Tag: #chartoftheweek

ICAEW chart of the week: a trillion dollar deficit

Chart: A trillion dollar deficit. Revenue $3.6tn, Spending $4.6tn.

The #ICAEWchartoftheweek this week is on the US federal government budget. This is forecast by the Congressional Budget Office (CBO) to end the current financial year this month at just under a trillion dollars in deficit, with the budget shortfall in the year ended 30 September 2020 projected to exceed a trillion dollars for the first time.

Revenue in 2020 is expected to amount to $3,620bn. The largest contributions are from federal income taxes of $1,800bn and payroll taxes of $1,281bn, followed by a modest $245bn from corporate taxes and $294bn in other revenues.

This is projected to be $1,008bn less than planned spending by the federal government in 2020 of $4,628bn. Social security is expected to cost $1,097bn, while spending on Medicare, Medicaid and other health programmes are expected to cost $1,163bn net of receipts. Income security (welfare) programmes are expected to cost $302bn, while the balance of mandatory expenditure includes spending on military veterans and federal civilian and military retirement plans.

Discretionary spending of $1,400bn comprises $737bn on defense and $663bn on everything else apart from interest. This includes elementary and secondary education, housing assistance, international affairs, and the administration of justice, as well as outlays for highways and other programmes. Net interest is expected to cost $390bn.

The shortfall in revenues compared with spending will be funded by borrowing, with federal external debt expected to increase from $16.7tn to $17.8tn at the end of September 2020.

Federal revenues and spending are estimated to amount to 16.4% and 21.0% of GDP respectively in 2020, with the deficit equivalent to 4.6% of GDP. The CBO projects that the average federal deficit between 2020 to 2029 will be 4.7% of GDP, significantly higher than the 2.9% average over the last fifty years, resulting in federal debt growing from 79% of GDP in 2019 to 95% of GDP over the coming decade.

Of course, the federal budget does not give the full picture for the public finances in the US, with most state governments choosing (or being legally required) to run budget surpluses.

As with many developed economies, the public finances in the US are under increasing pressure with an increasingly long-lived population driving higher costs for social security, health and social care. With lower levels of economic growth (albeit currently much higher than in the UK or Europe) and a growing level of debt, there are concerns about the resilience of the US public finances if there were to be an economic downturn or another financial crisis in the medium term.

As summer turns into fall, it may be that a turn in economic seasons is on the way too. After all, winter is coming.

The full Congressional Budget Office report is available on cbo.gov.

ICAEW chart of the week: Schools budget up £14bn, or is it £1.2bn?

English schools budget 2020-21 +£2.6bn, 2021-22 +£4.8bn, 2022-23 +£7.1bn

The Prime Minister’s announcement of a ‘£14bn package’ of more money was welcome news for English schools as they prepare to re-open their doors after the summer holidays.

Unfortunately, as is common with government announcements, there is a tendency to add several years together to give a bigger headline, exacerbated this time by the inclusion of inflation to make the headline even bigger! 

In reality the announcement is a lot less exciting, as illustrated by the #ICAEWchartoftheweek. The announced increase in the 5-16 schools’ budget in three years’ time of £7.1bn (from £45.1bn in 2019-20 to £52.2bn in 2022-23) turns out to be £3.6bn, or an average of £1.2bn a year after taking account of inflation and the expected growth in the number of school pupils of around 2% over that time.

This is still very good news for schools trying to manage within constrained budgets, but (as the IFS and others have reported) the increase will still be insufficient to restore real-terms per pupil funding to the levels seen before the financial crisis. A 12% increase in pupil numbers since 2009-10 has seen budgets squeezed as funding has been constrained to inflation-only increases for most of the last decade.

Ironically, the Chancellor wasn’t able to take advantage of the same trick in his announcement the following day of £400m for further education and sixth forms, despite the fact that this was proportionately a bigger increase. The announcement was only for one year, so he couldn’t add multiple years together to create a bigger headline, and HM Treasury no doubt held the line about not adding in inflation.

Either way, these announcements are indication of how the fiscal approach is changing after a decade of austerity and struggling public services. This week’s Spending Review will give us a few more clues about the direction of public spending, although if (as rumoured) the Budget is postponed then we may not find out what the plans for taxes and borrowing to fund these increases until the Spring.

ICAEW chart of the week: A rush of capital spending in March

Our #ICAEWchartoftheweek this time is on the subject of public sector net investment. This is the government’s preferred measure of capital spending, including much needed investment in the UK’s economic and social infrastructure.

Over the years, the process for delivering capital expenditure in the public sector in the UK has had a pretty bad reputation. 

The anecdote goes that the first quarter is spent arguing about budgets, in the second everyone goes on holiday, and it is only in the third quarter that programmes finally get up and running, before everything stops for the Christmas break. The final quarter is then a mad rush to spend the remaining budget before the end of the financial year.

Unfortunately, there does appear to be some support for this conjecture when we take a look at the actual numbers.

According to the provisional financial results for the year released last week, around 41% of public sector net investment in 2018-19 was incurred in the last quarter. £8.2bn or 19% was reported in the last month alone!

Brexit has been an added complication in this particular financial year, with the government’s no-deal preparations in the run up to the end of March involving additional capital spending. Despite this, March was the peak month last year, as it has been over the years.

This is a stubbornly consistent feature of the public finances in the UK, even after numerous attempts within government to improve capital budgeting and delivery processes. For example, departments are now able to carry over some of their capital budgets to future years, which in theory should reduce the incentive to spend every last penny of their allocation in-year. In practice, a great deal of activity seems to take place in March, while April and May appear to be much quieter.

Of course, it is possible that our concerns about the quality of government’s investment delivery process are not fully justified. There could after all be some very good reasons as to why the winter months are the best time for carrying out public capital works!

ICAEW chart of the week: Housing sales

The ICAEW chart of the week this week is on the topic of the residential housing market, one of the swathe of economic statistics published by the Office for National Statistics last week. 

While there is often great interest in what is happening to house prices, data on the number of transactions tends to get less publicity – despite perhaps being more important to the economy. After all, people moving home often generate a great deal of additional economic activity, such as redecorating and buying new furniture.

There were 856,000 housing sales in the year ended 30 September 2018, down from 948,000 in 2016 and 36% lower than the pre-crisis peak of 1,340,000 in 2007.

Much of the decline in the volume of transactions has been put down to the weak economic recovery, with low real family incomes making it difficult for many to buy, despite extremely low mortgage rates. Another culprit may be stamp duty, a friction in the housing market as it significantly increases the cost of moving home.

The total value of the transactions in 2018 was £253bn, meaning that the average price paid for house in England & Wales was £296,000.

The statisticians prefer to focus on the median value, which was £232,000 in 2018. The ONS uses this to calculate affordability, with the ratio to gross annual earnings at 7.83 in 2018, up from the 7.77 seen in 2017. Surprisingly this is higher than the 7.17 calculated for the peak in 2007, which in turn was significantly higher than the ratio of 4.13 back in 2000.

With politicians of all parties keen to increase housing supply, the hope is that more people will be able to get on the housing ladder and the volume of transactions will start to increase again. Whether that will actually happen remains to be seen.