#publicdebt – 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: 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: Make America Indebted Again!

My chart for ICAEW this week looks at official projections, published three days before President Trump was inaugurated for the second time, that predict federal debt is on track to return to and exceed levels last seen in the 1940s.

Shaded-area chart showing debt held by the public/GDP between 1905 and 2035, with highlighted peaks of 106% of GDP in 1946, 48% in 1993, a projected 100% in Sep 2025, and a projected 118% in Sep 2035.

24 Jan 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: US Congressional Budget Office.

The US Congressional Budget Office (CBO) published its latest 10-year projections for the US federal government finances on 17 January 2025, covering the decade from 2025 to 2035. These projections are based on legislation enacted up to 6 January 2025, prior to the start of President Trump’s second term as President on 20 January 2025.

As the chart of the week illustrates, debt held by the public in relation to the size of the economy was 4% of GDP in 1905, falling to 3% in 1916 before rising to 33% of GDP as a result of the US entering the First World War. Debt/GDP fell over the subsequent decade to 15% of GDP in 1929 before rising again during the Great Depression to 42% of GDP in 1936. A drop to 40% in 1937 was then followed by a rise to 106% of GDP in 1946 following the end of the Second World War.

A rapidly growing economy over the next quarter of a century or so saw debt inflated away despite a major expansion in the size of the federal government over that period, with debt/GDP falling to 23% in 1974. More difficult economic times in the 1970s and 1980s and continued governmental expansion saw debt/GDP rise to 48% in 1993, before a growing economy again eroded debt as a share of GDP to down to 35% in 2007.

Debt rose rapidly during the financial crisis and subsequently, to reach 79% of GDP by 2019, before the pandemic drove it up further to 99% in September 2020. The post-pandemic economic recovery saw debt falling back to 95% of GDP in September 2022, but since then continued deficit spending since then has seen debt held by the public/GDP rise to 98% last year on its way to a projected 100% of GDP in September 2025.

The CBO predicts that debt held by the public will increase from $28.2tn at the end of September 2024 to $30.1bn in September 2025 and then to $52.1tn in September 2035, equivalent 118% of GDP. This assumes economic growth of 1.8% a year over the ten years to 2035 and is based on extrapolating from approved budgets and legislation in place as of 6 January 2025.

The big question is how that projected path will change as a result of the incoming Trump administration. His plan to cut taxes (pushing up the level of borrowing further) and to cut federal spending (offsetting some of that increase) will have a direct fiscal impact, but the indirect effects his policies have on the US economy will also be very important. Faster growth would have the effect of slowing the rise in the debt/GDP ratio or even bringing it down, while slower growth could shorten the time it takes to make America as indebted as it was back in 1946.

For further information, read the CBO’s ‘Budget and Economic Outlook: 2025 to 2035’.

This chart was originally published by ICAEW.

ICAEW chart of the week: Commonwealth of Australia balance sheet

My chart for ICAEW this week heads down under for some warmer weather and to take a look at the Australian federal government balance sheet in its recently published consolidated financial statements for the year ended 30 June 2024.

Column chart illustrating the Commonwealth of Australia balance sheet. Assets of A$989bn in the left hand column and liabilities of (A$1,557bn) in the right hand column.

19 Dec 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Commonwealth of Australia, 'Consolidated financial statements 2023/24'.

The Commonwealth of Australia consolidated financial statements for the year ended 30 June 2024 were published on 12 December, bringing together the results and financial position of 199 audited financial statements for entities within the federal government system, public financial corporations (such as the Reserve Bank of Australia and Export Finance Australia), and public non-financial corporations (including Australia Post and Snowy Hydro for example). However, this does not include state and territory governments or local authorities in each state and territory.

As my chart this week illustrates, the balance sheet reports negative net worth of $568bn (21% of GDP or £284bn at the current exchange rate of approximately A$1 = £0.50), comprising assets of A$989bn (37% of GDP or £495bn) less liabilities of A$1,557bn (58% of GDP or £779bn).

Assets consisted of investments and cash of A$527bn (£264bn), receivables and other financial assets of A$162bn (£81bn) and non-financial assets of A$300bn (£150bn), while liabilities comprised debt of A$1,044bn (£522bn), payables and provisions of A$205bn (£103bn), and superannuation liabilities of A$308bn (£154bn).

Investments and cash of A$527bn consisted of investments, loans and placements of A$417bn, equity investments of A$102bn, and cash of A$8bn. Investments include $225bn invested in the Australia Future Fund, a sovereign wealth fund established in 2006 to strengthen the Australian government’s long-term financial position, together with $A$44bn in a series of other sovereign wealth funds established over the last decade.

Receivables and other financial assets of A$162bn comprised tax receivables and accrued taxation of A$59bn, other receivables and accrued revenue of A$26bn, student loans of A$54bn, and other advances of A$23bn.

Non-financial assets of A$300bn comprised A$89bn of military equipment, A$88bn of other plant, equipment and infrastructure, A$74bn in land and buildings, A$17bn in intangibles, $A13bn in heritage and cultural assets, and A$19bn of inventories and other non-financial assets.

Debt of A$1,044bn consisted of interest-bearing liabilities of A$943bn (A$611bn in government securities, A$227bn in central bank deposit liabilities, A$32bn for leases, and A$73bn in loans and other interest-bearing liabilities) and A$101bn in Australian currency in circulation.

Payables and provisions of A$205bn included A$90bn in provisions, A$63bn in non-pension employee liabilities, A$26bn in supplier payables and A$26bn in other payables.

The net pension obligation of A$308bn includes A$276bn for partially funded defined benefit schemes (obligations of $323bn less scheme assets of $A47bn) and A$32bn for one unfunded scheme. These schemes are now all closed to new members and so the liability is gradually reducing over time.

Not shown in the chart is the operating statement, which reported revenue of A$728bn (27.2% of GDP or £364bn), expenses of A$718bn (26.9% of GDP or £359bn) and net capital investment of A$12bn (0.5% of GDP or £6bn) to result in an operating surplus of A$10bn (0.4% of GDP or £5bn) and a fiscal deficit (on an accounting basis) of A$2bn (0.1% of GDP or £1bn).

Although the reported net worth in the financial statements is negative, Australia’s public finances are in a much stronger position than for many other countries. Australia’s general government net debt (including 13% for state and territory governments) was 32% of GDP on 30 June 2024, in contrast with the equivalent of 91% of GDP for the UK on the same date. This also doesn’t take account of the UK’s much larger public sector pension liabilities that are not included within net debt.

As a result there are more reasons than just the warmer weather to be thinking about enjoying a Christmas barbie on the beach on the other side of the world at this time of the year.

This is the last chart of the week for 2024 and so we would like to wish our readers all the best for the holiday season and for a healthy and prosperous 2025. We return in January.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK public sector pension liabilities

My chart for ICAEW this week looks at how public sector net pension obligations reduced by £1.2tn from £2.6tn to £1.4tn during the financial year ended 31 March 2023 as a consequence of a sharply rising discount rate.

Step chart on UK public pension liabilities in the Whole of Government Accounts 2022/23. Opening position at 1 April 2022 £2,639bn (£2,539bn unfunded and £100bn funded) + £117bn service costs + £48bn net interest costs - £1,269bn net actuarial gains = £50bn unfunded benefits paid - £70bn other movements = £1,415bn pension liability on 31 Mar 2023 (£1,419bn unfunded scheme liabilities - £4bn funded scheme net pension asset).

13 Dec 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.

My chart of the week for ICAEW is on UK public sector pension liabilities, analysing how the net pension obligations reported in the Whole of Government Accounts 2022/23 reduced from £2,639bn on 1 April 2022 to £1,415bn on 31 March 2023.

The Whole of Government Accounts are prepared in accordance with International Financial Reporting Standards (IFRS), with net pension obligations calculated in line with International Accounting Standard 19 (IAS19): Employee benefits.

The chart starts with opening net pension liabilities on 1 April 2022 of £2,639bn, comprising £2,539bn for unfunded schemes (including the NHS, teachers, civil services, armed forces, police and fire service schemes, among others) and a net liability of £100bn for funded schemes (principally local government schemes, but also some central government entities such as the BBC and the Bank of England, for example). The closing position on 31 March 2023 was £1,415bn, being pension liabilities of £1,419bn for unfunded schemes and a net pension asset of £4bn for funded schemes.

Service costs added £117bn to pension liabilities during 2022/23 and net interest added a further £48bn. These increases were more than offset by £1,269bn in net actuarial gains, £50bn in payments to pensioners in the unfunded pension schemes, and £70bn in other movements.

Service costs principally arise from the additional pension entitlements earned by public sector workers during the year, while net interest comprises the unwinding of the discount on pension liabilities (£40bn for unfunded schemes and £11bn for funded schemes) less investment income on assets in funded schemes (£3bn).

The net actuarial gains of £1,269bn comprises £1,357bn from changes in the assumptions underlying the value of liabilities (£1,218bn on unfunded schemes and £139bn in funded schemes) less £60bn (£59bn on unfunded schemes and £1bn on funded schemes) in experience gains and losses, less a loss of £28bn on investments. The principal assumption changes related to a change in the discount rates used to calculate pension obligations, which for the unfunded schemes increased from a real (i.e. inflation-adjusted) rate of 1.3% on 31 March 2022 to 1.7% on 31 March 2023.

The unfunded scheme liability is reduced for pensions paid on behalf of the schemes by the government. This contrasts with the funded schemes where assets are used to fund settlement of pension liabilities, resulting in no change in the net position. Other movements include £35bn in opening balance restatements relating to the NHS and former Royal Mail pension schemes and £39bn from the failure of 198 local authorities and the Northern Ireland Teachers Superannuation Scheme to report numbers to HM Treasury, less a net £4bn in other movements.

The omission of so many local authorities, and the lack of audit assurance for many others, has led to the first ever audit opinion disclaimer by the Comptroller and Auditor General on the consolidated financial statements for the UK public sector.

Not shown in the chart is the breakdown of the £1,419bn closing balance for unfunded schemes into its constituent schemes: £535bn for NHS workers, £335bn for teachers, £222bn for civil servants, £156bn for the armed forces, £104bn for police, £30bn for pre-privatisation Royal Mail workers, £23bn for fire services, and £14bn for public sector staff in other unfunded schemes. Also not shown is the £304bn of liabilities in local government and other funded pension schemes or the related £308bn in investments in those schemes that result in a net pension fund asset of £4bn on 31 March 2023.

The recognition of a £1.3tn actuarial gain in the statement of comprehensive income and expenditure appears positive for the reported financial position of the nation by contributing to a reduction in overall net liabilities from £3.9tn to £2.4tn. However, it is important to realise that the future obligations to pay pensions to public sector employees haven’t changed – it is how those obligations are converted into current values.

Irrespective of the discount rate used, we as a nation will need to pay out very large amounts of money in public sector pensions.

This chart was originally published by ICAEW.

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.

ICAEW chart of the week: Eurozone government bond yields

My chart for ICAEW this week is on the cost of government borrowing in the Eurozone, which on 4 September ranged from 2.17% for Danish 10-year bonds up to 3.59% for their Italian equivalents.

My chart this week is on the range of yields payable on 10-year government bonds by 18 out of the 20 countries in the Eurozone for which data is available.

The chart illustrates how investors in German 10-year government bonds (known as ‘bunds’) would have received a yield to maturity of 2.22% – or conversely the German government could have borrowed at an effective interest rate of 2.22% if issuing fresh debt at that point in time. Yields on German bunds are used as benchmark rates for government debt not just in the Eurozone, but globally.

Just one country in the Eurozone has a lower 10-year bond yield than Germany, which is Denmark at 2.17% on 4 September, which is a 0.05 percentage points or 5 basis points (bp) ‘spread’ below the benchmark bund rate.

While quoted yields move up and down all the time, sometimes by quite large amounts, spreads are much less volatile, providing an insight into how debt investors perceive the relative risks of investing in different countries’ sovereign debt.

The next lowest yields were the Netherlands at 2.51%, with a spread of 0.29 percentage points above bunds, and Finland at 2.59% (+0.37%). This is then followed by Ireland on 2.67% (+0.45%), Austria on 2.71% (+0.49%), Belgium on 2.80% (+0.58%), Portugal on 2.82% (+0.60%), France on 2.93% (+0.71%), Slovenia on 2.94% (+0.72%), Cyprus on 3.00% (0.78%) and Spain on 3.02% (+0.80%). There is then a small jump to Greece on 3.28% (+1.06%), Slovakia on 3.30% (+1.08%), Malta on 3.34% (+1.12%), Lithuania on 3.36% (+1.14%) and Croatia on 3.41% (+1.19%).

The highest yield for investors among Eurozone countries – and hence the highest borrowing cost for its government – is Italy with 3.59%, which is 1.37 percentage points above the effective interest rate at which Germany could in theory borrow.

Comparing the bond yields in the Eurozone provides an insight into the relative strengths and weaknesses of these countries’ public finances and economies given that they all share a currency, a central bank base interest rate (currently 3.75%), and are all in the EU Single Market and Customs Union. Comparing yields with other currencies, such as the UK’s 3.95% for example (not shown in the chart), needs to take other factors into account, such as the UK’s much higher central bank base rate of 5%.

The chart also reports the government debt to GDP levels of each country for the second quarter of 2024 according to Eurostat, which may help explain why Denmark (with debt/GDP of 34%) pays a significantly lower borrowing cost than Spain (109%).

However, debt/GDP doesn’t explain all of the differences, with the 10-year yield on Greek government debt (debt/GDP 160%) of 3.28% for example being significantly lower than the 10-year yield on Italian government debt (debt/GDP 138%) of 3.59%.

Not shown in the chart are Estonia (debt/GDP 24%) and Latvia (45%), both of which tend to borrow at shorter maturities.

The lack of a firm correlation between debt/GDP and bond spreads should not be surprising as debt/GDP is a relatively crude measure of public finance strength or weakness. It excludes most government assets and non-debt liabilities, the funded or unfunded nature of their social security systems, as well as a country’s medium- and longer-term economic prospects and the perceived stability of that country’s government. These are all factors debt investors take into account when deciding the level of risk that they are willing to accept when investing.

This chart was originally published by ICAEW.