Tag: #economy

March fiscal deficit hits £28bn as departments rush to spend capital budgets

The UK reported a £28.0bn fiscal deficit in March 2021, bringing the total shortfall for 2020-21 to £303.1bn. The last month of the financial year saw net investment of £10.3bn, up from a monthly average of £4.0bn over the previous eleven months.

The latest public sector finances released on Friday 23 April reported a deficit of £28.0bn for March 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the financial year to £303.1bn, £246.0bn more than the £57.1bn reported for the same period last year.

The combination of receipts down 5%, expenditure up 27% and net investment up 25% has resulted in a deficit for the twelve months to March 2021 that is more than five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 25%.

The deficit is smaller than the £354.6bn forecast by the Office for Budget Responsibility (OBR) in March as the economy has been less damaged than was feared, despite the extended lockdown during the final quarter of the financial year. However, some of this difference relates to spending that has been deferred into the following financial year, while the provisional numbers also exclude £27bn of bad debts on COVID-related lending that were included in the OBR forecast.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last twelve months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. 

Net investment is greater than last year (mostly as planned), while the interest expense line has benefited from ultra-low interest rates. March 2021 saw a return to the traditional end-of-financial-year rush to get capital budgets spent, with net investment spending of £10.3bn in March contrasting with an average of £4.0bn over the previous eleven months.

Public sector net debt increased to £2,141.7bn or 97.7% of GDP, an increase of £344.0bn from the start of the financial year. This reflected £40.9bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures. Although net debt was reported as exceeding 100% of GDP at various points during the financial year, slightly improved GDP numbers have kept the ratio below that point.

The cash outflow (the ‘public sector net cash requirement’) for the month was £16.4bn, increasing the cumulative total cash outflow for 2020-21 to £339.0bn. This is a significant increase over the cumulative net cash outflow of £17.2bn reported for 2019-20.

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 and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first eleven months from £278.8bn to £275.1bn and the reported deficit for 2019-20 from £57.7bn to £57.1bn.

This article was originally published by ICAEW.

ICAEW chart of the week: IMF world economic outlook update

29 January 2021: The UK economy is expected to shrink over the three years from 2020 to 2022, compared with flat growth in the Eurozone, modest growth by the USA and relatively strong growth by China.

The IMF released updated economic forecasts this week, estimating the world economy shrank by 3.5% in 2020 with output projected to increase by 5.5% in 2021 and 4.2% in 2022. World output over the three years is now expected to see an average annualised growth rate of 2.0%.

The UK’s economy has been one of the hardest hit by the coronavirus pandemic, shrinking by an estimated 10.0% in 2020. Growth prospects are weak, with forecasts of 4.5% and 5.0% in 2021 and 2022 respectively bringing the annualised average growth rate over three years to a negative 0.4%. This contrasts with the 1.4% average growth forecast last year in the Spring Budget 2020, meaning that the UK economy is now projected to be around 4.7% smaller in 2022 than pre-pandemic expectations.

Prospects for the Eurozone countries are also disappointing, with forecast growth in 2021 and 2022 expected to bring their economies back to where they started and substantially below where they might have expected to have been without COVID-19. 

The USA economy appears to be more resilient, with growth in 2021 expected to offset the decline experienced in 2020 by a modest amount, bringing annualised growth over the three years to 1.3%.

In contrast, China expects to see annualised growth of 5.3% as it recovers from much slower than normal growth in 2020 as a consequence of the pandemic. While this is relatively strong compared with most other countries, China itself will consider this to be a relatively modest level of growth compared to the recent past. 

IMF World Economic Outlook Update – summary and selected countries

  2020 2021 2022 Average
 World output (1) -3.5% +5.5% +4.2% +2.0%
 World growth at market exchange rates -3.8% +5.1% +3.8% +1.6%
 Emerging and developing economies -2.4% +6.3% +5.0% +2.9%
 Advanced economies -4.9% +4.3% +3.1% +0.8%
 Eurozone -7.2% +4.2% +3.6% +0.0%
 Argentina -10.4% +4.5% +2.7% -1,3%
 Australia -2.9% +3.5% +2.9% +1.1%
 Brazil -4.5% +3.6% +2.6% +0.5%
 Canada -5.5% +3.6% +4.1% +0.6%
 China +2.3% +8.1% +5.6% +5.3%
 Egypt (2) +3.6% +2.8% +5.5% +4.0%
 France -9.0% +5.5% +4.1% +0.0%
 Germany -5.4% +3.5% +3.1% +0.3%
 India (2) -8.0% +11.5% +6.8% +3.1%
 Indonesia -1.9% +4.8% +6.0% +2.9%
 Iran (2) -1.5% +3.0% +2.0% +1.1%
 Italy -9.2% +3.0% +3.6% -1.1%
 Japan -5.1% +3.1% +2.4% +0.1%
 Kazakhstan -2.7% +3.3% +3.6% +1.4%
 Korea -1.1% +3.1% +2.9% +1.6%
 Malaysia -5.8% +7.0% +6.0% +2.2%
 Mexico -8.5% +4.3% +2.5% -0.7%
 Netherlands -4.1% +3.0% +2.9% +0.5%
 Nigeria -3.2% +1.5% +2.5% +0.3%
 Pakistan (2) -0.4% +1.5% +4.0% +1.7%
 Philippines -9.6% +6.6% +6.5% +0.9%
 Poland -3.4% +2.7% +5.1% +1.4%
 Russia -3.6% +3.0% +3.9% +1.0%
 Saudi Arabia -3.9% +2.6% +4.0% +0.8%
 South Africa -7.5% +2.8% +1.4% -1.2%
 Spain -11.1% +5.9% +4.7% -0.5%
 Thailand -6.6% +2.7% +4.6% +0.1%
 Turkey +1.2% +6.0% +3.5% +3.5%
 UK -10.0% +4.5% +5.0% -0.4%
 USA -3.4% +5.1% +2.5% +1.3%

For more information, read the IMF World Economic Outlook Update.

This chart was originally published by ICAEW.

ICAEW chart of the week: A square root-based recovery?

17 July 2020: Debate rages about which symbol to attribute to the shape of the economic recovery.

Chart on OBR Real GDP growth forecast. Shows huge economic hit in the first half of 2020 with potential recovery paths to Q1 2025. Upside scenario returns to previous trend by 2021, central scenario recovers but not fully, and downside is even worse.

The #icaewchartoftheweek is on the economy this week, with the Office for Budget Responsibility indicating that hopes of a sharp V-shaped recovery have receded. Instead, their central scenario is for a square root-based recovery – with economic activity recovering less quickly than originally hoped and not to the same level predicted before the pandemic took hold in the UK.

According to the OBR, quarterly GDP fell from £558bn in the fourth quarter of 2019 to £432bn before inflation in the second quarter of this year, a drop of almost 23% in the level of economic activity. Under the OBR’s central scenario GDP in real-terms is not expected to get back to where it was until the fourth quarter of 2022. At a predicted £584bn (excluding inflation) in the first quarter of 2025, GDP would be 3% lower than where it was predicted to be prior to the pandemic.

The OBR hasn’t completely ruled out a V-shaped recovery as a possibility and their upside scenario would see the economy returning to the previous trend by the second quarter of 2021. However, with job losses starting to accelerate, such a speedy return to trend seems increasingly unlikely.

The good news is that the OBR’s downside scenario, for which no symbol has yet been assigned, is not as shallow as the dreaded U-shaped recovery that some economists are worried about. In the downside scenario, economic activity recovers by the middle of 2024, unlike a U-shaped recovery that might extend into the second half of the 2020s.

In practice, the fortunes of different sectors of the economy are likely to vary, with some suggesting the recovery is more likely to be K-shaped, with some sectors stalling just as others emerge to grow back strongly following the end of the lockdown. The Government will be hoping that the fiscal interventions it has announced to support the hospitality, leisure and housing sectors in particular will help prevent the ‘full K’.

This chart of was originally published by ICAEW.

ICAEW chart of the week: Post-GE2019 fiscal deficits

With the General Election now complete, the Office for Budget Responsibility (OBR) was able to release a restated version of its March 2019 fiscal forecasts this morning, reflecting technical revisions to the way the fiscal numbers are calculated, in particular that of student loans. This enables us to update the numbers set out our GE2019 Fiscal Insight on the party manifestos as best we can, given that the OBR has not deigned to include either the changes to public spending announced in the Spending Round 2019 nor the tax and spending changes in the Conservatives manifesto.

As illustrated by the #icaewchartoftheweek, the revised baseline forecast for the fiscal deficit is now £50bn for the current fiscal year, followed by £59bn next year in 2020-21, £58bn in 2021-22 and 2022-23 and £60bn in 2023-24.

It was frustrating that the OBR scheduled their publication of these revised numbers for the first day of the General Election purdah period making it vulnerable – as happened – to being pulled. A day earlier and that would not have happened! Ideally, these revisions would have been published as soon as practical after the publication by the ONS of their revisions to historical numbers in September.

It would have been even better if the OBR had been able to update their economic forecast too, given that the current baseline is still based on an economic and fiscal analysis from nine-months ago. With weak economic growth over the first half of the financial year, it is likely that the OBR will cut its forecasts for tax revenues over the forecast period when it does get round to updating them, resulting in higher deficits – even before taking account of suggestions that the Conservative GE2019 winners plan to announce a splurge of more capital expenditures in the Spring Budget in February.

Unfortunately, we won’t see an updated long-term forecast until at least July 2020, when the OBR is scheduled to publish its next fiscal sustainability report on the prospects for the public finances.