Tag: #publicsectorinvestment

Fiscal deficit of £24.3bn in May as COVID spending trends downward

COVID-related spending continues to drive borrowing even as receipts approach pre-pandemic levels, with debt up by £24.9bn to £2,195.8bn or 99.2% of GDP in May 2021.

The latest public sector finances released on Tuesday 22 June reported a deficit of £24.3bn for May 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. An improvement from the £43.8bn reported for the same month last year during the first lockdown, it was still significantly higher than the £5.5bn reported for May 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.1bn from £300.3bn to £299.2bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Cumulative receipts in the first two months of the financial year of £128.6bn were £15.9bn or 14% higher than a year previously, but this was still £0.7bn or 0.5% below the level seen a year before that in April and May 2019. At the same time cumulative expenditure of £165.8bn was £20.9bn or 11% lower than the first two months of 2020-21, but £37.2bn or 29% higher than the same period two years ago.

Ultra-low interest rates continued to benefit the interest line, which at £9.1bn in April and May 2021 was £0.1bn or 1% lower than April and May 2020 and £1.5bn or 14% lower than April and May 2019.

Net public sector investment was slightly lower than last year with £7.1bn invested in April and May 2021, down £0.8bn or 10% from a year before but up £0.9bn or 15% from two years ago.

This combined to produce a cumulative deficit for the first two months of the 2021-22 financial year of £53.4bn, £37.7bn or 41% below that of the same period a year previously, but up £37.3bn or 232% from the total for April and May 2019.

Public sector net debt increased to £2,195.8bn or 99.2% of GDP, an increase of £58.4bn since March, reflecting £5.0bn of additional borrowing over and above the deficit, principally to fund coronavirus loans to businesses. Debt is £259.1bn or 13% higher than a year earlier and £427.2bn or 24% higher than in April and May 2019.

Alison Ring, ICAEW Public Sector Director, said: “With numbers for the second month of the financial year now in, we can see tax receipts are starting to approach pre-pandemic levels, while borrowing continues to increase despite COVID-19 spending starting to decrease. 

“The public finances remain in a fragile state, and ongoing debates about education spending, adult social care and the pensions triple-lock highlight the difficult decisions facing Rishi Sunak as he seeks to balance pressures on our public services with still growing levels of public debt. The prospects of the Chancellor raising taxes in the Autumn Budget appear to be increasing.”

Images showing a table of the fiscal numbers for 2 months to May 2021 and variances against the prior year and two years. Click on link at end of this post to the ICAEW website which has a readable version of the table.
Images showing a table of the fiscal deficit by month, including receipts, expenditures interest and net investment. Click on link at end of this post to the ICAEW website which has a readable version of the table.

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £31.7bn to £29.1bn and the deficit for the twelve months ended 31 March 2021 from £300.3bn to £299.2bn.

This article was originally published by ICAEW.

March fiscal deficit hits £28bn as departments rush to spend capital budgets

The UK reported a £28.0bn fiscal deficit in March 2021, bringing the total shortfall for 2020-21 to £303.1bn. The last month of the financial year saw net investment of £10.3bn, up from a monthly average of £4.0bn over the previous eleven months.

The latest public sector finances released on Friday 23 April reported a deficit of £28.0bn for March 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the financial year to £303.1bn, £246.0bn more than the £57.1bn reported for the same period last year.

The combination of receipts down 5%, expenditure up 27% and net investment up 25% has resulted in a deficit for the twelve months to March 2021 that is more than five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 25%.

The deficit is smaller than the £354.6bn forecast by the Office for Budget Responsibility (OBR) in March as the economy has been less damaged than was feared, despite the extended lockdown during the final quarter of the financial year. However, some of this difference relates to spending that has been deferred into the following financial year, while the provisional numbers also exclude £27bn of bad debts on COVID-related lending that were included in the OBR forecast.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last twelve months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. 

Net investment is greater than last year (mostly as planned), while the interest expense line has benefited from ultra-low interest rates. March 2021 saw a return to the traditional end-of-financial-year rush to get capital budgets spent, with net investment spending of £10.3bn in March contrasting with an average of £4.0bn over the previous eleven months.

Public sector net debt increased to £2,141.7bn or 97.7% of GDP, an increase of £344.0bn from the start of the financial year. This reflected £40.9bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures. Although net debt was reported as exceeding 100% of GDP at various points during the financial year, slightly improved GDP numbers have kept the ratio below that point.

The cash outflow (the ‘public sector net cash requirement’) for the month was £16.4bn, increasing the cumulative total cash outflow for 2020-21 to £339.0bn. This is a significant increase over the cumulative net cash outflow of £17.2bn reported for 2019-20.

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first eleven months from £278.8bn to £275.1bn and the reported deficit for 2019-20 from £57.7bn to £57.1bn.

This article was originally published by ICAEW.

Fiscal deficit on course to exceed £300bn in 2020-21

The UK reported a £19.1bn fiscal deficit in February 2021, bringing the total shortfall over eleven months to £278.8bn. Public sector net debt is up by £333.0bn at £2.13tn.

The latest public sector finances released on Friday 19 March reported a deficit of £19.1bn for February 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the first eleven months of the financial year to £278.8bn, £228.2bn more than the £50.6bn reported for the same period last year.

The reported deficit for the eleven months excludes £27.2bn in potential business loan write-offs that the Office for Budget Responsibility (OBR) has included in its forecast deficit of £354.6bn for the full financial year.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last eleven months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. Net investment is greater than last year (mostly as planned), while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,131.2bn or 97.5% of GDP, an increase of £333.0bn from the start of the financial year and £347.2bn higher than in February 2020. This reflects £54.2bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures.

The cash outflow (the ‘public sector net cash requirement’) for the month was £11.4bn, increasing the cumulative total cash outflow this financial year to £322.3bn. This is a significant swing from the cumulative net cash inflow of £10.9bn reported for the equivalent eleven-month period in 2019-20.

The combination of receipts down 5%, expenditure up 27% and net investment up 21% has resulted in a deficit for the eleven months to February 2021 that is around five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 27%.

Alison Ring, ICAEW Public Sector Director said: “Today’s numbers are in line with expectations, with the deficit for the past 11 months reaching £278.8bn. This means we are on track for public sector net borrowing to exceed £300bn for the full year once a potential £27bn in bad debts that have not yet been recorded are factored in.

“Our eyes are now focused on what possible tax measures, in addition to the planned corporation tax rise, the government might use to start rebuilding the public finances.”

Table: public sector finances month ended 28 February 2021. Analyses deficit of £19.1bn for month and variances from same month last year. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: public sector finances 11 months ended 28 February 2021. Analyses deficit of £278.8bn and change in net debt of £333.03bn and variances from same period last year, together with net debt of £2,131.2bn or 97.5% of GDP. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the 11 months to 28 February 2021. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the prior year. Click on link at the end of the post to ICAEW article for a readable version of the table.

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first ten months from £270.6bn to £259.7bn and increasing the reported deficit for 2019-20 from £57.1bn to £57.7bn.

This article was originally published by ICAEW.

ICAEW chart of the week: Spring Budget cutting the current deficit

5 March 2021: The Budget provides the basis for this week’s chart, which illustrates government plans to achieve a current budget surplus to meet a new fiscal rule that hasn’t yet been formally announced but was hinted at.

Chart showing receipts, net investment and the current deficit from 2019-20 to 2025-26, showing very large current deficit in 2020-21 falling to almost zero by 2025-26.

The Chancellor will use a corporation tax rise and spending cuts to cut the current deficit over the next five years, but this relies on the economy recovering as expected and being able to restrain pressures on public spending.

The current deficit – the difference between receipts and expenditure excluding net investment – is expected to go from £14bn in 2019-20 to £279bn in the current financial year before falling to £172bn in 2021-22, £40bn in 2022-23, £15bn in 2023-24, £3bn in 2024-25 and just under £1bn in 2025-26 – almost, but not quite meeting the anticipated fiscal rule hinted at by Rishi Sunak in his Budget speech.

This will only be achievable if the pandemic can be brought under control so that support measures are no longer needed, in addition to depending on the strength of the economic recovery. The government will be hoping that the economic stimulus it plans to provide over the next two years will help drive that growth, with the hope of higher corporate profits to pay a higher rate of corporation tax over the rest of the period.

Despite the uncertainties around the numbers, the Chancellor felt it necessary to trim £4bn a year from public spending to get within touching distance of meeting his non-target – signalling his commitment to ‘fiscal responsibility’ and helping to achieve his other main non-target, which is to see the debt to GDP ratio start to fall after peaking at 110% of GDP in 2024. However, a number of commentators have suggested that this appears unlikely to be achievable, given both pre-existing pressures on public spending and a likely need to provide additional post-pandemic support to the NHS, social care and education in particular.

This provides a challenging context for the three-year Comprehensive Spending Review later this year, especially as the longer-term challenges facing the public finances remain unaddressed. In the nearer term though, the Chancellor will be hoping for a bigger bounce back to the economy over the summer to provide him with more room for manoeuvre in the autumn.

This chart was originally published by ICAEW.

Spending Review 2020: public finances dominated by COVID aftermath

26 November 2020: The Office for Budget Responsibility presented its latest economic and fiscal forecasts to accompany yesterday’s Spending Review. As expected, the forecasts were far from pretty.

In its latest economic and fiscal outlook, the Office for Budget Responsibility (OBR) confirmed that economic and fiscal damage from the pandemic is severe and will have a lasting effect. 

The fiscal watchdog now expects to see a sea of red ink across the first half of the coming decade: a £394bn deficit (19% of GDP) this year and the UK still running a fiscal deficit of over £100bn in five years’ time. This will be a decade after the point at which a previous Chancellor, George Osborne, hoped to have eliminated the deficit completely.

This is the highest ever fiscal deficit experienced in peacetime by the UK and reflects an additional £21bn for the cost of extending the furlough scheme across the winter and £30bn in anticipated write-offs of CBILS and other lending packages.

The fiscal pain is expected to continue into the next financial year starting on 1 April 2021, with the government planning an additional £55bn in COVID-related spending. This is offset to an extent by £10bn in lower departmental budgets, partly as a consequence of the one-year public sector pay freeze. The government says that despite this, ‘core day-to-day department spending’ is growing at 3.8% a year on average in real terms from 2019-20 to 2021-22.

Deficit to remain high for years to come

Table 1 below highlights how the deficit is forecast to be £164bn next year and to remain at over £100bn over the rest of the forecast period. This is despite GDP recovering in 2021-22 to the same level as last year (about 4% lower once inflation is taken into account) with the Chancellor hoping for strong growth to continue into 2022-23 before returning to trend after that.

Table 1 - OBR November 2020 summary economic and fiscal forecasts to 2025-26. Click on link to ICAEW website for a readable version of this table.

The Spending Review boasts that it includes £100bn of central government capital investment in 2021-22, a £27bn real-terms increase compared with 2019-20. This reflects planned increases in previous budgets, with no new funding included in yesterday’s announcement. There are concerns about how deliverable the government’s capital investment plans are, with the OBR increasing its estimate for capital budget underspends and scaling back expectations of local authority and public corporation capital expenditure by £4bn in 2021-22 and by £3bn in subsequent years. These are both likely to reduce any positive impact that may come from the £4bn ‘levelling up fund’ announced by the Chancellor

Table 2 summarises the changes between the pre-pandemic forecasts presented in the Spring Budget in March 2020 and the latest forecasts published yesterday.

Table 2 - OBR November 2020 changes since March 2020 pre-pandemic forecasts Click on link to ICAEW website for a readable version of this table.

Table 3 illustrates how debt is expected to increase from £1.8tn in March 2020 to £2.3tn in March 2021 and to continue to grow to £2.8tn by March 2026, in excess of 100% of GDP throughout the next five years.

Fortunately for the government, the cost of the additional borrowing required to fund the deficit has continued to fall dramatically, with central government debt interest falling from £37bn in 2019-20 to £18bn in 2021-22, before gradually rising to £29bn in 2025-26.

Table 1 - OBR November 2020 public sector net debt to 2025-26 Click on link to ICAEW website for a readable version of this table.

Martin Wheatcroft FCA, external adviser to ICAEW on public finances, commented: “The Spending Review was pretty much as expected, with COVID-related spending extended into the next financial year and the trailed public sector pay freeze allowing the government to maintain its capital investment ambitions.

However, buried in the detail is an expectation by the OBR that it will be difficult to deliver those plans on schedule. Combined with lower capital expenditure by local government and public corporations, the hoped-for economic boost could prove elusive.

With the spending side buttoned-down for now, the focus will move to how the Chancellor plans to close the gap between receipts and spending, with the prospect of tax rises on the horizon. It is important the government takes this opportunity to develop a long-term fiscal strategy to address the long-term unsustainability of the public finances that needed addressing even before the pandemic added to the scale of the challenge.”

This article was originally published on the ICAEW website.

ICAEW writes to Chief Secretary on Spending Review priorities

16 November 2020: Alison Ring, ICAEW’s director for public sector, has written to the Chief Secretary to the Treasury ahead of the Spending Review to stress the importance of investment in infrastructure, data and financial management.

The government has announced that the Spending Review will take place on 25 November 2020 but with the uncertainties caused by coronavirus, it has decided to restrict this to only one year instead of the previously planned three-year time horizon.

In the letter to Steve Barclay MP, Chief Secretary to the Treasury, ICAEW stresses how vital it is the government moves forward with its ambitious programme of infrastructure investment, and that projects are not delayed by the postponement of the Budget until next year and the reduction of the scope of the Spending Review to one year.

Commenting on the letter Alison Ring OBE FCA, ICAEW’s director for public sector said: “The 2020 Spending Review comes at a critical time for the UK and its public finances and will quite rightly focus on the government’s current spending plans for the coming financial year starting in April 2021 and capital budgets for the following year. Well-targeted support will be critical to ensure as strong a recovery from the coronavirus pandemic as possible. 

Our letter to the Chief Secretary focuses on the importance of budgetary certainty to ensure infrastructure projects are green-lit now rather than risking further delays because of the restriction in Spending Review time horizon. The long-delayed National Infrastructure Strategy is urgently needed if the government’s ambitions to level up economic prosperity and deliver carbon neutrality are to be achievable.

The government also has ambitious plans to improve the way government works, with the recently published National Data Strategy setting out how digital innovation will be key. We comment in the letter how the importance of high-quality financial skills, finance processes and risk management to delivering better outcomes and ensuring value for money for taxpayers should not be underestimated. The government does not have the best of records in undertaking major transformation programmes, and we caution the Chief Secretary against under-resourcing the planning stages of these projects. 

Finally, we hope that the government will use the delays in the Budget and the later years of the Spending Review to think about the longer term and how to put the public finances on a sustainable path. Even before the pandemic and the huge amounts of additional borrowing being undertaken this year, the Office for Budget Responsibility had reported that the strains on public services, more people living longer, and growing debts and other public liabilities were not being addressed. A comprehensive long-term fiscal strategy is needed to look beyond the immediate and establish a sustainable framework for the public finances for the next quarter of a century.”

The letter to the Chief Secretary to the Treasury focuses on three key areas, all of which ICAEW believes are essential to re-balancing economic opportunity and performance across the UK and to achieving carbon neutrality, as well as being key to driving the post-pandemic economic recovery in 2021 and the decade ahead.

Sustainable infrastructure investment

The shortening of the Spending Review period risks causing uncertainty in departmental capital budgets and the potential for further delays in getting infrastructure projects underway. ICAEW believes that establishing capital budgets for 2023-24, as well as 2022-23, would help departments to be confident in carrying out the groundwork for these projects so that they can be implemented as soon as possible.

The National Infrastructure Strategy is more urgent than ever to reduce regional inequalities and deliver on the ‘levelling up’ agenda.

Data and financial management

ICAEW welcomes the publication of the recent National Data Strategy and the commitment to rethinking how government works set out in the Chief Secretary’s speech of 28 July – digital innovation and better use of data will be key to delivering improved public services at a lower cost. However, sufficient resources must be provided to the initial stages of these projects – the experience of ICAEW members is that underinvestment in planning is one of the major causes of project failure.

Relatively small amounts invested in improving the quality of financial information needed to support effective decision-making, in more efficient and effective finance systems and processes, and in enhancing financial controls such as fraud prevention and detection are likely to be paid back many times over.

A long-term fiscal strategy

One benefit of the delay in the Budget and the deferral of the second two years of the Spending Review is the additional time this will give the government time to think about the longer term and how to put the public finances on a sustainable path. 

This is more pressing than ever as strains on public services increase, people live longer, and debt and other public sector liabilities continue to grow. 

A comprehensive strategy setting out a framework for taxes, welfare and public services over the next quarter of a century would provide an opportunity for sustainable reform to deliver a robust public balance sheet, a more resilient government machine, and a stronger and more prosperous economy. 

This article was originally published on the ICAEW website.

Where is the infrastructure for delivering infrastructure?

19 October 2020: How can the UK deliver on its ambitious infrastructure plans without a national infrastructure strategy, a comprehensive multi-year spending review, or an infrastructure investment bank?

It seems that everyone agrees that investing more in infrastructure is critical to the future prosperity of the UK, but how do we actually deliver those ambitions on the ground? 

After decades of underinvestment that has seen the UK fall behind many other developed, and even some developing countries, there is a great deal of consensus that a substantial amount of new investment is needed in both economic and social infrastructure right across the country. An investment-led recovery is also increasingly seen as essential to repair the economic damage caused by the coronavirus pandemic.

The UK does not score that well with only one relatively short high-speed railway, low broadband speeds across most of the country, severely congested roads, poor public transport networks outside London and the South East, a collapsing nuclear energy programme, underinvestment in hospitals, schools and care homes, and a failure to deliver enough houses. The fading glory of the on-time and on-budget delivery of the 2012 Olympics seems a long-time ago, as does the admittedly controversial PFI investment boom of the early 2000s.

A successful infrastructure programme requires many elements, starting with a clear national strategy setting out what needs to be built and how. Budget allocations for publicly funded infrastructure and a financial framework for privately funded infrastructure need to be in place well in advance. Financial institutions are required to provide finance for major infrastructure projects and to the businesses constructing them. An efficient planning system is needed that balances the economic benefits of building new assets with other interests.

Despite the enthusiasm for new investment from across the political spectrum, many of the building blocks are not yet in place. The National Infrastructure Strategy has been delayed several times and is still not published. The coronavirus pandemic has delayed the planned three-year Spending Review by yet another year, with a more limited one-year Spending Round expected this November instead. Similarly, we are still awaiting the outcome of the Infrastructure Finance Review that is expected to provide a new financial framework for private sector participation in infrastructure projects, as well as an anticipated UK successor to the European Investment Bank (EIB).

Despite this, there are some bright spots. Behind the scenes, there is a major upgrade underway of the UK’s energy transmission and distribution networks that is seeing tens of billions invested in improving the resilience and flexibility of the UK’s energy plumbing. And the UK has become a world leader in offshore wind power, with decisions taken a decade ago starting to bear fruit.

How can the UK deliver on ambitious plans to achieve carbon-neutrality while ensuring a reliable and secure energy supply, become a digital superpower and ‘level up’ deprived regions all at the same time? 

This is one of the more important debates we need to have – after all the very future of the country is at stake.

Join Katie Black, Director for Policy at the National Infrastructure Commission, Melanie Onn, Deputy Chief Executive for Renewable UK, Iain Wright, Director for Business and Industrial Strategy at ICAEW and Alison Ring, Director for Public Sector at ICAEW, to discuss the UK’s infrastructure plans at an ICAEW webinar on Thursday 22 October at 11am.

To read ICAEW’s submission to the Infrastructure Finance Review click here.

This article was originally published on the ICAEW website.

Chief Secretary brands Treasury ‘new radicals in government’

3 August 2020: Chief Secretary to the Treasury Steve Barclay delivered his first speech last week, providing fresh detail on the plan for the Spending Review.

Steve Barclay’s first speech as Chief Secretary, delivered to thinktank Onward on Tuesday 28 July 2020, set out how he believes Treasury can be an accelerator of change in government.

He sees the Spending Review as a significant moment in the lifecycle of any government, but with the current review being conducted against the backdrop of the most challenging peacetime economic circumstances in living memory.

Despite that, the Government believes the recovery from this pandemic can be a moment for national renewal, with the Spending Review acting as the mechanism to deliver the Prime Minister’s ambition to ‘level up’ the country.

As a constituency MP, Barclay said he has run up against a system that is slow and siloed. By way of an example, he asked why there is a seven-year gap between funding being agreed for a road scheme and the first digger arriving? Or why it takes a decade to decide to produce a full business case on whether to re-open eight miles of railway track?

The lack of upfront clarity on outcomes, the slow speed of delivery and the variable quality of data within government are all areas the Spending Review provides an opportunity to challenge.

The Chief Secretary stressed that to ‘level up’ the country properly, the Government needs to ensure that Treasury decision-making better reflects the UK’s economic geography, with more balanced judgments taking into consideration the transformative potential of investment to drive localised growth.

He drew on the speed of change during the pandemic, with the furlough scheme taking just one month from being announced to being opened for applications when normally such schemes take months – years even – to deliver.

He asked if the wheels of government can be made to spin this fast in a crisis, with all the added pressures of lockdown, why can’t it happen routinely?

Time to level up

The Chief Secretary stated that the actions being taken to support businesses and jobs during the pandemic are the right thing to do, even though it comes at a cost. The cost of inaction would be far greater, he claimed.

Even though the Prime Minister has made it clear that austerity is not the answer to navigating a much-changed economic landscape, departments will have to make tough choices in the months ahead.

The commitment to reviewing the Green Book investment manual was reiterated with changes planned to allow room for more balanced judgments on investments to reduce inequality and drive localised growth.

During the speech, Barclay listed several priorities for government in the Spending Review:

  • accelerating the UK’s economic recovery;
  • levelling-up opportunity across the country;
  • improving public services; and
  • making the UK a scientific superpower.

Outcomes, speed and data

To achieve these objectives, the Chief Secretary focused on three key approaches: outcomes, speed and data.

On outcomes, the Spending Review would try to tie expenditure and performance more closely together, with Treasury having clearer sight of both intended outcomes and subsequent evaluation of their delivery. 

For some of the most complex policy challenges, this will involve breaking the silos between departments, and pilot projects are currently being used to test innovative ways of bringing the public sector together.

On speed, Barclay noted that this is a ‘hallmark of the digital era’. Programmes need to start with robust goals and the temptation to repeatedly change plans has to be resisted if the UK is to bring down capital costs that are typically between 10% and 30% higher than in other European countries. A new Infrastructure Delivery Task Force (known as Project Speed) will be established to cut down the time it takes to develop, design and deliver vital projects.

This will involve more standardisation and modularisation between projects, for example in speeding housing construction. The Spending Review will seek to accelerate the adoption of Modern Methods of Construction and explicitly link funding decisions to schemes that priorities it.

On data, the Chief Secretary believes that government is behind the curve when it comes to obtaining, analysing, and enabling access to open data. It remains the case that decisions still rely heavily on spreadsheets from departments rather than data directly sourced in real time. Work has already begun to incentivise departments and arms-length bodies to supply higher quality standardised data and to support the Treasury to better interrogate this data.

Building this will involve sorting out the data architecture as well as the data sets, and the Spending Review will focus on addressing legacy IT and investing in the data infrastructure needed to become a “truly digital government”.

The new radicals

Barclay concluded with stressing the importance of taking risks, setting ambitious goals and experimenting with ways of delivery, even if failure is a possibility. He wants to move beyond a simple yes/no approach to public spending and instead bring together people, ideas and best practice from inside and outside government.

He concluded: “This is an opportunity for the Treasury to capture the ‘can do’ attitude shown by civil servants during the COVID pandemic and make it permanent. To be the new radicals, leading change across government.

“Done well, we can move on from an era of spreadsheets. We can create a smarter and faster culture in Whitehall. And we can ensure that Britain does indeed bounce back from this crisis stronger and better than before.”

Speech by Steve Barclay MP, Chief Secretary to the Treasury, on 28 July 2020.

This article was originally published by ICAEW.

Spending Review suspension sensible, but avoid more delays

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

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

This article was originally published by ICAEW.

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

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

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

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

Key headlines for 2020-21:

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

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

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

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

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

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

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

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

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

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

This article was originally published by ICAEW.