#deficit – Martin Wheatcroft

ICAEW chart of the week: One Big Beautiful Bill Act 2025

My chart for ICAEW this week looks at the impact on the US federal government deficit of the major tax and spending changes passed by Congress and signed into law by President Trump on 4 July 2025.

ICAEW chart of the week: A step chart showing the projected effect of the One Big Beautiful Bill Act 2025 on the average annual US federal government deficit between FY2025 and FY2034.

Left hand column: Baseline projection $2,109bn.

Steps 1 to 3 (shaded): Spending cuts -$110bn plus Tax cuts +$449bn plus Extra interest +$68bn.

Step 4: Net change +$407bn (total of steps 1 to 3).

Right hand column: Revised projection $2,516bn.

25 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday.
Sources: Congressional Budget Office; ICAEW calculations.

My chart this week looks at the impact on the US federal government deficit of the major tax and spending changes passed by Congress and signed into law by President Trump on 4 July 2025.

The Congressional Budget Office (CBO) published on 21 July 2025 its assessment of Public Law 119-21 (the 21st law passed by Congress in its 119th session), also known as the One Big Beautiful Bill Act 2025 (OBBBA).

OBBBA was passed by Congress and signed into law by President Trump on 4 July 2025 and contains sweeping changes to the US federal tax system as well as a significant shift in spending priorities.

The chart this week attempts to illustrate the impact of OBBBA on the federal deficit by looking at how it changes the average annual projected deficit over the next 10 years from FY2025 (the current fiscal year ending on 30 September 2025) to FY2034, compared with the CBO’s baseline projection.

The baseline projection, published by the CBO in January 2025, was for the federal government deficit to increase from $1,865bn in FY2025 to $2,597bn in FY2034, an average deficit over the 10 years of $2,109bn or 5.8% of GDP.

According to the CBO, OBBBA is expected to increase the federal deficit each year by $339bn on average over the period to FY2034, with a net cut in federal spending of $110bn on average offsetting a net cut in revenues of $449bn. The CBO’s assessment does not take account of the additional cost of financing these higher deficits, which ICAEW calculates would add a further $68bn a year on average to the interest bill.

The consequence is a net increase in the annual federal deficit of $407bn on average over 10 years, taking it to an average of $2,516bn or 7.0% of GDP.

Net spending cuts of $110bn comprise spending increases of $66bn a year on average, net of spending reductions of $164bn a year and incremental ancillary income that is deducted from spending of $12bn. Extra spending includes an extension of child tax benefits ($19bn a year on average) and more money for homeland security and immigration enforcement ($18bn), the military and coastguard ($17bn), farm subsidies ($5bn), air traffic control ($1bn), the mission to Mars ($1bn) and other items ($5bn).

Spending reductions include cuts in Medicaid and Medicare programmes ($106bn on average each year), education and student loan relief ($30bn), other welfare and health programmes ($19bn), clean energy subsidies ($8bn) and other cuts ($1bn), while ancillary income comprises $9bn on average from spectrum auctions, $2bn from oil and gas leases, and $1bn extra from higher visa fees.

Net tax cuts comprise $511bn a year in tax cuts less $62bn a year in tax increases.

Tax cuts include making previous temporary tax cuts permanent ($379bn), business tax reforms ($97bn), personal tax reforms ($26bn), energy related tax credits ($4bn), Medicaid and Medicare related tax deductions ($3bn), and other ($2bn). Tax increases include the termination of tax reliefs for clean energy ($47bn a year), addressing tax loopholes ($6bn), additional immigration fees included in revenue ($4bn), taxing low-value international shipments ($4bn) and other ($1bn).

The CBO doesn’t directly conclude what this will mean for the US national debt (debt held by the public), which was expected in January’s baseline projection to increase from $28.2tn or 98% of GDP at the start of the current financial year to $49.5tn or 117% of GDP on 30 September 2034. Adding $4.1tn over 10 years to that amount suggests this would increase to $53.6bn or 127% of GDP.

These numbers don’t take account of the anticipated economic boost of lower taxes that should partially offset some of the tax impacts set out in the CBO’s analysis, as well as increasing the denominator in the deficit to GDP ratio. However, they also don’t take account of other factors such as US trade policy – including the additional tax receipts from tariffs and the potential effect that those higher taxes will have on the US economy – or many other policies of the US administration. We will need to wait for the CBO’s next full economic and fiscal projections later in the year to understand more about what that might mean.

Either way, the OBBBA will go down as one of the most consequential legislative acts of the US Congress in recent years.

This chart was originally published by ICAEW.

First quarter fiscal deficit in line as Chancellor ponders tax rises

Despite borrowing to fund the deficit in the first three months of the financial year of £58bn being in line with expectations, it was still the third-highest first quarter result on record.

The monthly public sector finances release for June 2025 published by the Office for National Statistics (ONS) on 22 July reported a provisional deficit of £21bn for the month of June and £58bn for the three months then ended. This is £4bn more and in line with budget respectively, and £7bn and £8bn more in each case than the first fiscal quarter a year ago.

Alison Ring OBE FCA CPFA, ICAEW Director of Public Sector and Taxation, says: “Even if borrowing to fund the deficit in the month of June was only a little higher than expected and was in line with expectations in the first three months of the financial year, the first quarter was still the third highest since monthly records began. This trajectory will not have lightened the Chancellor’s mood as she decides which taxes to put up in the Autumn Budget later this year.

“The government has two big problems with the public finances: the short-term outlook – which is bad – and their long-term prospects – which are worse. Public spending continues to outpace tax receipts by a significant margin, while the OBR has reiterated its conclusion that the public finances are unsustainable over the next 25 to 50 years if this and future governments continue on the current path.

“Unfortunately, the major challenges facing the public finances over the next quarter of a century and beyond means that this will not be the last time a chancellor of the exchequer needs to come back asking for more. Now is the time to stop kicking the can down the road and develop a comprehensive long-term fiscal strategy to put the public finances onto a sustainable path.”

Month of June 2025

The fiscal deficit for June 2025 was £21bn, £4bn more than budgeted and £7bn more than a year previously. According to the ONS, this was the second-highest June deficit since monthly records began in 1993, with only June 2020 during the pandemic being higher.

First quarter to June 2025

The deficit for the first three months of the 2025/26 financial year was £58bn, £8bn more than a year previously. Despite being in line with budget, this is the third-highest first quarter deficit since monthly records began (after the first quarter deficits in 2020/21 and 2021/22).

Table 1 highlights how total receipts and total current spending in the three months to June 2025 of £278bn and £323bn were up 7% and 8% respectively, compared with the same period last year.

Receipts were boosted by the employer national insurance increase from April 2025 onwards in addition to the effect of fiscal drag on income tax caused by the continued freeze in personal tax allowances. Meanwhile, the increase in current spending over the past year was primarily as a consequence of public sector pay rises, higher supplier costs and rises in welfare benefits.

The increase in debt interest of £5bn to £42bn consisted of a £6bn increase in indexation on inflation-linked debt as inflation returned less a £1bn reduction in interest on variable and fixed-interest debt. The latter was primarily the effect of a lower Bank of England base rate offsetting a higher level of debt compared with a year ago.

Net investment of £13bn in the first quarter of 2025/26 was £1bn or 8% higher than the same period last year. Capital expenditure of £22bn was up by £1bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £9bn were up by £1bn, less depreciation of £18bn up by £1bn.

Table 1: Summary receipts and spending

3 months to June	2025/26 £bn	2024/25 £bn	Change %
Income tax	64	60	+7%
VAT	52	50	+4%
National insurance	48	41	+17%
Corporation tax	26	24	+8%
Other taxes	57	56	+2%
Other receipts	31	30	+3%
Current receipts	278	261	+7%
Public services	(178)	(165)	+8%
Welfare	(77)	(72)	+7%
Subsidies	(8)	(8)	–
Debt interest	(42)	(37)	+14%
Depreciation	(18)	(17)	+6%
Current spending	(323)	(299)	+8%
Current deficit	(45)	(38)	+18%
Net investment	(13)	(12)	+8%
Deficit	(58)	(50)	+16%

Borrowing and debt

Table 2 summarises how the government borrowed £64bn in the first quarter to take public sector net debt to £2,874bn on 30 June 2025. The movements comprised £58bn in public sector net borrowing (PSNB) to fund the deficit and £6bn to fund government lending activities and working capital movements.

The table also illustrates how the debt to GDP ratio increased from 95.2% of GDP at the start of the financial year to 96.3% on 30 June 2025, with the incremental borrowing partly offset by the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

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

3 months to June	2025/26 £bn	2024/25 £bn
PSNB	58	50
Other borrowing	6	(3)
Net change	64	47
Opening net debt	2,810	2,686
Closing net debt	2,874	2,733

*PSNB/GDP*	*2.0%*	*1.8%*
Other/GDP	0.2%	(0.1%)
Inflating away	(1.1%)	(1.5%)
*Net change*	*1.1%*	*0.2%*
Opening net debt/GDP	95.2%	95.6%
*Closing net debt/GDP*	*96.3%*	*95.8%*

Public sector net debt on 30 June 2025 of £2,874bn comprised gross debt of £3,286bn less cash and other liquid financial assets of £412bn.

Public sector net financial liabilities were £2,504bn, comprising net debt of £2,874bn plus other financial liabilities of £706bn less illiquid financial assets of £1,076bn. Public sector negative net worth was £878bn, being net financial liabilities of £2,504bn less non-financial assets of £1,626bn.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government where the numbers are only updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

The latest release saw the ONS revise the previously reported deficit for the two months to May 2025 down by £1bn and revise public sector net debt on 31 May 2025 up by £7bn.

For further information, read the public sector finances release for June 2025.

This article was originally published by ICAEW.

ICAEW chart of the week: climate change and the public finances

My chart for ICAEW this week looks at how climate change is now expected to make the OBR’s dire predictions for the public finances even worse.

A line chart on climate change and the public finances, with three curved lines for public sector net as a share of GDP over fifty years. with labels from March 2034 onwards.

Bottom line: Baseline public sector net debt/GDP. Falls from just under 100% of GDP to 90% of GDP in March 2034 and then rises to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively.

Middle line: Baseline + climate change (below 3°C scenario). Rises from 94% of GDP in March 2034 (label not shown) to 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively.

Top line: Baseline + climate change + economic shocks. Rises from 104% in March 2034 to 134%, 187%, 275% and then 398% in March 2074.

18 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: OBR, 'Fiscal risks and sustainability', Sep 2024 and Jul 2025 reports.

ICAEW’s chart of the week is on climate change this week, illustrating how it could add a further 74 percentage points to the Office for Budget Responsibility (OBR)’s already disheartening baseline projection for public sector net debt of 274% of GDP to reach 348% of GDP, or potentially 398% if economic shocks are included.

The baseline projection, published by the OBR in September 2024, showed public sector net debt as a proportion of the size of the economy falling from just under 100% of GDP to 90% of GDP in March 2034 and then rising to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively.

One of the main drivers of the baseline projection is the expected rise in spending on pensions, health and social care as more people live longer, sometimes less healthy lives, combined with a falling fertility rate that means there will be proportionately fewer working age adults to pay the taxes needed to fund that rise.

Incorporating the OBR’s new central projection for climate change, public sector net debt would be 94% of GDP in March 2034 (not shown in the chart because of a lack of space between lines) and then 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively. Adding potential economic shocks on top would increase the projection for public sector net debt/GDP to 104% in March 2034 rising to 134%, 187%, 275% and then 398% in March 2074.

The September 2024 baseline projection included the loss of fuel duty receipts from the phasing out of petrol and diesel vehicles between now and 2050, but the OBR in its recent July 2025 fiscal and sustainability report has looked in more detail at both the incremental costs of transitioning to net zero and the damage that is likely to result from a much warmer and wetter climate in several different scenarios.

OBR’s central ‘below 3°C’ scenario is based on global average temperatures rising by 2.9°C above pre-industrial levels by 2100, of which weather and other damage associated with a much warmer and wetter climate is projected to add 17 percentage points to accumulated debt over the next half century from direct and indirect costs and revenue losses. Climate damage is also expected to result in slower economic growth that would add 27 percentage points over 50 years by reducing the denominator in the debt to GDP ratio. The government’s share of transition costs (including lower tax receipts from higher private sector spending) is projected to add 7 percentage points, while there is a 22 percentage point impact from the incremental debt interest that would be incurred on a higher level of debt.

This is before taking account of recessions and other potential economic shocks, which based on historical patterns are expected to add 10% of GDP to public sector net debt every decade or so.

The chart does not reflect other risks identified by the OBR in its latest report, where it reports that the exposures to the public finances have increased since its assessment last year. One risk they did look at in some detail is the prospect of higher interest rates on government borrowing on the basis that demand for gilts reduces as the Bank of England winds down its holdings of gilts (quantitative tightening) and defined benefit pension schemes gradually sell their holdings of gilts to fund pension payments. This risk might be mitigated by selling shorter-dated gilts, although shorter maturities would make the public finances less resilient by increasing the amount of debt needing to be refinanced each year.

The OBR’s dismal assessment of the prospects for the public finances highlights just how difficult a financial position the UK finds itself in, with a lot to do (and some luck needed) if it is to be restored to a sustainable path. At the same time, the costs of climate change are now becoming that much more apparent as extreme weather events and other climate-related costs start to show up in public finance and insurance data.

For more information about the role of the accountancy profession in climate change, visit ICAEW’s climate hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spending up

My chart for ICAEW this week looks at what the Spending Review 2025 does to total day-to-day spending and capital budgets over the next three years.

A step chart showing the Spending Review 2025 change in total departmental budgets over three years.

2025/26: Day-to-day spending £517bn + Capital investment £131bn = total £648bn.

Inflation: +£38bn (+1.9% a year).

Day-to-day spending: +£21bn (+1.3% a year).

Capital investment: +£10bn (+2.4% a year).

2028/29: Day-to-day spending £568bn + Capital investment £149bn = total £717bn.

20 Jun 2025. Chart by Martin Wheatcroft. Design by Sunday.
Source: HM Treasury. 'Spending Review 2025'.

Last week’s chart of the week looked at the winners and losers between departments in the Spending Review 2025. This week’s chart looks at the overall picture and the government’s different approaches between operating and capital expenditure.

As my chart this week illustrates, total departmental budgets for the current financial year ending on 31 March 2026 (2025/26) of £648bn are expected to rise to £717bn by 2028/29. This comprises departmental ‘day-to-day’ operating budgets of £517bn in 2025/26 that rise to £568bn in 2028/29 and departmental capital budgets going from £131bn to £149bn over the same period.

Inflation of 1.9% a year on average is expected to add £38bn a year to total departmental spending by the end of the three-year period, with a real-term increase in operating budgets of £21bn by 2028/29 or 1.3% a year on average, and a real-term increase in capital budgets of £10bn or 2.4% a year on average.

In practice, the increase in day-to-day spending is not much of an increase at all given that ‘government inflation’ is often higher than the GDP inflator all-economy measure of inflation used in HM Treasury’s calculations. Pay awards and supplier price rises are likely to absorb a significant proportion of this additional money, with departments needing to find significant efficiency savings and productivity improvements if they are to avoid cuts to public services, let alone improve them. And, as our chart last week highlighted, several departments are in effect having their operating budgets cut over the spending review period.

Unlike operating budgets, where total planned departmental spending increases each year broadly in line with inflation and the 1.3% average real-term increase, the average annual real-term increase of 2.4% a year in capital budgets over three years comprises a 6.9% real-term increase in 2026/27, a real-term cut of 0.2% in 2027/28, and a real-term increase of 0.7% in 2028/29. (There is also no increase after inflation in the fourth year to 2029/30, which would reduce the average annual increase over four years to 1.8%.)

This follows an 11.6% real-term increase in capital budgets in 2025/26 that was enabled by the Chancellor’s change to the fiscal rules in the Autumn Budget 2024. This gave the government more flexibility to borrow for capital investment, and the Chancellor chose to front load that investment, no doubt in the hope of accelerating the economic benefits of that investment and of improving public services more quickly than might be possible if spreading the increase more evenly over the spending review period.

Whether the government will be able to actually deliver its planned capital programmes as quickly as it might hope remains to be seen, as will whether that investment in turn actually results in stronger economic growth and better public services. Let’s hope it does, as we could definitely do with a boost.

This chart was originally published by ICAEW.

ICAEW chart of the week: End of the first quarter (century)

Our chart this week marks the end of the first fiscal quarter of the 21st century on 31 March 2025 by comparing it with the previous four quarters in the 20th century.

A five column chart showing changes in the public sector net debt to GDP ratio from 1 April 1900 to 31 March 2025 by quarter century.

1900s Q1: Borrowing of +£7bn or +184% of GDP less debt inflated away of -42% of GDP = +142% of GDP.

1900s Q2: +£18bn or +210% of GDP - 182% of GDP = +28% of GDP.

1900s Q3: +£26bn or +48% of GDP - 203% of GDP = -155% of GDP.

1900s Q4: +£301bn or +72% of GDP - 88% of GDP = -16% of GDP.

2000s Q1: +£2,461bn or +130% of GDP - 66% of GDP = +64% of GDP.

9 May 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: Bank of England, 'Historical public finances database'; OBR, 'Public finances databank'.

March 2025 marked the end of the first fiscal quarter of the 21st century, comprising the 25 financial years from 2000/01 to 2024/25. Our chart this week takes a look at how it compares with the previous four quarters in the 20th century.

Our chart starts with the first quarter of the 20th century that started on 1 April 1900 and ended on 31 March 1925 – the comparative period a century ago. Public sector net debt increased by £7bn (from just under £1bn to just under £8bn) and by 142 percentage points of GDP (from 33% of GDP to 175% of GDP) over the 25 years.

As the chart illustrates, the increase in the net debt to GDP ratio reflected an increase in the numerator from borrowing of 184% of GDP, partially offset by 42% of GDP from the ‘inflating away’ effect of economic growth and inflation on the denominator.

Almost all of the borrowing in the first quarter a century ago was incurred to finance the First World War, while the severe contraction in the UK economy after the war (partly because of the global ‘Spanish flu’ influenza pandemic) meant that the erosion of net debt as a share of GDP from economic growth and inflation was just 42% instead of the 84% it had been in the first 20 years of the century.

Around £15bn of the £18bn or 210% of GDP that was borrowed during the second quarter of the 20th century was during the Second World War years from 1940/41 to 1945/46. This was substantially offset by strong economic growth during the quarter (especially in the five years up to 1949/50 as the nation emerged from the war) that saw debt ‘inflated away’ by 182% of GDP. The consequence was an increase of just 28 percentage points in net debt as a share of GDP to 203% of GDP on 31 March 1950.

The third quarter of the 20th century saw the government borrow a further £26bn, resulting in net debt doubling to £52bn on 31 March 1975. However, net debt fell as a share of GDP by 155 percentage points to 48% of GDP, with borrowing of 48% of GDP being more than offset by a 203-percentage point reduction from economic growth and inflation increasing the denominator in the net debt/GDP ratio.

The last quarter of the 20th century saw a further reduction in the ratio of net debt to GDP of 16 percentage points, from higher borrowing of £301bn or 72% of GDP being offset by an 88% of GDP inflating away effect of economic growth and inflation. Net debt reached £353bn on 31 March 2000, equivalent to 32% of GDP.

The first quarter of the 21st century, based on provisional numbers for the year ended 31 March 2025, saw net debt/GDP increase by 64 percentage points, with £2,461bn or 130% of GDP borrowed over the past 25 years, taking net debt to £2,814bn and net debt/GDP to 96% of GDP after reflecting a 66% of GDP inflating away effect from economic growth and inflation.

One positive from these comparisons is that at least the latest quarter was not as bad as the comparative quarter a century ago. However, for a period of peacetime we still managed to borrow approaching ‘warlike’ sums to fund the costs of a financial crisis, a pandemic (although the comparative period had one of those too) and an energy crisis that all combined to increase public sector net debt massively. Meanwhile, lower levels of economic growth than in the second half of the 20th century mean that we have not inflated debt away as quickly as we might hope.

As we start the second quarter of the 21st century, the hope is that we can avoid wars, boost economic growth, control spending to keep borrowing under control and – at the same time – increase the speed at which debt is inflated away. Doing so will be essential if we are to move the public finances back onto a sustainable path.

ICAEW chart of the week: One trillion pounds (almost)

Our chart this week takes a look at how UK public sector net debt has increased from £1,816bn to £2,814bn over the past five years – an increase just £2bn short of £1tn.

According to the provisional public sector finance numbers for March 2025 released by the Office for National Statistics (ONS) on 23 April, public sector net debt was £2,814bn on 31 March 2025. This comprised gross debt of £3,198bn, less cash and other liquid financial assets of £384bn.

Our chart this week illustrates how the net amount the nation owes to its creditors has changed over the last five years, starting with net debt of £1,816bn on 31 March 2020. Debt repayments of £541bn were financed by replacement borrowing of £541bn, followed by borrowing of £847bn to fund deficits over the five years (£315bn in 2020/21, £122bn in 2021/22, £127bn in 2022/23, £131bn in 2023/24 and a provisional £152bn in 2024/25) and borrowing for other reasons of £151bn (principally to fund government lending and working capital requirements). The result is an increase of £998bn to reach net debt of £2,814bn on 31 March 2025.

At just short of a trillion pounds, this is the largest amount ever borrowed by the UK government in a five-year period, with only the £0.8tn (£799bn) borrowed over the five years to March 2013 following the financial crisis coming close – when net debt went from £567bn on 31 March 2008 to £1,366bn on 31 March 2013.

The pandemic and the subsequent energy and cost-of-living crises are, of course, the main drivers behind the need to borrow so much in such a short time, but the worry is that annual borrowing levels are not coming down as quickly as might have been hoped (or budgeted).

Either way, the consequences of building up so much debt will be with us for a long time to come, with debt interest squeezing the amounts available to pay for public services and the tax burden approaching an all-time high, just as demographic change is reducing the proportion of working-age adults, compared with those in retirement.

Of course, as the latest numbers are provisional and the historical ones are often subject to revision, it would only take a couple of relatively small adjustments to the starting or closing debt balances to turn this from just under a trillion pounds to just over a trillion.

Perhaps a reminder that while a couple of billion pounds is a huge sum of money to you or me (or even to many billionaires), in terms of the UK public finances it is not much more than a rounding error.

This chart was originally published by ICAEW.

ICAEW chart of the week: Pre-Spring Forecast forecast

Our chart looks ahead to next week’s Spring Statement by looking back at the fiscal forecast prepared by the OBR last October.

A seven-column chart showing the OBR forecast for the deficit from October 2024, prior to its March 2025 to accompany the Spring Statement.

2023/24 Outturn: Current budget deficit (£61bn) + net investment (£70bn) = Fiscal deficit (£131bn).

2024/25 Forecast: (£55bn) + (£72bn) = (£127bn).

2025/26 Forecast: (£26bn) + (£80bn) = (£106bn).

2026/27 Forecast: (£5bn) + (£83bn) = (£88bn).

2078/28: £11bn current budget surplus + (£83bn) net investment = (£72bn).

2028/29: £9bn + (£81bn) = (£72bn).

2029/30: £10bn + (£81bn) = (£71bn).

21 Mar 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: ONS, 'Public sector finances, Jan 2025'; OBR, 'Economic and fiscal outlook, Oct 2024'.

There has been some confusion on both the title of next week’s Spring Forecast and whether it will or will not constitute a formal ‘fiscal event’.

Traditionally, each Chancellor of the Exchequer stands up in Parliament twice a year to announce policy decisions on tax, spending and borrowing, and to set out the latest economic and fiscal forecasts, which since 2010 have been prepared by the independent Office for Budget Responsibility (OBR). One of these fiscal events is a ‘Budget’, which involves requesting parliamentary approval of the annual budget for the upcoming financial year, while the alternate has historically been described as a ‘Statement’.

Chancellor Rachel Reeves set out an ambition on taking office for there to be only one fiscal event a year – an Autumn Budget – mostly in the hope of creating a more stable tax system by reducing the frequency of tax changes, but also to provide a more stable budgeting framework for the public sector. However, she is still legally required to present fiscal forecasts to Parliament twice a year, and so HM Treasury’s decision to relabel the second event as a Spring Forecast was originally intended to emphasise that there wouldn’t be any major tax or spending changes between Budgets.

Unfortunately for the Chancellor, weak economic data – and what that implies for the profile of public spending of tax receipts and public spending over the next five years – mean that she has been unable to achieve her hope of a policy-decision-free Spring Forecast on this, her first attempt.

Instead, the government has brought forward from later in the year its anticipated reform of disability benefits to ensure the associated cost savings are reflected in the new OBR forecast, while there are also rumours that she may, for the same reason, revise down the total amount of public spending allocated to this summer’s three-year Spending Review.

The tight fiscal situation is illustrated by our chart this week, which sets out how the current budget balance was expected to turn from deficits of £61bn, £55bn, £26bn and £5bn between 2023/24 and 2026/27 to surpluses of £11bn, £9bn and £10bn between 2027/28 and 2029/30.

Our chart also shows how public sector net investment of £70bn, £72bn, £80bn, £83bn, £83bn, £81bn and £81bn between 2023/24 and 2029/30 added to the current budget balance was expected to result in fiscal deficits of £131bn, £127bn, £106bn, £88bn, £72bn, £72bn and £71bn between 2023/24 and 2029/30 respectively.

The Chancellor’s primary fiscal rule is to achieve a current budget surplus by 2029/30, but the £10bn headroom against this target represents just 0.9% of projected receipts of £1,440bn and 0.7% of projected total managed expenditure of £1,510bn in 2029/30.
A deteriorating economic outlook is believed to have seen this headroom evaporate in the working projections presented by the OBR to the Chancellor as part of the Spring Forecast process – at least before taking account of any offsetting decisions by the Chancellor.

Similarly, the Chancellor may also need to take action to ensure that her secondary fiscal rule – for the debt-to-GDP ratio to fall between March 2029 and March 2030 – is met. This test (not shown in the chart) also had a relatively low headroom of £16bn in the Autumn Budget forecast and further changes to government plans may also be required to stay within it.

Many of the references in the media and elsewhere to the Spring Statement next week are likely to be from people who didn’t see the announcement from HM Treasury about the name change. We did get the memo, but on reflection we think sticking with the former title is going to be more appropriate on this occasion.

This chart was originally published by ICAEW.

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.

ICAEW chart of the week: UK long-term fiscal projections

The OBR’s latest fiscal risks and sustainability report projects that public debt could reach 274% of GDP in 50 years’ time, or 324% if likely economic shocks are included.

Our chart this week is on the long-term fiscal projections included in the Office for Budget Responsibility’s (OBR) latest fiscal risk and sustainability report published on 12 September 2024.

The OBR suggests that – without action to improve productivity, increase taxes, cut spending, bring in more people or do more to tackle climate change – public sector net debt is projected to rise to 274%, or potentially 324% if likely economic shocks are included.

As the chart illustrates, debt to GDP was 98% at the end of 2023/24 and the baseline projection shows this falling over the coming decade to 90% by 2033/34, and then gradually increasing to 100% of GDP in 2043/44, 130% in 2053/54, 188% in 2063/64, and then 274% in 2073/74.

Experience tells us to expect an economic shock such as a recession every decade or so, and so the OBR also reports a ‘baseline with shocks’ scenario that sees the debt to GDP ratio reaching 100% of GDP in 2033/34, 120% in 2043/44, 160% in 2053/54, 228% in 2063/64, and then 324% in 2073/74.

The projections reflect long-term pressures on the public finances from the post-economic crisis slowdown in economic growth, an ageing population, the effects of climate change, and higher defence spending.

They are, of course, dependent on the assumptions used in their calculation, especially reproductivity growth, net inward migration, the health of the population, and the degree of rise in global temperatures. They also assume that the previous government’s plans to cut public spending significantly over the next five years are adopted by the incoming government, which is considered to be unlikely given that most economic commentators thought these plans were unrealistic even if there had not been a change in government.

Alternative scenarios prepared by the OBR include a better health scenario that results in a 44% lower debt to GDP ratio in 2073/74, a worse health scenario that increases debt by 49% of GDP, a higher rise in global temperatures to 2℃ that increases debt by 23% and to 3℃ that increases debt by 33%.

The good news is that all of these projections are completely unrealistic.

They are based on extrapolating from current tax and spending policies, without taking account of any actions that governments might take in the future to raise taxes, cut spending or develop the economy. It is extremely unlikely that future governments would be willing, or even able, to finance such large fiscal deficits over the next 50 years.

The bad news is that in consequence taxes are likely to go up.

While there are options to mitigate pressures on the public finances by cutting spending on public services or cutting the level of benefits such as the state pension, these are likely to be politically and practically difficult to achieve. Similarly, immigration remains a politically charged issue and encouraging higher levels of net inward migration significantly more than the 315,000 a year assumed from 2028/29 onwards might be challenging.

The OBR suggests a ‘fiscal tightening’ of 1.5% each decade would be necessary to return debt to its pre-pandemic level of approximately 80% of GDP. If accomplished through tax rises alone, this would see tax levels increase from a projected 37% of GDP in 2027/28 to around 43% of GDP in 2073/24.

Avoiding either of these outcomes – unsustainable debt or ever-increasing levels of taxation – will require productivity growth to increase significantly. So, if you have any good ideas on how to achieve higher productivity that no one else has thought of (preferably without increasing public spending too much), please write to the Chancellor at 11 Downing Street as she would probably be interested to hear them.

This chart was originally published by ICAEW.