Economic storm clouds darken outlook for public finances

A slightly higher fiscal deficit for May and rising interest rates provide no comfort for the Chancellor as he considers how to respond to public sector wage demands.

The monthly public sector finances released on Thursday 23 June 2022 reported a provisional deficit for the month of May 2022 of £14.0bn, an improvement from this time last year, but still £8.5bn higher than May 2019, the year before the pandemic.

Public sector net debt increased by £21bn from £2,342bn at the end of March 2022 to £2,363bn or 95.8% of GDP at the end of May. This is £570bn higher than 31 March 2020, reflecting the huge sums borrowed over the course of the pandemic.

The deficit reported for the two months to May 2022 of £35.9bn was an improvement of £6.4bn from the deficit of £42.3bn reported for the months of April and May 2021, and £64.2bn better than the £100.1bn reported for April and May 2020. However, it was £19.8bn worse than the pre-pandemic deficit of £16.1bn for the two months to May 2019.

Tax and other receipts in the two months amounted to £147.5bn, £12.4bn or 9% higher than a year previously. This included higher income tax receipts from wage increases and bonuses as well as the new higher rate of national insurance, as well as higher VAT receipts driven by higher retail prices.

Expenditure excluding interest and investment for the year to date of £158.5bn was unchanged from the same period last year, as reduced spending on the pandemic including furlough programmes was offset by planned increases in spending announced in last year’s Spending Review and by additional support to households to help with their energy bills.

Interest amounted to £15.7bn in April and May, £6.1bn or 64% higher than the £9.6bn in the two months ended 31 May 2021, reflecting how higher interest rates and higher inflation are increasing the government’s cost of borrowing.

Net public sector investment in April and May 2022 was reported to be £9.2bn, which is £0.1bn lower than a year previously. This is slightly surprising given planned increases in capital expenditure as well as the subsidies given in the past two months to Bulb Energy, a failed energy supplier taken over by the government.

The increase in net debt of £21.2bn since the start of the financial year comprises the deficit for the month of £35.9bn less £14.7bn in net borrowing repayments. This reflects the recovery of loans to banks through the Bank of England’s Term Funding Scheme and of loans to businesses via the British Business Bank (including bounce-back and other coronavirus loans), offset by funding for student loans and other government cash requirements.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “A slightly higher deficit than expected in this month’s numbers and a rising interest bill will not provide any comfort for the Chancellor as he considers how to respond to public sector wage demands at the same time as attempting to build capacity for pre-election tax cuts next year.

The economic storm clouds hovering over the fiscal outlook, as living standards go into reverse and inflation erodes the extent of planned investment in local communities, are likely to make the government’s ambition to level up the country even more difficult to achieve.”

Table showing cumulative numbers for April and May 2022 and variances against the same period a year ago:

Receipts £147.5bn: £12.4bn or +8%
Expenditure (£158.5bn): £0.0bn
Interest (£15.7bn): (£6.1bn) or +39%
Net investment: (£9.2bn): £0.1bn or -1%
Deficit (£35.9bn): £6.4bn or -18%
Other borrowing: £14.7bn: £31.1bn or -212%
(Increase) in net debt: (£21.2bn): £37.5bn or -177%

Public sector net debt: £2,363.2bn: £170.1bn or +8%
Public sector net debt / GDP 95.8%: 0.5% or +0.5%

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made several revisions to the prior period fiscal numbers to reflect revisions to estimates. These had the effect of increasing the reported fiscal deficit for the month of April 2022 by £3.3bn from £18.6bn to £21.9bn and decreasing the reported fiscal deficits for the 12 months to March 2022 by £0.9bn from £144.6bn to £143.7bn and for the year ended 31 March 2021 by £7.7bn from £317.3bn to £309.6bn.

Table showing receipts, expenditure, interest, net investment, deficit and net debt for April and May combined in 2019, 2020, 2021 and 2022 respectively.

For details, click on the link to the original article on the ICAEW website.

This article was originally published by ICAEW.

ICAEW chart of the week: Spring Statement 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This article was originally published by ICAEW.

A Spring Statement dominated by inflation

Tax plans brought forward as Chancellor Rishi Sunak seeks to limit spending commitments and build fiscal headroom ahead of the Autumn Budget.

Inflation dominated the Spring Statement as the Chancellor added to his support package for households and businesses facing rapidly rising prices but held off giving any extra money for public services.

Despite a major tax cut from raising National Insurance thresholds, the OBR estimates that the measures announced by the Chancellor for the coming financial year will offset around a third of the fall in living standards. This will leave household budgets to take most of the strain of the rapidly rising prices, with the potential that the government will need to intervene again later in the year as the impact becomes clearer.

The biggest individual change in the government’s spending plans is the bill for interest on central government debt, which increases from £24bn in 2020/21 to £54bn this year and a forecast of £83bn for 2022/23. This is the biggest driver of an increase in the forecast deficit for next year from last October’s forecast of £62bn to a revised forecast of £99bn, despite an £11bn boost from restructuring the system for student loans that could see graduates paying back their loans almost up until retirement.

Despite the increase in the coming financial year, the OBR expects the deficit in the rest of the forecast period to be lower than before, with the projected deficits in the subsequent four years up to 2026/27 down from £62bn, £46bn, £46bn and £44bn to £50bn, £37bn, £35bn and £32bn – a net improvement of £11bn a year on average. 

Higher tax receipts are the primary driver of a reduced forecast for public sector net debt at 31 March 2027 of £2,480bn, down from a previous forecast of £2,567bn, but still £687bn higher than the £1,793bn at 31 March 2020. The impact on the debt-to-GDP ratio is greater, with lower cash outflows and higher GDP driven by inflation combining to reduce the ratio from a previous forecast of 88% in 2027 to 83%, reversing a significant proportion of the increase caused by the pandemic.

The OBR calculates that the Chancellor has about £30bn of headroom against his fiscal targets, giving him more capacity to provide additional support for households and businesses later in the year if he thinks it necessary. Given the uncertainties surrounding the potential impact of Russia’s invasion of Ukraine on the UK economy, it is perhaps understandable for Rishi Sunak to want to accelerate the reduction in debt in relation to the size of the economy and build greater fiscal resilience. However, he will be conscious of the risk of a recession if households cut back their spending in the domestic economy by too much.

Other than some welcome additional funding to tackle fraud, there was no significant additional funding for departments or local authorities who will need to stick within their original budgets set by the three-year Spending Review announced last October. This could result in ‘unplanned austerity’ as they seek to find savings to offset rising costs, in particular the government’s capital investment plans, where the cost of building infrastructure is likely to increase significantly, potentially jeopardising priorities such as levelling up.

Alison Ring, Director of Public Sector and Taxation, commented: “The story of the Spring Statement is inflation, which is driving a sharp fall in living standards and is causing the interest bill on public debt to multiply. The government has responded with a package of measures that the OBR estimates offset about a third of the decline, but this still leaves household budgets exposed to the effect of rapidly rising prices. The Chancellor’s focus on building up fiscal resilience suggests he may be trying to preserve some firepower for possible further interventions later in the year.

“With public finances in a better shape than previously forecast, the Chancellor will hope that he is going to be able to make good on his pledge to cut income tax in 2024.”

This article was originally published by ICAEW.

Spring Statement: what the new measures will mean

ICAEW Insights quotes me in an article on the Spring Statement 2022:

“Despite its impact on the government’s interest bill, there is a major benefit to inflation in that it helps bring down the debt-to-GDP ratio more quickly, providing the Chancellor more space to intervene to help with the cost of living,” Martin Wheatcroft, public finance adviser to ICAEW, explains.

According to the OBR, the new measures announced in the Spring Statement, along with the existing package announced previously, should offset around a third of the increase in costs that households are facing, leaving them with the burden of the other two-thirds, Wheatcroft says. “I think we should expect further measures from the Chancellor in the summer or autumn as the impacts on households become more apparent.”

Wheatcroft adds that it is likely that some of the announcements included in the Spring Statement were brought forward to ease tensions with backbenchers. “With members of his own party pressing for a delay in the NIC increase, I suspect the Chancellor felt pressure to bring forward measures that he may have been saving for later in the year, in particular his planned cut to income tax in 2024 and a tax plan that was likely set for a summer release ahead of the Autumn Budget.”

To read the full article, click here.

Public finances raise hopes for Spring Statement giveaway

February’s £13.1bn deficit was offset by revisions to prior month estimates, boosting public finances and putting further pressure on the Chancellor to provide more help to households and businesses facing rapidly rising prices.

The public sector finances for February 2022, released on Tuesday 22 March 2022, reported a deficit for the month of £13.1bn. This was an improvement of £2.4bn from the deficit of £15.4bn reported for February 2021, but £12.8bn worse than the £0.4bn deficit reported for February 2020.

The cumulative deficit of £138.4bn for the first 11 months of the 2021/22 financial year was £0.1bn less than that reported last month, as the £13.1bn deficit for February was offset by £13.2bn in revisions to prior month estimates.

Public sector net debt increased by £6.6bn from £2,320.2bn at the end of January to £2,326.8bn or 94.7% of GDP at the end of February, with tax and loan recoveries partly offsetting the deficit for the month. Despite that, debt is £192.4bn higher than at the start of the financial year and £533.7bn higher than March 2020.

The year-to-date deficit of £138.4bn compares with a cumulative deficit for the first 11 months of the financial year of £290.9bn in 2020/21 and £48.7bn in 2019/20. This was £25.9bn below the forecast published by the Office for Budget Responsibility alongside last October’s Autumn Budget and Spending Review 2021, with higher-than-forecast tax receipts being partially offset by higher-than-forecast interest charges on index-linked debt. Both are driven by higher rates of inflation, which takes more time to feed through to non-interest expenditure. This suggests that the deficit for the full year could end up somewhere in the region of £30bn below the official forecast of £183bn.

Cumulative receipts in the first 11 months of the 2021/22 financial year amounted to £826.0bn – £104.7bn or 15% higher than a year previously but £69.3bn or 9% above the level seen in the first 11 months of 2019/20. At the same time, cumulative expenditure excluding interest of £846.2bn was £65.1bn or 7% lower than the same period last year, but £127.4bn or 18% higher than two years ago.

Interest amounted to £69.2bn in the eleven months to 28 February 2022, which was £29.4bn or 74% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £17.8bn or 35% more than in the equivalent 11-month period ended 29 February 2020.

Cumulative net public sector investment up to February 2022 was £49.0bn. This was £12.1bn or 20% below the £29.7bn reported for the first 11 months of last year, which included around £17bn of COVID-19 related lending that the government does not expect to recover. Investment was £13.8bn or 39% more than two years ago, principally reflecting greater capital expenditures, including on HS2.

The increase in debt of £192.4bn since the start of the financial year comprises the cumulative deficit of £138.4bn and £54.0bn in other borrowing. The latter has been used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses via the British Business Bank (including bounce-back and other coronavirus loans), student loans and other cash requirements, net of the recovery of taxes deferred last year and loan repayments.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, says: “Today’s numbers show the impact inflation is having on the public finances as it continues to drive both tax receipts and interest costs higher. The deficit for the financial year is expected to be around £30bn lower than October’s official forecast of £183bn, while tomorrow’s Spring Statement forecasts could see a smaller deficit next year than the £62bn expected before the pandemic.

“Uncertainty about the impact of the war in Ukraine on the UK means it will be extremely difficult for the Chancellor to gauge the level of intervention needed to support households and businesses facing rocketing energy prices if he’s to avoid a recession that could permanently damage the economy and the public finances, and still leave room for tax cuts in the Autumn Budget.”

Table showing cumulative 11 month numbers and variances against prior year and two years ago. All amounts in £bn, with negative numbers in brackets (costs / negative variances).

Receipts 826.0: 104.7 +15% better than prior year; 69.3 +9% versus two years ago

Expenditure (846.2): 65.1 -7%; (127.4) +18%

Interest (69.2): (29.4) +74%; (17.8) +35%

Net investment (49.0): 12.1 -20%; (13.8) +39%

Subtotal Deficit (138.4): 152.5 or -52% lower than the prior year; (89.7) +184% higher than two years ago

Other borrowing (54.0): (8.5) +19%; (73.3) -380%

Total (Increase) in net debt (192.4): 144 -43%; (163.0) +554%

Also:

Public sector net debt 2,326.8: 197.3 or +9% higher than prior year and 542.8 +30% higher than two years ago

Public sector net debt / GDP 94.7%: 0.3% or 0% higher than prior year; 12.7% or +15% higher than two years ago.

Caution is needed with respect to the numbers published by the Office for National Statistics (ONS), which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the 10 months to January 2022 by £13.2bn from £138.5bn to £125.3bn and reducing the deficit for the year ended 31 March 2021 by £4.1bn from £321.9bn to £317.8bn.

Table showing receipts, expenditure, interest, net investment and the deficit by month from Apr 2021 to Feb 2022.

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

This article was originally published by ICAEW.

Boost to tax revenues is a dilemma for the Chancellor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the nine months to December 2021 from £146.8bn to £141.4bn and increasing the deficit for the year ended 31 March 2021 from £321.8bn to £321.9bn.

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

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

This article was originally published by ICAEW.

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

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

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

ICAEW chart of the week: UK quarterly public finances

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

Column chart showing quarterly deficits:

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

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

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

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

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

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

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

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

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

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

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

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

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

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

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

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

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the eight months to November 2021 from £136bn to £130bn and the deficit for the year ended 31 March 2021 from £321.9bn to £321.8bn.

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

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

This article was originally published by ICAEW.

Public debt at highest level for almost 60 years

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the seven months to October 2021 from £127.3bn to £118.6bn and the deficit for the year ended 31 March 2021 from £323.1bn to £321.9bn.

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

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

This article was originally published by ICAEW.