia (£41bn), France (£38bn), the UK (£38bn), Germany (£38bn), Japan (£34bn), South Korea (£33bn), Australia (£21bn), Italy (£20bn), Canada (£17bn), Israel (£16bn), Brazil (£14bn), Spain (£13bn), Turkey (£11bn), the Netherlands (£9bn), Iran (£9bn) and Poland (£9bn).

Exchange rates affect the relative orders of many countries in the list, for example between Russia, France, the UK and Germany which can move up or down according to movements in their currencies, while there are a number of caveats over the estimates used given the different structures of armed forces around the world and a lack of transparency in what is included or excluded in defence budgets in many cases.

In addition, the use of in-year military spending does not necessarily translate directly into military strength. Military capabilities built up over many years or in some cases (such as the UK) over many centuries need to be taken into account, as do differing levels of technological development and spending on intelligence services, counter-terrorism and other aspects of security. Despite these various caveats, estimated military spending still provides a useful proxy in understanding the global security landscape and in particular highlights the UK’s position as a major second-tier military power – in the top 10 countries around the world.

Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy sets out some ambitious objectives for security and defence, which it summarises as follows: “Our diplomatic service, armed forces and security and intelligence agencies will be the most innovative and effective for their size in the world, able to keep our citizens safe at home and support our allies and partners globally. They will be characterised by agility, speed of action and digital integration – with a greater emphasis on engaging, training and assisting others. We will remain a nuclear-armed power with global reach and integrated military capabilities across all five operational domains. We will have a dynamic space programme and will be one of the world’s leading democratic cyber powers. Our diplomacy will be underwritten by the credibility of our deterrent and our ability to project power.”

The estimates of military spending used in the chart were taken from the Stockholm International Peace Research Institute (SIPRI)’s Military Expenditure Database, updated to current exchange rates.

This chart was originally published by ICAEW.

ICAEW chart of the week: Debt to GDP ratio

12 March 2021: This week’s chart illustrates how an expected increase of £1tn of additional public debt between 2020 and 2026 translates into the debt to GDP ratio.

Chart showing public sector net debt increased from £1,798bn (84.4% of GDP) at March 2020 to £2,747bn (109.7%) at March 2024 and £2,804bn (103.8%0 at March 2026.

This week’s #icaewchartoftheweek illustrates how a trillion pounds of extra public debt translates into the debt to GDP ratio. This rises from 84.4% last March to a forecast peak of 109.7% in 2024 before falling to 103.8% in 2026, according to the medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) that accompanied the Spring Budget. These forecast a rise in public sector net debt from £1.8tn at 31 March 2020 to £2.8tn at 31 March 2026.

Most of the additional borrowing is expected to occur in the period to March 2024, with £781bn (equivalent to 35.2% of a year’s GDP) borrowed to fund four years of deficits – an estimated £355bn (16.9% of GDP) in the current financial year and forecast deficits of £234bn (10.3% of GDP), £107bn (4.5% of GDP) and £85bn (3.5% of GDP) in 2021-22 through 2023-24 respectively. A further £168bn (7.5% of GDP) is needed over that same period to fund lending and working capital requirements.

Despite borrowing the equivalent of 42.7% of GDP, the debt to GDP ratio is expected to increase by a smaller amount – 25.3% of GDP from 84.4% at 31 March 2020 to 109.7% of GDP at 31 March 2024. This reflects an increase in the denominator for GDP, as a combination of inflation and economic growth ‘inflate away’ the debt by the equivalent of 17.4% over four years. This effect appears quite large, given the annualised growth of 0.7% a year forecast over the four years (comprising a 12% fall during the current financial year followed by growth of 10% in the coming financial year, 5% in 2022-23 and 1.5% in 2023-24) and an average GDP deflator inflation rate of 1.8%, but the magic of compounding, combined with timing differences in the value for GDP used in the calculation all multiply up.

The following two years see the forecast debt to GDP ratio decline to 103.8%. Debt is only expected to increase by £57bn (or 2.2% of GDP) over these two years because lending to businesses during the pandemic is expected to be repaid, reducing the £148bn (5.7% of GDP) needed to fund deficits of £74bn (2.9% of GDP) in 2024-25 and £74bn (2.8% of GDP) in 2025-26 by a net cash inflow of £91bn (3.5% of GDP). As a consequence, the debt to GDP ratio is forecast to drop by 5.9% overall once 8.1% of ‘inflating away’ is taken into account.

As with all forecasts, the reality will be different. A stronger economic recovery would both reduce the need for borrowing and increase the size of GDP at the same time, accelerating the decline in the debt to GDP ratio. A weaker recovery combined with higher spending in response to pressures on public services and/or higher interest rates might do the reverse. Either way, the debt to GDP is likely to remain at a significantly higher level than the pre-financial crisis 34% seen in 2008 for many years, if not decades, to come.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spring Budget cutting the current deficit

5 March 2021: The Budget provides the basis for this week’s chart, which illustrates government plans to achieve a current budget surplus to meet a new fiscal rule that hasn’t yet been formally announced but was hinted at.

Chart showing receipts, net investment and the current deficit from 2019-20 to 2025-26, showing very large current deficit in 2020-21 falling to almost zero by 2025-26.

The Chancellor will use a corporation tax rise and spending cuts to cut the current deficit over the next five years, but this relies on the economy recovering as expected and being able to restrain pressures on public spending.

The current deficit – the difference between receipts and expenditure excluding net investment – is expected to go from £14bn in 2019-20 to £279bn in the current financial year before falling to £172bn in 2021-22, £40bn in 2022-23, £15bn in 2023-24, £3bn in 2024-25 and just under £1bn in 2025-26 – almost, but not quite meeting the anticipated fiscal rule hinted at by Rishi Sunak in his Budget speech.

This will only be achievable if the pandemic can be brought under control so that support measures are no longer needed, in addition to depending on the strength of the economic recovery. The government will be hoping that the economic stimulus it plans to provide over the next two years will help drive that growth, with the hope of higher corporate profits to pay a higher rate of corporation tax over the rest of the period.

Despite the uncertainties around the numbers, the Chancellor felt it necessary to trim £4bn a year from public spending to get within touching distance of meeting his non-target – signalling his commitment to ‘fiscal responsibility’ and helping to achieve his other main non-target, which is to see the debt to GDP ratio start to fall after peaking at 110% of GDP in 2024. However, a number of commentators have suggested that this appears unlikely to be achievable, given both pre-existing pressures on public spending and a likely need to provide additional post-pandemic support to the NHS, social care and education in particular.

This provides a challenging context for the three-year Comprehensive Spending Review later this year, especially as the longer-term challenges facing the public finances remain unaddressed. In the nearer term though, the Chancellor will be hoping for a bigger bounce back to the economy over the summer to provide him with more room for manoeuvre in the autumn.

This chart was originally published by ICAEW.

ICAEW chart of the week: an unsustainable path

26 February 2021: The Chancellor needs to build a bridge to economic recovery in his first Budget on Wednesday, focusing on jobs, exports and investment. But with the OBR’s official projections showing public debt to be on an unsustainable path, what vision will he set out for the public finances in the long-term?

The Spring Budget announcement on Wednesday will primarily be about the government’s fiscal budget for the financial year commencing 1 April 2021. The UK is still in the midst of a major health emergency and in a difficult economic situation, and the announcement is likely to provide for an extension of support measures for businesses and individuals affected by the pandemic, funding for under-pressure public services and stimulus measures to drive economic growth once restrictions are lifted, particularly in the second half of the financial year. 

In the absence of a formal fiscal strategy event in the Parliamentary calendar, the Budget is also the main forum the Chancellor has to discuss the medium and long-term prospects for the public finances. This includes considering the five-year fiscal forecasts prepared by the Office for Budget Responsibility (OBR), as well as setting out any medium-term fiscal rules the government might want to use in determining its tax and spending plans and in demonstrating financial credibility with debt investors and citizens.

What is often less discussed is the long-term path for the public finances, which – as the #icaewchartoftheweek illustrates – is on an unsustainable path according to the official 50-year fiscal projections prepared by the OBR last July.

These projections indicate that, in the absence of government action, public debt will rise steadily over the next fifty years as public spending grows in line with anticipated demand, and increasing amounts of borrowing will be needed to cover the shortfall between that spending and the amount collected in taxes. It is important to understand that these projections were already on this path before the pandemic arrived and the principal difference between the OBR’s 2020 and 2018 projections is that the initial level of debt has increased from in the order of 80% to just over 100% of GDP. The starting point may be higher, but the fundamental issues haven’t changed.

This financial backdrop permeates every Budget and is the reason the Chancellor finds himself constrained in the choices he can make, despite ultra-low interest rates that currently permit him to borrow huge sums for one-off expenditures at almost no cost. He doesn’t have the same freedom when it comes to permanent increases in spending, whether that be on health, social care, welfare, education, defence or other public services, especially if he wants to minimise the scale of any potential tax increases. Of course, higher economic growth would help – but as successive Chancellors have found that is not so easy to deliver.

So while much of the focus on the Budget on Wednesday will be on the short-term extension of the life support package for individuals and businesses while restrictions remain in place and the economic stimulus thereafter, the Chancellor’s words will also be scrutinised for his vision on the direction of travel for the public finances beyond the end of the next financial year.

This chart was originally published by ICAEW.

ICAEW chart of the week: Japan Budget 2021-22

5 February 2021: This week’s chart focuses on the Japanese economy as it seeks to return to relative fiscal normality in the year commencing 1 April 2021, following multiple supplementary budgets in its current financial year.

The #icaewchartoftheweek is full of anticipation for the UK Budget next month and so decided to take a look at how the Japanese central government plans to borrow ¥28.9tn (£205bn) in the year to 31 March 2022. Together with taxes and other income of ¥63.0tn (£450bn), this will be used to fund ¥86.9tn (£620bn) of spending and a ¥5.0tn (£35bn) COVID-19 contingency.

This follows a significant amount of borrowing in the current financial year, with the 2020-21 Budget amended by three supplementary Budgets in response to the coronavirus pandemic. If temporary and special measures are excluded, the 2021-22 Budget reflects a 0.7% increase in spending over the previous year’s ¥86.3tn (£615bn) pre-COVID budget.

Spending comprises ¥35.8tn (£255bn) on social security, central government spending of ¥26.1tn (£185bn), and other spending of ¥16.5tn (£120bn), with the latter principally relating to transfers and grants to local government. Interest of ¥8.5tn (£60bn) is only marginally higher than the previous year’s ¥8.3tn, despite a 9% increase in the level of government bonds outstanding to ¥990tn (£7tn) – equivalent to 177% of GDP – at March 2022.

Borrowing has increased over pre-pandemic levels, with net borrowing of ¥28.9tn (£205bn) in 2021-22 compared with the 2020-21 pre-pandemic budget of ¥18.0tn (£130bn, not shown in the chart). This is principally driven by a 10% decline in anticipated income, with taxes and other income of ¥63.0tn (£450bn) falling from the ¥70.1tn (£500bn) originally budgeted for the current year (but not actually received).

The chart does not include the substantial amounts of taxation raised and spent by its 47 regional prefectures and so does not provide a complete fiscal picture for Japan. However, it does provide an indication of how the Japanese public finances have been able to respond to the pandemic.

The Japanese government will be hoping that there will be no need for supplementary Budgets in the coming financial year, as no doubt will UK Chancellor Rishi Sunak as he prepares for his government’s Budget on 3 March.

This chart was originally published by ICAEW.

ICAEW chart of the week: BBC finances

22 January 2020: The BBC’s finances are in the spotlight for this week’s chart, as it struggles to generate the income it needs to fund its public service broadcasting mission.

National Audit Office report out this week on the BBC’s strategic financial management highlights the financial pressures facing the BBC as it seeks to deliver on its universal public service broadcasting obligation in the face of a rapidly changing media landscape.

The #icaewchartoftheweek illustrates how the BBC generated revenue of £4.9bn in the year ended 31 March 2020. This is less than the £9bn or so generated by Sky in the UK & Ireland each year, but more than ITV’s £3bn or Channel 4’s £1bn. 

The principal source of income is the TV licence fee, which generated £3.2bn in 2019-20 from 21.2m households. This excludes 4.5m households that received free licences, with the government providing £253m to cover this in addition to an £87m grant for the World Service. Other income generated by the public service broadcasting arm amounted to £0.2bn, while BBC Studios and other commercial activities had external revenues of £1.2bn.

Expenditure of £5.0bn included £4.0bn incurred on public service broadcasting, paying for eight TV channels and 60 radio stations in the UK, radio services around the world in more than 40 languages and extensive online services – most notably BBC iPlayer. 

The BBC’s domestic TV and radio channels cost £1,609m and £494m respectively, while £238m was spent on BBC Online and £315m on the BBC World Service, of which £228m was funded from the licence fee. £204m was incurred on other services (including a contribution to S4C), while distribution, support and other costs incurred amounted to £1,070m, excluding £119m of licence fee collection costs.

A colour TV licence in 2019-20 cost £154.50, equivalent to £12.88 per month and the BBC estimates that £6.83, £2.22, £1.24 and £1.24 of each licence fee went on TV, radio, BBC Online and the World Service respectively, while £1.35 paid for other services, distribution and support, licence fee collection and other costs.

Commercial activities contributed £176m to the bottom line, providing a small subsidy to licence fee payers, with attempts by the BBC to start a global subscription service for British TV content in partnership with ITV (Britbox) yet to bear much fruit. The principal commercial revenue stream remains sales by BBC Studios to broadcasters around the world, together with advertising from the seven UKTV channels now wholly owned by BBC Studios and declining amounts from DVD sales. 

At the bottom line, the BBC incurred a loss of £119m in 2019-20, following on from a loss of £69m in the previous year and a profit of £180m in 2017-18. An improved contribution from commercial activities was not enough to offset the cut in the government funding for free TV licences for over-75s, which fell from £656m in 2017-18 to £253m in 2019-20. This funding has now ceased and from 1 August 2020 the BBC reintroduced licence fees for around three million over-75s households, retaining free licences for 1.5m or so over-75s households receiving pension credit (a welfare benefit for pensioners on low incomes).

There is a lot of debate both inside and outside the BBC about the future of the licence fee model and whether it can survive in a landscape of global streaming services. As it approaches its 100th anniversary in October 2022, the BBC will be hoping it can find a way to extend its public service broadcasting mission for a second century.

This chart was originally published by ICAEW.

A difficult winter ahead for the public finances

23 December 2020: The UK public sector incurred a £31.6bn deficit in November, bringing the total shortfall over eight months to £240.9bn. Debt reached an all-time high of £2.1tn.

Commenting on the latest public sector finances for November 2020, published on Tuesday 22 December 2020 by the Office for National Statistics (ONS), Alison Ring sector director at ICAEW, said: 

“A slightly more optimistic forecast for GDP from the Office for Budget Responsibility last month resulted in the UK’s debt to GDP ratio being revised downwards, despite public sector debt having reached an all-time high of £2.1tn in November. However, this optimism may prove to have been premature, with reports suggesting another national lockdown in the new year and disruption in international trade foretelling a potentially difficult winter ahead for the economy and the public finances. 

Prospects for the spring will depend on how quickly the vaccine can be rolled out, whether testing and tracing can deliver rapid and reliable results, and the extent to which disruption at borders now and after 1 January can be minimised.”

Public sector finances for November

The latest public sector finances reported a deficit of £31.6bn in November 2020, a cumulative total of £240.9bn for the first eight months of the financial year. This is £188.6bn more than the £52.3bn recorded for the same period last year.

Falls in VAT, corporation tax and income tax drove lower receipts, while large-scale fiscal interventions resulted in much higher levels of expenditure. Net investment is greater than last year, as planned, while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,099.8bn or 99.5% of GDP, an increase of £301.6bn from the start of the financial year and £303.0bn higher than in November 2019. This reflects £60.7bn of additional borrowing over and above the deficit, most of which has been used to fund coronavirus loans to business and tax deferral measures.

Table of results for the month of November and for the 8 months then ended, together with variances against the prior year. Click on the link at end of post to visit the original ICAEW article for a readable version.

The combination of receipts down 8%, expenditure up 29% and net investment up 26% has resulted in a deficit for the eight months to November 2020 that is over four times the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 26%. The cumulative deficit is approaching five times as much as for the same eight-month period last year.

Cash funding (the ‘public sector net cash requirement’) for the month was £20.7bn, bringing the cumulative total this financial year to £295.8bn, compared with £14.9bn for the same eight-month period in 2019. 

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

The deficit remains on track to approach the £393.5bn forecast for the financial year to March 2021 by the Office for Budget Responsibility in the Spending Review once bad debts not yet recognised on coronavirus loans are included.

Upwards revisions to GDP based on the latest Office for Budget Responsibility forecasts have reduced the debt to GDP ratio for this and previous months to below 100% of GDP. However, the likelihood of a further national lockdown in the new year and for disruption in international trade with the end of the EU transition period could depress prospects for GDP growth in 2021.

Table of results each of the 8 months to November 2020. Click on the link at end of post to visit the original ICAEW article for a readable version.
Table of results each of the 8 months to November 2019 and of the 12 months ended 31 March 2020. Click on the link at end of post to visit the original ICAEW article for a readable version

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first seven months from the £214.9bn reported last time to £209.3bn and increasing the reported deficit for 2019-20 from £56.1bn to £57.4bn.

This article was originally published by ICAEW.

ICAEW chart of the week: 40 years of technology

18 December 2020: Our last chart this year takes a look at how technology has advanced over the last forty years, using the number of transistors in central processing unit microprocessors as a proxy for technological advancement.

Transistors on chips: 2020 Apple M1 16bn, 2010 Intel Xeon 2.3bn, 2000 Intel Pentium IV 42m, 1990 Motorola 68040 1.2m and 1980 Motorola 68000 68,000.

As we look back over the course of a difficult year, the contribution of technology to keeping the economy working has become apparent. Working from home instead of the office, joining video calls instead of in-person meetings and collaborating using online tools have made it possible for most businesses to continue to operate, albeit perhaps not quite as normal. Similarly, consumers have been able to turn to online retail, streaming services and cashless technology to cope with closed stores and shuttered entertainment venues during lockdowns and tiered restrictions.

This has only been possible as a consequence of huge advancements in technology over the past forty years, with the arrival of affordable personal computers in the 1980s, mobile phones in the 1990s, practical laptops and broadband connections in the 2000s, and smartphones and tablets in the 2010s.

We have used the number of transistors in central processing unit (CPU) microprocessors as a proxy for technological advancement in the #icaewchartoftheweek, but of course there have been many other advancements that have been just as significant, from processing capabilities, memory size, data storage, video quality and broadband speeds.

Back in 1980, the Motorola 68000 chip with 68,000 transistors was the leading chip. It was originally used in high-end business computers before lower production costs enabled it to be included in the original Apple Macintosh launched in 1984. That first Macintosh had separate chips to provide 64K of read-only-memory (ROM), 128k of random-access memory (RAM), a built-in 400KB floppy disk drive and 512 x 342 monochrome display.

A decade later, Intel had caught up with Motorola in chip design, with the Intel 80486 containing 1,180,235 transistors, matching Motorola’s 68040 chip that contained approximately 1.2 million transistors. The Intel 80486 was used in many IBM-compatible PCs while the Motorola 68040 was used in the Commodore Amiga 4000 and HP Series 400 desktops.

Intel was the leading chip-maker in 2000 with the Pentium series of microprocessors being the core of many PCs, albeit against strong competition from AMD’s Athlon x86 compatible CPUs. The Pentium 4 had 42 million transistors, while by 2010, Intel had taken over from Motorola in Apple’s range of computers, although its Xeon series of chips (with 2.3 million transistors in 2010) was primarily used in high-end workstations and servers rather than in desktops or laptops.

In 2020, Apple has started to replace Intel in its computers with the launch of its ARM-based M1 chip. This has 16 billion transistors, more than 235,000 times as many as there were in the leading edge Motorola 68000 of 40 years ago. Processing power and capability is expected to continue to expand: for example, we didn’t have enough room on the chart to fit in AMD’s Epyc Rome microprocessor with 39.5billion transistors on a single chip.

The recently launched M1-based edition of the Apple MacBook Air has a specification that would unimaginable to the personal computer owner of four decades past, with a base configuration containing 8Gb of memory (62,500 times as much RAM as the original Macintosh desktop), 256 GB of storage (640,000 times) and a 2560 x 1600 colour display. 

Our ability to cope with the pandemic would have been much harder even a mere decade ago when smartphones were only just emerging, let alone if we had been back in the world of dial-up modems and fax machines of 40 years ago. This demonstrates just how much technology has improved our ability to deal with a global crisis such as the coronavirus pandemic.

The #icaewchartoftheweek is taking a break for a couple of weeks in order to enjoy socially-distanced Christmas and New Year celebrations and will be returning on 8 January 2021. After such a difficult year, we hope you will be able to take some time off to recharge and return to your home-office (and eventually your actual office) energised for what we hope will be a much improved 2021!

This chart was originally published by ICAEW.

ICAEW chart of the week: Government bond yields

11 December 2020: Ultra-low or negative yields provide governments with an opportunity to borrow extremely cheaply, but what will happen if and when interest rates rise?

Government 10-year bond yields

Germany -0.61%, Switzerland -0.59%, Netherlands -0.53%, France -0.36%, Portugal -0.02%, Japan +0.01%, Spain +0.02%, UK +0.26%, Italy +0.58%, Greece +0.60%, Canada +0.76%, New Zealand +0.91%, USA +0.95%, Australia +1.02%

On 9 December, the benchmark ten-year government bond yield for major western economies ranged from -0.61% for investors in German Bunds through to 0.95% for US Treasury Bonds and 1.02% for Australia Government Bonds, as illustrated in the #icaewchartoftheweek.

One of the more astonishing developments of the last decade or so has been the arrival of an era of ultra-low or negative interest rates, even as governments have borrowed massive sums of money to finance their activities. This is not only a consequence of weak economic conditions and the slowing of productivity-led growth, but it has also been driven by the monetary policy actions of central banks through quantitative easing operations that have driven down yields by buying long-term fixed interest rate government bonds in exchange for short-term variable rate central bank deposits.

For bond investors this has been a wild ride, with the value of existing bonds sky-rocketing as central banks have come calling to buy a proportion of their holdings, crystallising their gains. The downside is the extremely low yields available to debt investors on fresh purchases of government bonds, which in some cases involve paying governments for the privilege of doing so.

Yields vary according to maturity, with yields on UK gilts ranging from -0.08% on two-year gilts through to 0.26% for 10-year gilts (as shown in the chart) up to 0.81% on 30-year gilts. In practice, the UK issues debt with an average maturity between 15 and 20 years, so the current average cost of its financing is higher than that shown in the chart at between 0.48% and 0.77% being the yields on 15-year and 20-year gilts respectively. This has the benefit of locking in low interest rates for longer, in contrast with most of the other countries shown that tend to issue debt with an average maturity of less than ten years.

Quantitative easing complicates the picture, as by repurchasing a significant proportion of government debt and swapping it for central bank deposits, central banks have reversed the security of fixed interest rates locked in to maturity with a variable rate exposure that will hit the interest line immediately if rates change. 

In theory, this should not be a problem, as higher interest rates are most likely to accompany stronger economic growth and hence higher tax revenues with which to pay the resultant higher debt interest bills, but in practice treasury ministers are not so sanguine. In leveraging public balance sheets to finance their responses to COVID-19 – on top of the legacy of debt from the financial crisis – governments have significantly increased their exposure to movements in interest rates, just as other fiscal challenges are growing more pressing.

Expect to hear a lot more over the coming decade about the resilience of public finances as governments seek to reduce gearing and reduce their vulnerability to the next unexpected crisis, whenever that may occur.

This chart was originally published on the ICAEW website.