Tag: #publicdebt

ICAEW chart of the week: UK debt financing requirement

16 October 2020: The Institute for Fiscal Studies annual pre-Budget report forecasts a doubling to £1.5tn in the amount of debt to be raised by the UK Government over the next five years.

UK debt financing requirement by year from 2020-21 to 2024-25, adding up to £757bn (March 2020 budget), £1,305bn (optimistic), £1,536bn (central) and £1,789bn (pessimistic forecast).

Although the Budget itself may have been delayed, the IFS Green Budget 2020 has been published on schedule, with a wealth (if that is the right word in the current context) of analysis on the economy and the public finances. 

With £201bn in discretionary measures and a £95bn economic impact from the coronavirus pandemic, the IFS is forecasting that the deficit will reach £350bn in the current financial year. At 17% of GDP, this is a level never before seen in the UK outside of the two world wars. 

Unfortunately, the effect of the pandemic on public finances will not be restricted to this financial year. Even if the economy recovers in 2021, or more likely in 2022, tax revenues will be significantly lower and spending significantly higher than they were previously expected to be.

This is perhaps best highlighted by looking at the UK Government’s gross financing requirement – the amount that the UK Debt Management Office (DMO) will be tasked with raising from external debt investors over the next five years to finance the shortfall in taxes compared with spending (the deficit), to finance business and other lending and to repay existing debts as they fall due. This is forecast by the IFS to double to £1.5tn in their central forecast, within a range from £1.3tn in a more optimistic scenario to £1.8tn in a more pessimistic scenario.

As the IFS points out, the enormous amount of debt being issued means that even small differences in financing costs will have a very large impact on the public finances. This is despite the sizeable proportion of debt being issued with long maturities (as long as 50 years in some case) that are locking in extremely low interest rates for decades to come.

Reducing interest costs on debt has provided the Chancellor with room to provide the unprecedented levels of financial support to the UK economy that we saw over the summer. The prospect of negative nominal rates could see investors paying the Government rather than the other way round, providing headroom for further interventions.

There is a downside, of course. The ‘good times’ of ultra-low interest rates may not last for ever, and with a central debt forecast at 31 March 2025 of 112% of GDP significantly higher than the 35% of GDP before the financial crisis a dozen years ago the exposure to changes in interests is that much more significant.

To find out more about the latest forecasts for the economy and the impact that will have on the public finances, please do read the IFS Green Budget 2020.

This chart was originally published by ICAEW.

Public sector debt hits £2tn for the first time

21 August 2020: The fiscal deficit of £150.5bn for the four months to July 2020 is almost triple the £55bn budgeted for the entire financial year.

The latest public sector finances for July 2020 published by the Office for National Statistics (ONS) on Friday 21 August 2020 reported a deficit of £26.7bn in July 2020, following on from £123.8bn for the three months to June 2020 (revised from £127.9bn reported last time).

Public sector net debt increased to £2,004.0bn or 100.5% of GDP, an increase of £198.3bn from the start of the financial year and £227.6bn higher than in July 2019. This is the first time this measure has exceeded £2tn, a major milestone that has arrived several years earlier than anticipated as a consequence of the pandemic.

Image of table showing variances against prior year. Go to the ICAEW website at the end for the table itself.

The combination of lower tax receipts and much higher levels of public spending has resulted in a deficit for the four months to July 2020 that is almost triple the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, and almost seven times as much as the same period last year.

Cash funding (the ‘public sector net cash requirement’) for the four months was £199.1bn, compared with £5.4bn for the same period in 2019.

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

Some 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. In particular, the OBR points out that the ONS has yet to record any allowance for losses that might arise on the more than £100bn of tax deferrals, loans and guarantees provided to support businesses through the pandemic.

Commenting on the latest figures Alison Ring FCA, director for public sector at ICAEW, said:

“The positive news for the Government is that despite debt reaching £2tn, low interest rates have reduced its cost, and its growth is slowing as the exceptional support measures to deal with the pandemic are withdrawn and furloughed employees return to work.

“The big question is how much permanent damage is being done to the economy, with accelerating job losses a concerning sign as we approach the autumn. How quickly debt continues to grow will also depend on any additional support that the Government might provide to sectors that are still struggling.”

Image of tables showing monthly breakdown for April through July 2020 and 2019. Go to the ICAEW website at the end for the tables themselves.

For further information, read the public sector finances release for July 2020.

This article was originally published on the ICAEW website.

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

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

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

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

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

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

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

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

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

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

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

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

This article was originally published by ICAEW.

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

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

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

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

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

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

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

ICAEW chart of the week: Money for nothing

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

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

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

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

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

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

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

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

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

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: UK gilt issues

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

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

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

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

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

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

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: deficit and debt

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

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

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

This chart was originally published by ICAEW.

ICAEW chart of the week: a trillion dollar deficit

Chart: A trillion dollar deficit. Revenue $3.6tn, Spending $4.6tn.

The #ICAEWchartoftheweek this week is on the US federal government budget. This is forecast by the Congressional Budget Office (CBO) to end the current financial year this month at just under a trillion dollars in deficit, with the budget shortfall in the year ended 30 September 2020 projected to exceed a trillion dollars for the first time.

Revenue in 2020 is expected to amount to $3,620bn. The largest contributions are from federal income taxes of $1,800bn and payroll taxes of $1,281bn, followed by a modest $245bn from corporate taxes and $294bn in other revenues.

This is projected to be $1,008bn less than planned spending by the federal government in 2020 of $4,628bn. Social security is expected to cost $1,097bn, while spending on Medicare, Medicaid and other health programmes are expected to cost $1,163bn net of receipts. Income security (welfare) programmes are expected to cost $302bn, while the balance of mandatory expenditure includes spending on military veterans and federal civilian and military retirement plans.

Discretionary spending of $1,400bn comprises $737bn on defense and $663bn on everything else apart from interest. This includes elementary and secondary education, housing assistance, international affairs, and the administration of justice, as well as outlays for highways and other programmes. Net interest is expected to cost $390bn.

The shortfall in revenues compared with spending will be funded by borrowing, with federal external debt expected to increase from $16.7tn to $17.8tn at the end of September 2020.

Federal revenues and spending are estimated to amount to 16.4% and 21.0% of GDP respectively in 2020, with the deficit equivalent to 4.6% of GDP. The CBO projects that the average federal deficit between 2020 to 2029 will be 4.7% of GDP, significantly higher than the 2.9% average over the last fifty years, resulting in federal debt growing from 79% of GDP in 2019 to 95% of GDP over the coming decade.

Of course, the federal budget does not give the full picture for the public finances in the US, with most state governments choosing (or being legally required) to run budget surpluses.

As with many developed economies, the public finances in the US are under increasing pressure with an increasingly long-lived population driving higher costs for social security, health and social care. With lower levels of economic growth (albeit currently much higher than in the UK or Europe) and a growing level of debt, there are concerns about the resilience of the US public finances if there were to be an economic downturn or another financial crisis in the medium term.

As summer turns into fall, it may be that a turn in economic seasons is on the way too. After all, winter is coming.

The full Congressional Budget Office report is available on cbo.gov.