Tag: #publicfinances

Spending Review suspension sensible, but avoid more delays

2 April 2020: ICAEW has called the delay to the UK Government’s 2020 Spending Review a ‘sensible move’ in the current climate, but warned that any further delays pose a major risk to infrastructure projects and economic recovery.

The 2020 Spending Review, scheduled to be completed by July this year, has been delayed to enable the government to remain focused on responding to the ongoing coronavirus outbreak. It is likely that the 2020 Spending Review will now be moved to November to coincide with the Autumn Budget, adding a further delay of at least four months to the process.
 
The last three-year Spending Review was in 2015, covering the financial years 2016-17, 2017-18 and 2018-19. The anticipated 2018 Spending Review never took place and departmental budgets were instead ‘rolled over’ into 2019-20, while the Spending Review in 2019 was also cancelled and replaced by an interim Spending Round that set out current spending by departments for one financial year (2020-21) and capital investment plans for two financial years (2020-21 and 2021-22).
 
Based on the overall spending envelope set out in the Spring Budget 2020, the Spending Review this year is expected to set out detailed financial budgets for each government department for a three-year period (from 2021-22 to 2023-24) and four years for capital investment (to 2024-25), enabling public bodies to plan ahead and get the best value for money for the taxpayer.
 
Alison Ring, Director, Public Sector for ICAEW said: “The latest delay is completely understandable given the huge ramifications for the economy and the public finances of the coronavirus emergency. It makes sense for the Chancellor and the Treasury to redeploy resources to deal with the coronavirus now and to re-evaluate spending plans later when there is a clearer view on the financial impact.
 
One concern is the risk this further delay poses to infrastructure projects, given how important they will be to a successful economic recovery. The need to plan and design infrastructure well in advance means that delays in authorising funding could have a significant knock-on effect to when projects are eventually delivered, and to the boost they can give to the economy. 
 
The Chancellor should give some thought to providing assurances to departments about capital funding in 2021-22 and 2022-23 so that they have sufficient certainty to green-light projects sooner rather than later.
 
The Chancellor should also consider the Government’s approach to Spending Reviews. There are many arguments in favour of holding five-year Spending Reviews every three years, rather than three-year Spending Reviews every five years.”
 
For more information:

This article was originally published by ICAEW.

Government watchdog sounds COVID-19 fraud risk alarm

31 March 2020: the Government Counter Fraud Function has published new guidance for public bodies about fraud arising from the actions taken to address the coronavirus emergency. 

Unfortunately, fraud is inevitable given the relaxation in scrutiny over emergency payments made by public bodies to support individuals and businesses affected by the current crisis. But there are still steps that can be taken to minimise fraud where possible.
 
The guidance sets out five overarching principles for public bodies to apply to counter potentially fraudulent activity in delivering emergency programmes:
 
1.     Accept that there is an inherently high risk of fraud, and it is very likely to happen.
 
2.     Integrate fraud control resources into policy and process design.
 
3.     Work together with fraud control teams to implement low friction counter measures to prevent fraud risk where possible.
 
4.     Carry out targeted post-event assurance to look for fraud, ensuring access to fraud investigation resources.
 
5.     Revisit the control framework when emergency payments shift into longer term services – especially where large sums are invested.
 
The guidance is intended to support government departments, local authorities and other public bodies to move quickly to provide financial support to those affected, whilst doing what is possible to address the inevitable frauds that will be committed. It recommends ensuring that consistent data is collected from those applying and receiving payments and putting in place robust claw back agreements to recover funds that are paid out incorrectly.
 
The advice makes clear that public bodies will need to put in place post-event assurance processes to review the payments being made now. 
 
Alison Ring, Director, Public Sector for ICAEW, commented: “It is important that public bodies move as quickly as they can to support individuals and businesses in distress but despite that, there is a lot they can do to minimise the potential for fraud. Where possible, implementing existing fraud prevention measures in the time available, combined with extensive post-transaction scrutiny and assurance to be carried out later.
 
The need for appropriate open access provisions, allowing public bodies to verify transactions at a later date and recover fraudulent claims where possible, will be an important component to both deferring fraud in the first place as well as detecting fraud afterwards.”

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.

IFS: deficit to triple as budget contingency increases

30 March 2020: the Institute for Fiscal Studies (IFS) has suggested that the budgeted fiscal deficit for the financial year starting 1 April 2020 of £55bn could more than triple to £177bn due to the coronavirus pandemic.

In a new publication, the economic research institute also stated that there is a chance the 2020-21 deficit could end up exceeding £200bn.

The Chancellor has already stopped reporting financial estimates for a series of emergency measures, such as the funding of 80% of pay for furloughed workers and support for self-employed workers, incurring tens of billions of public money to keep an economy going whilst in lockdown.

The Contingencies Fund Act 2020 (passed by Parliament on 25 March 2020 alongside the Coronavirus Act 2020), increases the amount available for contingencies from a limit of 2% of spending authorised by Parliament in the preceding financial year to a limit of 50%. In effect, this gives the Chancellor the power to spend an additional £266bn in 2020-21 over and above spending plans already announced, a substantial increase from the £11bn that would have been available otherwise.

The IFS’s estimate assumes that a 5% contraction in the economy would reduce tax revenues by somewhere in the region of £80bn in 2020-21, albeit this would be offset by savings in interest costs following the reduction in the base rate to 0.1% and quantitative easing operations by the Bank of England.

Fiscal measures include the £12bn emergency package announced on the day of the Budget and the £20bn announced on 17 March, together with an estimate by the IFS of £18bn for further measures announced up until 25 March 2020.

The effect on the public finances estimated by the IFS is summarised in the table below.

Estimate of coronavirus revisions to the Spring Budget 2020

Financial year 2020-21Spring Budget
£bn		Economic contraction
£bn		Fiscal measures
£bn
Revised
£bn
Taxes and other income873(80)(22)771
Total managed expenditure(928)8(28)(948)
Fiscal deficit(55)(72)(50)(177)
% of GDP2.4%+3.4%+2.3%8.1%

Source: HM Treasury, Spring Budget 2020; IFS, estimates of economic contraction and fiscal measures to date, 26 March 2020; ICAEW, rough estimate of the split of fiscal measures between waiving tax and additional spending.

The IFS analysis of fiscal measures includes £10bn for the 80% job retention credit for employed workers (for which the IFS have assumed a 10% take-up), but it was prepared for the announcement of support for the self-employed. This could add another £9bn to the deficit for 2020-21.

The IFS has not included the risk of bad debts on the Government’s £330bn programme of financial guarantees and business loans or on the £30bn of second quarter deferred VAT payments. There is also no cost provision for the exposure to additional bank financing and corporate bond purchases by the Bank of England that is being guaranteed by HM Treasury.

Altogether, this would increase the deficit to £177bn, or 8.1% of GDP based on a 5% smaller economy, before taking account of the support package announced for the self-employed. The prospect of further fiscal measures in the weeks and months to come, combined with the risks from loans and guarantees, means that the prospect of a deficit in excess of £200bn is looking increasingly likely.

For more information

  • For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.

ICAEW chart of the week: Forecast deficit doubles in a week

20 March 2020: Emergency spending measures added to Spring Budget measures drives forecast deficit for 2020-21 to double in a week.

Forecast deficit pre-budget £40bn + Budget £15bn = OBR forecast £55bn - base rate £3bn + Covid I £12bn + Covid II £20bn = Latest forecast £84bn

20 March 2020.   Chart research by Martin Wheatcroft FCA, design by Sunday.   ©ICAEW 2020
Source: HM Treasury, ‘Spring Budget 2020’, and emergency announcements on 11 and 17 March 2020.

Three fiscal events within a period of a week is pretty much unprecedented. Two of these were on Wednesday 11 March when an expansionary Spring Budget was accompanied by a £12bn package of emergency measures. Less than a week later, the Chancellor announced a £20bn package of additional financial support, together with an initial £330bn in loans and guarantees to keep the economy operating.

As the #icaewchartoftheweek illustrates, this means that the forecast deficit for 2020-21 has more than doubled, from £40bn before the Budget to £84bn now.

It looks increasingly likely that the fiscal deficit in the coming year will exceed £100bn, potentially by a significant margin. Just a 2% drop in tax revenues would be enough to take the deficit over that level, even before the impact on welfare spending of job losses and income reductions, or the cost of writing down any loans or guarantees that are not repaid. Further financial support packages from the Chancellor over the weeks and months ahead are also likely.

Sit tight. This is going to be a bumpy ride for the public finances.

This chart was originally published by ICAEW.

The £4.4bn cost of preparing for Brexit

17 March 2020: the NAO has provided an analysis of the spending by government departments on preparing for Brexit, highlighting just how significant an exercise leaving the EU is for the government machine.

A recent report by the National Audit Office (NAO) on the cost of EU Exit preparations analysed the £4.4bn spent by government departments in getting ready for Brexit between June 2016 and 31 January 2020.

The NAO is the independent audit body responsible for scrutinising public spending on behalf of Parliament. In its Brexit report, the NAO identified over 300 workstreams with £1.9bn spent on staff, £1.5bn on building new systems and procuring goods and services, £0.3bn on external advice, and £0.6bn in other costs.

Over half of the costs were incurred by three departments, with £871m, £803m, £748m spent respectively by DEFRA, the Home Office and HMRC. This included preparation for new international trade, immigration and customs processes, as well as implementing domestic regulation in areas currently regulated by the EU.

This spending is not the complete total. It does not include costs incurred, for example, of staff only partially working on Brexit or seconded for less than six months, nor local authority preparations not covered by central government funding. It also does not include the net contributions payable to the EU of £8bn during the transition period between 1 February 2020 and 31 December 2020 nor the net financial settlement payable to the EU after that of an estimated £23bn.

The NAO reported that some of the £1.8bn spent between 1 April and 31 October 2019 was spent on no-deal preparation, but that it is not possible to analyse how much of this was wasted (other than the £92m in losses incurred on terminating ferry and other contracts already identified by Whitehall as ‘fruitless payments’ or ‘constructive losses’). This is because many of the preparations will still be needed for when the UK leaves the Customs Union and Single Market at the end of the year.

Spending on advertising and communication amounted to £77m, including £49m spent on the Cabinet Office’s ‘Get ready for Brexit’ campaign, the subject of a critical NAO report in January 2020.

Alison Ring, Director, Public Sector for ICAEW commented: “The NAO has provided a very helpful analysis of the spending by government departments on preparing for Brexit. It highlights just how significant an exercise leaving the EU is for the government machine, with the need for more staff, new regulatory arrangements and new systems and processes across the public sector.

This effort is far from complete, with a huge amount of work still needed to prepare for leaving the EU Customs Union and Single Market in less than nine months’ time.”

The NAO report: ‘The cost of EU Exit preparations’ is publicly available.

This article was originally published by ICAEW.

ICAEW chart of the week: Spring Budget 2020

13 March 2020: Forecast deficits increase with new spending announced in the Spring Budget, even before the impact of the coronavirus.

Forecast deficit before and after the Budget. 2020-21: £40bn to £55bn, 2021-22: £38bn to £67bn, 2022-23: £35bn to £61bn, 2023-24: £33bn to £60bn, 2024-25: £58bn.

13 March 2020.   Chart research by Martin Wheatcroft FCA, design by Sunday.   ©ICAEW 2020
Source: HM Treasury, ‘Spring Budget 2020’.   2020-21 excludes £12bn additional funding in response to the coronavirus.

The sheer scale of the Spring Budget 2020 spending announcements are difficult to comprehend, but the #icaewchartoftheweek makes an attempt by illustrating their effect on the fiscal deficit compared with the previous forecast.

The budgeted deficit in the coming financial year is expected to increase by £15bn to £55bn, even before taking account of the emergency £12bn to respond to the coronavirus that was decided after the forecasts were finalised. The deficit is also expected to be much greater than the previous forecast in each of the subsequent years, albeit there was no previous official forecast for 2024-25.

The increase in the deficit in 2020-21 of £15bn reflects higher spending of £19bn less £1bn in higher taxes and £3bn in other forecast revisions. The spending increases in the subsequent four years are even greater, with an extra £46bn on average a year before taking account of £7bn a year in higher taxes, £8bn a year from the indirect boost to the economy that the incremental spending and investment should provide, as well as an average of £3bn a year in other forecast revisions.

The big uncertainty is how much the UK and global economies will be affected by the coronavirus pandemic in addition to the existing economic headwinds and changes in the trading relationships with other countries in the EU and elsewhere in 2021. These risks could potentially reduce tax revenues significantly, leading to even greater fiscal deficits than those presented by the Chancellor on Wednesday.

For more on Budget 2020 visit ICAEW’s dedicated Budget Hub. For the latest news and advice for accountants on the Covid-19 outbreak visit ICAEW’s Coronavirus hub.

Spring Budget 2020: Hey big spender, spend a little infrastructure with me

12 March 2020: Rishi Sunak’s first Budget as Chancellor of the Exchequer provided a sharp change in direction for the public finances – something that will please and surprise many, according to ICAEW’s Public Sector team.

Spring Budget 2020 combined a short-term fiscal stimulus to fight the coronavirus with higher spending on public services and new infrastructure investment to increase borrowing significantly. Fortunately, ultra-low interest rates will keep financing costs down on the more than £330bn in borrowing planned to finance these plans (not including short-term fiscal stimulus measures), with public sector net debt expected to exceed £2.0tn by 2025.

This Budget is particularly important as it sets the spending envelope for the three-year Spending Review expected to be published later this year. With a higher base for spending following the Spending Round 2019 announced by the previous Chancellor in October, this signals an end to the austerity policies of recent administrations. 

Key headlines for 2020-21:

  • Fiscal deficit up from £40bn to £55bn (2.4% of GDP), before coronavirus measures.
  • No significant tax changes beyond corporation tax remaining at 19%.
  • £14bn extra current spending and £5bn extra investment before coronavirus measures.
  • £12bn in tax and spending measures to respond to the coronavirus.
  • Gross financing requirement of £162bn, including £98bn to cover debt repayments.
  • No reflection of uncertain adverse economic effect of the coronavirus on tax revenues.

Key headlines for the four subsequent years to 2024-25:

  • Fiscal deficit of £62bn (2.5% of GDP) on average over the subsequent four years.
  • Tax policy measures to generate an additional £7bn per year.
  • Extra current spending of £27bn a year and extra investment of £19bn a year.
  • Gross financing requirement of £595bn (£149bn a year) including £315bn to cover repayments.
  • Significant economic uncertainty with coronavirus, global economic conditions and changes in UK trading relationships with the EU and other countries.

The existing plans already incorporated a significant ramp-up in infrastructure and other investment spending with public sector net investment forecast to increase from 2.2% of GDP in 2019-20 to 3.0% by 2022-23. The challenge for the Government will be to deliver and ‘get things done’, especially as capital investment by government departments is expected to increase by 25% in 2020-21 and by a further 35% over the subsequent four years. Will there be sufficient construction capacity and project management expertise to deliver such a rapid expansion and still deliver value for money for taxpayers?

The Budget also contained some important developments in the framework for the public finances, with a specific commitment to review the investment criteria in the Government’s ‘Green Book’ to ensure regions outside London and the South East benefit from the additional infrastructure spend proposed in the Budget. The focus on looking at the effect on investments on the public balance sheet was also welcome with new approaches planned for how to appraise public spending.

One surprise in the Budget announcement was that the OBR did not revise the economic forecasts down as much as had been expected. This was partly because of the economic benefits of higher public spending and investment, but also reflected an improved outlook for productivity. The benefit of this for the Chancellor was that he was able to announce additional current spending on public services, while still remaining within the fiscal rules set out in the Conservative party manifesto.

Unfortunately, the scale of the impact of the coronavirus on the economy is still unclear and so the forecasts for tax revenues may need to be revised downwards, potentially significantly, in the Autumn Budget later this year.

Commenting on Spring Budget 2020, Alison Ring, Director, Public Sector, at ICAEW said: “The Chancellor has announced a major loosening of the taps on spending and investment in his first Budget, with a combination of a short-term fiscal stimulus to fight the coronavirus, higher spending on public services, and a major programme of new infrastructure investment.

Those wondering where all the funding for this planned spending will come from may be surprised to discover that the Chancellor has not followed the custom of post-general election tax rises, but instead has decided to take advantage of ultra-low interest rates to borrow more than £330bn over the next five years. Public sector net debt is expected to exceed £2.0tn by 2025, although the Government hopes that this will then be falling as a ratio to the size of the economy.

Nevertheless, it is a Budget that many will be pleased with, even if a little surprising coming from the traditional champions of small government.”

This article was originally published by ICAEW.

ICAEW chart of the week: Raising taxes is hard to do

6 March 2020: How can the Chancellor raise taxes in the forthcoming Spring Budget?

Tax receipts 2019-20 £751bn. Top six taxes £615bn (82%): income tax £196bn. VAT £155bn, NI £143bn, corporation tax £54bn, council tax £36bn, business rates £31bn.

Traditionally, the first Budget after an election raises taxes and this would be a logical step given plans to increase public spending and investment in infrastructure. But which taxes could the Chancellor increase?

As the #icaewchartoftheweek illustrates, the top six taxes generate over 80% of tax receipts. But the Conservative manifesto rules out increases in the headline rates of income tax, national insurance and VAT, while increasing the corporation tax rate would be difficult given the planned cut from 19% to 17% has already been suspended. Most local authorities are already planning to increase council taxes as much as they can while increasing business rates would be really difficult.

We await the Budget to see what the Chancellor decides to do. Some money could be generated from increasing or introducing smaller taxes but for larger sums, the main place to look would be from reforming tax reliefs and exemptions, such as the rumoured abolition of Entrepreneurs’ Relief. However, it would be a brave Chancellor that decided to go after larger sums, for example by extending the scope of VAT.

Of course, the Chancellor might decide to cut taxes instead, hoping to boost a sluggish economy and so generate greater sums through higher levels of growth. Either way, borrowing is likely to increase – fortunately at extremely low interest rates.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK international reserves

21 February 2020: UK international reserves of £41bn analysed by currency.

UK international reserves: £149bn assets - £108bn liabilities = £41bn net. Euro £12bn, US dollars £13bn, Other currencies £6bn, Gold £10bn.

The UK’s official holdings of foreign government debt, central bank deposits, IMF Special Drawing Rights (SDRs) and gold are the subject matter for the #icaewchartoftheweek, being the foreign currency assets and liabilities used in monetary operations.

The UK Government and the Bank of England together held £149bn in foreign currency assets as of 31 December 2019, equivalent to approximately two months’ public spending or just under 7% of gross national income. However, these assets were offset by £108bn in foreign currency liabilities, comprising £59bn in net financial derivatives (currency forwards, interest rate and cross-currency swaps), £23bn due on repo transactions and £26bn in other liabilities.

Even though the official reserves are an extremely important tool used to help ensure the smooth operation of financial markets, provide confidence in the UK’s financial stability and (if needed) support the value of sterling, the net balance of £41bn is relatively small, with £12bn invested in the Euro, £13bn in the US dollar and £6bn in the Yen and other currencies, together with £10bn of gold.

This chart was originally published by ICAEW.

ICAEW chart of the week: Regional capex

Chart: Difference from average identifiable public sector Capex per per year of £967. See table at end of post.

The #icaewchartoftheweek this week is on the subject of public sector capital expenditure across the UK in the light of speculation that the Spring Budget in March will feature a significant boost to capital spending in the North of England.

We thought it might be interesting to look at the most recent data; albeit the usual caveats apply to the numbers given the lack of formal systems in government to fully track expenditure by region and the differences between capital expenditure in the fiscal numbers (shown in the chart) and the capital expenditure reported in the (as yet unpublished) Whole of Government Accounts for 2018-19.

According to the ONS, there was £64.2bn in capital expenditure that can be identified by nation and region of the UK, an average of £967 for the 66.4m people living in the UK in 2018-19.

It is perhaps not surprising that there is more capital spending in London than the per capita average given that the millions of commuters and visitors that add to the 8.9m local population every day. However, the scale of the difference is substantial with £13bn invested in 2018-19, an average of £1,456 per person – £489 more than the UK average.

Of course, variations in capital expenditure are to be expected across a country of the size of the UK given the different natures and needs of each region and nation. For example, Scotland’s much higher level of per capita public capital expenditure (£7.2bn / 5.4m people = £1,325 per person) needs to be seen in the context that it comprises a third of the land area of the entire UK, but only has 8% of the population.

The region that incurs the least capital expenditure on a per capita basis is the East Midlands, where £3.0bn was spent in 2018-19, an average of £621 per person (£346 less than the average) for each of the 4.8m people living there. This is followed by Yorkshire and The Humber (£694 per person), the South West (£723) and the West Midlands (£799).

Most of the other regions are close to the average, including (perhaps surprisingly given some of the headlines), the North East and the North West.

One question that does come to mind – if Government’s intention is to rebalance regional inequalities by investing more in the ‘Northern Powerhouse’ and the ‘Midlands Engine’, will it have anything to spare for the ‘Great South West’ too?

2018-19
Capex
Population		Per
capita		Difference
from average
North East£2.4bn2.7m£906-£61
North West£7.0bn7.3m£955-£12
Yorkshire and The Humber£3.8bn5.5m£694-£273
East Midlands£3.0bn4.8m£621-£346
West Midlands£4.7bn5.9m£799-£168
East of England£5.7bn6.2m£924-£43
London£13.0bn8.9m£1,456+£489
South East£8.6bn9.1m£945-£22
South West£4.0bn5.6m£723-£244
Wales£3.0bn3.1m£956-£11
Scotland£7.2bn5.4m£1,325+£358
Northern Ireland£1.8bn1.9m£949-£18
United Kingdom£64.2bn66.4m£967–

Source: ONS, Country and regional public sector finances 2018-19: identifiable capital expenditure.