Tag: #deficit

ICAEW chart of the week: Public finances per capita

My chart for ICAEW this week divides some very big numbers for the public finances by an estimated 69.2m people living in the UK to highlight how UK public spending is now in excess of £1,500 per person per month.

Column chart showing UK public sector receipts and spending per capita for 2024/25. Left hand column: Taxes £1,235 per month + Other receipts £150 per month = Receipts per capita £1,385 per month. Right-hand column: Pensions and welfare £445 per month + Health and social care £370 per month + Education £160 per month + Other public services £410 per month + Interest £150 per month = Spending per capita £1,535 per month.

According to the Autumn Budget 2024, the UK public sector expects to bring in £1,149bn and spend £1,276bn in the financial year ended 31 March 2025 (2024/25). At more than a trillion pounds a year in each case, these are very big numbers that can be difficult to comprehend.

My chart of the week attempts to make these numbers more understandable by averaging them over an estimated UK population of 69.2m for the current financial year and dividing them by 12 to arrive at per person per month equivalents (rounded to the nearest £5).

On this basis, total receipts are expected to average £1,385 per month for each person living in the UK in 2024/25, comprising £1,235 a month from tax receipts (£1,025bn in total) and £150 a month in other receipts (£124bn). 

Not shown in the chart is the approximately £940 per person per month on average – just over two-thirds of total receipts – that comes from the top five taxes: income tax £375 per month, VAT £245 per month, employer national insurance £135 per month, corporation tax £120 per month, and employee national insurance £65 per month.

Public spending is expected to average £1,535 per person per month in 2024/25, comprising approximately £445 per month on pensions and welfare, £370 per month on health and social care, £160 per month on education, £410 per month on other public services, and £150 per month on debt interest, based on forecast total spending in 2024/25 of £370bn, £307bn, £134bn, £340bn, and £125bn respectively.

Spending on welfare

Welfare spending includes (but is not limited to) approximately £170 per person per month to cover the cost of paying the state pension, around £105 per month to pay for universal credit (including housing benefit), and in the order of £75 per month to fund disability and illness benefits.

Per capita spending on health and social care comprises close to £290 per person per month on the NHS, £55 on social care and £25 on public health, health research and other health-related spending. 

Education costs each of us an average of £160 per month, of which approximately £115 per month pays for schools, £35 funds university and higher education (including just over £10 for student loans that are not expected to be repaid) and around £10 per month goes on further education, training and other.

The £410 per month cost of other public services includes in the region of £85 per month on defence and security, approximately £75 per month on roads and railways, £65 on industry and agriculture, nearly £60 per month on public order and safety, £15 per month on dealing with waste, and around £10 per month on international development and aid. This leaves approximately £100 per month to pay for all the other services that central and local government provide, including 11p per person per month for the Royal Family and palaces.

These numbers are averages and of course the amounts individuals pay in taxes and receive either in pensions and welfare benefits or in public services will vary significantly. For example, while health and social care spend is £370 per month when spread over the whole population, average spending on teenagers and those in their 70s are estimated to be significantly different from each other at £130 per month and £700 per month respectively.

Forecast per capita taxes and other receipts of £1,385 per month fall short of planned public spending of £1,535 per month to give rise to an expected deficit of approximately £150 per month funded by borrowing, being £127bn in total in 2024/25, divided by the estimated population of 69.2m. As a consequence, public debt now exceeds £2.8tn, equivalent to just under £41,000 for each person living in the UK, or somewhere in the region of £98,000 per household.

Navigating the public finances can be difficult at the best of times, but it is often helpful to translate the huge numbers you hear on the news into per capita equivalents to make sense of them. £1bn when spread across the UK population works at being equivalent to just over £1.20 per month.

This chart was originally published by ICAEW.

ICAEW chart of the week: Autumn Budget 2024

My chart for ICAEW this week looks at how the fiscal baseline inherited by the Chancellor has changed as a consequence of the Autumn Budget, with higher capital investment driving up borrowing needed to fund the deficit over the next five years.

Column chart showing Spring Budget fiscal deficit and the Autumn Budget change over the forecast period. 2024/25: Spring Budget forecast £87bn + Autumn Budget change £40bn = £127bn (4.5% of GDP). 2025/26: £78bn + £28bn = £106bn (3.6% of GDP). 2026/27: £69bn + £20bn = £89bn (2.9% of GDP). 2027/28: £51bn + £21bn = £72bn (2.3% of GDP). 2028/29: £39bn + £33bn = £72bn (2.2% of GDP). 2029/30: £35bn + £36bn = £71bn (2.1% of GDP).

Our chart of the week sets out the changes in fiscal projections calculated by the Office for Budget Responsibility (OBR) in its October 2024 economic and fiscal outlook compared with the numbers at the time of the Spring Budget seven months ago. 

These form a revised baseline for the public finances that will form the basis of the Chancellor’s spending and investment plans over the rest of the Parliament.

As our chart highlights, the fiscal deficit – the shortfall between tax and other receipts and public spending calculated in accordance with statistical standards – was forecast to amount to £87bn in 2024/25, but this has increased by £40bn to £127bn, or 4.5% of GDP. 

The projections for the following five years were also revised upwards between 2025/26 and 2029/30 have increased from £78bn, £69bn, £51bn, £39bn and £35bn by £28bn, £20bn, £21bn, £33bn and £36bn to result in a revised profile of £106bn (3.6% of GDP), £89bn (2.9% of GDP), £72bn (2.3% of GDP), £72bn (2.2% of GDP) and £71bn (2.1%). 

This contrasts with the previous government’s plan to bring down the deficit in relation to the size of the economy to 1.2% of GDP by 2028/29.

Perhaps the biggest surprise was the £40bn upward revision to the budgeted deficit of £87bn for the current financial year ending in March 2025. This reflects a combination of £14bn in higher debt interest and £6bn in other forecast revisions, £23bn in higher spending (most of which is the £22bn ‘black hole’ identified by the incoming government over the summer) and £2bn in additional capital investment, less £1bn in tax measures and £4bn from the indirect economic effect of policy decisions. 

In later years, the principal driver of the increases in the deficit is higher capital investment as the Chancellor replaced the previous government’s plan to cut public sector net investment by almost a third over the next five years (from 2.5% to 1.7% of GDP) to a profile that sees net investment increase to 2.7% of GDP in 2025/26 and 2026/27 before returning to 2.5% of GDP in 2029/30.

The changes in the deficit between 2025/26 and 2029/30 can be summarised as follows:

2025/26: £28bn increase = £18bn higher capital investment + £10bn net other changes (£42bn additional spending – £25bn tax rises – £6bn indirect effects of decisions – £1bn forecast changes).

2026/27: £20bn = £23bn capital – £3bn net other changes (£44bn – £35bn – £5bn – £7bn).

2027/28: £21bn = £26bn capital – £5bn net other changes (£47bn – £40bn – £2bn – £10bn)

2028/29: £33bn = £27bn capital + £6bn net other changes (£49bn – £40bn + £2bn – £5bn)

2029/30: £36bn = £25bn capital + £11bn net other changes (£47bn – £42bn + £6bn – not published).

The increases in taxation, spending and capital investment won’t avoid the need for difficult choices in the Spending Review next year as departmental budgets will remain tight.

Government enters crisis control mode to curb public spending

Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.

The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.

“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.

“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”

Month of July 2024

There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.

Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023. 

Financial year to date

The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.

Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts. 

Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.

The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.

Table 1: Summary receipts and spending

  Apr-Jul 2024
£bn		 Apr-Jul 2023
£bn		 Change
%
Income tax89.986.4+4%
VAT67.966.0+3%
National insurance53.558.3-8%
Corporation tax34.031.6+8%
Other taxes73.572.1+2%
Other receipts40.537.5+8%
Total receipts359.3351.9+2%
    
Public services(212.2)(204.8)+4%
Welfare(103.1)(97.5)+6%
Subsidies(10.6)(14.0)-24%
Debt interest(46.6)(52.7)-12%
Gross investment(38.2)(34.8)+10%
Total spending(410.7)(403.8)+2%
    
Deficit(51.4)(51.9)-1%

Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.

The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.

Table 2: Public sector net debt and net debt/GDP

 Apr-Jul 2024
£bn		Apr-Jul 2023
£bn
PSNB51.452.3
Other borrowing4.4(11.4)
Net change55.840.9
Opening net debt2,694.12,539.7
Closing net debt2,745.92,580.6
PSNB/GDP1.9%2.0%
Other/GDP0.2%(0.4%)
Inflating away(0.8%)(1.5%)
Net change1.3%0.1%
Opening net debt98.1%95.7%
Closing net debt99.4%95.6%

Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.

Revisions and other matters

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. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.

The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.

Q1 public finances confirm challenging position for new government

First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.

The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face. 

“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.

“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”

Month of June 2024

Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.

Financial year to date

Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.

Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Three months to Jun 2024 (£bn) Jun 2023 (£bn)Change (%) 
Income tax 58.1 56.1 +4%
VAT 49.9 49.6 +1%
National insurance 39.7 43.4 -9%
Corporation tax 25.3 23.4 +8%
Other taxes 54.9 54.1 +1%
Other receipts 30.1 27.7 +9%
Total receipts 258.0 254.3 +1%
Public services (158.8) (152.6) +4%
Welfare (76.9) (73.7) +4%
Subsidies (7.8) (11.3) -31%
Debt interest (35.2) (41.1) -14%
Gross investment (29.1) (26.5) +10%
Total spending (307.8) (305.2) +1%
Deficit (49.8) (50.9) -2%

Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.

Table 2: Public sector net debt

Three months toJun 2024 (£bn)Jun 2023 (£bn)
Deficit (49.8) (50.9)
Other borrowing 3.9 (7.7)
Debt movement (45.9) (58.6)
Opening net debt (2,694.1) (2,539.7)
Closing net debt (2,740.0) (2,598.3)
Net debt/GDP 99.5% 96.7%

Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.

The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.

Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades. 

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.

Revisions and other matters

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 latest release saw the ONS increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.

This article was originally published by ICAEW.

ICAEW chart of the week: Debt on the fourth of July

My chart for ICAEW this week ‘celebrates’ US Independence Day by setting out the latest congressional projections for federal debt.

Debt on the fourth of July. ICAEW chart of the week. Column chart showing projected US federal debt held by the public in $tn (plus as % of GDP) between 2023 and 2034. 2023: $26.2tn (97.3%). 2024: $28.2tn (99.0%). 2025: $30.2tn (101.6%). 2026: $32.1tn (104.1%). 2027: $33.9tn (106.2%). 2028: $36.0tn (108.6%). 2029: $38.0tn (110.5%). 2030: $40.2tn (112.7%). 2031: $42.5tn (114.8%). 2032: $45.0tn (117.1%). 2033: $47.8tn (119.9%). 2034: $50.7tn (122.4%). 04 Jul 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Congressional Budget Office, ONS, ‘An Update to the Budget and Economic Outlook, June 2024'. © ICAEW 2024

Two hundred and forty-eight years ago, on 4 July 1776, the United States of America declared its independence from Great Britain, inheriting debts used to finance the revolutionary war but without any tax raising powers to fund repayment of the amounts owed. This was addressed by the adoption of the US Constitution in 1789, which enabled Secretary of the Treasury Alexander Hamilton to raise taxes, start repaying those initial debts, and issue new debt to finance a fledgling nation.

My chart this week illustrates how the US federal government has continued to borrow since then, with the Congressional Budget Office (CBO) reporting that US federal debt held by the public was $26.2tn or 97.3% of GDP in September 2023, on track to reach $28.2tn or 99.0% of GDP on 30 September 2024, before rising to a projected $50.7tn or 122.4% on 30 September 2034. 

Debt on 4 July this year is estimated to be close to $27.8tn. 

The projected rise in debt held by the public over the coming decade is based on extrapolating the gap between federal revenues and spending of around $160bn a month in the current financial year, based on tax and spending legislation enacted at 12 May 2024 together with the CBO’s own assessment of the administration’s financial plans (for example over student loan relief) and assumptions around factors such as interest rates and economic growth.

However, the CBO is keen to stress that these numbers are not a forecast. They say: “The baseline projections are meant to provide a benchmark that policymakers can use to assess the potential effects of changes in policy; they are not a forecast of future budgetary outcomes. Future legislative action could lead to markedly different outcomes. But even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline projections, not only because of unanticipated economic conditions, but also because of the many other factors that affect federal revenues and outlays.”

The challenge for the US is that despite almost 250 years of taxation with representation, that representation finds it difficult to raise taxes to bring debt down, often choosing to cut taxes and increase borrowing instead. 

Whether that will change, or whether debt markets force it to change, remains a big unknown in the experiment commenced by George Washington and Alexander Hamilton all those years ago.

This chart was originally published by ICAEW.

New government to inherit tough public finances

Public sector net debt has passed £2.7tn for the first time. In May the debt increased by £49bn from £2,694bn to £2,743bn, 51% higher than it was in March 2020 at the start of the pandemic.

The monthly public sector finances for May 2024 released by the Office for National Statistics (ONS) on Friday 21 June 2024 reported a provisional deficit for the first two months of the 2024/25 financial year of £33.5bn, £1.5bn better than the £35.0bn predicted by the Office for Budget Responsibility (OBR) and £0.4bn higher than in April and May 2023.

An ICAEW spokesperson said: “Today’s numbers show that public sector net debt continues to grow, up from £2.69tn in April to £2.74tn in May, the first time it has exceeded £2.7tn.

“Net debt is now 51% higher than it was at the start of the pandemic in March 2020, and 167% higher than it was in March 2010, pushed up by the spikes in spending during the pandemic and to offset energy bills, as well as borrowing to fund day-to-day spending and investment. High borrowing costs and the financial consequences of more people living longer mean that the public finances are significantly weaker and less resilient than they were 14 years ago.

“When the country goes to the polls on 4 July, the reality is that whoever wins power will inherit an extremely challenging fiscal position that will hamper their ability to turn the country around.”

Month of May 2024

Taxes and other receipts amounted to £85.1bn in May 2024, up 2% compared with the same month last year, while total managed expenditure was also 2% higher at £100.1bn.

The resulting fiscal deficit of £15.0bn for the month was £0.8bn higher than in May 2023.

Financial year to date

As summarised in Table 1, total receipts in April and May 2024 of £170.4bn were 2% higher than in the same two months last year, with the cuts to employee national insurance rates offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Two months toMay 2024
£bn		May 2023
£bn		Change
%
Income tax38.236.8+4%
VAT33.933.6+1%
National insurance25.928.2-8%
Corporation tax16.615.5+7%
Other taxes36.035.2+2%
Other receipts19.818.5+7%
Total receipts170.4167.8+2%

Public services
(108.3)
(104.5)
+4%
Welfare(51.4)(49.1)+5%
Subsidies(5.2)(7.8)-33%
Debt interest(21.4)(21.6)-1%
Gross investment(17.6)(17.9)-2%
Total spending(203.9)(200.9)+1%

Deficit
(33.5)
(33.1)
+1%

Table 1 also shows how total managed expenditure for the two months of £203.9bn was up by more than 1% compared with April and May 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and marginally lower debt interest. The latter was driven by significantly lower indexation on inflation-linked debt offsetting the much higher rates of interest payable on variable rate and refinanced fixed-rate debt.

Table 2: Public sector net debt 

Two months toMay 2024
£bn		May 2023
£bn
Deficit(33.5)(33.1)
Other borrowing(10.2)2.1
Debt movement(43.7)(31.0)
Opening net debt(2,699.2)(2,539.7)
Closing net debt(2,742.9)(2,570.7)

Net debt/GDP
99.8%
96.1%

Public sector net debt as of 31 May 2024 was £2,743bn or 99.8% of GDP, just under £44bn higher than at the start of the financial year. The increase reflects borrowing to fund the deficit of £33.5bn and £10.2bn borrowed to fund lending by government and other cash requirements, net of loan recoveries.

Public sector net debt was £172bn or 7% higher than a year previously, and 3.7 percentage points higher in relation to the size of the economy.

Public sector net debt is £928bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,715bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last 14 years.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,074bn in non-liquid financial assets minus £2,743bn of net debt (£300bn liquid financial assets – £3,043bn public sector gross debt) and other liabilities of £670bn. This is a £47bn deterioration from the start of the financial year and is £95bn more negative than the -£631bn net worth number for May 2023.

Revisions and other matters

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 latest release saw the ONS reduce the reported deficit for April 2024 by £2.1bn from £20.5bn to £18.4bn and revise the deficit for the year to March 2024 up by £0.7bn from £121.4bn to £122.1bn as estimates of tax receipts and expenditure were updated for better data.

This article was originally published by ICAEW.

ICAEW chart of the week: Public spending crunch

Public spend as a share of the economy must fall over the next five years to make the sums add up – a big challenge for the next government.

Step chart: Public spending crunch ICAEW chart of the week Change in total public spending compared to change in nominal GDP 2025/26: -1.1% 2026/27: -0.7% 2027/28: -1.1% 2028/29: -0.7% Cumulative: -3.6% 11 April 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Spring Budget 2024'; OBR, 'Economic and Fiscal Outlook 2024'; ICAEW calculations. ©️ ICAEW 2024

My recently published in-depth Fiscal Insight into the Spring Budget 2024 highlights how the UK’s public finances are in a weak position, with difficult choices on spending deferred and post-election tax rises likely, irrespective of who wins the general election.

My chart for ICAEW this week illustrates how total public spending is forecast to fall by 3.6% as a share of national income between the first and final year of the fiscal forecast. This is equivalent to a 1.6 percentage point reduction in total managed expenditure from a budget of 44% of GDP in 2024/25 to a forecast of 42.4% of GDP in 2028/29.

At a reduction of 1.1% in 2025/26, 0.7% in 2026/27, 1.1% in 2027/28 and 0.7% in 2028/29, this may not sound that large – after all surely there must be some efficiencies that can be found in a budget of £1.2trn, or £1.4trn by 2028/29?

However, this doesn’t take account of the fact that around half of public spending goes on welfare, health and social care spending, where costs are principally driven by people living longer, the triple-lock state pension guarantee, and increasing levels of ill-health. And another 10% or so goes on interest, where costs are driven by no-longer-very-low interest rates on a growing level of debt.

Nor does it allow for the significant pressures facing many public services that are likely to need additional funding to address. This includes the deteriorating international security situation that has prompted recent calls for defence and security spending to increase from 2% to 3% of GDP, underperformance across a range of public services from the criminal justice system to potholes to HMRC service standards, local authorities that are struggling financially, and crumbling infrastructure (in some cases literally) – among many others. There is also little sign of the scale of investment that would be needed to transform the delivery of public services to achieve sustainable cost reductions while maintaining or improving service quality.

It is perhaps unsurprising that the government decided to postpone the three-year Spending Review scheduled for 2024 until after the general election, given how the Office for Budget Responsibility has highlighted how the 2021 Spending Review led to a departmental spending increase of £32bn a year, or around 1.2% of GDP. A similar revision to current spending plans would have more than absorbed the amounts used for tax cuts in the Autumn Statement 2023 and the Spring Budget 2024, or pushed up borrowing levels even higher than are currently planned.

If we are lucky, there will be more detail on each party’s tax and spending plans in their manifesto documents. Then again…

Read more in the ICAEW Fiscal Insight: Spring Budget 2024 or visit our Spring Budget 2024 hub for our extensive coverage of its tax and public finance implications.

This chart was originally published by ICAEW.

ICAEW publishes in-depth Fiscal Insight on the Spring Budget

Now that the dust has settled on last month’s Spring Budget, ICAEW has published a more detailed analysis on the implications for the public finances.

ICAEW’s Fiscal Insight on the Spring Budget 2024 provides an analysis of the key numbers, risks to the Office for Budget Responsibility forecast, tax measures, forecast revisions since the 2023 Autumn Statement, the fiscal position in the 2024/25 Budget year, borrowing over the next five years, the calculation of underlying debt, the £1.2trn that HM Treasury needs to raise from debt investors, and our conclusions on what the numbers mean for the public finances.

Key points highlighted in the report include:

Headlines

  • Modest improvement in forecasts and small tax increases ‘pay for’ national insurance cut.
  • Headroom of £9bn against the Chancellor’s primary fiscal rule is tiny compared with risks.
  • End of low-cost borrowing is hampering investment in infrastructure and public services.
  • Weak economy, high debt, demographic challenges, underperforming public services.
  • No long-term fiscal strategy.

Key numbers

  • Tax and other receipts of £1,139bn in 2024/25, equivalent to £1,375 per person per month.
  • Public spending of £1,226bn in 2024/25, equivalent to £1,480 per person per month.
  • Deficit projected to fall by a quarter to £87bn in 2024/25 and gradually to £39bn in 2028/29.
  • Headline debt expected to reach £2.8trn by March 2025 and £3.0trn by March 2029.
  • Underlying debt/GDP forecast to increase from 88.8% to 93.2% and then fall to 92.9%.

Conclusions

  • Difficult choices on spending deferred until after the general election.
  • Post-election tax increases likely, irrespective of who wins the general election.
  • A badly designed fiscal rule driving poor decisions and unrealistic spending forecasts.
  • Predicted reduction in the deficit to below 2% of GDP by 2027/28 is unlikely to occur.
  • Further pre-election tax cuts could affect credibility with debt markets. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, is quoted in the Fiscal Insight as follows:

“The principal story of the Spring Budget has been how the Chancellor was able to find room for tax cuts while still meeting his fiscal targets to ‘bring down debt and the deficit’.

“This is a frustrating narrative as it misses the bigger picture of public finances that are on an unsustainable path, with little sign of a long-term fiscal strategy to address demographic change, growing balance sheet liabilities, underperforming public services, rising debt interest, or resilience against future economic shocks.

“Debt is high and projected to be even higher in five years’ time than it is today. ‘Headroom’ is tiny in context of trillions of pounds of tax receipts and public spending over the next five years and forecasts that don’t reflect government practice in freezing fuel duties nor likely spending increases from the now postponed Spending Review.

“And we have a fiscal target that discourages essential infrastructure investment while at the same time never needing to be achieved as it is rolled forward each year.

“All of our fiscal eggs are now in a basket labelled ‘hope’ [for economic growth].”

Fiscal Insight

Read the full Fiscal Insight report, which provides detailed analysis on the Spring Budget’s implications for the public finances.

For further coverage, including more detailed information about tax measures, visit ICAEW’s Spring Budget 2024 site by clicking here.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

Fiscal deficit still too high for comfort

Only a small improvement in the year-to-date deficit of £107bn reported in the penultimate monthly public finance release for 2023/24 over the same period a year ago.

The monthly public sector finances for February 2024 released by the Office for National Statistics (ONS) on Thursday 21 March 2024 reported a provisional deficit for the month of £8bn, while at the same time revising the year-to-date deficit up by £2bn. This increased the cumulative deficit for the first 11 months of the financial year to £107bn, £5bn less than in the same period last year. 

The deficit for the first 11 months of 2023/24 is slightly ahead of the £114bn full-year estimate made by the Office for Budget Responsibility (OBR) in its latest fiscal forecasts that accompanied the Spring Budget 2024 earlier this month.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, said: “The numbers for February saw the public finances return to deficit following January’s self-assessment-driven surplus, bringing the cumulative deficit to £107bn for the first 11 months of the financial year. This is a £5bn improvement on the same period last year, with lower cost of living support payments and lower interest on index-linked debt as inflation has fallen, but it is still higher than is comfortable.

“Chancellor Jeremy Hunt’s aim to cut the deficit by a quarter to £87bn in the coming financial year will be challenging to achieve given much-higher-than-inflation rises to the state pension, benefits and the minimum wage, while pressure to find extra money for defence, local government and public services is only likely to grow as the general election approaches.”

Month of February 2024

The fiscal deficit of £8bn for the month was £3bn lower than in February 2023, but slightly higher than some predictions.

Taxes and other receipts amounted to £95bn, up 8% compared with the same month last year, while total managed expenditure was 4% higher at £103bn.

Public sector net debt as of 31 January 2024 was £2,659bn or 97.1% of GDP, £12bn higher than at the start of the month and £120bn higher than at the start of the financial year.

Eleven months to February 2024

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first 11 months of the 2023/24 financial year to February 2024 was £107bn, £5bn less than the amount reported for the first 11 months of 2022/23. 

This reflected a year-to-date shortfall between tax and other receipts of £995bn and total managed expenditure of £1,102bn, each up 6% compared with the corresponding numbers for April 2022 to February 2023.

Inflation benefited tax receipts for the first 11 months compared with the same period in the previous year, with income tax up 11% to £249bn and VAT up 6% to £181bn. Corporation tax receipts were up 18% to £93bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £163bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, in addition to the cut in employee national insurance implemented in January. Council tax receipts were up 6% to £39bn, but stamp duty on properties was down by 24% to £12bn, while the total for all other taxes was up by just 1% at £153bn as economic activity slowed. Non-tax receipts were up 10% to £105bn, primarily driven by higher investment income and higher interest charged on student loans.

Total managed expenditure of £1,102bn in the 11 months to February 2024 can be analysed between current expenditure excluding interest of £935bn, interest of £114bn and net investment of £53bn, compared with £1,049bn in the same period in the previous year, comprising £893bn, £125bn and £31bn respectively.

The increase of £42bn or 5% in current expenditure excluding interest was driven by a £33bn increase in pension and other welfare benefits (including cost-of-living payments), £19bn in higher central government pay, and £11bn in additional central government procurement spending, less £18bn in lower subsidy payments (principally relating to energy support schemes) and £3bn in net other changes.

The fall in interest costs for the 11 months of £11bn or 9% to £114bn comprises a £23bn or 46% reduction to £27bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £12bn or 16% increase to £87bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.

The £22bn increase in net investment spending to £53bn in the first 11 months of the current financial year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 17% increase in gross investment to £112bn, less a £4bn or 7% increase in depreciation to £59bn.

Table: Public sector finance trends: February 2024 11 months to Feb 2020 | 2021 | 2022 | 2023 | 2024 £bn Receipts: 756 | 719 | 835 | 937 | 995 Expenditure: (721) | (906) | (836) | (893) | (935) Interest: (53) | (40) | (71) | (125) | (114) Net investment: (36) | (62) | (48) | (31) | (53) Deficit: (54) | (289) | (120) | (112) | (107) Other borrowing: 20 | (53) | (77) | (9) | (13) Debt movement: (34) | (342) | (197) | (121) | (120) Net debt: 1,811 | 2,157 | 2,349 | 2,502 | 2,659 Net debt / GDP: 84.5% | 97.4% | 96.0% | 94.8% | 97.1%
Screenshot

The cumulative deficit of £107bn for the first 11 months of the financial year is £5bn below the OBR’s November 2023 forecast of £112bn for the same period but slightly higher than it should be to be consistent with the updated £114bn full year estimate for 2023/24 in its March 2024 forecast.

The OBR’s March 2024 forecast predicts an £87bn deficit in the next financial year commencing in April (2024/25) a reduction of approximately a quarter compared with the current financial year.

Balance sheet metrics

Public sector net debt was £2,659bn at the end of February 2024, equivalent to 97.1% of GDP.

This is an increase since the start of the financial year of £120bn, comprising borrowing to fund the deficit for the 11 months of £107bn plus an additional £13bn of borrowing to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £844bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,124bn more than the £535bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£668bn on 29 February 2024, comprising £1,596bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,659bn of net debt (£319bn liquid financial assets – £2,977bn public sector gross debt) and other liabilities of £667bn. This is a £65bn deterioration from the -£613bn reported for 31 March 2023.

Revisions

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 latest release saw the ONS revise the reported deficit for the 10 months to January 2024 up by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as revise the calculation of the public sector net debt to GDP ratio at 31 January 2024 from 96.5% to 96.8% as GDP estimates were updated in line with the latest OBR forecasts.

The ONS also revised its estimate for the deficit for the financial year to March 2023 (2022/23), down by £1bn to £128bn.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

ICAEW chart of the week: Spring Budget 2024

Our chart this week takes a look at the effect of the Spring Budget 2024 on the public finances.

Double step chart: Spring Budget 2024 ICAEW chart of the week 2028/29 forecast deficit Nov 2023 forecast: £35bn Forecast revisions: -£1bn Tax cuts: +£13bn Tax rises: -£6bn Other changes: -£2bn Mar 2024 forecast: £39bn 2024/25 budgeted fiscal deficit Nov 2023 forecast: £85bn Forecast revisions: -£10bn Tax cuts: +£14bn Tax rises: -£0bn Other charges: -£2bn Mar 2024 forecast: £87bn 7 Mar 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Spring Budget 2024'; OBR, 'Economic and Fiscal Outlook, Mar 2024'. (c) ICAEW 2024

This week’s chart summarises the changes announced in the Spring Budget 2024, analysing the changes in the budgeted fiscal deficit for 2024/25 and the forecast fiscal deficit for 2028/29 since the forecasts that accompanied the Autumn Statement 2023 last November.

As the chart illustrates, the budgeted deficit for 2024/25 of £85bn anticipated in November has been revised up to £87bn, comprising forecast revisions reducing the deficit of £10bn, followed by tax cuts of £14bn increasing the deficit, offset by tax rises of close to zero and other changes of £2bn reducing the deficit.

The chart also shows the changes to the final year of the forecast period, with the forecast of deficit £35bn at the time of the Autumn Statement 2023 reduced by £1bn from forecast revisions, increased by £13bn to fund tax cuts, reduced by £6bn from tax rises and £2bn from other changes to reach a new forecast for the deficit in 2028/29 of £39bn.

The good news for the Chancellor was the improvement in the public finances in the earlier years of the forecast, with interest rate expectations coming down from last year. This resulted in an improvement in the forecasts of £16bn in 2024/25 and £14bn in 2028/29, offset by the effect of lower inflation expectations on tax and other receipts of £2bn and £13bn respectively to result in net forecast revisions of £10bn and £1bn respectively. The lower inflation assumption has a bigger impact over time as there is a compounding effect on tax and other receipts.

This allowed the Chancellor to announce a two-percentage point cut in national insurance pushing up the deficit by £10bn in 2024/25 and £11bn in 2028/29, together with freezes in fuel and alcohol duties, changes in the high-income child benefit charge, an increase in the VAT threshold from £85,000 to £90,000, and a four-percentage point cut in capital gains tax on property sales from 28% to 24%. The latter change is expected to increase tax receipts by a few hundred million pounds a year as it is expected to encourage more property sales, with higher volumes offsetting lower tax on each sale. Overall, these other tax cuts push up the deficit by £4bn in 2024/25 and £2bn in 2028/29.

The forecast revisions weren’t enough to allow the Chancellor to cover the cost of cutting taxes, and so he also announced some tax rises. These include the introduction of a duty on vaping and an increase in tobacco duty, an extension of the energy profits levy to March 2029, and changes in the tax treatment of ‘non-doms’. These have a relatively small effect in 2024/25 but build up to a reduction in the deficit around £6bn a year by 2028/29. 

Other changes of £2bn in 2024/25 comprised £1bn in other policy measures and £1bn in indirect benefits to the economy from the Chancellor’s announcements in 2024/25, while the £2bn in 2028/29 reflected £1bn from improvements in tax collection, £1bn in other measures, and £2bn from indirect benefits to the economy, offset by £1bn from interest on increased borrowing, and £1bn to be invested in public sector productivity.

In summary, these are relatively tiny changes in the outlook for the public finance in the context of £1.2trn of public spending each year and public sector net debt that is still on track to exceed £3.0trn by the end of the forecast period in March 2029.

Even relatively small changes in economic assumptions, in spending plans, or in tax policies could have a significant impact on the fiscal forecasts, especially those for 2028/29.

For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.

This chart was originally published by ICAEW.