Tag: #publicfinances

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

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

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

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

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

Month of August 2023

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

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

Five months to August 2023

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

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

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

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

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

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

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

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

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

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

Balance sheet metrics

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

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

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

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

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

This article was originally published by ICAEW.

PACAC submission: statistics in the UK

I recently submitted a response to the House of Commons Public Administration and Constitutional Affairs Committee inquiry: Transforming the UK’s Evidence Base and this has now been published by the inquiry together with other written submissions.

My submission makes one major point about the UK government not comprehensively collecting and utilising financial data that is routinely produced by 10,000 or so public bodies in the UK, as well as other points around the availability of administrative data and the quality of spreadsheet design in communicating many statistics.

Martin-Wheatcroft-PACAC-evidence-submission-2023-08-31Download

July public sector finances: a mixed set of results

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

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

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

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

Month of July 2023

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

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

Four months to July 2023

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

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

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

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

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

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

Public sector finance trends: July 2023

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


Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. The latest release saw the ONS revise the reported deficit for the three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

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

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

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

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

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

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

This article was originally published by ICAEW.

Councils should ‘comply or explain’ on governance code

ICAEW welcomes proposed statutory guidance that establishes a corporate governance code for local authorities in England, but says councillors need better training and support if they are to be able to hold leaders to account.

Financial collapses and major stresses in local government finances have led the government to undertake a major rewrite of the applicable statutory guidance, in effect establishing a corporate governance code for local authorities in England.

ICAEW has formally responded to welcome the proposed new guidance, while also making some recommendations for improvements.

The government is introducing the new guidance in response to a series of high-profile collapses of local authorities in England in which governance failures were identified as a common feature, as well as an increasing number of local authorities reporting that they are in financial difficulty or at risk of being so.

Local authorities in Thurrock, Woking and Croydon are together estimated to have lost local and national taxpayers in excess of £1bn, with their communities adversely affected by significant cuts to local public services and higher council tax bills. Central government has also stepped in to provide additional funding and loans, some of which are unlikely ever to be repaid.

The proposed guidance technically relates to the ‘best value duty’, a legal obligation placed on specified public sector bodies, including local authorities, to have arrangements in place to secure continual improvement in how they carry out their work. Relevant public bodies are required to have regard to any statutory guidance issued by the government in deciding how they comply with this duty.

As the proposed guidance acknowledges, meeting the best value duty will only be possible if councils have adequate governance arrangements in place. It goes on to set out a series of characteristics of well-functioning authorities, as well as indicators of potential failure, covering continuous improvement, leadership, governance arrangements, culture, use of resources, service delivery, and partnerships and community engagement.

Accountability is not accidental

ICAEW has suggested a need for accountability events. These should include a formal presentation on financial performance and position each year by leaders and officers to councillors within four months of the end of the financial year, and proper consideration and adoption by full council of the annual financial report once the external audit is completed. The latter should cover the financial statements and accompanying narrative reports on financial performance and position, audit reports, and statements on governance arrangements; regard for the statutory guidance on best value duty; and responsibilities for the preparation of the financial statements and internal financial control.

ICAEW has recommended a ‘comply or explain’ approach when local authorities report on how they have had regard to the guidance. This would provide clarity on how local authorities have set about applying the guidance, where they have chosen to diverge, and where they have been unable to comply.

A feature of recent failures has been inadequate accountability, with councillors not being properly equipped to hold leaders and officers to account for unwise debt-leveraged investment strategies, poor individual financial decisions, and inadequate governance arrangements. In most cases councillors were not fully aware or did not fully understand the scale of the risks that were being assumed and the consequent financial implications for their local communities. ICAEW’s response stresses that councillors need sufficient training, information and support to undertake this role.

ICAEW has separately submitted evidence to the House of Commons Levelling Up, Housing and Communities Select Committee on how local authority financial statements must be understandable if they are to provide the information councillors need to hold their local authorities to account and to be used effectively in governance and risk management processes.

Good governance is critical

The proposed guidance stresses the importance of good governance and strong financial management, providing a useful framework for local authorities in how they set about ensuring they have appropriate governance arrangements in place.

However, the proposed guidance does not make it clear that performance management should include monitoring and management of the balance sheet and financial risks, a feature that was missing in recent local authority failures that saw debt-leveraged investments significantly increase balance sheet risk.

ICAEW’s response also highlights the role that internal audit can play in assuring governance arrangements are in place, while noting that local councillor codes of conduct will need to be updated to reflect the new guidance.

The role of the audit committee is extremely important to an effective system of governance, and ICAEW calls for the government to legislate, as promised, to require independent members of local authority audit committees.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, commented:

“We are very pleased that the government has recognised the need for a corporate governance code for local government in the form of new statutory guidance on the best value duty. This is particularly welcome in the light of recent financial collapses at Thurrock, Woking and Croydon that together have cost local and national taxpayers in excess of £1bn, as well as increasing levels of financial stress on local authorities across England.

“We believe that accountability does not happen by accident. There is a need for regular accountability events covering financial performance and the annual financial report as well as budgets, for a ‘comply or explain’ approach to reporting on how the best value duty guidance has been implemented, and for councillors to be properly equipped with the training, information and support they need to hold leaders and officers to account.

“Good governance is essential if local authorities in the UK are to ensure they obtain value for the more than £200bn of public money they spend each year on our behalf.”

Read ICAEW’s response to the consultation here.

This article was first published by ICAEW. The article, and the consultation response it refers to, were written by Martin Wheatcroft of behalf of ICAEW.

Spotlight on local audit also shines on the accounts

Alison Ring, ICAEW Director Public Sector and Taxation, says we must take a once-in-a-generation opportunity to fix long-standing underlying problems with the way local government financial statements are used. 

There is a crisis in local government financial reporting and audit in England that urgently needs resolving. Some 74% of 2021/22 local authority financial statements were still not signed off after a year, 31% after two years, and some audited accounts are still not published from 2018/19 or earlier. These delays are not just a compliance issue – they are fundamental to how our local democratic institutions operate at a time when many authorities are struggling amid difficult economic conditions.

Getting local audits back on track must be the immediate priority, even if it will mean accepting some unpalatable measures, such as temporary relaxations in some audit requirements, or the postponement of new accounting standards. All parts of the system will need to compromise a little to unlock audit sign-offs, clear the backlog, and get the system up and running and sustainable again. 

However, the spotlight focused on local audit illuminates some uncomfortable truths about the underlying effectiveness of audited financial statements in ensuring that councils are well managed and public money is spent wisely. They are often not understood, not read by enough people, and not used by councillors and other stakeholders in holding local authorities to account, as part of governance processes or when approving major financial decisions.

Many of these problems were identified by the Redmond Review, but progress in addressing its recommendations is, perhaps inevitably, much slower than anyone would like. In the meantime, there have been several well-publicised disasters as the financial tide has swept out to expose the naked vulnerability of some local authorities.

Much more than an informative read

Done well, financial statements are much more than an informative read that sets out the story of the most recent financial year. They are a multi-purpose tool for accountability, governance, risk management, strategic decision-making, regulatory and system oversight. They are also the apex of the system of internal financial control and the vehicle through which external assurance is delivered.

The trouble is that financial statements can only serve these purposes if they are read, understood, and actively utilised in each of these roles. When I hear that “nobody reads the accounts” I start to worry. Even though I know this is an exaggeration and that many people do of course read the annual financial report, the implication is that accounts are not being used to their full extent.

This poses some big questions. Are councillors able to properly hold their local authority and its management team to account if they aren’t actively using the principal tool designed to help them do so? 

Are governance committees able to ensure their local authority is well run if they aren’t using the official document that brings together the effects of thousands of financial decisions made every year into a single assured report that summarises financial performance as well as the end-of-year financial position? 

Are they able to assess the effectiveness of risk management if they aren’t looking at the balance sheet and the financial exposures disclosed in the notes to the financial statements? 

Where decisions are being made, are council leaders, cabinets, officers, and management teams able to make effective strategic choices, potentially transforming their balance sheets, if they aren’t starting from the foundation provided by the audited financial statements? 

Are DLUHC and other government departments, including HM Treasury, able to make good funding decisions, or assess the effectiveness of the overall system of local government in England, if they aren’t reading the accounts in some detail? 

Finally, how can the preparation of financial statements be a key factor in promoting financial control if they lack the challenge of having an interested readership?

Of course, this is not the whole story. Unlike in the private sector where internal financial reports are confidential, a whole swathe of financial documents are in the public domain. 

Why would anyone need to read a long and complicated set of accounts when they have access to this other “more useful” stuff?

The answer is that in many cases councillors and other stakeholders can’t properly understand the budget or other financial information provided to them if they haven’t first read and understood the annual report and accounts, and the financial context in which decisions are being made.

“The accounts are impenetrable”

This brings us on to another point that I have also heard frequently, which is that a reluctance to read the accounts is forgivable given how long and complicated many local authority annual financial reports are – “impenetrable”, in the words of some. Given my own attempts to grapple with some local authority annual accounts, I have sympathy for this claim.

To get this system working better, financial statements and accompanying narrative reports need to be much more understandable, so more people read them and use them as the multi-purpose tool they should be.

These concerns about whether accounts are being used effectively is one of the reasons I am so pleased that the Levelling Up, Housing and Communities Commons Select Committee is conducting an inquiry into the purpose and use of local authority financial statements and external audit in England, to which ICAEW and others have given evidence. 

The committee is focusing on both the overall financial reporting and audit framework for local authorities in England as well as the immediate challenges of clearing the backlog of unaudited accounts.

A vision for local financial reporting and audit

To make the system work better we need everyone to agree on a clear vision for local financial reporting and audit, which is why ICAEW developed its own.

ICAEW’s vision is to bring confidence to the finances of local public bodies through a valued and thriving profession, high-quality understandable financial reports, high-quality timely local audits, strong financial management, good governance, value for money, and protecting the public interest. 

When we started this project, it reminded us that everything starts with the financial statements. Not because they are more important than high-quality timely external audits, strong financial management, good governance, or a proper system of accountability, but because they are the rock on which everything else stands. 

We need financial statements to be as understandable as they can be. We need them to be read. And – most importantly – we need them to be used.

This article was written by Martin Wheatcroft on behalf of ICAEW and was originally published in Room 151, an online news, opinion and resource service for local authority finance officers covering treasury, pensions, strategic finance, funding, resources and risk, and subsequently published by ICAEW.

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

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

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

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

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

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

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

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

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

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

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

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

Read more: Whole of Government Accounts 2020/21.

This chart was originally published by ICAEW.

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

ICAEW chart of the week: A big number

Public spending is expected to approach £1.2trn this year, an extremely large and incomprehensible number to most of us. Our chart this week attempts to make that number more digestible.

Chart labelled 'A big number' comprising nine boxes in a grid each with the same number in nine difference versions: First row of three boxes - £1.2bn for UK budgeted public spending in 2023/24 - equivalent to £99bn per month - or £23bn per week Second row: - £1.2bn is equivalent to £41,600 per household in 2023/24 - or £3,470 per household per month - or £800 per household per week Third row: - £1.2bn is equivalent to £17,400 per person for 2023/24 - or £1,450 per person per month - or £335 per person per week

Public spending in the current financial year is budgeted to amount to £1,189bn or just under £1.2trn. But what does such a large number really mean? 

It can be difficult to comprehend the sheer scale of public spending that a major economy such as the UK incurs each year. The 2023/24 budget of £1,189,000,000,000 is just a huge amount of money to think about.

One way to understand the number is to break it down a little; knowing that the UK public spending is expected to be an average of £99bn a month or £23bn a week during the current financial year helps a little. However, smaller but still exceptionally large amounts can be equally difficult to understand.

The traditional way to look at the public finances, not shown in the chart, is to relate it to the size of the UK economy. GDP is projected to amount to £2,573,000,000,000 in 2023/24, meaning that public spending should be equal to around 46% of the overall economy. However, while this is helpful in putting public spending into context, it is still just a ratio between two incredibly large numbers that very few of us really comprehend. Surely there must be a better way of getting to grips with the public finances.

Our chart this week attempts to do so. By dividing the total for public spending by the number of households in the UK (expected to reach around 28.6m in September, the middle of the financial year) and by the size of the UK population (anticipated to be approximately 68.2m) as well as by month and by week, we can hopefully get a better a feeling for what is going on.

As our chart this week illustrates, average public spending in 2023/24 is equivalent to £41,600 per household, which breaks down to £3,470 per household per month or £800 per household per week, and it may be helpful to think about public spending. Whether you prefer to think in annual, monthly or weekly time periods, they are pretty big numbers in the context of most people’s household budgets.

Alternatively, you may find it easier to identify with how public spending in 2023/24 is equivalent to an average of £17,400 per person living in the UK, breaking down to £1,450 per person per month or £335 per person per week. Again, a very large number, particularly when you realise the average covers children as well as the adult population.

In some ways these much smaller versions of a big number – such as public spending of £3,470 per household per month – feel a lot larger when brought into a more relatable context. The figure of £1.2trn is baffling, but when you know the UK public sector plans to spend £800 per week for each of its 28.6m households, you get a better sense of just how much the UK state spends.

Of course, in working out averages it is important to be clear that they are just that – averages. Many people will benefit more, or less, from public spending than others, while conversely different groups will pay more or less in the taxes needed to fund that spending. Pensioners and children generally pay much less in taxes than those of working age, while benefiting from a much greater proportion of public spending. Similarly, poorer households will receive more in benefits and other forms of support, while richer households pay more in taxes. 

Despite that, per household and per person averages give us an opportunity to compare public spending with reference points we can relate to, such as our own salary or household budget.

One of the reasons the numbers are so high, whichever way you look at them, is that the state does an awful lot. Average spending planned of £1,450 per person per month can be broken down further to approximately £420 on pensions and welfare, £350 on health and social care, £160 on education, £140 on defence, security, policing and justice, £140 on debt interest, £75 on transport, and £165 per person per month on everything else. Each of these in turn are made up of hundreds if not thousands of different central and local government programmes, many costing mere fractions of a penny per person per month, but that together add up to a lot of money.

No matter how you break it down, public spending will always be a huge number.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public sector segments 2022/23

Our chart this week illustrates just how centralised the UK is by looking at the disparity between receipts and expenditure between central and local government.

Step chart for the financial year 2022/23, showing receipts of £1,018bn (first column) less expenditure £1,155bn (middle column) and deficit £137bn (last column). Central government: £931bn receipts - £919bn expenditure = £12bn surplus before intra-government transfers. Local government: £59bn receipts - £204bn = £145bn shortfall before transfers. Other public sector: £28bn receipts - £32bn expenditure = £4bn shortfall before transfers.

Most people living in the UK would be surprised to discover just how big a gap there is between the council taxes and other income received by local councils, police and fire authorities, and the amount that they spend on public services.

Our chart of the week illustrates this disparity by looking at public sector segments in 2022/23 and how receipts and expenditure match up, before taking account of intra-government transfers.

Fiscal reporting in the National Accounts is broken down into five segments, of which the two largest are central government and local government. The former includes UK government departments, the devolved administrations in Scotland, Wales and Northern Ireland, and several hundred government agencies and other public bodies. Local government principally consists of local authorities across the UK, the Greater London Authority and regional combined authorities in England, police and fire authorities in England and Wales, and local public transport bodies (the largest of which is Transport for London). The other three segments are public corporations (comprising publicly owned businesses plus social housing), funded pension schemes (mostly local authority schemes as central government schemes are generally unfunded), and the Bank of England.

The latest provisional numbers for the financial year ended 31 March 2023 reported that the UK public sector generated £1,018bn in receipts and incurred expenditure of £1,155bn, giving rise to a deficit of £137bn – a shortfall that has been funded by central government borrowing.

Central government raised £931bn in 2022/23 and spent £919bn, a net £12bn surplus before intra-government transfers. Local government received £59bn and spent £204bn, a shortfall of £145bn. And the three remaining fiscal segments together generated £28bn in receipts, and recorded £32bn in expenditure, a net shortfall of £4bn.

By excluding transfers in this way, the chart highlights just how centralised the UK state is, with local government dependent on central government largesse to pay for 69% of its spending in 2022/23. 

Local authorities received £41bn in council taxes and £18bn in non-tax receipts, with intra-government transfers amounting to £141bn, comprising £127bn in revenue grants and £14bn in capital grants. Transfers included a redistribution of £25bn in business rates, which although collected by local authorities are national taxes whose disposition is determined by central government. The rest came from a combination of block grants, subsidies, and specific grants (some of which councils need to bid for) as part of a complex and complicated web of funding arrangements for local authorities that makes them highly dependent on the decisions of government ministers.

After transfers there was a reported deficit of £137bn in central government and £4bn in local government, while £8bn in net transfers converted a £4bn shortfall between receipts and expenditure in the three other segments into a net £4bn surplus.

The big picture is of the most centralised state among medium and large economies in the developed world, with local authorities almost entirely dependent on the largesse of central government to fund the essential public services they deliver.

Distributing power to the devolved administrations in Scotland, Wales and Northern Ireland has started to see a share of national taxes dispersed (such as income tax in Scotland and Wales) and some limited tax-raising powers. This contrasts with the debate about devolution in England, which has primarily focused on structures with the partial creation of a regional tier of local government in the form of combined authorities, rather than on more fundamental questions of whether this very centralised system of funding for local authorities needs reform.

This chart was originally published by ICAEW.

ICAEW chart of the week: Japan demographics

We look at how Japan’s population is ageing and falling fast, presenting some major challenges for the public finances of the third largest national economy in the world.

Column chart showing Japan's population at twenty-year intervals from 1963 to 2063, analysed into five age groups: Ages 0-19, Ages 20-39, Ages 40-59, Ages 60-79, Ages 80+. 1963 – 36m, 32m, 19m, 8m and 1m – 96m total 1983 – 35m, 36m, 31m, 15m and 2m – 119m total 2003 – 25m, 35m, 35m, 27m and 5m – 127m total 2023 – 20m, 26m, 35m, 31m and 12m – 124m total 2043 – 15m, 22m, 26m, 31m and 16m – 110m total 2063 – 12m, 17m, 22m, 24m and 18m – 93m total

Our chart this week is on the demographics of Japan, looking at how its population grew rapidly from 96m in 1963 to 119m in 1983 and then 127m in 2003, before falling to 124m this year, to a projected 110m in 20 years’ time, and to 93m in 40 years’ time.

Our analysis starts with the 96m people who lived in Japan in 1963 and shows how increased longevity saw the population increase to 119m in 1983 (an increase of 24m from 36m births and 2m migrants less 14m deaths), before increasing to 127m in 2003 (a further 8m increase from 25m births less 17m deaths). 

The population has been relatively stable since then, peaking at 128m in 2010 (not shown in the chart), before dropping to 124m this year as the number of births (20m over the last 20 years) fell below the number of deaths (25m). This was offset by a small amount of net inward migration, with the non-Japanese component of the population amounting to 3m in 2023.

Fewer younger people means that the number of births is expected to be even smaller over the next 20 years to 2043 at around 15m, at the same time as deaths are expected to increase in line with an older population. According to the latest medium-variant projections of Japan’s National Institute of Population and Social Security Research, the population is projected to drop by 14m to 110m in 2043 (15m births + 3m migrants – 32m deaths) before falling by a further 17m to 93m in 2063 (12m births + 3m migrants – 32m deaths).

The primary purpose of the chart is to illustrate how the age profile has shifted and continues to change as Japan gets older. Grouped into five age segments: 0-19, 20-39, 40-59, 60-79 and 80+, the population was, is, and is projected to be as follows:

1963 – 36m, 32m, 19m, 8m and 1m – 96m total
1983 – 35m, 36m, 31m, 15m and 2m – 119m total
2003 – 25m, 35m, 35m, 27m and 5m – 127m total
2023 – 20m, 26m, 35m, 31m and 12m – 124m total
2043 – 15m, 22m, 26m, 31m and 16m – 110m total
2063 – 12m, 17m, 22m, 24m and 18m – 93m total

The contrast in the age profile in the 20th century compared with 21st century Japan is dramatic, with the proportion of population aged 60 or over increasing from 9% in 1963 to 35% today and to a projected 45% in 2063, at the same time as the share aged under 40 has fallen from 72% in 1963 to 37% in 2023 and to a projected 31% in 2063.

Also not shown in the chart is Japan’s median age, which was 26 in 1963, 33 in 1983, 42 in 2003 and 49 this year, before being projected to reach 53 in 2043 and 56 in 2063 – more than double that of a century earlier.

These demographic shifts have and will continue to present a major fiscal challenge for the Japanese government. The continued growth in size of older generations (who typically consume the most in public services and welfare), accompanied by a shrinking working-age population (the group that typically pays most of the taxes that fund public services and welfare), will not be an easy dynamic to manage. At the same time, Japan already has one of the largest national debts of any country at in excess of 250% of its GDP.

One action Japan could take is to increase the pace of net inward migration even more than it already has, given it is currently at a much lower level than in many other developed countries such as the UK. This would have the benefit of bringing in more tax-paying individuals of working age and potentially assist in driving up the birth rate, slowing the rate of fall in the size of the population. However, there would be significant political challenges to overcome for such a route to be successful.

The good news for Japan is that it can still borrow at very low interest rates, with the effective interest rate payable on 10-year government bonds currently at 0.4%, much lower than in many comparable countries with much lower levels of external debt. This is both a threat, in that interest rates could go up significantly in the future, but also an opportunity in that the Japanese government is able to invest in adapting itself for a very different future.

This chart was originally published by ICAEW.