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.

Boost to tax revenues is a dilemma for the Chancellor

January’s public sector finance surplus of £2.9bn was driven by a boost to tax revenues as inflation drove up VAT receipts and self assessment income grew, putting further pressure on Chancellor Rishi Sunak to increase support to households facing huge rises in energy prices.

The public sector finances for January, released on 22 February, reported a surplus for the month of £2.9bn. This was an improvement of £5.4bn from the deficit of £2.5bn reported for January 2021, but £7bn smaller than the £9.9bn surplus reported for January 2020.

Total receipts were £97.9bn in January, up from £76.0bn in the previous month.

Public sector net debt fell from £2,339.7bn at the end of December to £2,317.6bn or 95% of GDP at the end of January, with tax and loan recoveries supplementing the surplus for the month. Despite that, debt is £210.7bn higher than at the start of the financial year and £524.5bn higher than in March 2020.

The cumulative deficit for the first 10 months of the financial year was £138.5bn, compared with £278.7bn and £48.4bn for the same period last year and the year before that respectively.

This was £17.7bn below the forecast published by the Office for Budget Responsibility (OBR) alongside last October’s Autumn Budget and Spending Review 2021, although higher than forecast tax receipts were partially offset by higher than forecast interest charges on index-linked debt. Both are driven by higher rates of inflation, which takes more time to feed through to non-interest expenditure.

Cumulative receipts in the first 10 months of the 2021/22 financial year amounted to £741bn, £93.3bn or 14% higher than a year previously, but only £56.1bn or 8% above the level seen in the first 10 months of 2019/20. At the same time, cumulative expenditure excluding interest of £776.7bn was £58.8bn or 7% lower than the same period last year, but £122.2bn or 19% higher than two years ago.

Interest amounted to £59.6bn in the 10 months to January 2022, £25.4bn or 74% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £12.8bn or 27% more than in the equivalent 10-month period ended 31 January 2020.

Cumulative net public sector investment up to January 2022 was £43.2bn. This was £13.5bn or 24% below the £56.7bn reported for the first 10 months of last year, which included around £17bn of COVID-19-related lending that the government does not expect to recover. Investment was £11.3bn or 35% more than two years ago, principally reflecting greater capital expenditures, including on HS2.

The increase in debt of £183.2bn since the start of the financial year comprises the cumulative deficit of £138.5bn and £44.7bn in other borrowing. The latter has been used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses via the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the recovery of taxes deferred last year and loan repayments.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The strong tax receipts reported today will provide a welcome respite for the public finances, reducing the shortfall in the government’s income compared with its expenditure from previous forecasts. However, the deficit is still on track to be the third highest ever recorded in peacetime, while public debt is more than half a trillion pounds higher than it was at the start of the pandemic.

“The challenge for Sunak will be balancing the strong pressures on him to increase the support package for households facing rapidly rising energy costs and retail prices, with the need to strengthen the resilience of the public finances in the face of a great deal of economic uncertainty and increasing global security concerns. The Chancellor will be acutely aware that while inflation is adding to tax revenues today it will go on to add to public spending tomorrow”.

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing the increase in net debt for the 10 months to Jan 2021 and public sector net debt and public sector net debt / GDP at 31 Jan 2021 together with variances versus prior year and two years ago.

Click on link at the end of this article to the version of this article on the ICAEW website which has a readable version of this table.

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. These had the effect of decreasing the reported fiscal deficit for the nine months to December 2021 from £146.8bn to £141.4bn and increasing the deficit for the year ended 31 March 2021 from £321.8bn to £321.9bn.

Table showing receipts, expenditure, interest, net investment and the deficit for each of the 10 months to Jan 2021.

Click on link below to the version of this article on the ICAEW website which has a readable version of this table.

This article was originally published by ICAEW.

ICAEW chart of the week: UK quarterly public finances

Our chart this week looks at the fiscal forecast for the final quarter of the government’s financial year ending in March 2022.

Column chart showing quarterly deficits:

2019/20 outturn £55bn deficit: Apr-Jun £23bn, Jul-Sep £12bn, Oct-Dec £23bn, Jan-Mar -£3bn

2020/21 outturn £322bn deficit: Apr-Jun £133bn, Jul-Sep £77bn, Oct-Dec £66bn, Jan-Mar £46bn

2021/22 forecast £183bn deficit: Apr-Jun £61bn, Jul-Sep £41bn, Oct-Dec £45bn, Jan-Mar £23bn, with £13bn headroom

The December 2021 public sector finances published by the Office for National Statistics (ONS) on Tuesday 25 January provided numbers for the first three quarters of the current financial year. As our chart this week illustrates, this leaves the final quarter still to go, with £13bn of headroom against the official forecast prepared by the Office for Budget Responsibility (OBR) at the time of the Autumn Budget and Spending Review 2021 back in October.

To put the current fiscal year into context, our chart shows how the deficit of £55bn in 2019/20 comprised quarterly deficits of £23bn for April to June 2019, £12bn for July to September 2019 and £23bn for October to December 2019 less a surplus of £3bn for January to March 2020. Although there was some impact from the pandemic on the last month of that financial year, it broadly provides an indication of a ‘normal’ pattern of deficits across the year, with the second quarter and more especially the fourth quarter benefiting from self assessment tax receipts – the latter despite typically higher levels of capital expenditure in the run up to the end of the financial year.

This was followed by the first full year of the pandemic and associated lockdowns which saw tax receipts fall significantly and expenditures rise dramatically, resulting in an unprecedented peacetime deficit of £322bn in 2020/21, comprising £133bn, £77bn, £66bn and £46bn for the four quarters respectively.

The current forecast is also on course for a pretty eye-watering deficit, which despite being substantially below that seen last year is forecast to be as much as £183bn. The provisional numbers for the first three quarters of 2021/22 of £61bn, £41bn and £45bn respectively are currently £13bn below the October forecast, implying an equivalent amount of headroom for the final quarter, assuming the OBR’s forecast deficit of £23bn for the fourth quarter proves to be accurate.

In practice, it would be surprising if the fourth quarter did come in on target other than by coincidence. Better than expected tax revenues are expected to continue to reduce the deficit over the final quarter but this is likely to be offset to a greater or lesser extent by higher interest costs on index-linked debt driven by rising inflation. There are also significant uncertainties around expenditures given the continuation of pandemic restrictions into January and the potential for further interventions to support businesses and individuals struggling financially as a consequence.

There have been suggestions that this headroom of £13bn is a ‘windfall’ that the Chancellor should use to support households expected to be hit by a greater than 50% rise in energy prices from April 2022 as discussed in last week’s chart of the week.

However, this perspective has also been contradicted by Carl Emmerson, Deputy Director at the Institute for Fiscal Studies (IFS), who is reported to have commented: “While borrowing last month was in line with the Budget forecast, over the first nine months of 2021/22 it is now £13bn below that forecast for the same period in the October Budget – £147bn instead of the £160bn expected in October. The latest improvement to borrowing over this period has been driven by higher-than-expected corporation tax being paid by some very large companies.

“Some have suggested better borrowing figures provide the Chancellor room to act on the cost of living by, for example, delaying the rise in National Insurance contributions planned for April. The truth is these figures make no difference to that calculation. Mr Sunak certainly could find money to delay tax rises or find other one-off ways of supporting living standards such as uprating benefits in April with a more up-to-date measure of inflation. But the long-run pressures on public services, especially health and social care, remain just the same and tax rises are likely to be needed if these are to be met. If he acts now on the cost of living, Mr Sunak will also need to find a credible means of committing to taking tough action on the public finances in the not too distant future.”

Even if the deficit does come in below the official forecast of £183bn, it will still be at a much higher level than that expected before the pandemic, when the forecast deficits for 2019/20, 2020/21 and 2021/22 were £47bn, £55bn and £67bn respectively compared with the much larger numbers reported in our chart. A variance of £13bn is also relatively small in the context of the £547bn increase in public sector net debt between March 2020 and December 2021.

All this suggests that the next fiscal event scheduled for 23 March 2022 is likely to take on even more importance as the Chancellor seeks to navigate between the rock of fiscal responsibility and a hard place of a cost of living crisis.

This chart was originally published by ICAEW.

December public finances: rising debt interest costs offset higher tax revenues

December’s deficit of £16.8bn saw both a rise in tax revenues and in interest on inflation-linked debt as pressure grows on the Chancellor to address energy price hikes and rising prices in the shops.
The public sector finances for December 2021 released on Tuesday 25 January 2022 reported a monthly deficit of £16.8bn. This was £7.6bn lower than the £24.4bn reported for December 2020 but £11bn higher than the £5.8bn deficit reported for December 2019.

This brings the cumulative deficit for the first nine months of the financial year to £146.8bn compared with £276.1bn and £58.4bn for the same period last year and the year before that respectively.

Public sector net debt increased from £2,321.8bn at the end of November to £2,339.9bn or 96% of GDP at the end of December. This is £205.5bn higher than at the start of the financial year and an increase of £546.8bn from March 2020. As a proportion of GDP, debt is the highest it has been since March 1963, almost 60 years ago.

The deficit for the month was in line with the revised forecast for 2021/22, published by the Office for Budget Responsibility (OBR) alongside last October’s Autumn Budget and Spending Review 2021, although higher than forecast interest charges on index-linked debt offset the benefit of higher than forecast tax revenues.

Cumulative receipts in the first three quarters of the 2021/22 financial year amounted to £641.4bn, £82.8bn or 15% higher than a year previously, but only £44.2bn or 7% above the level seen in the first three quarters of 2019/20. At the same time, cumulative expenditure excluding interest of £700.5bn was £52.4bn or 7% lower than the first nine months of 2020/21, but £113.4bn or 19% higher than the same period two years ago.

Interest amounted to £53bn in the nine months to December 2021, £20.5bn or 63% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £10.6bn or 25% more than in the equivalent nine months ended 31 December 2019.

Cumulative net public sector investment in the three quarters to December 2021 was £34.7bn. This was £14.6bn or 30% less than the £49.3bn reported for the first nine months of last year, which included around £17bn of COVID-19-related lending that the government does not expect to recover. Investment was £8.6bn or 33% more than two years ago, principally reflecting greater capital expenditures, including on HS2.

The increase in debt of £205.5bn since the start of the financial year comprises the deficit of £146.8bn and £58.7bn in other borrowing. The latter was used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses overseen by the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the receipt of taxes deferred last year and loan repayments.

Martin Wheatcroft FCA, external advisor on public finances to ICAEW, said: “Today’s numbers highlight the impact inflation is having on the public finances, with higher tax revenues collected in December offset by the rising cost of index-linked debt. We expect interest charges to increase further in the next few months as the time lag on index-linked debt catches up with the current 7.5% rate of RPI.

“With borrowing costs low and headroom in forecasts for the next financial year, the temptation will be to delay fixing the public finances in order to tackle the immediate hit to household budgets from anticipated energy prices hikes and higher prices in the shops, so pressure on the Chancellor to postpone or phase in April’s national insurance rise is likely to grow.”

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing the increase in net debt for the 9 months to Dec 2021 and public sector net debt and public sector net debt / GDP at 31 Dec 2021 together with variances versus prior year and two years ago.

Click on link at the end of this article to the version of this article on the ICAEW website which has a readable version of this table.

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. These had the effect of decreasing the reported fiscal deficit for the eight months to November 2021 from £136bn to £130bn and the deficit for the year ended 31 March 2021 from £321.9bn to £321.8bn.

Table showing receipts, expenditure, interest, net investment and the deficit for each of the 9 months to Dec 2021.

Click on link below to the version of this article on the ICAEW website which has a readable version of this table.

This article was originally published by ICAEW.

EU fiscal consultation

Input into ICAEW’s response to the future of the EU Economic Governance Framework.

I recently contributed to ICAEW’s response to a consultation on the future of the EU Economic Governance Framework by Dr Susanna Di Feliciantonio, ICAEW’s Head of European Affairs.

To read more see Susanna’s article about the consultation response.

Public debt at highest level for almost 60 years

While November’s deficit of £17.4bn is in line with expectations, public sector net debt is up by more than half a trillion pounds since the start of the pandemic and as a proportion of GDP, debt is the highest it has been since March 1963.


The public sector finances for November 2021 released on Tuesday 21 December reported a monthly deficit of £17.4bn – £4.8bn lower than the £22.2bn reported for November 2020 but £11.8bn higher than the £5.6bn deficit reported for November 2019.

This brings the cumulative deficit for the first eight months of the financial year to £136.0bn compared with £251.7bn and £52.5bn for the same period last year and the year before that respectively.

Public sector net debt increased from £2,283.0bn at the end of October to £2,317.7bn or 96.1% of GDP at the end of November. This is £183.3bn higher than at the start of the financial year and an increase of £524.6bn over March 2020. As a proportion of GDP, debt is the highest it has been since March 1963, almost 60 years ago.

The increase in public sector net debt of £34.7bn in the month reflects borrowing to finance the deficit of £17.4bn and £26.9bn in the final tranche of the Bank of England’s Term Funding Scheme, offset by repayments in coronavirus lending as well as other net movements.

As in previous months this financial year, the deficit came in below the forecast for 2021-22 prepared by the Office for Budget Responsibility (OBR) in March 2021 but was in line with the OBR’s revised forecast issued in October 2021 alongside the Autumn Budget and Spending Review 2021.

Cumulative receipts in the first eight months of the 2021-22 financial year amounted to £560.7bn, £71.4bn or 15% higher than a year previously, but only £31.2bn or 6% above the level seen a year before that in 2019-20. At the same time cumulative expenditure excluding interest of £622.7bn was £44.4bn or 7% lower than the first eight months of 2020-21, but £102.1bn or 20% higher than the same period two years ago.

Interest amounted to £44.2bn in the eight months to October 2021, £14.6bn or 49% higher than the same period in 2020-21, principally because of higher inflation affecting index-linked gilts. Despite debt being 29% higher than two years ago, interest costs were only £5.0bn or 13% more than the equivalent eight months ended 30 November 2019.

Cumulative net public sector investment in the eight months to November 2021 was £29.8bn. This was £14.5bn less than the £44.3bn reported for the first eight months of last year, which included around £17bn or so of coronavirus lending that is not expected to be recovered. Investment was £7.6bn or 34% more than two years ago, principally reflecting a higher level of capital expenditure, in particular on investment in HS2.

Debt increased by £183.3bn since the start of the financial year, £47.3bn more than the deficit. This reflects funding to cover outflows on lending, including to banks through the Term Funding Scheme, lending to businesses through the British Business Bank, and student loans, offset by the receipt of taxes deferred last year and the repayment of coronavirus loans taken out during the pandemic.

Commenting on the figures Alison Ring, ICAEW Public Sector and Taxation Director, said: “While the numbers for November are in line with expectations, it’s notable that debt has risen both in cash terms and as a proportion of GDP, and at 96.1% is the highest it has been for almost 60 years. The monthly deficit of £17.4bn is below the peaks of last year but still substantially above the pre-pandemic position.

“Despite the rise in interest rates earlier this month, the Chancellor is still able to take advantage of historically-low borrowing costs if he wants to provide support to businesses adversely affected by the Omicron variant and prevent further scarring to the economy. His concern will be how to do so without stoking inflation, which is expected to head even higher over the next few months.”

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing the increase in net debt for the 8 months to Nov 2021 and public sector net debt and public sector net debt / GDP at 30 Nov 2021 together with variances versus prior year and two years ago.

Click on link at the end of this article to the version of this article on the ICAEW website which has a readable version of this table.

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. These had the effect of decreasing the reported fiscal deficit for the seven months to October 2021 from £127.3bn to £118.6bn and the deficit for the year ended 31 March 2021 from £323.1bn to £321.9bn.

Table showing receipts, expenditure, interest, net investment and the deficit for each of the 8 months to Nov 2021.

Click on link below to the version of this article on the ICAEW website which has a readable version of this table.

This article was originally published by ICAEW.

ICAEW chart of the week: Bounce Back Loans

My chart this week is on Bounce Back Loans, one of the principal sources of financial support for businesses during the first year of the pandemic and the subject of a recent investigation by the National Audit Office.

Chart analysing Bounce Back Loans of £47bn by region and by recoverability.

London £11bn, South £10bn, Midlands & East £11bn, North £9bn, Scotland, Wales & Northern Ireland £6bn.

Repaid £2bn, recoverable £28bn, bad debts £12bn, fraud £5bn.

The recent publication of the Department for Business, Energy & Industrial Strategy (BEIS) accounts for 2020-21 contained an assessment of the losses expected on the financial provided to businesses through the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Future Fund. This was followed by an updated report from the National Audit Office (NAO) on the administration of the scheme and the potential losses to the taxpayers.

The largest of these schemes was BBLS, with Bounce Back Loans of up to £50,000 provided to eligible businesses to help them weather the first lockdown in the second quarter of 2020, before being extended to the whole of the 2020-21 financial year. In the end, around a quarter of businesses took out a Bounce Back Loan, comprising 1.5m loans for a total of £47bn at an interest rate of 2.5% repayable over six years. The interest in the first year was covered by the government, with no repayments due in that period. 

Businesses can extend the loans to ten years through the Pay As Your Grow option, as well as being allowed up to one six month payment holiday and three interest-only payments to provide flexibility without going into default.

The seven main UK banks provided around 90% of the loans by value, with the rest provided by other banks and non-bank lenders, such as peer-to-peer lenders. Each participating financial institution was provided with a 100% guarantee by the government to cover any amounts not repaid. Half a million or nearly 35% of the loans were for the maximum amount of £50,000 (adding up to £27bn) with £18bn lent out between £10,000 and £50,000 and £2bn lent for amounts between £2,000 (the minimum possible) and £10,000.

As the chart illustrates, the geographical distribution of loans was weighted towards the south and centre of England, with £11bn borrowed by businesses in London, £10bn in the South (£6.5bn South East and £3.6bn South West) and £11bn in the Midlands & East (£3.8bn West Midlands, £2.9bn East Midlands and £4.5bn East of England), a total of £32bn. The balance of £15bn was split between £9bn in the North (£3.2bn Yorkshire & the Humber, £4.8bn North West and £1.3bn North East) and £6bn in the other nations of the UK (£2.7bn Scotland, £1.6bn Wales and £1.3bn Northern Ireland).

More than 90% of the loans, amounting to £40bn, went to micro-businesses, ie businesses with turnover below £632,000.

BEIS have estimated in their 2020-21 financial statements that they do not expect 37% of the loans with a value of £17bn to be repaid, comprising £12bn in estimated bad debts and £5bn in estimated losses from fraud, although the NAO says that these numbers are highly uncertain at this stage. With £2bn already repaid, this leaves £28bn believed to be recoverable over the remainder of the six years of the loans (or 10 years for those that are extended).

The fraud estimate, for 11% of the loans with a value of £4.9bn, was based on a sample of 1,067 loans as at 31 March 2021, but a subsequent analysis in October 2021 suggests that the level of fraud may be lower at around 7.5% of loans and so there is some hope that BEIS and the British Business Bank will be able to reduce the amount they will have to reimburse to participating banks under the 100% guarantees.

However, as the NAO reports, these guarantees mean participating banks have no financial incentive to chase repayment and it has raised concerns that insufficient resources are being dedicated by BEIS and the British Business Bank to recovering outstanding amounts. 

The challenge for government is that many businesses have not been able to get back to their pre-pandemic level of operation and so there is a need to be sensitive, whilst at the same time seeking to protect public money and tackle those who made fraudulent claims.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK payrolled employees

My chart this week looks at how the number of employees on UK payrolls has been supported by the furlough scheme, with more people employed in October 2021 than before the pandemic.

Chart showing UK payrolled employees in work and on furlough:

Oct 2015: 27.7m
Oct 2016: 28.1m
Oct 2017: 28.5m
Oct 2018: 28.8m
Oct 2019: 29.0m
Nov 2019: 29.1m
Feb 2020: 28.9m
Mar 2020: 22.0m (6.8m on furlough)
Apr 2020: 19.7m (8.8m on furlough)
Oct 2020: 23.8m in October 2020 (2.4m on furlough)
Jan 2021: 23.1m (4.9m on furlough)
Feb 2021: 23.3m (4.7m on furlough)
Sep 2021: 28.1m (1.1m on furlough) 
Oct 2021: 29.4m (no furlough)

Concerns that the end of the furlough scheme in September 2021 would be followed by a sharp rise in unemployment proved to be unfounded, with the flash estimate of the number of people on UK payrolls increasing to 29.4m in October 2021, an increase of 166,000 from the previous month and greater than before the pandemic. This is positive news as it suggests that the majority of the 1.1m still on the furlough scheme when it ended on 30 September 2021 have been able to retain their jobs or have found work elsewhere.

The chart shows how payrolled employees increased gradually before the pandemic from 27.7m in October 2015 to 28.1m in October 2016, 28.5m in October 2017, 28.8m in October 2018 and 29.0m in October 2019, peaking in November 2019 at 29.1m. Numbers fell to 28.9m in February 2020 although on a seasonally adjusted basis the numbers increased slightly. Those in work fell significantly by the end of March 2020 to 22.0m when 6.8m were placed on furlough under the government’s Coronavirus Job Retention Scheme (CJRS) and to 19.7m at the end of April 2020 when 8.8m were on furlough.

Despite the furlough scheme overall payrolled numbers fell during the pandemic from 28.9m in March 2020 (including 6.8m on furlough) to 28.2m in October 2020 (when 2.4m were on furlough) to 28.0m at its lowest in January and February 2021 (when 4.9m and 4.7m were on furlough), before gradually rising to 29.2m in September 2021 (when 1.1m were on furlough) and 29.4m in October 2021 (when no one was on furlough).

Although the flash numbers for October 2021 are provisional and subject to change, they should be sufficiently reliable for policy makers to take some comfort that the furlough scheme has done its job in stabilising the economy and avoiding significant levels of unemployment. However, with the pandemic still not over, there will be concerns about whether growth in employment can be maintained over the coming months. 

According to the ONS, the median monthly pay in October 2021 was £2,005, slightly down on the £2,010 reported for September 2021, but an increase of 4.9% compared with the £1,911 calculated for October 2020. The latter compares with consumer price inflation of 4.2% over the same period.

The idea that we might be emerging from the pandemic with higher levels of employment and wages than before it started might have seemed unlikely at the start of the first lockdown. But then at an estimated total cost of £370bn, of which £70bn was for the CJRS, the eye watering sums incurred by the government in getting to this position have been far from insubstantial.

This chart was originally published by ICAEW.

Deficit in line with expectations at £19bn but public debt jumps by £69bn

The monthly public sector deficit was flat at £18.8bn in October but a last-minute rush by banks to access cheap finance caused public sector net debt to jump by £68.7bn to £2,277.6bn.


The public sector finances for October 2021 released on Friday 18 November reported a monthly deficit of £18.8bn, slightly better than the £19.0bn reported for October 2020 but higher than the £11.6bn deficit in October 2019.

This brings the cumulative deficit for the first seven months of the financial year to £127.3bn compared with £230.7bn last year and £46.9bn for the equivalent period two years ago.

Public sector net debt increased from £2,208.9bn at the end of September to £2,277.6bn or 95.1% of GDP at the end of October. This is £141.8bn higher than at the start of the financial year and an increase of £484.5bn over March 2020.

The increase in public sector net debt of £68.7bn in the month includes £57.3bn to funding lending to banks who rushed to borrow under the ‘Term Funding Scheme with additional incentives for SMEs’ (TFSME) before the extended drawdown period ended on 31 October 2021. A further £26.9bn will be recorded in November for cash movements after the cut-off date, bringing the total amount financed through the TFSME to £193.4bn on 10 November 2021.

As in previous months this financial year, the deficit came in below the forecast for 2021-22 prepared by the Office for Budget Responsibility (OBR) in March 2021 but was in line with the OBR’s revised forecast issued in October 2021 alongside the Autumn Budget and Spending Review 2021.

Cumulative receipts in the first seven months of the 2021-22 financial year amounted to £489.0bn, £65.7bn or 16% higher than a year previously, but only £23.7bn or 5% above the level seen a year before that in 2019-20. At the same time cumulative expenditure excluding interest of £548.2bn was £39.3bn or 7% lower than the first seven months of 2020-21, but £92.5bn or 20% higher than the same period two years ago.

Interest amounted to £39.3bn in the seven months to October 2021, £14.2bn or 57% higher than the same period in 2020-21, principally because of higher inflation affecting index-linked gilts. Despite debt being 24% higher than two years ago, interest costs were only £2.6bn or 7% more than the equivalent seven months ended 31 October 2019.

Cumulative net public sector investment in the seven months to October 2021 was £28.8bn. This was £12.6bn less than the £41.4bn in the first seven months of last year, which included around £17bn on coronavirus lending that is not expected to be recovered. Investment was £9.0bn or 45% more than two years ago, principally reflecting a higher level of capital expenditure.

Debt increased by £141.8bn since the start of the financial year, £14.5bn more than the deficit. This reflects funding to cover outflows on lending to business, including to banks through the Term Funding Scheme, and student loans offset by the receipt of taxes deferred last year and the repayment of coronavirus loans taken out during the course of the pandemic.

Alison Ring, ICAEW Public Sector Director, said: “Today’s public finance numbers show a deficit of £18.8bn in October, which is in line with the revised forecasts published by the Office for Budget Responsibility last month. The deficit has stopped growing now that the furlough and other pandemic support schemes have finished.

“However, a last-minute rush by banks to obtain cheap loans for small and medium enterprises, before the application deadline on 31 October, caused government debt to jump by £68.7bn last month. These loans should help businesses navigate choppy economic waters with rapidly rising inflation, as well as supply chain and staffing challenges. Nonetheless, the Chancellor will need to continue watching events closely to see if he will need to reintroduce any pandemic support schemes.”

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing the increase in net debt for the 7 months to Oct 2021 and public sector net debt and public sector net debt / GDP at 31 Oct 2021 together with variances versus prior year and two years ago.

Click on link at the end of this article to the version of this article on the ICAEW website which has a readable version of this table.

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. These had the effect of increasing the reported fiscal deficit for the six months to September 2021 from £108.1bn to £108.5bn and the deficit for the year ended 31 March 2021 from £319.9bn to £323.1bn.

Table showing receipts, expenditure, interest, net investment and the deficit for each of the 7 months to Oct 2021.

Click on link below to the version of this article on the ICAEW website which has a readable version of this table.

This article was originally published by ICAEW.

ICAEW chart of the week: Spending Review 2021

Chancellor of the Exchequer Rishi Sunak found some extra money to supplement the Spending Review 2021, turning a very tough settlement for government departments into a moderately tough one.

Departmental budgets chart.

2019-20: £416bn (£346bn resource, £70bn capital)
2020-21: £570bn (£355bn, £88bn, £127bn covid-19 supplementary budget)
2021-22: £554bn (£385bn, £99bn, £70bn)

Spending Review 2021

2022-23: £542bn (£435bn resource with +£15bn health & social care and +£27bn spending review, £107bn capital)
2023-24: £554bn (£443bn with +£12bn and +£21bn, £111bn)
2024-25: £566bn (£454bn with +£14bn and +£13bn, £112bn)

The Chancellor had already announced an increase in the health budget from the proceeds of the health and social care levy, but as highlighted by our chart last week, this implied a very tough budget settlement for most other departments, including cuts for some. Instead, Rishi Sunak was able to use some of the upward revisions in the economic forecasts from the Office for Budget Responsibility to add to departmental resource budgets, ensuring that each department receives a real term spending increase in their combined resource and capital budgets even with higher levels of inflation in the coming year.

However, there was a sting in the tail, as supplementary COVID-19 funding ceases at the end of this financial year, leaving departments to absorb further COVID-related expenditure within their budgets from next April onwards. This will include catching up on backlogs built up during the pandemic in addition to any incremental costs that may continue into the Spending Review period.

The chart starts by highlighting how departmental resource and capital budgets of £346bn and £70bn in 2019-20, increased to £355bn and £88bn in 2020-21 and to £385bn and £99bn in the current year. This is before £127bn in COVID-19 supplementary budgets last year and £70bn this year.

The Spending Review period itself covers the three financial years 2022-23, 2023-24 and 2024-25, with the combination of funding from the health and social care levy and the Spending Review seeing departmental resource budgets increase to £435bn, £443bn and £454bn respectively. This is more than the spending envelope originally set out by the Chancellor last month.

Capital investment budgets remained broadly unchanged at £107bn, £111bn and £112bn respectively, continuing the significant jump from the £70bn invested in 2019-20 in the coming financial year before flattening out in the following two years.

Over the three years, the resource budget settlement implies annualised average real terms growth in the health & social care budget of 4.1% and in the education budget of 2.2%, while the defence budget is broadly frozen in cash terms and cut by 1.4% in real terms. This assumes average inflation over the three years of 2.2%, with higher inflation in the coming financial year offset by much lower rates in the following two years.

Other departments are expected to grow by 3.1% on average over the period, with central funding for local government up 9.4%, transport up 6.8%, work & pensions up 4.6% and justice up 4.1%, each receiving larger relative settlements than other departments. International trade (+0.1%), HM Treasury (+0.9%), levelling up, housing & communities (+1.1%), HMRC (+1.2%), the Cabinet Office (+1.4%), business, energy & industrial strategy (+1.4%), and intelligence (+1.7%) are the departments receiving increases below 2% a year on average.


2021-22
£bn

2022-23
£bn

2023-24
£bn

2023-24
£bn
Average
real-terms
growth
Education147.1167.9173.4177.4+4.1%
Defence70.777.079.080.6+2.2%
Transport31.532.432.232.2-1.4%
Large departments249.3277.3284.6290.2+2.9%
Other departments70.783.982.782.7+3.1%
Devolved administrations56.863.064.365.3+2.5%
ODA to 0.7% of GDP5.2
Reserves8.111.010.910.3
Total excluding covid-19384.9435.2442.5453.7+3.3%
HM Treasury, ‘Autumn Budget and Spending Review 2021’

The above growth rates exclude capital budgets, expected to increase in real terms by 1.9% a year on average over the three years of the Spending Review. Departments benefiting from higher capital budgets include small and independent bodies (+16.8%), FCDO (+16.0%), digital, culture, media & sport (+11.8%), and intelligence (+9.1%), albeit mostly from relatively small bases in each case. The 3.8% average real terms increase in health & social care capital investment is much less proportionately, but much larger in cash terms.

Perhaps just as important as the monetary amounts provided to departments as the Chancellor opened his proverbial cheque book, is the certainty that a three-year budgetary settlement provides. This will help departments plan ahead with confidence and hopefully help them obtain better value for the money they spend on our behalf.

This chart was originally published by ICAEW.