Tag: #publicfinances

Public sector net debt hits an unprecedented £2.6trn

Monthly public sector finances for October saw spending continue to exceed receipts by a large margin, even if by less than was predicted earlier in the year.

The Office for National Statistics (ONS) released the month public sector finances for October on Tuesday 21 November 2023. It reported a provisional deficit for the month of October of £15bn, bringing the cumulative deficit for the first seven months of the year to £98bn, £22bn more than in the same period last year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Although it is positive that the cumulative deficit to October of £98bn is less than the £115bn predicted by the OBR, cash going out continues to exceed cash coming in by a very large margin. Public sector net debt has now exceeded £2.6 trillion for the first time, which is a staggering new record.  

“Tomorrow’s Autumn Statement will see the OBR revise and roll forward its forecast, giving the Chancellor so-called headroom to cut taxes or increase spending. But in reality there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”

Month of October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of October 2023 was £15bn, made up of tax and other receipts of £85bn less total managed expenditure of £100bn, up 3% and 6% respectively compared with October 2022. 

This was the second highest October deficit on record since monthly records began in 1993, following a monthly deficit of £18bn in October 2020 at the height of the pandemic.

Public sector net debt as of 31 October 2023 was £2,644bn or 97.8% of GDP, the first time it has exceeded £2.6trn – only eight months after it first reached £2.5trn.

Seven months to October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the seven months to October 2023 was £98bn, £22bn more than the £76bn deficit reported for the first seven months of 2022/23. This reflected a widening gap between tax and other receipts for the seven months of £595bn and total managed expenditure of £693bn, up 5% and 8% respectively compared with April to October 2022.

Inflation benefited tax receipts for the first seven months compared with the first half of the previous year, with income tax up 10% to £137bn and VAT up 9% to £117bn. Corporation tax receipts were up 12% to £55bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 4% to £99bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £8bn and the total for all other taxes was up just 3% to £115bn, much less than inflation as economic activity slowed. Non-tax receipts were up 10% to £63bn, primarily driven by higher investment income.

Total managed expenditure of £693bn in the seven months to October 2023 can be analysed between current expenditure excluding interest of £587bn, up £39bn or 7% over the same period in the previous year, interest of £76bn, up £4bn or 5%, and net investment of £30bn, up £9bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £20bn increase in pension and other welfare (including cost-of-living payments), £12bn in higher central government pay, £6bn in additional central government procurement spending, plus £1bn in net other changes.

The rise in interest costs for the seven months of £4bn to £76bn comprises a £18bn or 53% increase to £52bn for interest not linked to inflation as the Bank of England base rate rose, mostly offset by an £14bn or 37% fall to £24bn for interest accrued on index-linked debt from lower inflation than last year.The £9bn increase in net investment spending to £30bn in the first seven months of the current year reflects high construction cost inflation amongst other factors that saw a £11bn or 17% increase in gross investment to £65bn, less a £2bn or 6% increase in depreciation to £35bn. 

Public sector finance trends: October 2023 Table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the seven months to October 2023 plus net debt and net debt / GDP at 31 October 2023. Receipts: £466bn (Oct 2019), £425bn (Oct 2020), £500bn (Oct 2021), £565bn (Oct 2022), £595bn (Oct 2023) Expenditure: (£457bn), (£582bn), (£536bn), (£548bn), (£587bn) Interest: (£38bn), (£26bn), (£41bn), (£72bn), (£76bn) Net investment: (£20bn), (£42bn), (£28bn), (£21bn), (£30bn) [line above subtotal] Deficit: (£49bn), (£225bn), (£105bn), (£76bn), (£98bn) Other borrowing: £5bn, (£61bn), (£61bn), £5bn, (£7bn) [line above total] Debt movement: (£44bn), (£286bn), (£166bn), (£71bn), (£105bn) [line below total] Net debt: £1,821bn, £2,101bn, £2,319bn, £2,454bn, £2,644bn. Net debt / GDP: 82.1%, 99.3%, 97.5%, 95.5%, 97.8%

The cumulative deficit of £98bn is £17bn lower than the Office for Budget Responsibility (OBR)’s official forecast of £115bn for the first seven months of 2023/24 as compiled in March 2023. The OBR is expected to revise its forecast for the full year deficit down from £132bn in tomorrow’s Autumn Statement, but it is still on track to be more than double the £50bn projection for 2023/24 set out in the official forecast from a year earlier (March 2022). 

Balance sheet metrics

Public sector net debt was £2,644bn at the end of October 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £105bn, comprising borrowing to fund the deficit for the seven months of £98bn plus £7bn in net cash outflows to fund lending to students, businesses and others net of loan repayments together with working capital movements.

Public sector net debt is £829bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,106bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£716bn on 31 October 2023, comprising £1,565bn in non-financial assets, £1,029bn in non-liquid financial assets, £2,644bn of net debt (£305bn in liquid financial assets less public sector gross debt of £2,949bn) and other liabilities of £666bn. This is a £102bn deterioration from the -£614bn reported for 31 March 2023.

Revisions

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 six months to September 2023 up by £1.7bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of September 2023 was revised down by 1.4 percentage points from 97.8% to 96.4% as a consequence of updated estimates of GDP.

This article was originally published by ICAEW.

ICAEW chart of the week: Pensioners dilemma

The ‘elephant in the room’ of growing numbers of pensioners and what that will mean for the long-term prospects of the public finances is likely to be avoided yet again at next week’s Autumn Statement.

Pensioners dilemma Two column chart with lines between them showing projected changes in the UK population between 2023 and 2043. 2023: 68.1m (left hand column) Change: +4.0m (+6%) 2043: 72.1m (right hand column) Split into two bars in each column. Pensioners (in purple) 2023: 12.4m Change: +3.3m (+27%) 2043: 15.7m Everyone else 2023: 56.7m Change +0.7m (+1%) 2043: 56.4m

My chart for ICAEW this week is on the ‘elephant in the room’ that haunts fiscal events such as next week’s Autumn Statement – the rapidly rising number of pensioners that is driving some of the biggest line items in the national budget: pensions, health and social care.

This fiscal event is unlikely to be any different, with the Chancellor expected to focus most of his statement on short-term measures to free up headroom for pre-election tax cuts at a time of stagnant economic growth.

Any substantive discussion on the long-term prospects for the public finances is likely to be absent beyond a continued commitment to seeing the debt to GDP ratio start to fall within the next five years. How he – or more likely his successors – might be able to avoid having to raise taxes significantly in the coming decades to pay for the cost of pensions, health and social care for many more people, living longer, sometimes less healthy lives, is unlikely to be at the core of what is announced.

To illustrate the dilemma facing policymakers and the public, our chart shows how pensioners represent 3.3m out of the 4.0m projected increase in the size of the UK population between 2023 and 2043. The total population of the UK is projected to increase by 6% from 68.1m in 2023 to 72.1m in 2043, with the number of pensioners expected to increase by 27% from 12.4m this year to 15.7m in 20 years’ time. 

The number of non-pensioners is expected to increase by 0.7m or 1% from 55.7m to 56.4m, with net inward migration of 5.0m over that period offsetting what would otherwise be a significant fall in the numbers below retirement age. (Not shown in the chart is a projected 3% rise in the working age population and a 7% fall in the number of children.)

The projected 27% rise in the number of pensioners is despite a planned increase in the state pension age from age 66 to age 67 in 2027, one of the few long-term steps the government has taken to mitigate the fiscal effects of rising pensioner numbers. However, increasing the retirement age doesn’t directly impact health and social care costs, as well as being partly offset by the cost of supporting increasing numbers of people out of work between traditional retirement age and the age at which they can take their state pension.

Given the significance of the demographic challenge to the public finances, there is very little public debate on what to do, especially as the current policy of cutting the proportion of spending going on public services outside of health appears increasingly unsustainable. 

Spending on defence and security (the traditional budget to raid) is already close to the NATO minimum and appears likely to need to increase given the global security situation, while extracting further savings from other public services seems extremely unlikely, especially given the reluctance of successive governments to put in the level of upfront and ongoing capital investment that might make operational savings possible.

The irony is that, unlike the game-theory scenario of the prisoners’ dilemma that makes optimal decision-making difficult for two prisoners who can’t communicate with each other, there is no theoretical restriction on the ability of policymakers to talk to the public about the pensioners dilemma and to have a proper debate about that might mean for taxes and public services in the long term.

Read more: ICAEW Autumn Statement 2023 hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: US federal government deficit 2023

My chart this week looks at the federal deficit of $1.7trn reported by the US government for its recently completed financial year ended 30 September 2023.

Column chart split into three vertical sections: receipts, outlays and deficit. Actuals for the five years to the year ended September 2023, then budget for Y/E Sep 2024. Y/E Sep 2019: $3.5trn receipts - $4.5trn outlays = -$1.0trn deficit Y/E Sep 2020: $3.4trn - $6.5trn = -$3.1trn Y/E Sep 2021: $4.0trn - $6.8trn = -$2.8trn Y/E Sep 2022: $4.9trn - $6.3trn = -$1.4trn Y/E Sep 2023: $4.4trn - $6.1trn = -$1.7trn Y/E Sep 2024 (Budget): $5.0trn - $6.9trn = -$1.9trn 26 Oct 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: US Department of the Treasury; US Office of Budget and Management.

The US Department of Treasury published on 20 October 2023 its final monthly treasury statement for the US government’s financial year ended 30 September 2023 (FY2023), enabling our chart this week to look at the actual numbers over the past five years and the budget for the new financial year that started on 1 October.

Our chart illustrates how the deficit increased significantly from the $1.0trn reported for FY2019 ($3.5trn receipts less $4.5trn outlays) to $3.1trn in FY2020 ($3.4trn-6.5trn) and $2.8trn in FY2021 ($4.0trn-$6.8trn) at the height of the pandemic, before falling to $1.4trn in FY2022 ($4.9trn-$6.3trn) as the US economy recovered. The deficit by $0.3trn increased to $1.7trn in FY2023 ($4.4trn-$6.1trn) and is budgeted to increase by a further $0.2trn to $1.9trn in FY2024 ($5.0trn forecast receipts-$6.9trn forecast outlays).

Not shown in the chart is the excess of financial liabilities over financial assets, which increased by $1.7trn from $22.3trn on 30 September 2022 to $24.0trn on 30 September 2023. This differs from ‘debt held by the public’ (the headline measure of federal debt), which increased by $2.0trn from $24.3trn to $26.3trn, more than the federal deficit because of movements in other financial assets and liabilities.

Receipts in FY2023 of $4,439bn comprised $2,176bn in individual income taxes, £1,614bn in social security and retirement contributions, $420bn in corporation income taxes, $80bn in customs duties, $76bn in excise taxes, £34bn in estate and gift taxes and $39bn in other receipts. Outlays for same period of $6,134bn comprised $1,737bn on health and Medicare, $1,354bn on social security, $821bn on defence, $774bn in welfare benefits, $659bn in interest, $302bn for veteran services and benefits, $127bn on transportation, $100bn on commerce, and $260bn on other outlays. 

The latter includes the administration of justice, agriculture, community and regional development, education, training, employment and social services, energy, general government, general science, space and technology, international affairs, natural resources and environment, and undistributed offsetting receipts.

These amounts are different from the accruals-based US GAAP federal government financial statements for FY2023 that are expected to be published next April, which will show a much larger accounting loss than the federal deficit reported here. For example, the FY2022 net operating cost (ie accounting loss) of $4.2trn was $2.8trn higher than the federal deficit of $1.4trn for last year, of which the largest difference of $2.6trn related to accruals for federal employee and veteran benefits.

These amounts appear astronomical, especially to those of us living in smaller (and unfortunately) less prosperous countries than the 335m people who live in the US, with its estimated GDP of $26.3trn in FY2023 – equivalent to around $6,600 per person per month.

Federal receipts and outlays in FY2023 represented 17% and 23% of GDP respectively or on a per capita basis were approximately $1,105 and $1,525 per person per month. The federal deficit was therefore equivalent to 6% of GDP or $420 per person per month. 

The excess of financial liabilities over financial assets and debt held by the public were 91% and 100% of GDP respectively, equivalent to an amount owed of around $71,500 or $78,500 per person, depending on which measure is used.

This chart was originally published by ICAEW.

ICAEW chart of the week: Home Office financial statements 2022/23

The Home Office spent £24.5bn in 2022/23 according to its recently published annual financial report, funded by £5.4bn in income and £19.2bn in net parliamentary funding.

Column chart showing main components of the Home Office financial statements 2022/23. Column 1: Net parliamentary funding £19.2bn Column 2: Income £5.4bn = Customer contracts £3.7bn + Other income £1.7bn Column 3: Expenditure (£24.5bn) = Police grants (£9.2bn) + Other grants (£5.6bn) + Goods and services (£4.3bn) + Staff costs (£2.4bn) + Other operating costs (£3.0bn) 21 Sep 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Home Office, 'Annual Report and Accounts 2022/23'.

The Home Office published its Annual Report and Accounts for the year ended 31 March 2023 on 19 September 2023. 

Net expenditure in 2022/23 was £19.1bn, comprising expenditure of just over £24.5bn net of income of £5.4bn, while parliamentary funding net of other items amounted to £19.2bn.

The Home Office breaks down its income for the year of £5.4bn between revenue from contracts with customers of £3.7bn and other income of £1.7bn. The former includes £2.2bn from visa and immigration charges, £0.6bn in passport fees, £217m for the disclosure and barring service (DBS), and £0.7bn from other sources. Other income is primarily comprised of immigration health surcharges payable by foreign residents and visitors for the use of the National Health Service, a proportion of which is transferred to the Department of Health and Social Care and the devolved administrations.

As our chart this week illustrates, the majority of the Home Office’s spending is in the form of grants. The largest grants, totalling £9.2bn, are to local police forces across England to supplement the council tax precepts they raise locally. Other grants include £1.7bn to top up police pensions, £0.4bn to top up fire and rescue services pensions, £3.3bn in other operating grants (many of which also go to police forces, in addition to transfers to other government departments) and £209m in capital grants.

Purchases of goods and services of £4.3bn is dominated by the £3.1bn paid in relation to asylum and detention, together with £287m in facilities management and staff services, £229m on professional fees, £219m for media and IT, £169m for passport printing and stationery and £120m for visa and immigration commercial partners amongst other costs.

Staff costs of £2.4bn cover the costs of employing full-time equivalent averages of 41,607 permanent staff, seven ministers, seven special advisers, and 6,489 other staff during 2022/23. Wages and salaries amounted to £1.8bn, equivalent to an average full-time equivalent salary of £37,900. 

At 31 March 2023 there were 345 senior civil servants on salaries in excess of £70,000, of which 251 were between £70,000 and £100,000, 86 between £100,000-£150,000 and eight between £150,000 and £190,000. The average of seven government ministers who served during the year (a total of 22 different individuals!) earned the equivalent of an average annual salary not including pension entitlements of around £49,000 in addition to their parliamentary salary or House of Lords attendance allowances.

Other operating costs of £3.0bn include £1.6bn on IT and accommodation-related service charges, £0.7bn for depreciation and amortisation of assets, and £113m in asset recovery costs together with other costs.

Parliamentary funding net of other items of £19.2bn is reported in the consolidated statement of taxpayers’ equity and comprised £19.4bn in drawn-down parliamentary funding, £0.3bn in deemed funding less £0.5bn in amounts repayable.

Not shown in the chart is the Home Office’s consolidated balance sheet, which comprised £2.6bn in non-current assets, trade and other receivables of £0.7bn and cash and cash equivalents of £0.6bn less trade and other payables of £3.7bn, £0.6bn in lease liabilities and £0.5bn in provisions to give net liabilities of £0.9bn. 

Reported in the notes to the accounts are £0.8bn in capital additions, of which £374m was incurred on software and other intangible assets.

Find out more: Home Office annual report and accounts: 2022 to 2023.

This chart was originally published by ICAEW.

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.