ICAEW chart of the week: Fuel prices

Our chart this week gives a breakdown of what makes up the cost of petrol and diesel, which continue to soar in price despite the temporary cut in fuel duty.

Column chart showing wholesale costs for 50 litres, distribution and retail costs, taxes and the fuel duty saving.

Petrol: £36.75, £4.30 and £40.40 = £81.45 (162.9p/litre x 50) after a fuel duty saving of £3.00.

Diesel: £44.20, £2.90 and £41.60 = £88.70 (177.4p/litre x 50) after a fuel duty saving of £3.00.

Source: RAC Foundation, 'Daily Fuel Prices 2022-05-03' x 50 litres.

A key component of the cost-of-living crisis is the expense incurred filling up our cars, which has risen by over 50% in two years from approximately 107p a litre for petrol and 112p a litre for diesel back in May 2020 to average prices of 162.9p and 177.4p per litre respectively on 3 May 2022.

Our chart illustrates how much this means in terms of a 50-litre fuel purchase. For petrol, this would have cost an average of £81.45 according to numbers supplied by the RAC Foundation, comprising £36.75 in wholesale costs, £4.30 in distribution and retail costs, and £40.40 in taxes. For diesel, the cost of buying 50 litres would have been £88.70, comprising £44.20 in wholesale fuel costs, £2.90 for distribution and the retailer, and £41.60 in taxes.

In each case, the Chancellor’s temporary 5p cut in fuel duty saves 6p per litre once VAT is taken into account, or £3.00 on a 50-litre purchase.

The wholesale costs of £36.75 and £44.20 (73.5p and 88.4p per litre) for petrol and diesel respectively are made up of £31.30 and £35.55 (62.6p and 71.1p per litre) for refined petrol and diesel and £5.45 and £8.65 (10.9p and 17.3p per litre) for bio content (principally ethanol) included in what you buy at the pump. Distribution and retail costs of £4.30 and £2.90 (8.7p and 5.8p per litre) for petrol and diesel respectively comprise delivery and distribution costs of £0.85 and £1.05 (1.7p and 2.1p per litre) and retailer margin of £3.45 and £1.85 (6.9p and 3.7p per litre). 

Taxes of £40.40 and £41.60 (80.7p and 83.2p per litre) comprise fuel duty of £26.45 (52.9p per litre) and £0.35 (0.7p per litre) in greenhouse gas and development fuel obligations for both petrol and diesel, and £13.60 for petrol and £14.80 for diesel (27.1p and 29.6p respectively) in VAT at 20%.

Most of the fuel duty cut has been absorbed by higher wholesale costs, meaning that prices at the pump are only just below their peak immediately prior to the Spring Statement on 23 March. However, retail fuel prices could well go up further in the coming weeks as higher crude oil prices flow through into the cost of refined petrol and diesel in response to EU sanctions against Russian oil.

Taxes on petrol and diesel remain a significant contributor to the public purse, with £26bn expected to be generated in fuel duty in the current fiscal year, despite a decade or so of freezing the rate and the recent temporary cut until March next year. The plan to phase out petrol and diesel vehicles poses a big dilemma for HM Treasury, which will need to make up for lost tax revenues once there is no hydrocarbon fuel to levy duties on. 

The current favourite option to fill the gap is road pricing, but the government has yet to formally announce a decision, something that will become more pressing as more and more drivers switch to electric cars.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK International Reserves

We take a look at the UK’s official international reserves that are held to safeguard sterling and support monetary policy.

Step chart showing components of the UK International Reserves.

Gross reserves: £101bn foreign currency securities and deposits, £36bn IMF, £15bn gold, £23bn other instruments.

Liabilities: (£109bn) other instruments

Net reserves: £66bn

Our chart this week is on the UK International Reserves, which comprise foreign currency securities and deposits, gold, investments in the International Monetary Fund (IMF), and other financial instruments primarily used to manage sterling as a national currency and support monetary policy.

As illustrated by the chart, the combined total of UK government and Bank of England international gross reserves was £175bn at 31 March 2022, comprising £101bn in foreign currency securities and deposits, £36bn invested in the IMF, £15bn in gold and £23bn in other financial instruments. This was offset by £109bn in liabilities to arrive at net reserves of £66bn.

According to the Bank of England, the £101bn in foreign currency securities consisted of £75bn in bonds and notes issued by foreign governments, £15bn in foreign government money market investments, £6bn in foreign central bank deposits and £5bn in private sector securities. The £36bn invested the IMF comprises £6bn in IMF reserves (effectively the IMF’s share capital) and £31bn in Special Drawing Rights (SDRs), a government-specific financial asset underpinned by a basket of currencies (US dollar, Euro, Chinese Yuan, Japanese Yen and sterling). The UK government also owned or had rights to 9,976,041 fine troy ounces of gold worth £15bn on 31 March 2022, while other financial instruments of £23bn included £20bn of claims against counterparties on account of reverse repo transactions.

Reserve assets were offset by £109bn in liabilities, comprising loans and securities used to finance reserve assets, repo obligations, and derivative financial instruments including foreign currency forwards, cross currency interest rate swaps and sterling interest rate swaps.

Not shown in the chart is the split between the UK government’s net reserves of £66bn, consisting of £151bn in gross assets less £85bn in liabilities, and the Bank of England’s approximately zero net reserve position, consisting of £24bn in gross assets (£12bn in foreign currency securities and bonds plus £12bn in other financial instruments) less £24bn in liabilities.

The Bank of England manages both its own foreign currency reserves, used to support its monetary policy objectives of controlling inflation, and the UK government’s international reserves, most of which sit in the Exchange Equalisation Account established in 1932 to provide a fund that can be used, when necessary, to regulate the exchange value of sterling. In normal circumstances the Bank of England’s main objectives in managing the reserves are to ensure the liquidity of sterling, the liquidity and security of the reserve assets themselves, and to ensure the reserves are managed in a cost-effective way.

In normal circumstances, the reserves are not used to actively intervene in foreign exchange markets, but are kept ‘in reserve’ on a precautionary basis in case there is any change in exchange rate policy in the future or in the event of any unexpected shocks. More prosaically, they are used to provide foreign currency services for government departments and agencies needing to transact in foreign currencies, as well as to buy, hold and sell SDRs as required by the UK’s membership of the IMF.

Although relatively small in the context of over £1trn a year in UK public spending and £2.3trn in public sector net debt, the UK’s international reserves provide HM Treasury and the Bank of England with a substantial amount of firepower in the foreign exchange markets should there ever be a need to intervene to support sterling. Fortunately, almost all of the foreign currency securities and deposits held in the reserves are invested in governments and central banks of allied countries, a contrast to the position of Russia, which has seen a substantial proportion of its international reserves frozen following its invasion of Ukraine.

One piece of good news amid all the economic gloom at the moment is that the UK International Reserves aren’t hitting the headlines. Because when they do, you really will know that all is not well.

This chart was originally published by ICAEW.

ICAEW chart of the week: GCSE maths grade inflation

Our chart this week looks at the grade inflation challenge facing 16-year-olds across England as they study for their forthcoming GCSEs in the third year of the pandemic.

Chart showing GCSE results by grade for 2018, 2019, 2020 and 2021 respectively.

2018 – U (2.4%), grades 1-3 (5.4%, 8.8%, 12.7%), grades 4-6 (20.3%, 18.5%, 11.8%), grades 7-9 (9.5%, 6.9%, 3.7%)

2019 – U (2.3%), grades 1-3 (5.3%, 8.5%, 12.6%), grades 4-6 (21.1%, 18.2%, 11.4%), grades 7-9 (9.6%, 7.2%, 3.8%)

2020 – U (0.7%), grades 1-3 (4.0%, 7.3%, 11.1%), grades 4-6 (19.6%, 20.1%, 12.9%), grades 7-9 (11.0%, 7.9%, 5.4%)

2021 – U (1.1%), grades 1-3 (4.3%, 7.0%, 9.9%), grades 4-6 (18.7%, 20.3%, 12.7%), grades 7-9 (11.4%, 8.6%, 6.0%)

The ICAEW chart of the week is on the results of the General Certificate of General Education (GCSE) in mathematics for the past four years in England according to the Department for Education (DfE), illustrating how a burst of grade inflation in the pandemic poses challenges for both students and their examiners in the reinstated examinations this summer.

Maths is one of the core exam subjects taken by almost all 16-year-olds in England, with passes at grade 4 or above in both maths and English being a base requirement for most students wanting to progress onto GCSE Advanced (A level) courses and to university or a degree apprenticeship after that. It is also a prerequisite for many vocational qualifications, where good numeracy skills are often essential. 

The current grading system was adopted in 2017, with results now split into nine grades, which can be grouped into three categories of three grades each: below standard (1-3), good performance (4-6) and high performance (7-9). The four former grades of G, F, E and D were condensed into three (grades 1-3), while the old passing grade of C and the next level up of B were expanded to three, being 4 (pass), 5 (strong pass) and 6. The former high performance grades of A and A* were replaced by grades 7, 8 and 9, providing even more granularity at the top end.

The chart illustrates how before the pandemic the results in 2018 and 2019 were similar with 2.4% and 2.3% ungraded ‘U’ results respectively (which includes those who failed to turn up or who withdrew after entering), with respectively 26.9% and 26.4% of students receiving below standard grades (1-3), 50.6% and 50.7% received good performance grades (4-6), and 20.1% and 20.6% received high performance grades (7-9).

The debacle of the cancelled school examinations and regraded results in 2020, and the deliberate decision in 2021 to adopt teacher-assessed grades instead of exams, saw a significant rise in the number of higher grades awarded. There were fewer ungraded results (0.7% in 2020 and 1.1% in 2021), fewer below standard awards (22.4% and 21.2% respectively), more good performance grades (52.6% and 51.7%) and a great deal more high performance grades (24.3% and 26.0%). There was a big jump in the very top award, the so-called A**, with 6.0% of students receiving grade 9 in 2021 compared with 3.7% in 2018.

The percentage of each grade awarded by year were as follows:

2018 – U (2.4%), grades 1-3 (5.4%, 8.8%, 12.7%), grades 4-6 (20.3%, 18.5%, 11.8%), grades 7-9 (9.5%, 6.9%, 3.7%) – 535,312 entrants

2019 – U (2.3%), grades 1-3 (5.3%, 8.5%, 12.6%), grades 4-6 (21.1%, 18.2%, 11.4%), grades 7-9 (9.6%, 7.2%, 3.8%) – 554,598 entrants

2020 – U (0.7%), grades 1-3 (4.0%, 7.3%, 11.1%), grades 4-6 (19.6%, 20.1%, 12.9%), grades 7-9 (11.0%, 7.9%, 5.4%) – 571,624 entrants

2021 – U (1.1%), grades 1-3 (4.3%, 7.0%, 9.9%), grades 4-6 (18.7%, 20.3%, 12.7%), grades 7-9 (11.4%, 8.6%, 6.0%) – 584,933 entrants

The Office of Qualifications and Examinations Regulation (Ofqual), which regulates qualifications, examinations and assessments in England, has expressed a desire to return to a pre-pandemic grade profile but has acknowledged that the current cohort of GCSE students have experienced significant disruption to their education over the past two years. As a consequence, they believe it would be unfair to revert back to the previous level awards in one go and have said that they will set grade boundaries around the mid-point between the 2019 and 2021 results, subject to the normal process of moderation. 

This may seem unfair to students who can expect to be rewarded with less generous marks than their immediate predecessors given the difficulties being experienced in many schools over the past two years as they have studied for their GCSEs. There have been frequent closures and class disruptions as the coronavirus has and continues to propagate around the country. But Ofqual and the examiners are keen to avoid the grade inflation experienced over the last two years of teacher-assessed grades becoming embedded, a real prospect if they were to wait another year or two before attempting to bring grades back down towards pre-pandemic levels.

The experience of the last two years is that the ability of Ofqual and the DfE to deliver their plan will depend on events, so we will need to wait to see how well the process of sitting exams goes and how the results when they are announced are viewed by the court of public opinion.

In the meantime, we wish all the best of success to all those studying for their GCSEs this summer in England, as well as to their compatriots sitting equivalent exams in Wales, Scotland and Northern Ireland.

ICAEW chart of the week: US proposed federal budget 2023

Our chart this week illustrates the $5.8tn federal budget for the 2023 fiscal year proposed by President Biden to Congress for approval – a process that will not be straightforward.

Chart illustrating the 2023 US federal budget proposal.

Receipts $4.6tn + Deficit $1.2tn = Outlays $5.8tn.

Receipts comprise social security $1.5tn, income taxes $2.3tn, corporate taxes $0.5tn and other $0.3tn.

Outlays comprise welfare $3.7tn (social security $1.3tn, healthcare $1.4tn, veterans $0.2tn, income security $0.8tn), net interest of $0.4tn and federal government spending of $1.77tn (defence $0.8tn, non-defence $0.9tn).

The US Office for Management and Budget (OMB) has just published President Biden’s proposal for the Budget of the United States Government, Fiscal Year 2023, which commences on 1 October 2022.

Federal spending proposed of $5.8tn comprises $3.7bn of ‘mandatory’ spending, primarily on welfare programmes, $0.4tn on debt interest, and $1.7tn of ‘discretionary’ spending. Welfare spending includes $1.3tn on social security, $1.4tn on healthcare (Medicare and Medicaid), $0.2tn on support to veterans, and $0.8tn on income security and other programmes.

This is a $60bn reduction from the $5.9tn forecast for the current financial year ending on 30 September 2022, with increases in social security ($99bn), Medicare and Medicaid ($67bn), interest ($39bn) and defence ($29bn), offset by a reduction of $280bn in income security (primarily pandemic support) and $14bn in non-defence departmental spending. This compares with the $6.8trn spent in the fiscal year ended 30 September 2021 at the height of the pandemic.

Receipts are forecast at $4.6tn, comprising social security payroll taxes of $1.5tn, federal income taxes of $2.3tn, corporate taxes of $0.5tn, and other taxes $0.3tn, resulting in a deficit of $1.2tn to be funded by borrowing.

Receipts are forecast to be $201bn higher than the $4.4tn forecast for the current financial year, with social security receipts up $64bn, income taxes up $82bn and corporate taxes up $118bn, offset by a fall of $63bn in other receipts. This primarily relates to economic factors as the US emerges from the pandemic but, as has been publicly reported, also involves higher taxes on ‘billionaires’, among other tax measures.

With pandemic income security and furlough programmes no longer required, the deficit has fallen from $2.8tn in 2021 to $1.4tn in the current year and a proposed $1.2tn in the next, before increasing to $1.8tn in 2032, reflecting increases in both receipts and spending over the coming decade.

The budget documents prepared by the OMB focus in particular on the major plans to improve infrastructure embodied in the bipartisan Infrastructure Investment and Jobs Act 2021, as well as further investment in defence, in lowering health and social care costs for individuals, in improving housing, pre-school and college education, and in reducing energy costs by combating climate change. The OMB suggests that there is some prudence in the budget given the uncertainties about whether proposed tax rises will obtain political support from within Congress, with an indication that this will be used to reduce the federal deficit even further if all the proposed tax rises are enacted into law.

For President Biden, this is his last budget proposal before the mid-term elections in November, when there is a possibility that the Democrats might lose control of one, or even both, houses of Congress. This makes it particularly important to his ability to deliver his domestic agenda.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spring Statement 2022

This week we look at the Spring Statement, where the story is all about inflation as the Chancellor responded to the pressures that have contributed to the cost of living crisis.

Step chart showing changes from the October forecast for the deficit in 2022/23 and the revised Spring Statement forecast for the same period.

October forecast £83bn - higher receipts £30bn - lower unemployment £3bn + debt interest +£41bn + other revisions £2bn = updated forecast of £93bn.

The - student loans £11bn + energy support £12bn + tax cuts £6bn - other changes £1bn = Spring Statement forecast of £99bn.

What Chancellor Rishi Sunak had originally hoped would be a short report to Parliament on the latest economic and fiscal forecasts turned into a fully-fledged fiscal event as he responded to a ‘cost of living’ crisis that is expected to put severe pressure on household budgets and is risking the viability of many businesses. The Office for Budget Responsibility (OBR) estimates that the Chancellor’s energy support package and tax cuts will cover around a third of the decline in living standards expected in the coming financial year.

Inflation is now centre stage in a way that it hasn’t been since the 1970s.

Our chart summarises the changes in the forecast for fiscal deficit the coming financial year commencing on 1 April 2022, showing how last October’s forecast of a £83bn shortfall between receipts and expenditure has increased to a £99bn shortfall in the latest forecasts by the OBR.

The good news is that the economic recovery from the pandemic has been stronger than previously thought, with the pandemic support measures such as the furlough scheme being rewarded with stronger tax receipts coming through into the forecasts. An extra £30bn is expected in 2022/23, complemented by lower unemployment than expected, which also reduces the forecast for welfare spending by an estimated £3bn.

Offsetting that is a huge rise in interest costs. This is driven by a sharp rise in the retail prices index (RPI), to which a substantial proportion of the government’s debt is linked, combined with higher interest rates as the Bank of England attempts to prevent inflation rising even further. These factors add an extra £41bn to the forecast interest bill for next year, bringing it up to £83bn, three and a half times the £24bn in 2020/21 and more than 50% higher than the £54bn now expected for the current financial year. Interest in subsequential financial years has been revised up by around £9bn a year on the basis (the forecasters hope) that inflation is brought back under control in 2023/24.

Other changes to the fiscal forecast add £2bn to the deficit forecast, bringing it up to £93bn before taking account of policy decisions announced since last October. The first, which for some reason was not highlighted by the Chancellor in his speech, was the impact of increasing the amounts that graduates will have to repay on their student loans, reducing the anticipated bad debt write-off in 2022/23 by £11bn from the estimate made last October.

The Chancellor did talk about the energy support package that he announced last month as the energy prices rises coming in April were announced. However, he did not add to that package directly – instead choosing to announce tax cuts of about £6bn in 2022/23. The main element is an increase from July of around £3,000 in the threshold at which National Insurance is payable by employees, which will benefit many low to middle income families, but not (as the Institute for Fiscal Studies, the Resolution Foundation and others have pointed out) the very poorest that will be hit hardest by price rises. More than two thirds of the benefit will go to higher income households.

Overall, the OBR says the energy support package and tax cuts together will offset around a third of the fall in living standards that is expected in the coming year.

Other policy changes amounting to around £1bn were offset by indirect effects of £2bn, resulting in a net £1bn benefit to bring the forecast deficit to £99bn, some £16bn higher in total than that predicted in October.

These numbers don’t include the 1p cut in the basic rate of income tax from 6 April 2024 that was also announced by the Chancellor. This is expected to cost around £6bn a year in lower tax receipts, but is expected to be more than offset by the effect of freezing both income tax and national insurance thresholds (expected to bring in somewhere in the region of £18bn extra a year). In effect, the Chancellor has chosen to bank the ‘benefit’ of higher inflation on his decision to freeze thresholds.

The big question is whether the Chancellor will be able to hold off from providing further support to households and businesses for the rest of the financial year. Most commentators appear to suggest that it is likely that he will return to the despatch box in the House of Commons before the next round of energy prices rises in October in order to make further announcements.

This article was originally published by ICAEW.

ICAEW chart of the week: pre-Spring Statement debt forecast

This week’s chart reviews the sharp increase in the national debt to GDP ratio as we reflect on the challenges facing Chancellor Rishi Sunak.

Step chart showing changes in the debt to GDP ratio.

March 2015: 79.8% +12.6% borrowing -9.7% economic growth and inflation = 82.7% in March 2020.

82.7% + 26.1% - 10.6% = 98.2% in March 2022

98.2% + 7.8% - 18.0% = 88.0% forecast for March 2027.

Better tax receipts and higher inflation are expected to contribute to an improvement in the fiscal forecasts that will accompany the Spring Statement on 23 March 2022, further increasing the pressure on the Chancellor to do more to support households and businesses facing spiralling energy prices and a cost-of-living crisis.

Our chart this week is based on the latest official forecast for public sector net debt prior to its update on 23 March 2022 at the Spring Statement. The chart highlights how it took five years for debt to increase from 79.8% to 82.7% as a share of GDP before leaping to a projected 98.2% over the two years to 31 March 2022 and then falling to a projected 88.0% at 31 March 2027.

The debt to GDP ratio is probably the most important key performance indicator used by most governments to assess their public finances, so much so that when ministers talk about reducing debt, they do not mean paying back the amounts owed to debt investors (unless they are in the German government). Instead, governments in most developed countries aim to borrow at a slower rate than the increase in the size of the economy, allowing the combination of economic growth and inflation to offset the often-significant sums of cash required to finance the shortfall between tax receipts and public spending.

This objective has been difficult to achieve over the past decade of low economic growth and low inflation, as illustrated by the increase in the UK’s debt to GDP ratio from 79.8% to 82.7% between 31 March 2015 and 2020. In cash terms, public sector net debt increased by £261bn from £1,532bn to £1,793bn over that five-year period, equivalent to 12.6% of a year’s GDP. The debt to GDP ratio only went up by 2.9 percentage points, with economic growth and inflation offsetting the increase in the amounts owed by the equivalent of 9.7% of GDP. (The objective would have been achieved but for a quirk in the choice of GDP measure used for this calculation by the Office for National Statistics in the UK, which is ‘mid-year GDP’; at 31 March 2020 this encompassed both the last six months of 2019/20 before the pandemic but also the first six months of 2020/21 and the lockdowns that occurred during that time, reversing some of the economic growth experienced in the preceding five years.)

The chart goes onto illustrate how the more than half a trillion pounds (£576bn or 26.1% of GDP) borrowed by the government in just two years over the course of the pandemic is partially offset by the economic recovery and a great deal more inflation, reducing the impact on the debt to GDP ratio by the equivalent of 10.6%.

Debt as a share of GDP over the next five years is then expected to decline, with a projected net addition of £198bn (7.8% of GDP) expected to be added to debt according to last October’s forecast. Projected public sector net debt of £2,567bn at 31 March 2027 is currently expected to be lower in proportion to the size of the economy at 88.0% of GDP, as the post-pandemic recovery and already forecast higher rates of inflation cause GDP to rise at a faster rate than the government can borrow, resulting in a reduction equivalent to 18.0% of GDP.

The official projections for the current financial year, prepared last October by the Office for Budget Responsibility (OBR), are expected to be revised upwards to incorporate the stronger tax receipts reported in recent monthly public sector finance reports and higher levels of GDP from even higher rates of inflation than previously expected. These effects are likely to combine to reduce the 98.2% of GDP forecast for debt for the end of March 2022 by several percentage points.

There is a much greater deal of uncertainty about how the OBR’s medium-term projections will deal with the potential future path of the pandemic, the cost-of-living squeeze on household incomes, and the effect of the war in Ukraine and sanctions on Russia on UK businesses. This is in addition to its normal difficulty in both measuring and forecasting the trillions of financial transactions that are undertaken every year in an economy of more than 67m people.

Many economic commentators expect stronger tax receipts and higher inflation to flow through to the projections for the next five years, even after taking account of the increased interest costs that come from higher rates of inflation and higher interest rates and the already announced package of support measures for households struggling with energy price rises. This should in theory result in a substantial improvement in the projected debt to GDP ratio in March 2027 from the 88.0% previously forecast, but what we won’t know until the Spring Statement is to what extent Chancellor Rishi Sunak intends to spend some of that improvement.

Mixed signals mean that it is difficult to tell to whether there will be an improvement to the support package to households facing large rises in their energy costs and the prices they pay for food and other essentials, whether the Chancellor will also choose to reduce fuel duties to help motorists, and how far he will opt to support businesses affected by substantially higher input costs in addition to the knock-on effects of the war in Ukraine and sanctions on Russia. Not to mention the political pressure on the Chancellor to announce increases in the defence budget now rather than waiting for the Autumn Budget.

For what was envisioned as a quiet fiscal occasion dealing with routine revisions to the fiscal forecasts, the Spring Statement has turned into a significant fiscal event. After all, even if the Chancellor decides to do nothing, that will still be a choice, with major implications for the public finances and the UK economy.

As the sage once said (or possibly didn’t), we live in fiscally interesting times.

This chart was originally published by ICAEW.

ICAEW chart of the week: NZ government balance sheet

Our chart this week delves into New Zealand’s public finances, one of the very few developed countries to have a government balance sheet with positive net assets.

Step chart illustrating New Zealand government balance sheet.

Assets NZ$438bn = PP&E NZ$ 213bn + Other assets NZ$ 24bn + Financial assets NZ$ 201bn.

Liabilities NZ$ 281bn = Borrowings NZ$ 163bn + Insurance liabilities NZ$ 60bn + Other liabilities NZ$ 58bn.

Net worth NZ$ 157bn = Taxpayer funds NZ$ 20bn + Revaluation and other reserves NZ$ 137bn.

The signing of the UK-New Zealand Free Trade Agreement on 28 February 2022 prompted us to take a look at New Zealand’s public finances, one of the few developed countries with public assets in excess of public liabilities, and a pioneer of accruals accounting in government.

Our chart this week summarises the total crown balance sheet reported in the Financial Statements of the Government of New Zealand for the year ended 30 June 2021, comprising assets of NZ$438bn (£223bn) less liabilities of NZ$281bn (£143bn) to give net worth of NZ$157bn (£80bn).

New Zealand is a leading country in adopting accruals accounting for use in government, with the financial statements prepared in accordance with New Zealand-adopted accruals-based International Public Sector Accounting Standards (IPSAS), which are aligned with IFRS with some adaptation for the public sector. The New Zealand government not only uses IPSAS for financial accounting and reporting, similar to how the UK’s Whole of Government Accounts is based on IFRS, but they also use these standards for budgeting, management accounting and fiscal target setting. This contrasts with the UK, which uses a distinct UK-specific ‘resource’ accounting framework for budgeting and management accounting, and the statistics-based National Accounts system for fiscal target setting.

The asset side of the balance sheet includes NZ$213bn (£109bn) of property, plant and equipment, other non-financial assets of NZ$24bn (£12bn) and financial assets of NZ$201bn (£102bn). The latter includes marketable securities, student loans, residential loans and other financial investments in addition to receivables and cash.

Liabilities include NZ$163bn (£82bn) of borrowings, insurance liabilities of NZ$ 60bn (£31bn) and other liabilities of NZ$58bn (£30bn). Insurance liabilities are relatively high compared with many other countries as a consequence of New Zealand’s unique national no-fault accident compensation scheme that covers everyone in the country, including visitors.

Net worth is made up of taxpayer funds of NZ$20bn (£10bn) and reserves of NZ$137bn (£70bn), with the latter comprising a property revaluation reserve of NZ$134bn (£68bn) and minority interests of NZ$6bn (£3bn) less negative reserves of NZ$3bn (£1bn) principally relating to defined benefit retirement plans and veterans disability entitlements.

With a population of 5.1m, net worth on a per capita basis at 30 June 2021 is equivalent to approximately NZ$31,000 (£16,000) per person, comprising NZ$86,000 (£44,000) in assets per person less NZ$55,000 (£28,000) in liabilities per person. This compares with the approximate negative net worth of £37,000 per person based on the UK Whole of Government Accounts at 31 March 2019, comprising £31,000 in assets per person less £68,000 in liabilities per person.

While some caution needs to be taken in comparing these amounts given differences in accounting policies and the exclusion of local government from the New Zealand numbers, they do provide an insight into how on a proportional basis the New Zealand public sector is much better capitalised than the UK public sector.

While there are significant differences between the economies of New Zealand and the UK that no doubt explain the respective strengths and weaknesses of their public balance sheets, the presence of accountants in New Zealand’s highest office, most recently Sir John Key (prime minister 2008-2016), may also have something to do with it.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK Armed Forces

Our chart of the week puts the spotlight on defence, illustrating how the UK’s regular forces have more than halved over the past 40 years. The big question is, are further reductions planned over the next few years still realistic in light of the invasion of Ukraine by Russia?

Filled area chart showing decline of the UK armed forces from 338,000 in 1981 to 149,280 in 2021.

Army - down 50% from 166,000 to 82,230 soldiers

Royal Navy (including Royal Marines) - down 54% from 74,300 to 33,850 sailors and marines

Royal Air Force - down 64% from 93,500 to 33,200 aviators.

The post-Cold War ‘peace dividend’ has been reflected in a decline in defence spending over the past 40 years, accompanied by fewer soldiers, aviators, sailors and marines, as illustrated by our chart of the week. This shows how regular force numbers have fallen from 338,800 on 1 April 1981 (comprising 166,000 in the Army, 74,300 in the Royal Navy, including the Royal Marines, and 93,500 in the Royal Air Force) to 149,280 on 1 April 2021 (comprising 82,230 soldiers, 33,850 sailors and marines and 33,200 aviators). 

There has been a small rise in numbers in the past couple of years as improvements to recruitment have helped bring the armed forces up to its planned complement.

The substantial falls in service personnel numbers since the 1980s have been accompanied by significant reductions in the numbers of tanks, ships and aircraft in operation – although technological and warfare developments mean that modern defence equipment is much more powerful than its predecessors. The two Queen Elizabeth-class aircraft carriers recently commissioned by the Royal Navy are a case in point.

The numbers in the chart exclude Army, Navy and Air Reserves of 37,420, Ghurkas of 4,010 and other military personnel of 8,170, at 1 April 2021. Also not included are civilians working for the Ministry of Defence or for the security services, who are also important parts of the UK’s national defence and security capability.

Last year’s Integrated Review of Security, Defence, Development and Foreign Policy included plans for greater investment in military equipment and cyber warfare, but it also set out further reductions in regular force numbers, with the Army expected to reduce to fewer than 75,000 by 2024.

Whether these plans will be revised in the context of a war in Europe remains to be seen, but it seems likely that the government will, at the very least, need to re-evaluate its plans. This may have implications for public finances as pressure will probably grow for spending on defence to increase from the £46bn – just under 2% of GDP – budgeted in the current financial year. 

However, as the pandemic has perhaps demonstrated, the costs of being inadequately prepared for future eventualities – both in lives and money – could end up being significantly greater in the long run.

This chart was originally published by ICAEW.

ICAEW chart of the week: Quarterly GDP per head

GDP statistics have become much more exciting, with low but steady growth in per capita GDP before the pandemic giving way to large swings as the economy adjusts to a major shock.

Column chart showing quarterly GDP per capita from Q1 2015 to Q4 2021 on a real-terms seasonally adjusted basis.

Showing steady growth each quarter to Q4 2109 before falling sharply in Q2 2020, recovering partway in Q3 2020 and more fully in Q2 2021 up to £8,820 in Q4 2021. This is about level with Q4 2017 and below Q1 2018 through Q4 2019.

GDP for the fourth quarter of 2021 was calculated to be £596bn by the ONS in its first estimate of this statistic measuring economic activity in the UK, bringing the provisional estimate for the full year to £2,318bn for the 2021 calendar year. On a per capita basis, this was equivalent to approximately £8,820 per person for the fourth quarter and £34,330 per person for the year.

The ICAEW chart of the week looks at how quarterly GDP has changed in real-terms over the past few years on a seasonally adjusted basis – demonstrating how boring GDP statistical releases were in the ‘before times’. Then, a relatively steady average per capita increase of approximately 0.3% each quarter reflected the low but steady level of economic growth that has been seen since the financial crisis. The arrival of the pandemic has seen all that change, with a collapse in GDP during the last half of 2020, followed by a stop-and-start recovery over the past few quarters, with provisional GDP estimate growing by 0.9% in the fourth quarter – faster than the pre-pandemic years, but slower than the revised 1.0% reported for Q3 and the 5.5% rise in Q2 of 2021.

The change in real-terms quarterly GDP per head in 2020 and 2021 illustrated by the chart were -2.7%, -19.5%, +17.4%, +1.3% and -1.3%, +5.5%, +1.0%, +0.9% respectively. It is, of course, always important to note that the statistics reported by the ONS are subject to frequent revision, especially when trying to count up the trillions of transactions entered into each quarter in a large and complex economy like the UK’s. The population estimates used for calculating per capita amounts are also likely to be revised, in particular once the results of the 2021 census are finalised in a few months’ time.

Despite the recovery in the last three quarters, GDP and GDP per capita remained below their peaks in the third quarter of 2019 and more significantly below the trend the economy was on.

With rapidly rising inflation, supply chain disruptions and uncertainty regarding how society will transition from a coronavirus pandemic to an endemic, the likelihood is that quarterly GDP releases are likely to continue to be observed with some excitement by economists (and the rest of us) for some time to come.

This chart was originally published by ICAEW.

ICAEW chart of the week: National Insurance Fund 2020-21

We take a look at the Great Britain National Insurance Fund, illustrating how the balance in the fund grew from the equivalent of 4.2 months of annual payments to 4.6 months over the course of 2020-21.

Step chart showing movements in the Great Britain National Insurance Fund in 20201/21.

Opening balance £37bn (4.2 months of payments) + receipts £140bn - NHS £26bn - payments £109bn = closing balance £42bn (4.6 months of payments).

One of the many myths about the UK’s public finances is around the use of the word ‘fund’. This is often assumed to imply there is a pot of money set aside to cover spending requirements, when in practice it tends to refer to a budget allocation. An example is the National Productivity Investment Fund that was announced in 2016, which turned out to refer to unallocated amounts within the government’s budget for capital expenditure over several years.

Despite this terminology there are some actual ‘funds’ that have a legal basis and which have money in them, such the Contingencies Fund, where cash of £425bn passed through its accounts in response to the pandemic last year (up from £17bn in the previous year). However, net assets remained unchanged by this tidal wave of money at just £2m, highlighting how many such funds are principally mechanisms to facilitate the flow of money around government on the way to its intended destination.

The Great Britain National Insurance Fund and the Northern Ireland National Insurance Fund are perhaps the most well known of these funds, being the source of payments for the state pension and contributory welfare benefits. Surprisingly, there is a balance in these funds, which caused some excitement in a House of Lords debate last year when a peer decided that this was a pot of money that could be used to fund more spending.

Before getting too excited, it is important to understand that although the £42bn in the Great Britain National Insurance Fund sounds like a large amount of money, the reality is that it is more akin to a float, representing less than five months’ worth of annual payments from the fund and a relatively small fraction of the trillions of pounds in future payments expected to be paid out of the fund over the next quarter of a century and beyond. Likewise for the £1bn in the Northern Ireland National Insurance Fund.

In addition, when you delve into the accounts, you discover that most of the balances are invested in HM Treasury’s Debt Management Account, which are in effect intercompany balances (or ‘intra-government’ to be more technically accurate).

As our chart illustrates, the Great Britain National Insurance Fund had a balance of £37bn on 1 April 2020, equivalent to about 4.2 months of expenditure in the 2019/20 financial year. National Insurance receipts in Great Britain (ie, not including Northern Ireland) amounted to £140bn during 2020/21, including £3bn from other tax receipts to make up for contributions not received for those on statutory maternity, paternity, parental or bereavement pay.

Some £26bn of the national insurance contributions was deducted and sent off to help pay for the NHS, reducing the amount added to the fund to £114bn, while payments from the fund during the year amounted to £109bn. The latter comprised £100.4bn for the state pension, £5.2bn to cover contributory welfare benefits (employment and support allowance and jobseeker’s allowance), £0.9bn in administration costs, £0.8bn in bereavement and maternity allowances, £0.7bn in transfers to the Northern Ireland equivalent fund, £0.5bn in redundancy payments and £0.2bn in other payments.

The £5bn or so of surplus was added to the balance of the fund, taking it to £42bn at 31 March 2021, equivalent to 4.6 months of annual payments.

To be fair to the noble lord concerned, it might well be possible to use some of the money in the fund by reducing the effective float balance by a month or two, at least on a one-off basis. However, in the context of public spending in excess of £1.2tn a year and public sector net debt of £2.3tn, it is not likely to go that far!

This chart was originally published by ICAEW.