Tag: #publicdebt

August public sector finances: fourth-highest monthly deficit on record

Deficit marginally better than had been expected according to the latest figures from the ONS, but costly public sector problems emerge.

 The monthly public sector finances for August 2023 were released by the Office for National Statistics (ONS) on Thursday 21 September 2023. These reported a provisional deficit for the fifth month of the 2023/24 financial year of £12bn, bringing the total deficit for the five months to £70bn, £19bn more than in the same period in the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “While August’s deficit was marginally better than expected, problems costly to the public sector continue to emerge, from crumbling concrete in public buildings to Birmingham Council’s recent bankruptcy, and are likely to weigh on the Chancellor’s mind as he considers November’s Autumn Statement. 

“Both main parties are rightly cautious about making new public spending commitments in the current economic environment, including whether or not to extend the state pension triple lock into the next parliament. Whether they can hold this position as they enter into the party conference season remains to be seen.”

Month of August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of August 2023 was just under £12bn, being tax and other receipts of £84bn less total managed expenditure of £96bn – up 5% and 8% respectively compared with August 2022.

This was the fourth highest August deficit on record since monthly records began in 1993, following the deficits of £14bn in August 2021 and £24bn in August 2020 during the pandemic and £12bn in August 2009 during the financial crisis.

Five months to August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the five months to August 2023 was £70bn, £20bn more than the £50bn deficit reported for the first five months of 2022/23. This reflected a widening gap between tax and other receipts for the five months of £428bn and total managed expenditure of £498bn, up 7% and 10% respectively compared with April to August 2022.

Inflation benefited tax receipts for the first five months compared with the previous year, with income tax and VAT receipts both up 12% to £104bn and £84bn respectively. However, corporation tax was only up 13% to £37bn despite the increase in the corporation tax rate from 19% to 25% from 1 April 2023, and national insurance receipts were down by 3% to £71bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by £2bn or 29% to £6bn and the total for all other taxes was up just 3% to £82bn as economic activity slowed. Non-tax receipts were up 12% to £44bn, primarily driven by higher investment income.

Total managed expenditure of £428bn in the five months to August can be analysed between current expenditure excluding interest of £418bn (up £34bn or 9% over the same period in the previous year), interest of £61bn (up £6bn or 11%), and net investment of £19bn (up £7bn or 57%).

The increase of £34bn in current expenditure excluding interest compared with the prior year has been driven by a £14bn increase in benefit payments, £9bn in higher central government staff costs, £5bn in additional central government procurement spending and £5bn in energy support scheme costs, plus £1bn in net other changes.

The rise in interest costs of £6bn to £61bn reflects a £14bn increase in interest on non-inflation linked debt to £38bn as the Bank of England base rate rose, offset by an £8bn fall in the interest payable on index-linked debt to £23bn as inflation is running at a lower level than it was for the same period last year.

The £7bn increase in net investment spending to £15bn in the first five months of the current year reflects high construction cost inflation among other factors that saw an £8bn or 23% increase in gross investment to £44bn, less a £1bn increase in depreciation to £25bn. 

Public sector finance trends: August 2023 Image of a table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the five months (cumulative) to Aug 2019, 2020, 2021, 2022 and 2023 respectively. Receipts: £336bn (for the five months to Aug 2019(, £298bn, £355bn, £401bn, and £428bn (for the five months ended Aug 2023). Expenditure excluding interest: (£323bn), (£428bn), (£386bn), (£384bn) and (£418bn). Interest (£28bn), (£18bn), (£30bn), (£55bn) and (£61bn). Net investment: (£13bn), (£30bn), (£18bn), (£12bn) and (£19bn). (Subtotal) Deficit: (£28bn), (£178bn), (£79bn), (£50bn) and (£70bn). Other borrowing: £13bn, (£74bn), £6bn, £2bn and £14bn. (Total) Debt movement: (£15bn), (£252bn), (£73bn), (£48bn) and (£56bn). Net debt: £1,792bn, £2,067bn, £2,226bn, £2431bn and £2,594bn. Net debt / GDP: 79.8%, 98.8%, 96.2%, 96.5% and 98.8%,

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 latest release saw the ONS revise the reported deficit for the four months to July 2023 up by £2bn as estimates of tax receipts and expenditure were updated for better data, and it also reduced the reported deficit for the 2022/23 financial year by £1bn to £128bn for methodology changes in addition to new data. 

The methodology changes also saw small revisions in the reported deficits for previous periods back to 1999, most notably reductions of £1bn to the deficits in 2019/20 and 2020/21 and an increase of £2bn in the reported deficit for 2021/22.

Balance sheet metrics

Public sector net debt was £2,594bn at the end of August 2023, equivalent to 98.8% of GDP.

The debt movement since the start of the financial year was £56bn, comprising borrowing to fund the deficit for the five months of £70bn less £14bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £779bn or 43% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£618bn on 31 August 2023, comprising £1,604bn in non-financial assets, £1,038bn in non-liquid financial assets, £2,594bn of net debt (£339bn in liquid financial assets less public sector gross debt of £2,933bn) and other liabilities of £667bn. This is a £61bn deterioration from the -£557bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to over £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

This article was originally published by ICAEW.

July public sector finances: a mixed set of results

Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.

The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.

“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”

Month of July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.

This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.

Four months to July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.

Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.

Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).

The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.

The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose. 

The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn. 

Public sector finance trends: July 2023

 Four months toJul 2019 (£bn)Jul 2020 (£bn) Jul 2021 (£bn) Jul 2022 (£bn) Jul 2023 (£bn)
 Receipts270234282320343
 Expenditure(259)(348)(310)(308)(334)
 Interest(24)(15)(23)(44)(51)
 Net investment(10)(26)(13)(11)(15)
 Deficit(23)(155)(64)(43)(57)
 Other borrowing 4 (66) (22) 5 10
 Debt movement(19)(221)(86)(38)(47)
 Net debt 1,7962,0362,2392,4202,579
 Net debt / GDP 80.1% 96.9% 97.7% 96.6% 98.5%
Source: ONS, ‘Public sector finances, July 2023’.


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 latest release saw the ONS revise the reported deficit for the three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.

The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

For further information, read the public sector finances release for July 2023.

This article was originally published by ICAEW.

ICAEW chart of the week: Whole of Government Accounts 2020/21

My chart this week looks at the £3.3trn of net liabilities presented in the UK government’s consolidated financial statements for the year ended 31 March 2021 that were finally published more than 27 months after the balance sheet date.

Two column chart showing assets and liabilities that make up net liabilities of £3.3trn reported in the Whole of Government Accounts 2020/21 at 31 March 2021: Assets £2.2trn Fixed assets £1.3trn Receivables £0.2trn Investments £0.4trn Financial assets £0.3trn Liabilities (£5.5trn) Financial liabilities (£2.6trn) Payables (£0.2trn) Provisions (£0.4trn) Pensions (£2.3trn)

The UK’s Whole of Government Accounts for the year ended 31 March 2021 were published and submitted to Parliament on 20 July 2020, more than 27 months after the balance sheet date. These are consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) that incorporate the financial results of more than 10,000 public bodies in the UK across central government, local government, and other parts of the public sector. 

The Whole of Government Accounts provide a much more comprehensive picture of the financial performance and position of the UK public sector than is presented in the statistics-based National Accounts, using a financial language familiar to millions of users of financial reports in the private sector. 

As our chart this week highlights, the statement of financial position (balance sheet) of the UK public sector at 31 March 2021 was in heavily negative territory with £3.3trn in net liabilities, comprising assets of £2.2trn less liabilities of £5.5trn. This compares with net liabilities of £2.8trn a year earlier.

Assets of £2.2trn comprised £1.3trn in tangible and intangible fixed assets, £0.2trn in receivables and other non-financial assets, £0.4trn in non-current investments and £0.3trn in cash and other current financial assets. Liabilities of £5.5trn comprised £2.6trn in debt and other financial liabilities, £0.2trn in payables, £0.4trn in provisions and £2.3trn in net pension obligations.

Fixed assets of £1,313bn consisted of infrastructure assets of £677bn, land and buildings of £409bn, plant and equipment of £184bn, and intangible assets of £41bn. Receivables and other non-financial assets of £218bn comprised £164bn in tax receivable and accrued, £39bn in other receivables, prepayments and accruals, and £15bn in inventories. Non-current investments of £360bn comprised £152bn in loans and deposits, £85bn in student loans, £44bn in equities, £60bn in other financial investments, £16bn in investment properties, and £3bn in assets held for sale. Cash and other current financial assets of £317bn comprised £40bn in cash and cash equivalents, £12bn in gold, £129bn in debt securities, £101bn in loans and deposits, and £35bn of other financial assets.

Debt and other financial liabilities of £2,639bn comprised £1,265bn in externally held gilts, £203bn in direct borrowing from the public through National Savings & Investments, £53bn in short-term treasury bills, £815bn in Bank of England deposits, £84bn in bank and other borrowing, £85bn in banknotes, £27bn in derivatives, £20bn in financial guarantees, and £87bn in other financial liabilities. Payables of £221bn comprised £44bn in trade and other payables, £81bn in accruals and deferred income, £55bn in tax refunds, and £41bn on PFI, finance leases and other contracts. Provisions of £366bn consisted of £159bn for nuclear decommissioning, £87bn for clinical negligence, £36bn for payments to the EU, £29bn for the Pension Protection Fund, and £55bn in other provisions for liabilities and charges. Net public sector pension obligations of £2,306bn comprised £2,168bn in unfunded pension obligations (including £792bn for the NHS, £501bn for teachers, £339bn for the civil service, £254bn for the armed forces, £209bn for police and fire services, and £73bn other) and a net £138bn (£479bn of obligations less £341bn in fund assets) for local government and other funded pension schemes. 

Not shown in the chart is the revenue and expenditure statement, which reported revenue of £732, expenditure of £1,063bn and finance and other items of £73bn to give a net accounting loss for the year of £404bn – more than twice the £192bn loss reported for the pre-pandemic year. The financial statements covered the first year of the coronavirus pandemic, which saw income fall and costs soar, resulting in net borrowing during the year of £524bn according to the cash flow statement.

The Whole of Government Accounts is probably the most important report published by the UK government each year, but you wouldn’t have known that by the lack of fanfare on its publication amid the wave of hundreds of other documents released ahead of the parliamentary recess. This may be driven by understandable embarrassment by the length of time it has taken to prepare them – more than 27 months after the balance sheet date compared with the nine months that is its long-term aim – as well as by the gaps in preparation caused by local authorities and other public bodies that are substantially behind in producing their individual financial statements, leading to an additional audit qualification for completeness this year.

Despite that, and the other audit qualifications that highlight problems with the numbers reported, every citizen ideally should read the Whole of Government Accounts 2020/21. After all, it tells the financial story of the most dramatic year in recent history.

Read more: Whole of Government Accounts 2020/21.

This chart was originally published by ICAEW.

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

The OBR’s July 2023 fiscal risks and sustainability report indicates that, without higher taxes, public sector net debt as a share of GDP could triple or more over the next 50 years.

Column chart with bars equal to projected public sector net debt / GDP: 2022/23 Baseline projection: 101% 2072/73 Baseline projection: 310% 2072/73 + spending pressures: 385% 2072/73 + interest rate sensitivity: 376% 2072/73 + 21st century shocks: 435%

The Office for Budget Responsibility (OBR) published its latest fiscal risks and sustainability report on 13 July 2023, providing its analysis of the key risks confronting the UK public finances and long-term fiscal projections for the next 50 years.

This is a sobering report, suggesting that public sector net debt as a share of economic activity as measured by GDP could more than triple between March 2023 and March 2073 – and perhaps go even higher in certain circumstances. The OBR concludes that the public finances are on an unsustainable path.

As illustrated by this week’s chart, the OBR’s baseline projection suggests that the ratio of public sector net debt to GDP could rise from 101% of GDP in 2022/23 to 310% of GDP in 2072/73. The OBR also presented three alternate scenarios: the first is based on higher levels of spending, which could result in the ratio reaching 385% of GDP; one involves higher interest rates, where the ratio might reach 376% of GDP; and a further scenario assuming additional economic shocks, where the ratio might hit 435% of GDP.

The projections are based on the government’s current medium-term fiscal plans as set out in the March 2023 Spring Budget, extrapolated into the future based on existing trends. The starting point is the already high level of public debt that has built up over the past 15 years, together with the current government’s plan to cut spending on public services over the next five years.

The OBR has then overlayed its view of economic growth over the next half century and expected changes in patterns of public spending. This reflects a substantial rise in spending on pensions, health and social care as the proportion of the population in retirement rises, among other drivers that include the financial costs and benefits of delivering net zero. Other key assumptions relate to productivity, demographics (births, deaths and net migration), interest rates and inflation.

The one thing the OBR hasn’t been able to do is to include probable but not enacted tax changes in its projections, with increases in public spending assumed to be financed by higher levels of borrowing instead of the tax rises that future governments are in reality going to opt for. 

The projections therefore reflect borrowing that compounds over time to result in some very large headline debt numbers in March 2073, rather than the 1.5% of GDP rise in the tax burden each decade that would, according to the OBR, maintain the debt to GDP ratio at close to its current level.

The fiscal projections calculated by the OBR highlight just how difficult a position the UK’s public finances are in and the major fiscal challenges that will face the incoming government – whoever that may be – after the next general election.

This chart was originally published by ICAEW.

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.

ICAEW chart of the week: Public finances 2022/23

The public finances continue to be battered by economic shocks as this week’s chart on the past five years of red ink illustrates.

Column chart with five financial years illustrating tax and other receipts (top bar) less total managed expenditure (middle bar) = deficit (bottom bar). 2018/19 outturn: £813bn - £837bn = -£44bn 2019/20 outturn: £827bn - £888bn = -£61bn 2020/21 outturn: £793bn - £1,106bn = -£313bn 2021/22 outturn: £920bn - £1,041bn = -£121bn 2022/23 provisional: £1,016bn - £1,155bn = -£139bn

The monthly public sector finances for March 2023 released on Tuesday 25 April contained the first cut of the government’s financial result for 2022/23, with our chart this week illustrating trends over the past five years in receipts, expenditure and the deficit.

As our chart highlights, tax and other receipts increased from £813bn in 2018/19 to £827bn in 2019/20, before falling to £793bn during the first year of the pandemic. They recovered to £920bn in 2021/22 before rising with inflation to a provisional estimate of £1,016bn for the year ended 31 March 2023.

Total managed expenditure (TME) increased from £857bn in 2018/19 to £888bn in 2019/20, before exceeding £1trn for the first time in 2020/21 as the pandemic caused expenditure to rise significantly. TME fell in 2021/22 to £1,041bn as pandemic-released spending was scaled back, before rising this year to £1,155bn as inflation, higher interest rates and energy support packages more than offset the pandemic related spending that was not repeated in 2022/23.

The deficit of £44bn in 2018/19 was the lowest it had been since the financial crisis, following an extended period of spending restraint over a decade. The purse strings were loosened a little in 2019/20 as previous government plans to eliminate the deficit were abandoned, with the deficit rising to £61bn. The huge cost of the pandemic saw the deficit rise to £313bn in 2020/21 as the borrowing rose to meet the huge costs of dealing with the pandemic, before falling back to £121bn in 2021/22.

There were hopes that the situation would improve further, with the government in October 2021 budgeting for a deficit of £83bn. Unfortunately, rampant inflation and the energy crisis following Russia’s invasion of Ukraine mean that the government does not currently expect to reduce the deficit to below £50bn until 2027/28 at the earliest. And that is with what some commentators believe are unrealistic assumptions about the government’s ability to reduce spending on public services beyond the cuts already delivered.

Provisional receipts in 2022/23 were 25% higher than the outturn for 2018/19, which in the absence of economic growth has principally been driven by inflation of around 15% over that period combined with an increase in the level of taxation and other receipts from around 37% to approaching 41% of the economy. Total managed expenditure is provisionally 35% higher than in 2018/19, although this includes substantial amounts of one-off expenditures on the energy support packages and index-linked debt interest that should moderate, at least assuming inflation reduces in the coming financial year.

Not shown in the chart is what these numbers mean for public sector net debt, which has increased by £753bn over the past five years from £1,757bn at 1 April 2018 to a provisional £2,530bn at 31 March 2023. This comprises £678bn in borrowing to fund the deficits shown in the chart, and £75bn to fund lending by government and working capital requirements.

Our chart this week may be well presented, but it is not a pretty picture.

This chart was originally published by ICAEW.

Public sector finances return to red

February fiscal deficit hits £17bn, while the cumulative deficit for 11 months of £132bn doesn’t include backdated public sector pay awards.

The monthly public sector finances for February 2023 released on Tuesday 21 March 2023 reported a provisional deficit for the month of £17bn, which is a return to red after a surplus of £8bn last month in January 2023. 

The deficit was £10bn more than the £7bn deficit reported for the same month last year (February 2022), as higher interest costs, higher inflation on index-linked debt, and the cost of the energy price guarantee for households and businesses incurred during the month drove up the need to borrow. 

The cumulative deficit for the first 11 months of the financial year was £132bn, which is £15bn more than in the same period last year but £155bn lower than in 2020/21 during the first stages of the pandemic. It was £78bn more than the deficit of £54bn reported for the first 11 months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period. 

The reported deficit does not reflect backdated public sector pay settlements that have been or are expected to be agreed in March 2023, although the numbers are broadly in line with the £152bn estimated deficit for the full year in the Office for Budget Responsibility (OBR)’s revised forecasts made at the time of the Spring Budget. This was lower than their previous forecast of £177bn in November, primarily because the energy price guarantee is costing less than anticipated.

Public sector net debt was £2,507bn or 99.2% of GDP at the end of February 2023. This is £692bn higher than net debt of £1,815bn on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic. The OBR’s latest forecast is for net debt to reach £2,546bn by March 2023 and to exceed £2.9trn by March 2028.

Tax and other receipts in the 11 months to 28 February 2023 amounted to £924bn, £91bn or 11% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance for part of the year, while VAT receipts benefited from inflation in retail prices.

Expenditure excluding interest and investment for the 11 months of £888bn was £52bn or 6% higher than the same period in 2021/22, with Spending Review planned increases in spending, the effect of inflation, and the cost of energy support schemes partially offset by the furlough programmes and other pandemic spending in the comparative period not being repeated this year.

Interest charges of £120bn for the 11 months were £51bn or 73% higher than the £69bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt. 

Cumulative net public sector investment to February was £48bn, £4bn more than this time last year. This is much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £125bn since the start of the financial year comprised borrowing to fund the deficit for the 11 months of £132bn, less £7bn in net cash inflows from repayments of deferred taxes, and loans made to businesses during the pandemic, less funding for student, business and other loans together with working capital requirements.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The public finances are back in the red this month as a deficit of £17bn brings the total for the 11 months to February to £132bn, with public sector net debt in excess of £2.5trn. Although broadly in line with the OBR’s improved estimate accompanying the Spring Budget, the numbers don’t reflect the cost of backdated public sector pay settlements to be recorded in the final month of the 2022/23 financial year.

“The chancellor still needs to top up departmental budgets for pay awards in the next financial year, reducing his capacity to address inflationary cost pressures in other areas. HS2 may not be the only capital programme at risk of being scaled back or delayed as he seeks to make savings.”

Table showing fiscal numbers for the last four 11 month periods to February. Receipts - Expenditure - Interest - Net investment = Deficit - Other borrowing = Debt movement. Followed by Net debt and Net debt / GDP. All numbers in £bn, except for percentages. Apr 2019 - Feb 2020: 755 - 720 - 53 - 36 = -54 + 22 = -32. Debt: 1,811, 84.2%. Apr 2020 - Feb 2021: 721 - 906 - 40 - 62 = -287 - 56 = -343. Debt: 2,158, 98.0%. Apr 2021 - Feb 2022: 832 - 836 - 69 - 44 = -56 - 85 = -202. Debt: 2,356, 97.0%. Apr 2022 - Feb 2023: 924 - 888 - 120 - 48 =-132 + 7 = -125. Debt: 2,507, 99.2%.

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 prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the 10 months ended 31 January 2023 by £1bn to £116bn.

This article was originally published by ICAEW.

Chancellor spends forecast upside to leave public finances largely unchanged

Jeremy Hunt limits his tax and spending ambitions in the Spring Budget to stay within a very tight fiscal rule.

The Spring Budget 2023 for the government’s financial year of 1 April 2023 to 31 March 2024 was presented by the Chancellor of the Exchequer to Parliament on Wednesday 15 March 2023, accompanied by medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) covering the period up to 2027/28.

The fiscal numbers in the Budget are based on the National Accounts prepared in accordance with statistical standards. They differ in material respects from the financial performance and position that will eventually be reported in the Whole of Government Accounts prepared in accordance with International Financial Reporting Standards (IFRS).

A (slightly) lower fiscal deficit in 2023/24

Table 1 shows the Spring Budget estimate for the deficit in 2023/24 is £132bn, £8bn lower than the £140bn forecast in November 2022. Positive revisions to the forecast added £27bn to the bottom line, before £19bn from tax and spending decisions made by the Chancellor.

Image of Table 1 - showing changes in the OBR forecast for the fiscal deficit Click on link to ICAEW version of article which has a machine readable table.

Forecast revisions in 2023/24 comprised £13bn in lower debt interest, £7bn less in energy support and £8bn in higher tax receipts, less £1bn other changes. The cost of tax and spending decisions in 2023/24 was estimated to be £8bn in lower corporation tax receipts from the full expensing of capital expenditure, £5bn from freezing fuel duties, £5bn from extending the energy price guarantee and other energy support measures, £2bn more for defence and security and £2bn from other decisions, less £3bn in indirect effects of those policy decisions on tax receipts and welfare spending.

Total receipts in 2023/24 are now expected to be £1,057bn (£2bn higher than previously forecast) and total managed expenditure is now anticipated to be £1,189bn (£10bn lower).

The forecast for the deficit in 2024/25 was up £1bn at £85bn and was unchanged in 2025/26 at £77bn, with upward revisions of £18bn and £19bn respectively offset by an estimated £19bn net cost of tax and spending decisions. The latter includes £3bn in 2024/25 and £4bn in 2025/26 for expanded childcare eligibility.

The final two years of the forecast were better by £17bn in 2026/27 (down to a fiscal deficit of £63bn) and by £20bn in 2027/28 (down to £49bn), although several commentators have pointed out this is on the basis of unrealistic spending assumptions that do not take account of significant pressures on public services.

In addition to forecasts for the next five years, the OBR also revised its estimate for the deficit in the current financial year ending 31 March 2023 to £152bn, £25bn lower than November’s estimate of £177bn. This is £53bn more than the OBR’s March 2022 estimate of £99bn and £69bn more than the November 2021 Budget estimate of £83m.

Table 2 provides a breakdown of the forecast changes by year, showing how lower debt interest and higher tax receipts flowing through the forecast period have provided the Chancellor with capacity to extend energy support, incentivise business investment, freeze fuel duty for yet another year (and extend the temporary 5p cut) and increase spending in specific areas.

Image of Table 2 - showing breakdown of forecast revisions and policy decisions. Click on link to ICAEW version of article which has a machine readable table.

Receipts and expenditure development

As illustrated by Table 3, receipts are expected to rise from £1,020bn in the current financial year to £1,231bn in 2027/28, while expenditure excluding energy support and interest is expected to rise from £968bn in 2022/23 to £1,121bn in 2027/28.. 

Interest costs are expected to fall from £115bn this year to £77bn in 2025/26 as interest rates and inflation moderate, before rising to £97bn in 2027/28 based on a growing level of debt.

Net investment is expected to increase in 2023/24 as an £8bn one-off credit from changes in student loan terms in 2022/23 reverses, before declining gradually as capital expenditure budgets flatline and depreciation grows. Public sector gross investment is planned to be £134bn, £134bn, £133bn, £132bn and £132bn over the five years to 2027/28, in effect a cut in real terms over the forecast period.

Image of Table 3 - summarising the March 2023 OBR forecast Click on link to ICAEW version of article which has a machine readable table.

The government’s secondary fiscal target is to keep the fiscal deficit below 3% of GDP by the end of the forecast period. Based on the March 2023 forecasts, it has headroom of 1.3% of GDP, or £39bn, against this target.

Table 4 provides a summary of the year-on-year changes in receipts and spending, together with the forecast for the increase in the size of the economy, including inflation. This highlights how tax and other receipts are expected to increase faster than the overall rate of growth in the overall size of the economy, while the government plans to constrain the average rise in expenditure excluding energy support and interest to 3.0% including inflation.

The former is principally a result of ‘fiscal drag’ as tax allowances are frozen, bringing in proportionately more in tax as incomes rise with inflation. The latter reflects what is generally considered to be unrealistic plans to constrain public spending in the context of an expected 9% rise in the number of pensioners over the five-year period (that will add to pensions, welfare, health and social care spending), pressure on public sector pay and the deteriorating quality of public services.

Image of Table 4 - year-on-year % changes in receipts and spending. Click on link to ICAEW version of article which has a machine readable table.

Average nominal GDP growth over the five years of 3.3% combines average real-terms economic growth of 1.7% a year and inflation of 1.6%, the latter using the GDP deflator, a ‘whole economy’ measure of inflation. This is different to consumer price inflation, which is forecast to fall to 4.1% in 2023/24 and average 1.4% over the five years to 2027/28. 

Public sector net debt

Lower deficits over the forecast period translate into lower borrowing requirements, reducing forecasts for public sector net debt from just under £3.0trn to £2.9trn. This is partly increased or offset by changes in the forecasts for financial and other transactions and working capital movements.

Table 5 shows how forecast public sector net debt is now expected to reach £2,909bn by March 2028, £54bn less than was forecast in November. Although an improvement, debt at the end of the forecast period is expected to be £1,089bn higher than £1,820bn reported for March 2020 before the pandemic, reflecting the large amounts borrowed during the pandemic, in addition to borrowing planned over the next five years. 

Image of Table 15- showing changes in the OBR forecast for public sector net debt. Click on link to ICAEW version of article which has a machine readable table.

The government’s primary fiscal target is based on ‘underlying debt’, a non-generally accepted statistical practice measure that excludes the Bank of England and hence quantitative easing balances. Underlying debt needs to be falling as a proportion of GDP between the fourth and fifth year of the forecast period. 

The forecast gives the Chancellor just £6.5bn in headroom against this target, with underlying debt / GDP expected to fall from 94.8% to 94.6% between March 2027 and March 2028.

Fiscal rules limit ambitions for tax and spending

Following the disastrous ‘mini-Budget’ of his predecessor Kwasi Kwarteng, the Chancellor’s principal goal has been to stabilise the public finances to provide confidence to debt markets. To do this he has prioritised meeting his fiscal rules over incentivising business investment, cutting taxes and increasing defence spending. He has also adopted what are generally considered to be unrealistic assumptions about public spending in the later years of the forecast to keep within his self-imposed fiscal rules.

This has led to the Chancellor announcing ‘ambitions’ to extend the full expensing of capital expenditure beyond three years and to increase defence and security spending to 2.5% of GDP, as well as continuing to plan for increases in fuel duties each year despite the repeated practice of cancelling these rises. 

Because these are ambitions and not plans, they are not incorporated into the forecasts enabling fiscal targets to be met. The OBR reports that continuing to cancel fuel duty rises each year would reduce the headroom to just £2.8bn, while converting the Chancellor’s ambitions to extend full expensing beyond three years and to increase defence spending to 2.5% of GDP into formal plans would cause him to breach his primary fiscal rule.

Conclusion

The overall fiscal position remains weak, with public finances vulnerable to potential economic shocks.

The Chancellor has followed the practice of many of his predecessors in increasing planned borrowing when fiscal forecasts worsen, as occurred in November 2022, only to then use upsides from improvements in subsequent forecasts to fund new tax and spending commitments. This ratchets up borrowing and debt as forecasts fluctuate and creates instability in both tax policy and public spending plans.

The consequence is a relatively unchanged fiscal position for the financial year commencing 1 April 2023 and the two subsequent financial years, as tax and spending decisions offset forecast upsides. And although there is an anticipated improvement in the projected fiscal position in the final two years of the OBR’s five-year forecast (after the next general election), the likelihood is that it will be offset in due course by the reality of pressures on public service and welfare budgets.

There is a reason why the first Budget following a general election typically sees taxes rise and the Spring Budget 2023 suggests that this pattern is likely to be repeated, irrespective of whichever party wins power.

Read more about the Spring Budget 2023.

This article was originally published by ICAEW.

ICAEW chart of the week: Government bond yields

My chart this week looks at what a difference one year has made to the cost at which governments around the world can borrow.

Column chart showing 10-year yields on government debt as at 2 Mar 2022 and 2 Mar 2023. Japan: 0.13%, 0.50% Germany: 0.02%, 2.71% France: 0.47%, 3.19% Canada: 1.81%, 3.40% UK: 1.26%, 3.84% USA: 1.87%, 4.02% Italy: 1.55%, 4.56% Source: Bloomberg, 'Rates & Bonds 2023-03-02 11:33'.

The past year has seen a dramatic change in economic fundamentals around the world as inflation has surged and growth has stuttered. One of the most dramatic changes has been to the cost of new government borrowing, with the yields payable by governments to sovereign debt investors increasing significantly from where they were a year ago.

As our chart of the week illustrates, Japan has seen yields on 10-year government bonds increase from 0.13% on 2 Mar 2023 to 0.50% on 2 Mar 2023, a far cry from the negative yields it has obtained over much of the last decade when (in effect) investors were paying the government of Japan for the privilege of lending it money. The change for Germany has been even more marked, from a position a year ago where it could borrow over 10 years for almost nothing (0.02%) to today where if it wanted to raise new funds it would pay an interest rate of 2.71% over 10 years. 

The other members of the G7 have also seen the effective interest rate payable on 10-year government bonds rise, with France going from 0.47% a year ago to 3.19% today, Canada from 1.81% to 3.40%, the UK from 1.26% to 3.84%, the USA from 1.87% to 4.02%, and Italy from 1.55% to 4.56%.

Yields from 10-year government bonds are seen as a benchmark rate for most countries, as although governments can and do borrow for much longer periods – with market data often available for 20-year and 30-year bonds as well – most countries have average maturities of much shorter periods. The UK is an outlier in this respect with an average debt maturity on government securities of just over 15 years (before taking account of quantitative easing), in contrast with the more typical average maturity of seven years for Italian government debt.

Although the amount payable on new debt has risen significantly, this should in theory feed in to overall cost of government borrowing gradually as it will take time for existing government bonds to mature and be refinanced. For some time to come the overall cost of borrowing will continue to benefit from medium- and long-term government bonds that were issued at the ultra-low borrowing rates experienced over the last decade or so.

However, in practice not all government borrowing is at fixed rates, with many governments (including the UK) issuing inflation-linked debt, adding to their interest costs as inflation has surged. In addition, some government debt is short term or pays a variable rate of interest, while quantitative easing has seen central banks swap a substantial proportion of fixed-rate government bonds into variable-rate central bank deposits, increasing governments’ exposure to changes in short-term interest rates.

Either way, the rapid rise in the interest rates payable on sovereign debt marks a significant shift in the fiscal calculus for most governments when combined with much higher levels of debt in most developed countries. Lots more pounds, euros, dollars and yen will need to be diverted to servicing debt, making for hard choices for finance ministers as they work out their budgets for coming years.

This chart was originally published by ICAEW.

ICAEW chart of the week: US federal financial statements

My 250th chart of the week for ICAEW takes a look at the recently published Financial Report of the United States Government for the year ended 30 September 2022 and how net liabilities have increased by 67% to $34trn over the past five years.

This week’s chart takes a dive into the latest financial statements of the United States Government for the year ended 30 September 2022 that were published on 16 February 2023, illustrating how the consolidated balance sheet of the executive, legislative and judicial branches has changed over the last five years.

The federal government reported net liabilities of $20.4trn at 30 September 2017, comprising $3.5trn in assets ($1.9trn non-financial and $1.6trn financial) less $23.9trn in liabilities ($14.7trn debt and interest, $7.7trn employee and veteran benefits and $1.5trn other liabilities). 

By 30 September 2022, net liabilities had increased by 67%, from $13.6trn to $34.0trn, comprising $5.0trn in assets ($2.3trn non-financial and $2.7trn financial) less $39.0trn in liabilities ($24.3trn debt and interest, $12.8trn employee and veteran benefits and $1.9trn other liabilities).

The increase in net liabilities is a consequence of net accounting losses of $1.2trn, $1.4trn, $3.8trn, $3.1trn and $4.2trn for the five financial years up to 30 September 2022. These amounts are calculated in accordance with US generally accepted accounting principles (US GAAP) as adapted for government by Federal Financial Accounting Standards (FFAS) issued by the Federal Accounting Standards Advisory Board (FASAB). They differ from cash budget deficits (outlays less receipts) of $0.8trn, $1.0trn, $3.1trn, $2.8trn and $1.4trn over the same period.

Revenue in the year ended 30 September 2022 of $4.9trn comprised $4.0trn from individual income taxes and tax withholdings, $0.4trn in corporate income taxes and $0.5trn in other taxes and receipts. The net cost of government operations amounted to $9.1trn, comprising $7.4trn in gross costs less $0.5trn in fees and charges plus $2.2trn from changes in assumptions. The latter primarily relate to employee and veteran benefit obligations that are on the balance sheet in the US GAAP numbers.

The scale of the negative balance sheet and continued deficit financing highlight just how dependent the US federal government is on its ability to borrow money as needed to meet its financial obligations as they fall due, and why the current challenge in raising its self-imposed debt ceiling is starting to concern markets.

This is the 250th ICAEW chart of the week, a milestone that has crept up on us as we seek to share insights into the economy and public finances that we hope are of interest to ICAEW members and all our other readers. Many thanks for your continued interest and we look forward to providing you with many more nuggets in the future.

This article was originally published by ICAEW.