Shadow Chief Secretary joins Fabians-ICAEW roundtable

ICAEW and the Fabian Society recently held a joint roundtable event on how a future Labour government can bring a long-term approach to public sector financial management, infrastructure and investment, amidst a challenging position for the public finances.

While the next General Election is not scheduled until 2024, Labour shadow ministers are already starting to think about how they can both deliver on their policy objectives and ensure sustainable public finances at the same time.

As current and previous administrations have discovered, getting the ‘wiring’ of government right is essential to achieving progress and a joint ICAEW-Fabian Society roundtable on 15 July 2021 explored the challenges with members of Labour’s shadow team including Bridget Phillipson, Shadow Chief Secretary to HM Treasury, and policy experts from academia, ICAEW, the Institute for Government and Reform.

The discussion was focused on how to ensure a joined-up, long-termist approach to government, including strategy and foresight, outcomes and delivery, digital, data and service transformation, financial management, audit and procurement, and infrastructure, investment and major projects. The need for a more effective centre of government to drive policy outcomes at the same time as devolving more powers was a key theme, as was the contribution that effective public audit can make to improving the quality of decision making within government.

The challenges facing any future Labour government are exacerbated not only by the huge amounts of borrowing used to finance the UK’s response to COVID-19, but by public finances that were already challenged by the long-term financial consequences for pensions, health care and social care of more people living for longer. Higher gearing in the public balance sheet increases the vulnerability of the public finances to future economic shocks.

Andrew Harrop, General Secretary of the Fabian Society, commented: “The Fabian Society hopes that this early debate on how to bring a long-termist, coordinated perspective to the centre of government will help equip Labour to critique government inaction; and to start to think through ‘how’ as well as ‘what’ the party wants to achieve if it wins back power. Developing plans to reform the centre of government can also help opposition parties demonstrate their credibility, as the Conservatives proved in 2010 with the Office for Budget Responsibility.”

Alison Ring, director for public sector at ICAEW, commented: “ICAEW believes in engaging across the political spectrum on the importance of strong financial management, high quality financial reporting and a comprehensive fiscal strategy to deliver value for money and sustainable public finances over the long-term. We hope that this event will have helped to advance thinking on how to tackle the many significant challenges facing the UK public sector and public finances in uncertain times.”

This article was originally published by ICAEW.

Public debt hits £2.2tn as Budget delay rumours swirl

A June deficit of £22.8bn resulted in public sector net debt reaching £2,218.2bn or 99.7% of GDP at the end of the first quarter of the 2021-22 fiscal year, fuelling speculation that the Chancellor may delay the Autumn Budget and departmental spending reviews.

The latest public sector finances released on Wednesday 21 July reported a deficit of £22.8bn for June 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. This is an improvement from the £28.2bn reported for the same month last year during the first lockdown but was still significantly higher than the £7.0bn reported for June 2019.

Public sector net debt increased to £2,218.2bn or 99.7% of GDP, an increase of £80.8bn since March 2021 and £420.5bn higher than March 2020 just fifteen months ago.

Cumulative receipts in the first three months of the financial year of £201.6bn were £29.5bn or 17% higher than a year previously, but this was only £6.4bn or 3% above the level seen a year before that in the first quarter of 2019-20. At the same time cumulative expenditure of £243.4bn was £26.0bn or 10% lower than the first three months of 2020-21, but £51.6bn or 27% higher than the same period two years ago.

The effect of higher inflation on index-linked gilts drove a jump in interest costs, which at £18.1bn in the quarter to June 2021 were £6.0bn or 50% higher than Q1 in 2020-21, albeit this was still £0.4bn or 2% lower than the quarter ended 30 June 2019 despite much higher levels of debt. 

Net public sector investment was slightly lower than last year with £9.6bn invested in the three months to June, down £0.3bn or 3% from a year before but up £1.7bn or 22% from two years ago. This combined to produce a cumulative deficit for the first three months of the 2021-22 financial year of £69.5bn, £49.8bn or 42% below that of the same period a year previously, but up £46.5bn or 202% from the first quarter of the 2019-20 financial year.

Debt movements reflected £11.3bn of additional borrowing over and above the deficit for the quarter, principally to fund coronavirus loans to businesses. Public sector net debt of £2,218.2bn is £245.5bn or 12% higher than a year earlier and £438.2bn or 25% higher than in June 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.5bn from £299.2bn to £297.7bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Alison Ring, ICAEW Public Sector Director, said: “Public sector net debt has risen by £420bn since the first lockdown in March 2020, making the public finances more vulnerable to changes in interest rates and reducing the fiscal headroom available to the Chancellor as he seeks to navigate the economy out of the pandemic.

“Rumours that Rishi Sunak is considering cutting investment plans and delaying the Budget and departmental Spending Reviews are concerning. It is important that the baby of borrowing sensibly to fund much-needed investment in infrastructure is not thrown out with the bathwater of post-pandemic spending restraint.

“Central and local government desperately need budget certainty so they can plan, even if there are some adjustments next year when we all hope the pandemic will have run its course. The last full Spending Review was in 2015; it’s important that we end the cycle of deferral and delay and restore financial discipline to the government’s budgeting.”

Public sector finances 2021-22: three months to 30 June 2021

3 months to
June 2021
Variance vs
prior year
Variance vs
two years ago
£bn£bn%£bn%
Receipts201.629.5+17%6.4+3%
Expenditure(243.4)26.0-10%(51.6)+27%
Interest(18.1)(6.0)+50%0.4-2%
Net investment(9.6)0.3-3%(1.7)+22%
Deficit(69.5)49.8-42%(46.5)+202%
Other borrowing(11.3)44.4-80%(19.7)-235%
Change in net debt(80.8)94.2-54%(66.2)+453%
Public sector net debt2,218.2245.5+12%438.2+25%
Public sector net debt / GDP99.7%6.3%+7%19.4%+24%
Public sector finances 2021-22: three months to 30 June 2021

Public sector finances 2021-22: fiscal deficit by month


Receipts
Expend-
iture

Interest
Net
investment

Deficit
£bn£bn£bn£bn£bn
April 202166.2(82.3)(4.8)(5.2)(26.1)
May 202166.3(80.8)(4.5)(1.6)(20.6)
June 202169.1(80.3)(8.8)(2.8)(22.7)
Cumulative to June 2021201.6(243.4)(18.1)(9.6)(69.5)
Public sector finances 2021-22: fiscal deficit by month

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

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £29.1bn to £26.1bn, for May 2021 from £24.3bn to £20.6bn and for the twelve months ended 31 March 2021 from £299.2bn to £297.7bn.

For further information, read the public sector finances release for June 2021.

This article was originally published by ICAEW.

ICAEW chart of the week: OBR climate change scenarios

Our chart this week is on the OBR Fiscal Risks Report, highlighting how delaying action to achieve net zero could double the cost to the public finances compared with acting more quickly.

Chart show public debt change in 2150-51 as % of GDP for different scenarios: Investment switch and motoring tax -12%, early action high productivity +10%, early action scenario +21%, early action low productivity +32%, late action scenario +43%, unmitigated climate change +38%. The final column for unmitigated climate change also has the public debt change in 2100-01% of +161%.

With two ‘once in a century’ events in less than two decades adding more than £1tn to public debt, it is unsurprising that the OBR’s Fiscal Risks Report published earlier this week places much more emphasis than previous reports on the potential for catastrophic risks, whether that be from further pandemics, major wars, climate change or cyberattacks.

The report focuses on three particular risks: the coronavirus pandemic, the cost of debt, and climate change, with the latter being the subject of the #icaewchartoftheweek. 

The OBR distinguishes fiscal risks from climate change between those stemming from global warming itself (physical risks) and those relating to the move to a low-carbon economy, including the policies to achieve that (transition risks). In unmitigated climate change scenarios, the physical risks dominate, whereas the more that is done to mitigate global warming by reducing emissions, the more important transition risks become. 

The chart illustrates two main scenarios explored by the OBR – an early action scenario where the UK and other governments around the world push forward with plans to achieve net zero by 2050 and a late action scenario where the UK government delays taking actions to decarbonise the economy. The chart also shows three variants on the early action scenario depending on whether decarbonisation boosts or damages productivity or where investment is switched from other areas and motoring taxes retained. 

In the early action scenario, the OBR estimate that public sector debt would rise by 21% of GDP by 2050-51 (equivalent to £469bn in current prices) as a consequence of lost fuel duties and other taxes of 19%, additional spending of 6%, indirect economic effects of 6% and interest on borrowing of 4% less 14% from carbon taxes imposed to incentivise the shift to net zero. 

The high productivity variant is similar in terms of costs and carbon tax receipts, but with indirect economic effects contributing additional tax receipts with a consequent reduction in borrowing costs over 30 years, resulting in net additional debt of 10% of GDP. The low productivity variant assumes the reverse with lower tax receipts and a smaller economy combining to increase the net increase in public debt to 32% of GDP. The other variant identified by the OBR has the effect of reducing public debt, where investment in decarbonisation is funded by cutting other public investment plans and existing motoring taxes are shifted onto electric cars to retain that source of income to the exchequer.

A key finding in the report is that delaying action would cost a lot more than moving early with public sector debt rising by 43% in 2050-51, more than double the early action scenario, as it would require a more radical intervention costing more and resulting in more adverse economic effects.

Ironically, the OBR estimates that doing nothing would have a smaller impact on net debt by 2050-51 than the late action scenario as decarbonisation costs would not be incurred. However, the OBR estimates that unmitigated climate change would have a significant impact for the rest of the century, with public debt potentially rising to 289% of GDP by 2100-01 if action is not taken to prevent temperatures rising around the world.

For more information read the OBR Fiscal Risks Report.

This chart was originally published by ICAEW.

Fiscal deficit of £24.3bn in May as COVID spending trends downward

COVID-related spending continues to drive borrowing even as receipts approach pre-pandemic levels, with debt up by £24.9bn to £2,195.8bn or 99.2% of GDP in May 2021.

The latest public sector finances released on Tuesday 22 June reported a deficit of £24.3bn for May 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. An improvement from the £43.8bn reported for the same month last year during the first lockdown, it was still significantly higher than the £5.5bn reported for May 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.1bn from £300.3bn to £299.2bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Cumulative receipts in the first two months of the financial year of £128.6bn were £15.9bn or 14% higher than a year previously, but this was still £0.7bn or 0.5% below the level seen a year before that in April and May 2019. At the same time cumulative expenditure of £165.8bn was £20.9bn or 11% lower than the first two months of 2020-21, but £37.2bn or 29% higher than the same period two years ago.

Ultra-low interest rates continued to benefit the interest line, which at £9.1bn in April and May 2021 was £0.1bn or 1% lower than April and May 2020 and £1.5bn or 14% lower than April and May 2019.

Net public sector investment was slightly lower than last year with £7.1bn invested in April and May 2021, down £0.8bn or 10% from a year before but up £0.9bn or 15% from two years ago.

This combined to produce a cumulative deficit for the first two months of the 2021-22 financial year of £53.4bn, £37.7bn or 41% below that of the same period a year previously, but up £37.3bn or 232% from the total for April and May 2019.

Public sector net debt increased to £2,195.8bn or 99.2% of GDP, an increase of £58.4bn since March, reflecting £5.0bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses. Debt is £259.1bn or 13% higher than a year earlier and £427.2bn or 24% higher than in April and May 2019.

Alison Ring, ICAEW Public Sector Director, said: “With numbers for the second month of the financial year now in, we can see tax receipts are starting to approach pre-pandemic levels, while borrowing continues to increase despite COVID-19 spending starting to decrease. 

“The public finances remain in a fragile state, and ongoing debates about education spending, adult social care and the pensions triple-lock highlight the difficult decisions facing Rishi Sunak as he seeks to balance pressures on our public services with still growing levels of public debt. The prospects of the Chancellor raising taxes in the Autumn Budget appear to be increasing.”

Images showing a table of the fiscal numbers for 2 months to May 2021 and variances against the prior year and two years. Click on link at end of this post to the ICAEW website which has a readable version of the table.
Images showing a table of the fiscal deficit by month, including receipts, expenditures interest and net investment. Click on link at end of this post to the ICAEW website which has a readable version of the table.

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

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £31.7bn to £29.1bn and the deficit for the twelve months ended 31 March 2021 from £300.3bn to £299.2bn.

This article was originally published by ICAEW.

April fiscal deficit drops to £31.7bn as new financial year gets underway

The latest public sector finances reported a deficit of £31.7bn for April 2021, as COVID-related spending continued to weigh on the public finances.

Although an improvement from the £47.3bn deficit reported for the same month last year during the first lockdown, the figures are still significantly higher than the £10.6bn reported for April 2019.

The Office for National Statistics also revised the reported deficit for the year ended 31 March 2020 down by £2.8bn from £303.1bn to £300.3bn, still a peacetime record. The ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number and estimates will be refined further over the next few months.

Receipts in April 2021 of £64.6bn were £7.8bn or 14% higher than a year previously, but this was still £1.1bn or 2% below the level seen a year before that in April 2019. At the same time, expenditure of £83.3bn was £9.3bn or 10% lower than April 2020, but £18.7bn or 29% higher than two years before.

Ultra-low interest rates continued to benefit the interest line, which at £5.3bn in April 2021 was £0.2bn or 4% lower than April 2020 and £1.5bn or 22% lower than April 2019.

Net public sector investment, as planned, has continued to grow with £7.7bn invested in April 2021, up £1.7bn or 28% from a year before and £2.8bn or 57% from two years ago.

This combined to produce a deficit for the first month of the 2021-22 financial year of £31.7bn, £15.6bn or 33% below that of the same month a year previously, but £21.1bn or 199% higher than April 2019.

Public sector net debt increased to £2,171.1bn or 98.5% of GDP, an increase of £33.6bn over the course of April, reflecting £1.9bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses and tax deferral measures. Debt is £304.6bn or 16% higher than a year earlier and £410.2bn or 23% higher than in April 2019.

The net cash outflow (the ‘public sector net cash requirement’) for the month was £34.5bn.

Commenting on the figures, ICAEW’s Public Sector Director Alison Ring said: “It is difficult to read too much into the first month’s numbers in a new financial year, but the Chancellor is likely to be relieved that the gap between receipts and spending is narrower than that seen last year during the first lockdown. But the public finances are not out of the woods, with tax receipts still below pre-pandemic levels and COVID-related spending continuing to drive up borrowing. 

“The focus over the next few months is likely to be on the next Spending Review, which will decide on future public spending and investment with the long-awaited social care funding strategy now anticipated to be announced later this year. However, the need to address the long-term unsustainability of the public finances shouldn’t be forgotten.”

Image showing receipts, expenditure, interest, net investment, deficit, other borrowing, changes in net debt, and net debt for April 2021 public sector finances, together with variances against April 2020 and April 2019.

For a readable version of the table click on the link to the ICAEW article at the end of this post.

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

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the twelve months ended 31 March 2021 from £303.1bn to £300.3bn.

For further information, read the public sector finances release for April 2021.

This article was originally published by ICAEW.

What COVID-19 means for the future of tax

This article features in the May 2021 edition of TAXline, ICAEW Tax Faculty’s monthly magazine. One article is freely available each month.

With the pandemic increasing pressure on public finances, could this prompt overdue discussions on tax reform? ICAEW’s Head of Tax Frank Haskew and independent adviser Martin Wheatcroft reflect on recent announcements and challenges facing the Chancellor.

With the UK’s deficit set to increase to £2.5tn by 2023, the fact that tax revenues do not cover public spending is starker than ever. However, the problem of balancing the books far predates COVID-19

An aging population coupled with funding and tax administrative decisions made many decades ago have meant that the gap has been slowly but inexorably widening. Frank Haskew, Head of Tax at ICAEW, says: “Since the turn of the century, we have been running deficits almost every year. The fact is that we’re not raising enough tax meet to our day-to-day spending commitments.”

Martin Wheatcroft, an independent adviser and author on public finances who works closely with ICAEW, explains: “People are living longer which is a good thing, but it has a financial impact. For example, the NHS spends an average of £80 a month on 18-year-olds, while for 80-year-olds that cost is more than £500. The perennial issue is that we don’t have a clear long-term strategy for how the government, or any government, plans to deal with that.”

To balance the books, the primary strategy of governments has been to grow the economy and have a moderate level of inflation to inflate away debt. However, financial crises and recessions have meant that in the past decade growth has been a lot weaker than expected. George Osborne, for example, was forced to leave the Exchequer without fulfilling his pledge of eliminating the deficit due to the underperformance of the economy. “When you combine the demographic pressures with slower economic growth then it’s a difficult situation,” says Wheatcroft.

Paying for coronavirus

Into this strained situation enters a global pandemic and its huge financial repercussions. Alongside the severe and prolonged impact on economic activity, stimulus and support packages are expected to add between £0.5tn–£1tn onto UK debt in the next few years. 

Ahead of the Budget in March, the expectation was that the Chancellor would be looking for ways to raise revenues to help cover the costs of COVID. However, the measures announced will not do so – in the short term at least.

“It’s fair to say that there was no serious attempt to tackle a growing fiscal deficit in the Red Book,” says Haskew. “The 2019 manifesto pledge that there would be no rise in VATincome tax or national insurance means that the Chancellor is prevented from the most obvious, and quick, ways in which to raise revenues.”

The flagship measure for revenue raising in the Budget was the increase to corporation tax rates. However, as the change will not come into effect until 2023, this will not provide a quick cash injection. Haskew also argues that the fiscal impact may not be significant. “The potential corporation tax revenues over the forecast period are pretty much balanced by the cost of the super deduction. In overall terms any difference is probably loose change,” he says.

Wheatcroft believes the measure gives an indication of the government’s medium-term plans. “One of the more positive things you can do in the medium term to get your public finances under control is encourage stronger economic growth. By taking action on corporation tax the government wants to try and at least stabilise the situation.” 

Reallocating spending

Evidence for where the Chancellor is securing finance in the short term can be seen in the integrated defence review published on 16 March, which confirmed that the size of the army would be further reduced by 2025. “Since the 1950s the UK has cut defence spend from 10% of GDP down to 2%. Reallocating that finance to healthcare that has helped successive governments avoid increasing taxes,” explains Wheatcroft. “However, with defence spend now just above the NATO minimum, there’s no further capacity and taxes are going to have to go up at some point.” 

Haskew agrees: “The measures announced so far are just nibbling at the edges of the problem. The UK has a strategic question as to whether it tackles the deficit and if so how. Since the start of the pandemic there’s been suggestions from some commentators that capital gains tax and inheritance tax might rise, and other have proposed wealth taxes, but we saw none of those suggestions in the Budget. It shows just how hard it is to raise taxes.”

The need for change

There are a number of areas of the UK tax system that have been ripe for reform for many years, including the differences between the taxation of the employed and self-employed. “We’ve had a position of significant difference between these two types of taxpayer for 20 years and more. Successive governments, of every political hue, have identified it as a concern but never successfully addressed it,” says Haskew. 

He cites Philip Hammond’s attempt to make relatively modest changes to national insurance contributions for the self-employed in 2017, which were reversed within a week. 

Wheatcroft, meanwhile, points to the perennial thorny issue of business rates and the interim review published as part of HM Treasury’s Tax Day announcements on 23 March. “Everybody was in total agreement that it’s a bad tax and needs reform, but they were also very unhappy about the main alternative option,” he says. “There’s definitely an inertia bias when it comes to changing taxes because it is so difficult. It’s much easier to stay with the current ones, simply because they already exist and they are collecting revenue, however imperfectly.”

Haskew agrees: “These cases highlight that a lot of the structural problems in the tax system have become so ingrained that trying to change them is almost impossible.”

Catalyst for reform

Decisions on how to balance the books have been getting increasingly difficult year on year, but could the dramatic impact of the pandemic provide the impetus for the government to set out a long-term vision of how to tackle the deficit and for Rishi Sunak to make some brave choices?

“From a public support point of view, this past Budget was politically the best possible time to raise taxes, with everyone understanding the financial impact of the interventions that the government has had to take,” says Wheatcroft. “However, from an economic perspective it would be the worst time. At the moment the government wants to do everything possible to encourage a strong economic recovery. This is probably why the government took the opportunity to pre-announce raising corporation tax rates now, rather in three years’ time immediately prior to a general election.”

Wheatcroft suggests that the Chancellor has potentially another 12 months of political goodwill in which to implement changes and suggests that Tax Day is a good indication of travel. “The very fact of having a Tax Day announcing the consultations and setting out a 10-year strategy, which it did last year, is a positive sign of longer-term thinking,” he says.

Haskew believes that now is the time to start having a national conversation about the future of tax and cites a Treasury Committee report, Tax after coronavirus, published on 1 March as a step in the right direction. “It’s a really interesting report because there was a consensus among the cross-party members about proposals to try and address some of these issues,” he says. 

“The deficit and tax reform are more than political issue, so reaching a consensus was really encouraging,” he says. “We have this growing problem as a nation, so what are we going to do about it? These things need to be debated, to see whether we can reach some consensus about the best way of raising tax without harming productivity.”

This article was originally published by ICAEW.

ICAEW chart of the week: The debt of G7 nations

This week’s chart looks at how the pandemic has driven government debt levels higher, a topic that will be on the agenda at the G7 summit in Cornwall in six weeks’ time.

2019 General Government Net / GDP plus forecast change over 2020 and 2021:

Canada 23% + 14% = 37%
Germany 41% +11% = 52%
UK 75% + 22% = 97%
France 89% + 17% = 106%
USA 83% + 26% = 109%
Italy 122% + 22% = 144%
Japan 150% + 22% = 172%

The #icaewchartoftheweek is on the topic of government debt, looking at the indebtedness of the seven nations that comprise the G7 together with the EU. 

The strength (or otherwise) of public finances will underlie many of the discussions at the upcoming G7 summit in Cornwall in June as countries decide how best to deal with the coronavirus pandemic, achieving net-zero carbon and the COP26 goals, strengthening defence and security, and economic recovery. All of these are likely to require significant public investment at a time when public finances have been hit hard from a combination of the financial crisis just over a decade ago and the coronavirus pandemic over the past year.

Perhaps best-placed amongst the G7 are Canada and Germany, with stronger public balance sheets than their peers putting them in a better position to fund public investment. Canada’s general government net debt to GDP ratio (the net debts of the federal government, provincial governments and local authorities combined compared with Canadian GDP) is forecast to increase from 23% at 31 December 2019 to 37% at 31 December 2021, while Germany’s general government net debt to GDP ratio is forecast to increase from 41% to 52% over the same period.

The UK is next with its general government net debt up from 75% of GDP to a forecast 97% of GDP, followed by France with its net debt increasing from 89% in December 2019 to a forecast 106% of GDP for the end of 2021. The USA is expected to overtake France with its major stimulus packages seeing debt rise from 83% as a proportion of GDP to 109% by the end of this year. The biggest ratios within the G7 are Italy, which is expected to increase from 122% to 144%, while Japan is expected to rise from 150% to 172% of GDP.

Not shown on the chart are G7 guest nations this year: Australia (up from 26% to a forecast 49% of GDP) and South Korea (12% to 23%) are both in relatively strong public finance positions, while India (74% to 99%) is in a more challenging fiscal situation.

Despite the differences in debt levels, there will be a commonality amongst all the nations present in needing to find money to deal with increased pressure on public services and social security systems as populations age, for public investment in achieving net zero and in infrastructure more generally, to fund defence in an increasingly unstable global security environment and in economic stimulus to restart economies as they reopen, not to mention the need to replace tax income on fossil fuels as they are eliminated over the coming decades.

The signs are that tax reform will play a larger part in discussions than it may have done previously, with the USA’s suggestion for a minimum corporation tax indicative of a move to limit tax competition between nations and work more collaboratively to capture tax receipts from increasingly mobile global corporations and individuals.

Hence while many of the headlines from the G7 summit are likely to be focused on the heads of government talking about the global response to the coronavirus pandemic, the global security situation and global plans to deliver net zero, the side room containing finance ministers discussing global taxation and global public investment may be just as consequential. 

This chart was originally published by ICAEW.

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

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

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

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

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

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

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

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

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

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

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first eleven months from £278.8bn to £275.1bn and the reported deficit for 2019-20 from £57.7bn to £57.1bn.

This article was originally published by ICAEW.

Biggest peacetime deficit caps extraordinary year for UK public finances

Huge economic shock combined with unprecedented fiscal interventions results in a provisional fiscal deficit of £303bn or 14.5% of GDP for the year ended 31 March 2021.

The Office for National Statistics today published its first estimate of fiscal history, reporting a provisional fiscal deficit of £303bn or 14.5% of GDP for 2020-21 and a £344bn increase in public sector net debt from £1.8bn to £2.14tn at 31 March 2021, breaking peacetime records for the public finances. This compares with an official forecast for the deficit of £55bn presented by the Chancellor just prior to the start of the financial year last March, admittedly together with the first in a series of mini-fiscal announcements that saw spending soar to tackle the pandemic at the same time as tax revenues collapsed.

The damage is less than had been feared at some points during the past year, with the provisional deficit coming in below the £355bn estimated by the Office for Budget Responsibility (OBR) at the time of the Spring Budget 2021 last month and substantially below their forecast of £394bn in November 2020 at the time of the Spending Review. While some of this is down to better economic performance as lockdowns have been less harmful than anticipated, there has been an offsetting increase in the forecast deficit for the 2021-22 financial year starting this month to £234bn compared with the pre-pandemic projection of £67bn. The provisional deficit of £303bn also excludes somewhere in the region of £27bn for bad debts on covid-related lending that will need to be accounted for at some point.

The deficit is only part of the story, as the government has borrowed significant amounts to finance tax deferrals and lending to business to help them survive. As a consequence, public sector net debt has increased by more than the deficit, with an increase of £344bn to a provisional £2,142bn or 97.7% of GDP at 31 March 2021. Debt is expected to rise over the next couple of years to in excess of £2.5tn.

While the numbers for both the deficit and debt are likely to be revised up or down over the next few months, the big picture won’t change – debt as a proportion of GDP has increased from 35% in March 2008 before the financial crisis to around 80% of GDP a couple of years ago before climbing to in the region of 100% of GDP today. These numbers don’t include other significant liabilities in the government balance sheet such as public sector employee pension obligations, nor do they include future financial commitments such as for welfare benefits. Despite that they still provide an indication of just how significantly the UK’s fiscal position has changed over a period of less than a decade and a half.

Fortunately, interest rates have been coming down even faster than debt has been going up, enabling the Government to reduce its interest bill over the course of the year. However, higher leverage comes with a greater exposure to movements in interest rates going forward, a concern for the Chancellor in mapping out his plans for the next few years.

While the Spring Budget last month provided some indications on how the Chancellor aims to stabilise the public finances through a combination of higher investment spending, short-term economic stimulus and a corporation tax rise, there is as yet no indication of his longer-term fiscal strategy to address the unsustainability of the public finances identified by the OBR before the pandemic.

While the government has been taking steps to set the foundations for better management of the public finances, for example through the National Infrastructure Strategy released last year, the soon to be launched National Data Strategy and actions coming out of HM Treasury’s recent Balance Sheet Review, there is no clear plan for how the government intends to fund pensions, health and social care over the next quarter of a century. These costs will continue to grow as many more people live longer in retirement and the working age population shrinks, just at a time that huge investments are needed to achieve net zero and pressures on public spending are unlikely to disappear. At the same time the government needs to work out how it can ensure the public finances are more resilient and better prepared for future crises – from whatever corner they may come.

Alison Ring, ICAEW Public Sector Director, said: “Today’s numbers cap a dramatic year for the UK’s public finances, and show this is the biggest deficit since the end of World War Two. However, the damage is less than had been feared, with the shortfall lower than the OBR had forecast.

Ultra-low borrowing costs have provided the government with the room it needed to provide unprecedented spending to tackle the coronavirus pandemic, protect jobs and prevent the economy from crashing, as well as the opportunity to invest for growth in the coming years.

However, even as the economy starts to recover, the legacy of higher debt and a greater exposure to changes in interest rates will be with us for years, if not decades to come. The public finances were already on an unsustainable path before the pandemic, and the government will need a long-term strategy for rebuilding them.”

This article was originally published by ICAEW.

ICAEW chart of the week: Canada Budget 2021

Canada Budget 2021

2020-21 Forecast outturn
C$635 (£363bn)

Budget shortfall C$339bn + Taxes and other income C$296bn
Covid-19 C$252bn + Federal spending C$363bn

2021-22 Federal budget
C$498bn (£285bn)

Budget shortfall C$143bn + Taxes and other income C$355bn
Covid-19 C$76bn + Federal spending C$422bn

Monday 19 April 2021 saw Chrystia Freeland, the Canadian deputy prime minister and minister of finance, release her country’s 725-page Budget 2021, setting out the Government of Canada’s plan to “finish the fight against COVID-19 and ensure a robust economic recovery that brings all Canadians along”.

As the #icaewchartoftheweek illustrates, the forecast outturn for the fiscal year ended 31 March 2021 involved spending by the federal government of C$635bn (equivalent to £363bn at an exchange rate of C$1,75:£1), resulting in a budget shortfall of C$339bn after taking taxes and other income of C$296bn into account. Spending comprised C$363bn on ‘normal’ federal government activities – operational spending, welfare payments and transfers to provinces and territories and C$272bn on exceptional measures in response to covid-19.

COVID-19 spending is much lower in 2021-22 at C$76bn, even as other spending increases to C$422bn as the federal government seeks to generate economic growth following the pandemic – total spending of C$498bn (£285bn). Assuming taxes and other income recovers to C$355bn as expected, the budget shortfall should reduce to C$143bn – still much higher than the C$29bn seen before the pandemic in 2019-20.

The federal finances were in a fairly strong position coming into the pandemic compared with many other countries, with debt at 31 March 2020 of C$813bn (31% of GDP) rising to C$1,176bn (49% of GDP) at 31 March 2021 and a forecast C$1,334bn (51% of GDP) at 31 March 2022. This provides Canada with some room for manoeuvre as it navigates its way after the pandemic. 

Fortunately for Canadians, one side-effect of the US government’s stimulus package is that it is expected to not only drive growth in the US economy, but in its Canadian neighbour too.

More (much more) information is available in the Canada Budget 2021.

This chart was originally published by ICAEW.