#publicfinances – Martin Wheatcroft

ICAEW chart of the week: Eurozone government bond yields

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

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

Government enters crisis control mode to curb public spending

Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.

The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.

“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.

“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”

Month of July 2024

There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.

Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023.

Financial year to date

The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.

Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts.

Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.

The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.

Table 1: Summary receipts and spending

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn	Change %
Income tax	89.9	86.4	+4%
VAT	67.9	66.0	+3%
National insurance	53.5	58.3	-8%
Corporation tax	34.0	31.6	+8%
Other taxes	73.5	72.1	+2%
Other receipts	40.5	37.5	+8%
Total receipts	359.3	351.9	+2%

Public services	(212.2)	(204.8)	+4%
Welfare	(103.1)	(97.5)	+6%
Subsidies	(10.6)	(14.0)	-24%
Debt interest	(46.6)	(52.7)	-12%
Gross investment	(38.2)	(34.8)	+10%
Total spending	(410.7)	(403.8)	+2%

Deficit	(51.4)	(51.9)	-1%

Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.

The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.

Table 2: Public sector net debt and net debt/GDP

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn
PSNB	51.4	52.3
Other borrowing	4.4	(11.4)
Net change	55.8	40.9
Opening net debt	2,694.1	2,539.7
Closing net debt	2,745.9	2,580.6
*PSNB/GDP*	*1.9%*	*2.0%*
Other/GDP	0.2%	(0.4%)
Inflating away	(0.8%)	(1.5%)
*Net change*	*1.3%*	*0.1%*
Opening net debt	98.1%	95.7%
*Closing net debt*	*99.4%*	*95.6%*

Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.

Revisions and other matters

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. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.

The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.

A new dawn for local government has broken, has it not?

With money tight and many local authorities in a precarious financial state, ICAEW’s Alison Ring asks how the government can deliver on its commitment to devolution in the latest instalment of Room 151’s Municipal Missions Manifesto series.

A change in government. A commitment to devolve power. No money.

We all know that England is the most centralised of the advanced economies, but it is still difficult to comprehend just how strange it is that in a nation of 58 million people (out of a UK total of 69 million), the national government in Westminster should be so intimately involved in deciding which high streets in Nottinghamshire or Cornwall are improved, whether to fund public conveniences in Lancashire or Kent, or which parks in Herefordshire or Hertfordshire should get outdoor chess sets.

We might also wonder why we have a central government ministry dedicated to local government at all when in most countries it is the regions, states or provinces that are responsible for local authorities.

Here in the UK, there is a large bureaucracy devoted to overseeing hundreds of councils across England of many shapes and sizes, while another department decides whether to fund road schemes hundreds of miles from London that the ministers and civil servants making those decisions may never use.

Despite the extensive control exercised by Whitehall, successive governments have found that this does not translate into effective action on the ground, while local leaders are frustrated by excessive bureaucracy and limitations on how they can drive economic development and deliver public services locally and regionally. Labour has committed to devolving power in England, but without resolving many of the current problems in local and regional government it is going to be difficult to make devolution a practical possibility.

Step 1 – stabilise the system

The new government has already made two promising announcements that should go a small way to stabilising the existing system. Firstly, it has confirmed that local authorities will participate in rolling three-year spending reviews to be carried out every other year. This will make a huge difference by enabling budget holders to plan ahead more effectively, particularly on capital investments where projects can often span multiple financial years.

Secondly, a ministerial statement from local government minister Jim McMahon has confirmed that action will be taken to tackle the backlog of incomplete audits which is undermining local authority financial reporting and the assurance provided by external auditors. Although tempered by the knowledge that it will take several years to get local audits back on track, and that many of the longer-term fundamental issues identified by the Redmond Review remain unaddressed, this is a positive step forward.

While money is tight, if funds can be found then supporting local authorities under the most financial pressure should be a priority.

Step 2 – complete the roll out of a regional tier of government

A combination of gentle encouragement, financial incentives and some arm twisting has led to the establishment of 11 combined authorities led by regional ‘metro’ mayors mainly in so called ‘city-regions’. Together with the Greater London Authority this means that around half of the English population now have a regional mayor, but the corollary is that the other half do not.

While a large part of devolution is about empowering individual local authorities, gaps in the regional tier of government make it difficult for Whitehall to hand out some of its core functions. This is particularly the case for economic development where, for example, Greater Manchester’s mayor Andy Burnham is all too eager to grasp whatever powers he can and run with them, but there is no one to take the lead in the same way for most of the South West.

One way to fill in the gaps would be to accelerate the roll-out of combined authorities, while another would be to go for the ‘big bang’ approach adopted by France in 1986 when it created a new tier of regional government across Metropolitan France in one fell swoop.

Step 3 – separate out social care and SEND from funding for local public services

One of the biggest drivers of the financial challenges faced by many local authorities is the growing cost of welfare provision – principally adult social care and special educational needs and disabilities (SEND) support. The ‘reverse hypothecation’ caused by these two costs has had the effect of squeezing budgets for local public services and pretty much everything else delivered by local authorities outside of (ring-fenced) social housing.

Ironically, one of the most effective ways to strengthen local government would be to centralise or regionalise social care and SEND budgets or at the very least deal with them separately in council tax bills as a distinct precept. Depending on how this is implemented, this could provide a much closer link between how much communities pay to their local councils and the local public services they receive.

Step 4 – sort out the finances

As the joke goes, if you want to get to where you want to go, then you shouldn’t start from here.

In this case, ‘here’ is a place where many local authorities are in financial difficulty and struggling to meet their statutory obligations. Funding formulas that are based on out-of-date population numbers and don’t reflect underlying needs. A council tax system reliant on 1991 property valuations. Business rates that are an unwieldy tangled mess.

These weak financial foundations to the local government system in England are crying out for reform, even it is necessary to acknowledge that change will be very difficult and politically risky. Despite the many different options that are theoretically possible, it is worth considering the proposal put forward by the Fabian Society in a recent report on fiscal devolution produced in association with ICAEW.

The Fabians suggested that the distribution of central government grants be agreed among local authorities rather than determined in Westminster, accompanied by a more stable basis to determining their amount. Another route that the Fabians looked at is the system of shared taxation in Germany which provides the core funding for German regions out of national taxes in a way that equalises funding between richer and poorer regions.

Step 5 – rebuild trust

Prising the hand of Whitehall off the shoulder of English local authorities is not going to be easy. It will take significant political capital to make devolution happen, and there will be many reasons found to not hand over control of the purse strings ‘just yet’.

Many of these reasons will be down to a lack of trust. Trust in the ability of local authorities to manage money wisely, not helped by the governance failures of recent years. Trust in the transparency of local authority finances, not helped by the impenetrable nature of the accounts. Trust in the quality of local public audit, not helped by the local audit crisis.

That is why devolution is not just about the decisions that central government makes to give away or delegate power and money, and how it chooses to structure the system. It is also about the choices made by local and regional authorities asking for those new powers.

So, if you are in an area without a combined authority, it is time to start talking to your neighbouring areas about forming one. If your accounts make it difficult for stakeholders to understand how you have spent public money, it is time to streamline and invest in making them better. And if you are behind on your audits, then you need to do what you can to work with your external auditors to get back on track.

There is a big prize here. More effective and efficient local and regional government leading to better outcomes. And more bandwidth in Whitehall to focus on national and international priorities.

Alison Ring OBE FCA is director for public sector and taxation at ICAEW, the Institute of Chartered Accountants in England and Wales.

This article was written on behalf of ICAEW by Martin Wheatcroft in conjunction with Alison Ring, and was originally published in Room 151 and subsequently (with some minor changes) by ICAEW.

ICAEW chart of the week: BBC

My chart for ICAEW this week highlights how the BBC is struggling financially after incurring an operating loss of £0.3bn on the provision of public service broadcasting and the failure of commercial activities to contribute to the bottom line.

The British Broadcasting Corporation (BBC) recently published its annual report and accounts for the year ended 31 March 2024 (2023/24) and my chart highlights how the BBC is struggling financially with a reported operating loss of £0.3bn and no operating profit contribution from commercial activities.

Licence fee income was £3.7bn in 2023/24, which combined with other income of £0.3bn resulted in public services broadcasting revenue of £4.0bn. After deducting operating costs of £4.3bn, this meant the BBC lost £0.3bn on its eight national and seven regional TV channels, 10 national and 46 regional and local radio stations, BBC World Service radio in 42 languages, BBC iPlayer, BBC Sounds, BBC Education, news, sport and weather internet sites, orchestras and other activities, including funding of the independent S4C TV channel in Wales.

External income generated by the BBC’s commercial operations amounted to £1.4bn but this was offset by £1.4bn in operating costs, leaving the overall group operating loss broadly unchanged from the public service broadcasting total.

Licence fee income of £3.7bn was just under £0.1bn or 2% lower than the year before as the number of households paying the full licence fee reduced from 23.2m to 22.7m at the end of March 2024 on a fee frozen at £159 per year (equivalent to £13.25 per month). There were approximately 4,000 households with monochrome licences and 0.2m households on concessionary fees, with a further 1.0m with free licences (principally given to those aged 75 or more receiving pension credit).

Other income includes £0.2bn from contract income and £0.1bn in grants from the Foreign Office towards the cost of the World Service.

Public services broadcasting expenditure of £4.3bn was £149m lower than the year before and can be analysed between spending on content of £3.0bn, distribution and support costs of £0.9bn, and other activities of £0.4bn. Content spending can be further broken down into £1.7bn on TV channels, £0.5bn on radio, £0.3bn on the World Service, £0.2bn on online services including BBC iPlayer, and £0.3bn on other content.

While external commercial income was broadly matched by costs once intra-group transactions are taken account of, the BBC’s commercial businesses contributed £325m in 2023/24 towards the BBC’s overheads, down from £368bn in the previous year. They principally comprise BBC Studioworks, which supplies studio time and post-production services to the major TV networks and most production companies in the UK, and BBC Studios, which produces TV shows and films on behalf of the BBC and other broadcasters, as well as distributing BBC content around the world. BBC Studios also operates the UKTV network of four ad-supported TV channels, four ad-supported streaming channels and three pay TV channels in the UK, several international TV channels (including BBC America and BBC News international services), and the BritBox International streaming service outside the UK (now 100% owned by the BBC).

Not shown in the chart is £0.5bn in non-operating gains, most of which were one-off items, including £0.2bn in gains on disposals in the year and £0.2bn from tax adjustments in respect of prior years. This resulted in an overall net surplus of £0.2bn for the year ended 31 March 2024.

Real-term cuts in the value of the licence fee and falling returns from commercial activities have put significant financial pressure on the BBC in recent years, causing it to cut back on content and some services, consolidate operations such as domestic and international news gathering, and undergo a series of restructurings to improve efficiency.

The 8.7% increase in the licence fee to £169.50 from 1 April 2024 (equivalent to £14.13 per month) and inflation-linked increases planned over the next three years should help ease some of the pressure in the current financial year, although returning to operating profitability is likely to still require the BBC to look for further savings in its public service broadcasting operations.

Unfortunately, the BBC has not been able to replicate its commercial success in the years before streaming when it was able to generate significant returns from the sale of DVDs and international content licensing. While there are plans to build up its international streaming services (from a relatively low base), the BBC’s commercial businesses are unlikely to generate enough money to affect the dilemma facing the new government on what to do with the licence fee when the BBC’s current financial settlement ends on 31 December 2027.

The temptation will be for the government to defer reform of how the BBC is funded yet again, just as its predecessors have done over the last couple of decades. However, the erosion of income from younger households choosing to not watch broadcast television to stop paying the licence fee, and the likely consolidation of streaming services into a handful of global online ‘broadcasters’ that will dominate the market, is likely to make avoiding this conundrum that much more difficult this time around.

For more information, read the BBC annual report and accounts 2023/24 and the December 2022 House of Lords Communications and Digital Committee report on future funding of the BBC.

This chart was originally published by ICAEW.

Q1 public finances confirm challenging position for new government

First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.

The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face.

“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.

“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”

Month of June 2024

Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.

Financial year to date

Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.

Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)	Change (%)
Income tax	58.1	56.1	+4%
VAT	49.9	49.6	+1%
National insurance	39.7	43.4	-9%
Corporation tax	25.3	23.4	+8%
Other taxes	54.9	54.1	+1%
Other receipts	30.1	27.7	+9%
Total receipts	258.0	254.3	+1%
Public services	(158.8)	(152.6)	+4%
Welfare	(76.9)	(73.7)	+4%
Subsidies	(7.8)	(11.3)	-31%
Debt interest	(35.2)	(41.1)	-14%
Gross investment	(29.1)	(26.5)	+10%
Total spending	(307.8)	(305.2)	+1%
Deficit	(49.8)	(50.9)	-2%

Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.

Table 2: Public sector net debt

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)
Deficit	(49.8)	(50.9)
Other borrowing	3.9	(7.7)
Debt movement	(45.9)	(58.6)
Opening net debt	(2,694.1)	(2,539.7)
Closing net debt	(2,740.0)	(2,598.3)
Net debt/GDP	99.5%	96.7%

Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.

The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.

Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.

Revisions and other matters

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 increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.

This article was originally published by ICAEW.

ICAEW chart of the week: Debt on the fourth of July

My chart for ICAEW this week ‘celebrates’ US Independence Day by setting out the latest congressional projections for federal debt.

Debt on the fourth of July.
ICAEW chart of the week.

Column chart showing projected US federal debt held by the public in $tn (plus as % of GDP) between 2023 and 2034.

2023: $26.2tn (97.3%).
2024: $28.2tn (99.0%).
2025: $30.2tn (101.6%).
2026: $32.1tn (104.1%).
2027: $33.9tn (106.2%).
2028: $36.0tn (108.6%).
2029: $38.0tn (110.5%).
2030: $40.2tn (112.7%).
2031: $42.5tn (114.8%).
2032: $45.0tn (117.1%).
2033: $47.8tn (119.9%).
2034: $50.7tn (122.4%).

04 Jul 2024. Chart by Martin Wheatcroft FCA. Design by Sunday.
Source: Congressional Budget Office, ONS, ‘An Update to the Budget and Economic Outlook, June 2024'.

© ICAEW 2024

Two hundred and forty-eight years ago, on 4 July 1776, the United States of America declared its independence from Great Britain, inheriting debts used to finance the revolutionary war but without any tax raising powers to fund repayment of the amounts owed. This was addressed by the adoption of the US Constitution in 1789, which enabled Secretary of the Treasury Alexander Hamilton to raise taxes, start repaying those initial debts, and issue new debt to finance a fledgling nation.

My chart this week illustrates how the US federal government has continued to borrow since then, with the Congressional Budget Office (CBO) reporting that US federal debt held by the public was $26.2tn or 97.3% of GDP in September 2023, on track to reach $28.2tn or 99.0% of GDP on 30 September 2024, before rising to a projected $50.7tn or 122.4% on 30 September 2034.

Debt on 4 July this year is estimated to be close to $27.8tn.

The projected rise in debt held by the public over the coming decade is based on extrapolating the gap between federal revenues and spending of around $160bn a month in the current financial year, based on tax and spending legislation enacted at 12 May 2024 together with the CBO’s own assessment of the administration’s financial plans (for example over student loan relief) and assumptions around factors such as interest rates and economic growth.

However, the CBO is keen to stress that these numbers are not a forecast. They say: “The baseline projections are meant to provide a benchmark that policymakers can use to assess the potential effects of changes in policy; they are not a forecast of future budgetary outcomes. Future legislative action could lead to markedly different outcomes. But even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline projections, not only because of unanticipated economic conditions, but also because of the many other factors that affect federal revenues and outlays.”

The challenge for the US is that despite almost 250 years of taxation with representation, that representation finds it difficult to raise taxes to bring debt down, often choosing to cut taxes and increase borrowing instead.

Whether that will change, or whether debt markets force it to change, remains a big unknown in the experiment commenced by George Washington and Alexander Hamilton all those years ago.

This chart was originally published by ICAEW.

New government to inherit tough public finances

Public sector net debt has passed £2.7tn for the first time. In May the debt increased by £49bn from £2,694bn to £2,743bn, 51% higher than it was in March 2020 at the start of the pandemic.

The monthly public sector finances for May 2024 released by the Office for National Statistics (ONS) on Friday 21 June 2024 reported a provisional deficit for the first two months of the 2024/25 financial year of £33.5bn, £1.5bn better than the £35.0bn predicted by the Office for Budget Responsibility (OBR) and £0.4bn higher than in April and May 2023.

An ICAEW spokesperson said: “Today’s numbers show that public sector net debt continues to grow, up from £2.69tn in April to £2.74tn in May, the first time it has exceeded £2.7tn.

“Net debt is now 51% higher than it was at the start of the pandemic in March 2020, and 167% higher than it was in March 2010, pushed up by the spikes in spending during the pandemic and to offset energy bills, as well as borrowing to fund day-to-day spending and investment. High borrowing costs and the financial consequences of more people living longer mean that the public finances are significantly weaker and less resilient than they were 14 years ago.

“When the country goes to the polls on 4 July, the reality is that whoever wins power will inherit an extremely challenging fiscal position that will hamper their ability to turn the country around.”

Month of May 2024

Taxes and other receipts amounted to £85.1bn in May 2024, up 2% compared with the same month last year, while total managed expenditure was also 2% higher at £100.1bn.

The resulting fiscal deficit of £15.0bn for the month was £0.8bn higher than in May 2023.

Financial year to date

As summarised in Table 1, total receipts in April and May 2024 of £170.4bn were 2% higher than in the same two months last year, with the cuts to employee national insurance rates offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Two months to	May 2024 £bn	May 2023 £bn	Change %
Income tax	38.2	36.8	+4%
VAT	33.9	33.6	+1%
National insurance	25.9	28.2	-8%
Corporation tax	16.6	15.5	+7%
Other taxes	36.0	35.2	+2%
Other receipts	19.8	18.5	+7%
Total receipts	170.4	167.8	+2%
Public services	(108.3)	(104.5)	+4%
Welfare	(51.4)	(49.1)	+5%
Subsidies	(5.2)	(7.8)	-33%
Debt interest	(21.4)	(21.6)	-1%
Gross investment	(17.6)	(17.9)	-2%
Total spending	(203.9)	(200.9)	+1%
Deficit	(33.5)	(33.1)	+1%

Table 1 also shows how total managed expenditure for the two months of £203.9bn was up by more than 1% compared with April and May 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and marginally lower debt interest. The latter was driven by significantly lower indexation on inflation-linked debt offsetting the much higher rates of interest payable on variable rate and refinanced fixed-rate debt.

Table 2: Public sector net debt

Two months to	May 2024 £bn	May 2023 £bn
Deficit	(33.5)	(33.1)
Other borrowing	(10.2)	2.1
Debt movement	(43.7)	(31.0)
Opening net debt	(2,699.2)	(2,539.7)
Closing net debt	(2,742.9)	(2,570.7)
Net debt/GDP	99.8%	96.1%

Public sector net debt as of 31 May 2024 was £2,743bn or 99.8% of GDP, just under £44bn higher than at the start of the financial year. The increase reflects borrowing to fund the deficit of £33.5bn and £10.2bn borrowed to fund lending by government and other cash requirements, net of loan recoveries.

Public sector net debt was £172bn or 7% higher than a year previously, and 3.7 percentage points higher in relation to the size of the economy.

Public sector net debt is £928bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,715bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last 14 years.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,074bn in non-liquid financial assets minus £2,743bn of net debt (£300bn liquid financial assets – £3,043bn public sector gross debt) and other liabilities of £670bn. This is a £47bn deterioration from the start of the financial year and is £95bn more negative than the -£631bn net worth number for May 2023.

Revisions and other matters

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 reduce the reported deficit for April 2024 by £2.1bn from £20.5bn to £18.4bn and revise the deficit for the year to March 2024 up by £0.7bn from £121.4bn to £122.1bn as estimates of tax receipts and expenditure were updated for better data.

This article was originally published by ICAEW.

ICAEW chart of the week: Canada Budget 2024

Our chart zooms across the Atlantic this week to take a look at Canada’s federal budget for 2024/25.

Canada Budget 2024
ICAEW chart of the week

Column chart with three double columns

2023/24

Revenue C$465bn = Income tax C$319bn + GST and other taxes C$70bn + Other revenue C$76bn and Budgetary balance (C$40bn)

Expenditure (C$505bn) = Government programmes (C$220bn) + Welfare benefits (C$120bn) + Provinces and territories (C$110bn) + Interest and actuarial losses (C$55bn)

2024/25

Revenue C$498bn = Income tax C$336bn + GST and other taxes C$76bn + Other revenue C$86bn and Budgetary balance (C$40bn)

Expenditure (C$538bn) = Government programmes (C$225bn) + Welfare benefits (C$135bn) + Provinces and territories (C$121bn) + Interest and actuarial losses (C$57bn)

2028/29

Revenue C$586bn = Income tax C$389bn + GST and other taxes C$85bn + Other revenue C$112bn and Budgetary balance (C$20bn)

Expenditure (C$606bn) = Government programmes (C$240bn) + Welfare benefits (C$162bn) + Provinces and territories (C$142bn) + Interest and actuarial losses (C$62bn)

Canada’s budget 2024 sets out the financial plans of the government of Canada for the year from 1 April 2024 to 31 March 2025 (2024/25).

Like UK budgets, Canada’s budget 2024 is accompanied by financial projections for the four subsequent years to 2028/29. However, unlike the UK, Canada’s fiscal budget is prepared on an accruals basis, with a balance sheet including both financial and non-financial assets and liabilities, and a budgetary surplus or deficit that is equivalent to the accounting profit or loss in a private sector set of financial statements.

Canada’s approach contrasts with the statistics-based system of national accounts that most other countries use for setting fiscal targets, including the UK. This is despite the UK adopting International Financial Reporting Standards (IFRS) in its consolidated (Whole of Government Accounts), departmental and other public body financial statements, and an accruals-based resource accounting system derived from IFRS for internal budgeting and performance management.

Our chart this week shows how Canada’s federal budgetary balance is expected to be in deficit by C$40bn in both 2023/24 and 2024/25, before reducing over the rest of the forecast period to reach C$20bn in 2028/29, equivalent to 1.4%, 1.3% and 0.6% of GDP in 2023/24, 2024/25 and 2028/29 respectively. Or £24bn, £24bn and £12bn if converted at the 1 April 2024 exchange rate of C$1.70 to £1.00.

Budget 2024 assumes an average increase in nominal GDP of 4.0% a year between 2024 and 2028, reflecting a combination of economic growth of 1.8% on average and projected GDP inflation of 2.1%. Economic growth is expected to reflect a 0.9% annual increase in labour supply (1.6% from growth in the working-age population less 0.6% from lower labour force participation, 0.1% from higher unemployment, and 0.1% from fewer hours worked) and 0.9% from improved productivity.

Total revenue is forecast to grow by 7.1% from C$465bn (£274bn) in 2023/24 to C$498bn (£293bn) in 2024/25 before rising by an average of 4.2% a year to C$586bn (£345bn) in 2028/29. This is equivalent to 16.1%, 16.6% and 16.7% of GDP in 2023/24, 2024/25 and 2028/29 respectively.

Around two-thirds of revenue comes from federal income tax, amounting to a budgeted C$225bn in 2024/25. A further 15% comes from other taxes, with the C$76bn in 2024/25 comprising C$54bn from goods and services tax (GST, the Canadian version of VAT), C$6bn from customs import duties, C$13bn from excise taxes and other duties, and C$2bn from other federal taxes.

Other revenue is budgeted to amount to C$86bn in 2024/25 or 17% of total revenue, comprising C$30bn in employment insurance premiums, C$13bn from pollution pricing, C$9bn in revenues from Crown enterprises (net of Bank of Canada losses), C$3bn in foreign exchange revenues (principally returns on international reserves), and C$31bn in other income (including interest on tax receivables).

Total expenditure including net actuarial losses is expected to increase by 6.5% from C$505bn in 2023/24 to C$538bn (£316bn) in 2024/25 and then by an average of 3.0% a year to C$606bn (£356bn) in 2028/29. This is equivalent to 17.5%, 17.9% and 17.2% of GDP in 2023/24, 2024/25 and 2028/29 respectively.

Expenditure can be categorised between government programmes, welfare benefits, transfers to provinces, territories and municipalities, and interest and actuarial losses.

In 2024/25, spending on government programmes is budgeted to amount to C$225bn (C$123bn in operating expenses and C$102bn in transfer payments), while major transfers to persons are expected to be C$135bn (comprising C$80bn in elderly benefits, C$28bn in child benefit payments and C$27bn in employment insurance benefits).

Major transfers to provinces, territories and municipalities in 2024/25 of C$121bn comprise contributions of C$57bn for health care, C$25bn in equalisation payments to provinces, C$24bn for social programmes (social care, social assistance, post-secondary education, early years development, early learning and child care), C$5bn for territories, and C$2bn for community building, net of a C$7bn reduction in payments to Quebec (which acquired a greater share of taxes in the 1960s and 1970s), plus C$15bn in proceeds from pollution pricing returned to Canadians either directly or via provinces and territories.

Not shown in the chart is the projected balance sheet, with net liabilities expected to increase from an estimated C$1,216bn (£715bn) on 31 March 2024 to a budgeted C$1,255bn (£738bn) on 31 March 2025 and a projected C$1,372bn (£807bn) on 31 March 2029. The forecast balance sheet for 31 March 2025 comprises C$117bn (£69bn) in non-financial assets and financial assets of C$719bn (£423bn) less total liabilities of C$2,091bn (£1,230bn).

Net liabilities are expected to increase more slowly than the size of the economy, resulting in the ratio of net liabilities to GDP falling from 42.1% to 41.9% to 39.0% over the same period.

The budget document also reports on the Canadian government’s long-term financial projections, with federal net liabilities expected to reduce to 9.0% of GDP by 2055-56 despite a projected increase in the budgetary deficit back up to 1.1% of GDP. This partly reflects an assumption that net immigration will continue at 0.9% a year, offsetting the effects of more people living longer and a fertility rate of 1.5 births per woman.

Perhaps unsurprisingly, affordable housing is the first area of focus for Budget 2024, with the federal government aiming to increase the number of new homes by 3.87 million by 2031, a net 2 million on top of the 1.87 million already expected to be built.

For more information, read the Canada Budget 2024 website.

For more information about the UK Spring Budget 2024, visit icaew.com/budget.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public sector productivity

My chart for ICAEW this week suggests that the public sector is less productive than it was, but difficulties in measuring productivity make it hard to say for sure.

According to the Office for National Statistics, public sector productivity has not recovered following the pandemic and is now lower than it was in 1997, despite technological advances since then.

My chart highlights how public sector productivity fell between 1997 and 2010 as spending and investment increased – a fall of 3.3% or 0.25% a year on average over 13 years – before climbing during the austerity years until 2019 – an improvement of 7.5% or 0.8% a year over nine years. The pandemic led to productivity collapsing as public services were severely disrupted before partially recovering, with productivity flat between 2022 and 2023 – overall a net drop of 6.3% or 1.6% a year on average over four years.

Overall, this means public sector productivity as measured by the ONS has fallen by 2.6% or 0.1% a year on average over the last 26 years. It is important to note that these changes do not cover all of the public sector – in some areas such as defence spending, productivity (value of outputs / cost of inputs) is assumed to be a constant 1, reflecting how difficult and subjective it would be to attempt to measure our military preparedness for war.

Despite that, the picture shown by this metric aligns with our more general understanding of what happened in these periods. The decline in productivity between 1997 and 2010 as the then Labour government improved pay and conditions for public sector employees makes sense, while the austerity policies of the Coalition and Conservative governments between 2010 and 2019 constrained the cost of delivering public services. And the pandemic resulted in many public services being closed or curtailed, and we know that many public services – particularly the NHS and schools – are still struggling to recover from the pandemic.

The chart provokes questions about how well this statistic values outputs given that while it is very easy to measure inputs, it is less easy to assess the value produced. For example, larger class sizes might give rise to an apparent productivity improvement as measured (more children taught for the same input of teaching time), but this may not capture any deterioration in quality that may result.

Not only is the quality of outputs difficult to measure in calculating productivity, but it also doesn’t measure outcomes, often much more important than outputs. In the health context this is whether the patient survives rather than how many operations were performed, for education it means how well-equipped our young people are for the world rather than how many hours they spent in a classroom, and for the criminal justice system how few crimes are committed rather than how many criminals are prosecuted.

Public sector productivity is an important metric, even if an imperfect one. It is helpful to understand how well public service activities are being delivered from a cost perspective – and how there is a need for improvement. But it doesn’t tell us whether those activities are improving our well-being, growing our economy, improving our environment, or building our resilience as a nation.

This chart was originally published by ICAEW.

ICAEW chart of the week: IMF Fiscal Monitor

Our chart this week finds that the UK is ranking highly in the IMF’s latest five-year forecasts for general government net debt.

Bar chart

General government net debt/GDP: 2029 forecast

Emerging and developing economies (green bars)
World (purple bar)
Advanced economies (blue bar)
UK (red bar)

Kazakhstan (green) 8%
Canada (blue) 13%
Saudi Arabia (green) 22%
Iran (green) 23%
Australia (blue) 24%
South Korea (blue) 29%
Türkiye (green) 30%
Indonesia (green) 37%
Germany (blue) 43%
Netherlands (blue) 43%
Nigeria (green) 47%
Mexico (green) 51%
Poland (green) 55%
Egypt (green) 56%
Pakistan (green) 61%
Brazil (green) 70%
World (purple) 79%
South Africa (green) 84%
Spain (blue) 92%
UK (red) 98%
France (blue) 107%
US (blue) 108%
Italy (blue) 136%
Japan (blue) 153%

18 Apr 2024.
Chart by Martin Wheatcroft FCA. Design by Sunday.
Source: IMF Fiscal Monitor: 17 Apr 2024.

©️ ICAEW 2024

The International Money Fund (IMF) released its latest IMF Fiscal Monitor on 17 April 2024, highlighting how public debts and deficits are higher than before the pandemic and public debts are expected to remain high. The IMF says: “Amid mounting debt, now is the time to bring back sustainable public finances”, commenting that as prospects for a global economic soft landing have improved, it is time for action to bring government finances back under control.

Our chart this week illustrates how the UK is one of the ‘leading’ nations in government borrowing, with general government net debt projected by the IMF to reach 98% of GDP by 2029, compared with 92.5% in 2023. (Note: general government net debt is different to the public sector net debt measure used in the UK public finances – the latter includes the Bank of England and other public corporations.)

The chart illustrates how the major countries with the largest debt burdens tend to be advanced economies, with Spain (92% of GDP), the UK (98%), France (107%), US (108%), Italy (136%) and Japan (153%) having debt levels close to, or exceeding, the sizes of their economies.

Some countries are in much better fiscal positions, with Germany expected to bring its general government net debt down to 43% of GDP by 2029, while the Netherlands (43%), South Korea (29%), Australia (24%) and Canada (13%) also have relatively low levels of public debt compared with other advanced economies.

Emerging market ‘middle-income’ and ‘low-income’ developing countries often have much lower levels of public debt than advanced countries, often simply because it is more difficult for them to borrow to the same extent as well as not having the same scale of welfare provision as richer countries to finance. Examples include Kazakhstan (projected to have a general government debt of 8% of GDP in 2029), Saudi Arabia (22%), Iran (23%), Türkiye (30%) and Indonesia (37%). However, that does not stop some emerging and developing countries borrowing more, such as Nigeria (47%), Mexico (51%), Poland (55%), Egypt (56%), Pakistan (61%), Brazil (70%) and South Africa (84%).

Not shown in the chart are China and India for which no net debt numbers are available. The IMF projects them to have general government gross debt in 2029 of 110% and 78% of GDP respectively, indicating how their public debts have grown substantially in recent years. However, without knowing their levels of cash holdings it is less clear where they stand in the rankings.

Also not shown is Norway, the only country with negative general government net debt reported by the IMF. Norway’s general government net cash is projected to reach 139% of GDP in 2029, up from 99% in 2023.

As with all metrics, there are some issues in comparing the circumstances of individual countries. Many countries will also have investments, other public assets, or natural resource rights that are not netted off against debt, while many will also have other liabilities or financial commitments that aren’t counted within debt. For example, the UK has significant liabilities for unfunded public sector pensions as well as even larger financial commitments to the state pension, either of which, if included, would move the UK above the US in the rankings.

The IMF believes that as the world recovers from the pandemic and inflation is brought under control, it is important for countries to start tackling the deficits in the public finances and start bringing down the level of public debt.

This may be difficult for countries such as the UK where significant pressures on the public finances mean public debt is expected to increase over the medium term rather than fall.

This chart was originally published by ICAEW.