My chart of the week for ICAEW highlights the big rush in UK public sector capital expenditure in the final quarter of each financial year, prompting us to ask why March is the best time of the year to build new assets.
Over the years, the process for delivering capital expenditure in the public sector in the UK has had a pretty bad reputation. The anecdote goes that the first quarter is spent arguing about budgets, in the second everyone goes on holiday, and it is only in the third quarter that programmes finally get up and running, before everything stops for the Christmas break. The final quarter is then a mad rush to spend the remaining budget before the end of the financial year.
Unfortunately, there does appear to be some support for this conjecture when we take a look at the actual numbers.
According to the public sector finance release for December 2024, together with the latest Office for Budget Responsibility forecast for the current financial year to March 2025, public sector gross capital formation (in effect capital expenditure) is lowest in the first quarter, picks up in the second (despite the summer holidays), rises slightly again in the fourth (despite the Christmas break) and then explodes in the fourth quarter of each financial year (despite winter).
Our chart shows capital expenditure in 2022/23 of £85.3bn comprised £14.4bn in Q1 (Apr-Jun), £18.4bn in Q2 (Jul-Sep), £20.2bn in Q3 (Oct-Dec) and £32.3bn in Q4 (Jan-Mar). A similar pattern occurs in 2023/24 when a total £102.7bn of capex was incurred, with £18.6bn in Q1, £22.8bn in Q2, £24.2bn in Q3, and £37.1bn in Q4. Meanwhile in the current 2024/25 financial year, £20.4bn was incurred in Q1, £23.8bn in Q2, and £25.8bn in Q3, with a forecast of £39.0bn in Q4 to reach a forecast total of £109.0bn.
In practice the fourth quarter jump is principally seen in the final month of the financial year, as seen in 2023/24 when fourth quarter capital expenditure of £37.1bn consisted of £9.6bn in January 2024 (£1.0bn more than the monthly average capital expenditure of £8.6bn that financial year), £10.2bn in February 2024 (£1.6bn more than the monthly average), and £17.3bn in March 2024 (£8.7bn more than the monthly average).
This pattern is a stubbornly consistent feature of the public finances in the UK, even after numerous attempts within government to improve capital budgeting and delivery processes. For example, departments are able to carry over some of their capital budgets to future years, which in theory should reduce the incentive to spend every last penny of their allocation in-year. The new spending review process coming into force this summer should also help by setting out a four-year capital budget for 2026/27 to 2029/30, providing much greater forward certainty for investment programmes and (in theory) reducing the concern of future budgets disappearing if the current year budget is not spent in full.
Of course, it is possible that our concerns about the quality of government’s investment delivery process are not fully justified. There could after all be some very good practical reasons as to why March is the best time of the year for carrying out public capital works!
My chart for ICAEW this week divides some very big numbers for the public finances by an estimated 69.2m people living in the UK to highlight how UK public spending is now in excess of £1,500 per person per month.
According to the Autumn Budget 2024, the UK public sector expects to bring in £1,149bn and spend £1,276bn in the financial year ended 31 March 2025 (2024/25). At more than a trillion pounds a year in each case, these are very big numbers that can be difficult to comprehend.
My chart of the week attempts to make these numbers more understandable by averaging them over an estimated UK population of 69.2m for the current financial year and dividing them by 12 to arrive at per person per month equivalents (rounded to the nearest £5).
On this basis, total receipts are expected to average £1,385 per month for each person living in the UK in 2024/25, comprising £1,235 a month from tax receipts (£1,025bn in total) and £150 a month in other receipts (£124bn).
Not shown in the chart is the approximately £940 per person per month on average – just over two-thirds of total receipts – that comes from the top five taxes: income tax £375 per month, VAT £245 per month, employer national insurance £135 per month, corporation tax £120 per month, and employee national insurance £65 per month.
Public spending is expected to average £1,535 per person per month in 2024/25, comprising approximately £445 per month on pensions and welfare, £370 per month on health and social care, £160 per month on education, £410 per month on other public services, and £150 per month on debt interest, based on forecast total spending in 2024/25 of £370bn, £307bn, £134bn, £340bn, and £125bn respectively.
Spending on welfare
Welfare spending includes (but is not limited to) approximately £170 per person per month to cover the cost of paying the state pension, around £105 per month to pay for universal credit (including housing benefit), and in the order of £75 per month to fund disability and illness benefits.
Per capita spending on health and social care comprises close to £290 per person per month on the NHS, £55 on social care and £25 on public health, health research and other health-related spending.
Education costs each of us an average of £160 per month, of which approximately £115 per month pays for schools, £35 funds university and higher education (including just over £10 for student loans that are not expected to be repaid) and around £10 per month goes on further education, training and other.
The £410 per month cost of other public services includes in the region of £85 per month on defence and security, approximately £75 per month on roads and railways, £65 on industry and agriculture, nearly £60 per month on public order and safety, £15 per month on dealing with waste, and around £10 per month on international development and aid. This leaves approximately £100 per month to pay for all the other services that central and local government provide, including 11p per person per month for the Royal Family and palaces.
These numbers are averages and of course the amounts individuals pay in taxes and receive either in pensions and welfare benefits or in public services will vary significantly. For example, while health and social care spend is £370 per month when spread over the whole population, average spending on teenagers and those in their 70s are estimated to be significantly different from each other at £130 per month and £700 per month respectively.
Forecast per capita taxes and other receipts of £1,385 per month fall short of planned public spending of £1,535 per month to give rise to an expected deficit of approximately £150 per month funded by borrowing, being £127bn in total in 2024/25, divided by the estimated population of 69.2m. As a consequence, public debt now exceeds £2.8tn, equivalent to just under £41,000 for each person living in the UK, or somewhere in the region of £98,000 per household.
Navigating the public finances can be difficult at the best of times, but it is often helpful to translate the huge numbers you hear on the news into per capita equivalents to make sense of them. £1bn when spread across the UK population works at being equivalent to just over £1.20 per month.
My chart for ICAEW this week heads down under for some warmer weather and to take a look at the Australian federal government balance sheet in its recently published consolidated financial statements for the year ended 30 June 2024.
The Commonwealth of Australia consolidated financial statements for the year ended 30 June 2024 were published on 12 December, bringing together the results and financial position of 199 audited financial statements for entities within the federal government system, public financial corporations (such as the Reserve Bank of Australia and Export Finance Australia), and public non-financial corporations (including Australia Post and Snowy Hydro for example). However, this does not include state and territory governments or local authorities in each state and territory.
As my chart this week illustrates, the balance sheet reports negative net worth of $568bn (21% of GDP or £284bn at the current exchange rate of approximately A$1 = £0.50), comprising assets of A$989bn (37% of GDP or £495bn) less liabilities of A$1,557bn (58% of GDP or £779bn).
Assets consisted of investments and cash of A$527bn (£264bn), receivables and other financial assets of A$162bn (£81bn) and non-financial assets of A$300bn (£150bn), while liabilities comprised debt of A$1,044bn (£522bn), payables and provisions of A$205bn (£103bn), and superannuation liabilities of A$308bn (£154bn).
Investments and cash of A$527bn consisted of investments, loans and placements of A$417bn, equity investments of A$102bn, and cash of A$8bn. Investments include $225bn invested in the Australia Future Fund, a sovereign wealth fund established in 2006 to strengthen the Australian government’s long-term financial position, together with $A$44bn in a series of other sovereign wealth funds established over the last decade.
Receivables and other financial assets of A$162bn comprised tax receivables and accrued taxation of A$59bn, other receivables and accrued revenue of A$26bn, student loans of A$54bn, and other advances of A$23bn.
Non-financial assets of A$300bn comprised A$89bn of military equipment, A$88bn of other plant, equipment and infrastructure, A$74bn in land and buildings, A$17bn in intangibles, $A13bn in heritage and cultural assets, and A$19bn of inventories and other non-financial assets.
Debt of A$1,044bn consisted of interest-bearing liabilities of A$943bn (A$611bn in government securities, A$227bn in central bank deposit liabilities, A$32bn for leases, and A$73bn in loans and other interest-bearing liabilities) and A$101bn in Australian currency in circulation.
Payables and provisions of A$205bn included A$90bn in provisions, A$63bn in non-pension employee liabilities, A$26bn in supplier payables and A$26bn in other payables.
The net pension obligation of A$308bn includes A$276bn for partially funded defined benefit schemes (obligations of $323bn less scheme assets of $A47bn) and A$32bn for one unfunded scheme. These schemes are now all closed to new members and so the liability is gradually reducing over time.
Not shown in the chart is the operating statement, which reported revenue of A$728bn (27.2% of GDP or £364bn), expenses of A$718bn (26.9% of GDP or £359bn) and net capital investment of A$12bn (0.5% of GDP or £6bn) to result in an operating surplus of A$10bn (0.4% of GDP or £5bn) and a fiscal deficit (on an accounting basis) of A$2bn (0.1% of GDP or £1bn).
Although the reported net worth in the financial statements is negative, Australia’s public finances are in a much stronger position than for many other countries. Australia’s general government net debt (including 13% for state and territory governments) was 32% of GDP on 30 June 2024, in contrast with the equivalent of 91% of GDP for the UK on the same date. This also doesn’t take account of the UK’s much larger public sector pension liabilities that are not included within net debt.
As a result there are more reasons than just the warmer weather to be thinking about enjoying a Christmas barbie on the beach on the other side of the world at this time of the year.
This is the last chart of the week for 2024 and so we would like to wish our readers all the best for the holiday season and for a healthy and prosperous 2025. We return in January.
My chart for ICAEW this week looks at how the fiscal baseline inherited by the Chancellor has changed as a consequence of the Autumn Budget, with higher capital investment driving up borrowing needed to fund the deficit over the next five years.
Our chart of the week sets out the changes in fiscal projections calculated by the Office for Budget Responsibility (OBR) in its October 2024 economic and fiscal outlook compared with the numbers at the time of the Spring Budget seven months ago.
These form a revised baseline for the public finances that will form the basis of the Chancellor’s spending and investment plans over the rest of the Parliament.
As our chart highlights, the fiscal deficit – the shortfall between tax and other receipts and public spending calculated in accordance with statistical standards – was forecast to amount to £87bn in 2024/25, but this has increased by £40bn to £127bn, or 4.5% of GDP.
The projections for the following five years were also revised upwards between 2025/26 and 2029/30 have increased from £78bn, £69bn, £51bn, £39bn and £35bn by £28bn, £20bn, £21bn, £33bn and £36bn to result in a revised profile of £106bn (3.6% of GDP), £89bn (2.9% of GDP), £72bn (2.3% of GDP), £72bn (2.2% of GDP) and £71bn (2.1%).
This contrasts with the previous government’s plan to bring down the deficit in relation to the size of the economy to 1.2% of GDP by 2028/29.
Perhaps the biggest surprise was the £40bn upward revision to the budgeted deficit of £87bn for the current financial year ending in March 2025. This reflects a combination of £14bn in higher debt interest and £6bn in other forecast revisions, £23bn in higher spending (most of which is the £22bn ‘black hole’ identified by the incoming government over the summer) and £2bn in additional capital investment, less £1bn in tax measures and £4bn from the indirect economic effect of policy decisions.
In later years, the principal driver of the increases in the deficit is higher capital investment as the Chancellor replaced the previous government’s plan to cut public sector net investment by almost a third over the next five years (from 2.5% to 1.7% of GDP) to a profile that sees net investment increase to 2.7% of GDP in 2025/26 and 2026/27 before returning to 2.5% of GDP in 2029/30.
The changes in the deficit between 2025/26 and 2029/30 can be summarised as follows:
2025/26: £28bn increase = £18bn higher capital investment + £10bn net other changes (£42bn additional spending – £25bn tax rises – £6bn indirect effects of decisions – £1bn forecast changes).
2026/27: £20bn = £23bn capital – £3bn net other changes (£44bn – £35bn – £5bn – £7bn).
2027/28: £21bn = £26bn capital – £5bn net other changes (£47bn – £40bn – £2bn – £10bn)
2028/29: £33bn = £27bn capital + £6bn net other changes (£49bn – £40bn + £2bn – £5bn)
2029/30: £36bn = £25bn capital + £11bn net other changes (£47bn – £42bn + £6bn – not published).
The increases in taxation, spending and capital investment won’t avoid the need for difficult choices in the Spending Review next year as departmental budgets will remain tight.
Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.
The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.
“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.
“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”
Month of July 2024
There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.
Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023.
Financial year to date
The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.
Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts.
Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.
The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.
Table 1: Summary receipts and spending
Apr-Jul 2024 £bn
Apr-Jul 2023 £bn
Change %
Income tax
89.9
86.4
+4%
VAT
67.9
66.0
+3%
National insurance
53.5
58.3
-8%
Corporation tax
34.0
31.6
+8%
Other taxes
73.5
72.1
+2%
Other receipts
40.5
37.5
+8%
Total receipts
359.3
351.9
+2%
Public services
(212.2)
(204.8)
+4%
Welfare
(103.1)
(97.5)
+6%
Subsidies
(10.6)
(14.0)
-24%
Debt interest
(46.6)
(52.7)
-12%
Gross investment
(38.2)
(34.8)
+10%
Total spending
(410.7)
(403.8)
+2%
Deficit
(51.4)
(51.9)
-1%
Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.
The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.
Table 2: Public sector net debt and net debt/GDP
Apr-Jul 2024 £bn
Apr-Jul 2023 £bn
PSNB
51.4
52.3
Other borrowing
4.4
(11.4)
Net change
55.8
40.9
Opening net debt
2,694.1
2,539.7
Closing net debt
2,745.9
2,580.6
PSNB/GDP
1.9%
2.0%
Other/GDP
0.2%
(0.4%)
Inflating away
(0.8%)
(1.5%)
Net change
1.3%
0.1%
Opening net debt
98.1%
95.7%
Closing net debt
99.4%
95.6%
Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.
Revisions and other matters
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.
The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.
With money tight and many local authorities in a precarious financial state, ICAEW’s Alison Ring asks how the government can deliver on its commitment to devolution in the latest instalment of Room 151’s Municipal Missions Manifesto series.
A change in government. A commitment to devolve power. No money.
We all know that England is the most centralised of the advanced economies, but it is still difficult to comprehend just how strange it is that in a nation of 58 million people (out of a UK total of 69 million), the national government in Westminster should be so intimately involved in deciding which high streets in Nottinghamshire or Cornwall are improved, whether to fund public conveniences in Lancashire or Kent, or which parks in Herefordshire or Hertfordshire should get outdoor chess sets.
We might also wonder why we have a central government ministry dedicated to local government at all when in most countries it is the regions, states or provinces that are responsible for local authorities.
Here in the UK, there is a large bureaucracy devoted to overseeing hundreds of councils across England of many shapes and sizes, while another department decides whether to fund road schemes hundreds of miles from London that the ministers and civil servants making those decisions may never use.
Despite the extensive control exercised by Whitehall, successive governments have found that this does not translate into effective action on the ground, while local leaders are frustrated by excessive bureaucracy and limitations on how they can drive economic development and deliver public services locally and regionally. Labour has committed to devolving power in England, but without resolving many of the current problems in local and regional government it is going to be difficult to make devolution a practical possibility.
Step 1 – stabilise the system
The new government has already made two promising announcements that should go a small way to stabilising the existing system. Firstly, it has confirmed that local authorities will participate in rolling three-year spending reviews to be carried out every other year. This will make a huge difference by enabling budget holders to plan ahead more effectively, particularly on capital investments where projects can often span multiple financial years.
Secondly, a ministerial statement from local government minister Jim McMahon has confirmed that action will be taken to tackle the backlog of incomplete audits which is undermining local authority financial reporting and the assurance provided by external auditors. Although tempered by the knowledge that it will take several years to get local audits back on track, and that many of the longer-term fundamental issues identified by the Redmond Review remain unaddressed, this is a positive step forward.
While money is tight, if funds can be found then supporting local authorities under the most financial pressure should be a priority.
Step 2 – complete the roll out of a regional tier of government
A combination of gentle encouragement, financial incentives and some arm twisting has led to the establishment of 11 combined authorities led by regional ‘metro’ mayors mainly in so called ‘city-regions’. Together with the Greater London Authority this means that around half of the English population now have a regional mayor, but the corollary is that the other half do not.
While a large part of devolution is about empowering individual local authorities, gaps in the regional tier of government make it difficult for Whitehall to hand out some of its core functions. This is particularly the case for economic development where, for example, Greater Manchester’s mayor Andy Burnham is all too eager to grasp whatever powers he can and run with them, but there is no one to take the lead in the same way for most of the South West.
One way to fill in the gaps would be to accelerate the roll-out of combined authorities, while another would be to go for the ‘big bang’ approach adopted by France in 1986 when it created a new tier of regional government across Metropolitan France in one fell swoop.
Step 3 – separate out social care and SEND from funding for local public services
One of the biggest drivers of the financial challenges faced by many local authorities is the growing cost of welfare provision – principally adult social care and special educational needs and disabilities (SEND) support. The ‘reverse hypothecation’ caused by these two costs has had the effect of squeezing budgets for local public services and pretty much everything else delivered by local authorities outside of (ring-fenced) social housing.
Ironically, one of the most effective ways to strengthen local government would be to centralise or regionalise social care and SEND budgets or at the very least deal with them separately in council tax bills as a distinct precept. Depending on how this is implemented, this could provide a much closer link between how much communities pay to their local councils and the local public services they receive.
Step 4 – sort out the finances
As the joke goes, if you want to get to where you want to go, then you shouldn’t start from here.
In this case, ‘here’ is a place where many local authorities are in financial difficulty and struggling to meet their statutory obligations. Funding formulas that are based on out-of-date population numbers and don’t reflect underlying needs. A council tax system reliant on 1991 property valuations. Business rates that are an unwieldy tangled mess.
These weak financial foundations to the local government system in England are crying out for reform, even it is necessary to acknowledge that change will be very difficult and politically risky. Despite the many different options that are theoretically possible, it is worth considering the proposal put forward by the Fabian Society in a recent report on fiscal devolution produced in association with ICAEW.
The Fabians suggested that the distribution of central government grants be agreed among local authorities rather than determined in Westminster, accompanied by a more stable basis to determining their amount. Another route that the Fabians looked at is the system of shared taxation in Germany which provides the core funding for German regions out of national taxes in a way that equalises funding between richer and poorer regions.
Step 5 – rebuild trust
Prising the hand of Whitehall off the shoulder of English local authorities is not going to be easy. It will take significant political capital to make devolution happen, and there will be many reasons found to not hand over control of the purse strings ‘just yet’.
Many of these reasons will be down to a lack of trust. Trust in the ability of local authorities to manage money wisely, not helped by the governance failures of recent years. Trust in the transparency of local authority finances, not helped by the impenetrable nature of the accounts. Trust in the quality of local public audit, not helped by the local audit crisis.
That is why devolution is not just about the decisions that central government makes to give away or delegate power and money, and how it chooses to structure the system. It is also about the choices made by local and regional authorities asking for those new powers.
So, if you are in an area without a combined authority, it is time to start talking to your neighbouring areas about forming one. If your accounts make it difficult for stakeholders to understand how you have spent public money, it is time to streamline and invest in making them better. And if you are behind on your audits, then you need to do what you can to work with your external auditors to get back on track.
There is a big prize here. More effective and efficient local and regional government leading to better outcomes. And more bandwidth in Whitehall to focus on national and international priorities.
Alison Ring OBE FCA is director for public sector and taxation at ICAEW, the Institute of Chartered Accountants in England and Wales.
First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.
The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face.
“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.
“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”
Month of June 2024
Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.
Financial year to date
Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.
Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.
Table 1: Summary receipts and spending
Three months to
Jun 2024 (£bn)
Jun 2023 (£bn)
Change (%)
Income tax
58.1
56.1
+4%
VAT
49.9
49.6
+1%
National insurance
39.7
43.4
-9%
Corporation tax
25.3
23.4
+8%
Other taxes
54.9
54.1
+1%
Other receipts
30.1
27.7
+9%
Total receipts
258.0
254.3
+1%
Public services
(158.8)
(152.6)
+4%
Welfare
(76.9)
(73.7)
+4%
Subsidies
(7.8)
(11.3)
-31%
Debt interest
(35.2)
(41.1)
-14%
Gross investment
(29.1)
(26.5)
+10%
Total spending
(307.8)
(305.2)
+1%
Deficit
(49.8)
(50.9)
-2%
Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.
Table 2: Public sector net debt
Three months to
Jun 2024 (£bn)
Jun 2023 (£bn)
Deficit
(49.8)
(50.9)
Other borrowing
3.9
(7.7)
Debt movement
(45.9)
(58.6)
Opening net debt
(2,694.1)
(2,539.7)
Closing net debt
(2,740.0)
(2,598.3)
Net debt/GDP
99.5%
96.7%
Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.
The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.
Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades.
Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.
Revisions and other matters
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The latest release saw the ONS increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.
Public sector net debt has passed £2.7tn for the first time. In May the debt increased by £49bn from £2,694bn to £2,743bn, 51% higher than it was in March 2020 at the start of the pandemic.
The monthly public sector finances for May 2024 released by the Office for National Statistics (ONS) on Friday 21 June 2024 reported a provisional deficit for the first two months of the 2024/25 financial year of £33.5bn, £1.5bn better than the £35.0bn predicted by the Office for Budget Responsibility (OBR) and £0.4bn higher than in April and May 2023.
An ICAEW spokesperson said: “Today’s numbers show that public sector net debt continues to grow, up from £2.69tn in April to £2.74tn in May, the first time it has exceeded £2.7tn.
“Net debt is now 51% higher than it was at the start of the pandemic in March 2020, and 167% higher than it was in March 2010, pushed up by the spikes in spending during the pandemic and to offset energy bills, as well as borrowing to fund day-to-day spending and investment. High borrowing costs and the financial consequences of more people living longer mean that the public finances are significantly weaker and less resilient than they were 14 years ago.
“When the country goes to the polls on 4 July, the reality is that whoever wins power will inherit an extremely challenging fiscal position that will hamper their ability to turn the country around.”
Month of May 2024
Taxes and other receipts amounted to £85.1bn in May 2024, up 2% compared with the same month last year, while total managed expenditure was also 2% higher at £100.1bn.
The resulting fiscal deficit of £15.0bn for the month was £0.8bn higher than in May 2023.
Financial year to date
As summarised in Table 1, total receipts in April and May 2024 of £170.4bn were 2% higher than in the same two months last year, with the cuts to employee national insurance rates offset by higher income tax, corporation tax, and non-tax receipts.
Table 1: Summary receipts and spending
Two months to
May 2024 £bn
May 2023 £bn
Change %
Income tax
38.2
36.8
+4%
VAT
33.9
33.6
+1%
National insurance
25.9
28.2
-8%
Corporation tax
16.6
15.5
+7%
Other taxes
36.0
35.2
+2%
Other receipts
19.8
18.5
+7%
Total receipts
170.4
167.8
+2%
Public services
(108.3)
(104.5)
+4%
Welfare
(51.4)
(49.1)
+5%
Subsidies
(5.2)
(7.8)
-33%
Debt interest
(21.4)
(21.6)
-1%
Gross investment
(17.6)
(17.9)
-2%
Total spending
(203.9)
(200.9)
+1%
Deficit
(33.5)
(33.1)
+1%
Table 1 also shows how total managed expenditure for the two months of £203.9bn was up by more than 1% compared with April and May 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and marginally lower debt interest. The latter was driven by significantly lower indexation on inflation-linked debt offsetting the much higher rates of interest payable on variable rate and refinanced fixed-rate debt.
Table 2: Public sector net debt
Two months to
May 2024 £bn
May 2023 £bn
Deficit
(33.5)
(33.1)
Other borrowing
(10.2)
2.1
Debt movement
(43.7)
(31.0)
Opening net debt
(2,699.2)
(2,539.7)
Closing net debt
(2,742.9)
(2,570.7)
Net debt/GDP
99.8%
96.1%
Public sector net debt as of 31 May 2024 was £2,743bn or 99.8% of GDP, just under £44bn higher than at the start of the financial year. The increase reflects borrowing to fund the deficit of £33.5bn and £10.2bn borrowed to fund lending by government and other cash requirements, net of loan recoveries.
Public sector net debt was £172bn or 7% higher than a year previously, and 3.7 percentage points higher in relation to the size of the economy.
Public sector net debt is £928bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,715bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last 14 years.
Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,074bn in non-liquid financial assets minus £2,743bn of net debt (£300bn liquid financial assets – £3,043bn public sector gross debt) and other liabilities of £670bn. This is a £47bn deterioration from the start of the financial year and is £95bn more negative than the -£631bn net worth number for May 2023.
Revisions and other matters
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The latest release saw the ONS reduce the reported deficit for April 2024 by £2.1bn from £20.5bn to £18.4bn and revise the deficit for the year to March 2024 up by £0.7bn from £121.4bn to £122.1bn as estimates of tax receipts and expenditure were updated for better data.
Now that the dust has settled on last month’s Spring Budget, ICAEW has published a more detailed analysis on the implications for the public finances.
ICAEW’s Fiscal Insight on the Spring Budget 2024 provides an analysis of the key numbers, risks to the Office for Budget Responsibility forecast, tax measures, forecast revisions since the 2023 Autumn Statement, the fiscal position in the 2024/25 Budget year, borrowing over the next five years, the calculation of underlying debt, the £1.2trn that HM Treasury needs to raise from debt investors, and our conclusions on what the numbers mean for the public finances.
Key points highlighted in the report include:
Headlines
Modest improvement in forecasts and small tax increases ‘pay for’ national insurance cut.
Headroom of £9bn against the Chancellor’s primary fiscal rule is tiny compared with risks.
End of low-cost borrowing is hampering investment in infrastructure and public services.
Weak economy, high debt, demographic challenges, underperforming public services.
No long-term fiscal strategy.
Key numbers
Tax and other receipts of £1,139bn in 2024/25, equivalent to £1,375 per person per month.
Public spending of £1,226bn in 2024/25, equivalent to £1,480 per person per month.
Deficit projected to fall by a quarter to £87bn in 2024/25 and gradually to £39bn in 2028/29.
Headline debt expected to reach £2.8trn by March 2025 and £3.0trn by March 2029.
Underlying debt/GDP forecast to increase from 88.8% to 93.2% and then fall to 92.9%.
Conclusions
Difficult choices on spending deferred until after the general election.
Post-election tax increases likely, irrespective of who wins the general election.
A badly designed fiscal rule driving poor decisions and unrealistic spending forecasts.
Predicted reduction in the deficit to below 2% of GDP by 2027/28 is unlikely to occur.
Further pre-election tax cuts could affect credibility with debt markets.
Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, is quoted in the Fiscal Insight as follows:
“The principal story of the Spring Budget has been how the Chancellor was able to find room for tax cuts while still meeting his fiscal targets to ‘bring down debt and the deficit’.
“This is a frustrating narrative as it misses the bigger picture of public finances that are on an unsustainable path, with little sign of a long-term fiscal strategy to address demographic change, growing balance sheet liabilities, underperforming public services, rising debt interest, or resilience against future economic shocks.
“Debt is high and projected to be even higher in five years’ time than it is today. ‘Headroom’ is tiny in context of trillions of pounds of tax receipts and public spending over the next five years and forecasts that don’t reflect government practice in freezing fuel duties nor likely spending increases from the now postponed Spending Review.
“And we have a fiscal target that discourages essential infrastructure investment while at the same time never needing to be achieved as it is rolled forward each year.
“All of our fiscal eggs are now in a basket labelled ‘hope’ [for economic growth].”
Fiscal Insight
Read the full Fiscal Insight report, which provides detailed analysis on the Spring Budget’s implications for the public finances.
Only a small improvement in the year-to-date deficit of £107bn reported in the penultimate monthly public finance release for 2023/24 over the same period a year ago.
The monthly public sector finances for February 2024 released by the Office for National Statistics (ONS) on Thursday 21 March 2024 reported a provisional deficit for the month of £8bn, while at the same time revising the year-to-date deficit up by £2bn. This increased the cumulative deficit for the first 11 months of the financial year to £107bn, £5bn less than in the same period last year.
The deficit for the first 11 months of 2023/24 is slightly ahead of the £114bn full-year estimate made by the Office for Budget Responsibility (OBR) in its latest fiscal forecasts that accompanied the Spring Budget 2024 earlier this month.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, said: “The numbers for February saw the public finances return to deficit following January’s self-assessment-driven surplus, bringing the cumulative deficit to £107bn for the first 11 months of the financial year. This is a £5bn improvement on the same period last year, with lower cost of living support payments and lower interest on index-linked debt as inflation has fallen, but it is still higher than is comfortable.
“Chancellor Jeremy Hunt’s aim to cut the deficit by a quarter to £87bn in the coming financial year will be challenging to achieve given much-higher-than-inflation rises to the state pension, benefits and the minimum wage, while pressure to find extra money for defence, local government and public services is only likely to grow as the general election approaches.”
Month of February 2024
The fiscal deficit of £8bn for the month was £3bn lower than in February 2023, but slightly higher than some predictions.
Taxes and other receipts amounted to £95bn, up 8% compared with the same month last year, while total managed expenditure was 4% higher at £103bn.
Public sector net debt as of 31 January 2024 was £2,659bn or 97.1% of GDP, £12bn higher than at the start of the month and £120bn higher than at the start of the financial year.
Eleven months to February 2024
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first 11 months of the 2023/24 financial year to February 2024 was £107bn, £5bn less than the amount reported for the first 11 months of 2022/23.
This reflected a year-to-date shortfall between tax and other receipts of £995bn and total managed expenditure of £1,102bn, each up 6% compared with the corresponding numbers for April 2022 to February 2023.
Inflation benefited tax receipts for the first 11 months compared with the same period in the previous year, with income tax up 11% to £249bn and VAT up 6% to £181bn. Corporation tax receipts were up 18% to £93bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £163bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, in addition to the cut in employee national insurance implemented in January. Council tax receipts were up 6% to £39bn, but stamp duty on properties was down by 24% to £12bn, while the total for all other taxes was up by just 1% at £153bn as economic activity slowed. Non-tax receipts were up 10% to £105bn, primarily driven by higher investment income and higher interest charged on student loans.
Total managed expenditure of £1,102bn in the 11 months to February 2024 can be analysed between current expenditure excluding interest of £935bn, interest of £114bn and net investment of £53bn, compared with £1,049bn in the same period in the previous year, comprising £893bn, £125bn and £31bn respectively.
The increase of £42bn or 5% in current expenditure excluding interest was driven by a £33bn increase in pension and other welfare benefits (including cost-of-living payments), £19bn in higher central government pay, and £11bn in additional central government procurement spending, less £18bn in lower subsidy payments (principally relating to energy support schemes) and £3bn in net other changes.
The fall in interest costs for the 11 months of £11bn or 9% to £114bn comprises a £23bn or 46% reduction to £27bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £12bn or 16% increase to £87bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.
The £22bn increase in net investment spending to £53bn in the first 11 months of the current financial year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 17% increase in gross investment to £112bn, less a £4bn or 7% increase in depreciation to £59bn.
Screenshot
The cumulative deficit of £107bn for the first 11 months of the financial year is £5bn below the OBR’s November 2023 forecast of £112bn for the same period but slightly higher than it should be to be consistent with the updated £114bn full year estimate for 2023/24 in its March 2024 forecast.
The OBR’s March 2024 forecast predicts an £87bn deficit in the next financial year commencing in April (2024/25) a reduction of approximately a quarter compared with the current financial year.
Balance sheet metrics
Public sector net debt was £2,659bn at the end of February 2024, equivalent to 97.1% of GDP.
This is an increase since the start of the financial year of £120bn, comprising borrowing to fund the deficit for the 11 months of £107bn plus an additional £13bn of borrowing to fund lending to students, businesses and others, net of loan repayments and working capital movements.
Public sector net debt is £844bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,124bn more than the £535bn 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 -£668bn on 29 February 2024, comprising £1,596bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,659bn of net debt (£319bn liquid financial assets – £2,977bn public sector gross debt) and other liabilities of £667bn. This is a £65bn deterioration from the -£613bn 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 10 months to January 2024 up by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as revise the calculation of the public sector net debt to GDP ratio at 31 January 2024 from 96.5% to 96.8% as GDP estimates were updated in line with the latest OBR forecasts.
The ONS also revised its estimate for the deficit for the financial year to March 2023 (2022/23), down by £1bn to £128bn.
