ICAEW chart of the week: National Savings & Investments

My chart this week is on the £218bn balance sheet of the state-owned retail financial institution that borrows from the public to help fund the UK government.

While the bulk of the UK national debt is financed through the sale of government bonds primarily purchased by institutional investors, the UK government also borrows money directly from the public through its in-house ‘bank’, National Savings & Investments (NS&I). 

Originally established as the Post Office Savings Bank in 1861, NS&I has a long history of funding the UK government, for example through the sale of war bonds direct to the public in the twentieth century. Today it is a non-ministerial department for its banking or ‘product’ activities, managed by an executive agency of HM Treasury of the same name.

As my chart this week illustrates, NS&I’s product assets as of 31 March 2023 of £218bn were balanced by its liabilities. As a government-backed financial institution, it is not technically a bank and so does not need to maintain equity reserves, unlike commercial banks.

The primary job of NS&I is to attract money from the public to help finance the government’s operations, with a total of £215bn lent to the National Loans Fund as of 31 March 2023. This lending formed the bulk of the NS&I’s product assets, with the balance of assets of £3bn comprising mostly cash together with some receivables.

Liabilities of £218bn on 31 March 2023 were owed to depositors, comprising £123bn in Premium Bonds, £60bn in other variable rate savings products, an estimated £20bn in Index-Linked Savings Certificates, and £15bn in fixed-interest certificates and bonds.

Premium Bonds were introduced in 1956 and (from the NS&I’s perspective) pay a variable rate of interest (currently 4.00%). From a savers’ perspective, however, bonds do not attract any interest at all and instead represent a refundable ticket to a regular tax-free prize draw, with a 22,000 to 1 chance of winning a prize each month, ranging from £25 up to £1m.

Other variable rate savings products include £32bn in on demand Direct Saver accounts that pay interest monthly (currently 3.40% gross/3.45% AER), £20bn on demand Income Bonds paid annually (currently 3.40%), £5bn in ISAs (paying 2.40%) and Junior ISAs (paying 3.65%), and £3bn in Investment Account (paying 0.85%) and legacy savings products that pay either 0.25% or 0%.

Index-Linked Savings Certificates of approximately £20bn (the exact number is not disclosed) are no longer on sale. They are of three years’ duration and can be rolled over by existing holders. These typically attract interest equivalent to Consumer Price Inflation + 0.01% AER, a very low amount in the last decade, but of course much more recently.

Fixed rate liabilities of £15bn principally comprise £12bn in Guaranteed Bonds, £2bn in Fixed Interest Savings Certificates and £1bn in Green Savings Bonds. Guaranteed Bonds are one-year fixed-term fixed interest accounts, with Guaranteed Income Bonds that today pay 3.90% gross/3.97% AER in monthly instalments and Guaranteed Growth Bonds that pay 4.00% on maturity, higher than previous issues. Three-year Fixed Interest Savings Certificates are no longer on sale but can be rolled over by existing holders, however savers can opt instead for three-year Green Savings Bonds, with issue 4 on sale at a fixed interest rate of 4.20% credited annually. 

The above numbers do not include NS&I’s separate executive agency operational balance sheet that comprised £0.18bn in assets, £0.15bn in liabilities and equity of £0.03bn on 31 March 2023.

The £218bn lent by the public to NS&I is equivalent to 7.7% of public sector gross debt of £2,836bn on 31 March 2023. While this may seem relatively small in comparison to the £1,320bn in British government securities (gilts) and other debt securities and loans that have been raised from institutional debt investors, or the £1,298bn in currency and central bank deposit liabilities, NS&I provides both a useful public service and a useful alternative source of funding.

Prime Minister Henry Temple (Viscount Palmerston) and Chancellor of the Exchequer William Gladstone would no doubt be extremely pleased to see that their creation was still funding the nation 162 years on. Even if, with £10bn in net new deposits received during the year ended 31 March 2023, it is an increasing liability.

This chart was originally published by ICAEW.

Public debt exceeds 100% of GDP for first time since 1963

22 June 2020: The fiscal deficit of £103.7bn for April and May 2020 is over six times as large as the £16.7bn reported for the same period last year.

The latest public sector finances for May 2020 published by the Office for National Statistics (ONS) on Friday 19 June 2020 reported a revised deficit of £48.5bn for April and a deficit of £55.2bn for May 2020.

Public sector net debt increased to £1,950.1bn or 100.9% of GDP, an increase of £173.2bn (up 20.5 percentage points) compared with April 2019. This is the first time the headline debt number has exceeded 100% of GDP since 1963, although the ONS cautions that the numbers for the deficit and for GDP are both subject to potentially significant revisions.

Table showing receipts, expenditure, net investment, deficit and public sector net debt.  Details available on ICAEW article - click link at end of this post.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues as a consequence of the lockdown.

The deficit of £103.7bn for the two months to May is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March.

Cash funding (aka the ‘public sector net cash requirement’) for the two months was £143.5bn, compared with £1.8bn for the same period in 2019.

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

Alison Ring, director of public sector for ICAEW, commented:

“Significant borrowing over recent months means that this is the first time in more than 50 years that debt has been larger than GDP. And though the furlough scheme to date has cost less than originally estimated, cash funding in April and May was more than in the previous three financial years combined.

These are major milestones for the public finances and demonstrate the unparalleled impact of coronavirus, even if this is not surprising given the huge amounts of financial support the government is providing to keep the economy going through lockdown.”

This article was originally published by ICAEW.

ICAEW chart of the week: borrowing to exceed half a trillion pounds

29 May 2020: Government looks to financial markets to fund large-scale fiscal interventions in the economy.

The #icaewchartoftheweek shines a light on the massive expansion in borrowing being undertaken by the UK Government as it seeks to plug an expanding gap between tax receipts and spending and fund a huge amount of loans to banks and businesses in order to try and keep the economy from collapsing.

At the Spring Budget on 11 March, HM Treasury issued a financial remit to the Debt Management Office and National Savings & Investment amounting to £162bn, comprising £98bn to fund the repayment of existing debts, £55bn to fund a planned shortfall between tax receipts and public spending (the deficit), and £9bn to fund public lending to individuals and businesses.

Since then the fiscal situation has transformed, with the Office for Budget Responsibility (OBR) suggesting that the deficit could increase by as much as £243bn to £298bn in 2020-21, while lending activities could increase by a further £168bn to £177bn. Public sector net debt at 31 March 2021 might increase by £411bn from the Spring Budget forecast of £1,819bn to £2,230bn.

The good news is that the cost of this borrowing is relatively small, with yields on ten-year gilts as low as 0.20%.

To find about more about the global and UK fiscal crisis read the ICAEW Fiscal Insight on coronavirus and public finances.

ICAEW chart of the week: Money for nothing

22 May 2020: The UK Government is being paid to borrow money, with first negative yield gilt

Cash invested £1,026.35 (nominal value £1,000, premium and interest £26.35). Cash returned £1,026.25 (7 coupon payments £26.25, principal repayment £1,000). Net return -£0.10, yield -0.003%.

The news this week that the UK Government issued debt with a negative interest rate is the subject of the #icaewchartoftheweek. This shows how purchasers of the 0¾% Treasury Gilt 2023 at an auction on Wednesday 20 May accepted a negative yield of -0.003% on their investment.

At an average price of £102.388 for each £100 gilt or £1,023.88 for ten gilts, someone buying gilts at the auction would have paid £1,026.35 to the Government for each £1,000 of nominal value purchased, once £2.47 for interest already accrued payable with the bid is included. 

That investor will receive less money back, with 7 semi-annual coupon payments of £3.75 before repayment of the principal of £1,000 on 22 July 2023 adding up to £1,026.25, a net loss of 10p.

This is a return of just under -0.01% over 38 months on the £1,026.35 invested, equivalent to an annualised yield of -0.003%.

This is only just negative, and the UK Government still needs to pay to borrow for longer periods, with yields on 10-year and 30-year gilts still in positive territory at around +0.24% and +0.63% respectively.

Although this gilt auction is a milestone, being the first fixed-rate government bond with a duration over two years to be issued at a negative yield in the UK, this is not a new phenomenon in the world of government borrowing. For example, with 10-year and 30-year government bonds currently yielding -0.49% and -0.07% respectively, Germany’s €156bn of projected borrowing this year should end up reducing its interest bill!

Whether this presages a similar situation in the UK is unknowable, so we are not yet at the stage of money for nothing.

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: UK gilt issues

1 May 2020: The unsung heroes at the Debt Management Office (DMO) have swung into action as the UK Government has started to burn through cash at an astonishing rate, as illustrated by the #icaewchartoftheweek.

Chart. Cash raised 2019-20: £10bn, £10bn, £10bn, £13bn, £8bn, £12bn, £12bn, £12bn, £10bn, £13bn, £12bn, £15bn. Cash raised 2020-21: April £58bn.

The DMO, the low-profile unit within HM Treasury responsible for the national debt, raised an astonishing £58bn from selling gilt-edged government securities in April, compared with an average of £11bn obtained each month in the financial year to March. The size and frequency of gilt auctions went from an average of £2.6bn from one auction a week in 2019-20 to £3.2bn from four auctions a week in April.

The scale of the challenge became apparent in March as the Government announced a series of eye-watering fiscal interventions, with the DMO going overdrawn by £18.5bn to keep the Government supplied with cash in advance of ramping up gilt auctions in April.

Fortunately, the DMO is able to finance the Government at ultra-low rates of interest at the moment, with auctions oversubscribed and yields on 10-year gilts at just over 0.3% during the course of April. If maintained, the incremental cost of the additional £384bn in public sector net debt in 2020-21 set out by the Office for Budget Responsibility in its coronavirus reference scenario would be less than £2bn a year.

A legacy of debt for future generations to deal with, but – at least for now – a relatively cheap burden to service.

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: deficit and debt

17 April 2020: The #icaewchartoftheweek is on the ‘coronavirus reference scenario’ put together by the Office for Budget Responsibility (OBR).

Fiscal deficit 2020-21: £55bn Budget 2020 + £130bn lower receipts +£88bn higher spending = £273bn. Net debt: £1,819bn Budget 2020 +£384bn more borrowing = £2,203bn.

It suggests that the deficit for the current fiscal year could end up somewhere in the region of £273bn, around five times as much as the official Spring Budget forecast of £55bn, while public sector net debt could exceed £2.2tn by 31 March 2021, £384bn more than previously expected.
This scenario, which the OBR stresses is not a forecast, is based on a three-month lockdown followed by restrictions for a further three months, resulting in a 35% contraction in the economy in the second quarter of 2020, before bouncing back relatively quickly to leave the economy 13% smaller in 2020 than in 2019.
Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.
This is only of one many potential scenarios, but what is clear is that whatever actually happens, the damage to the public finances from the coronavirus pandemic will be extremely severe.
We can (and will) worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.

This chart was originally published by ICAEW.