Tag: #publicsectorinvestment

Government enters crisis control mode to curb public spending

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 tax89.986.4+4%
VAT67.966.0+3%
National insurance53.558.3-8%
Corporation tax34.031.6+8%
Other taxes73.572.1+2%
Other receipts40.537.5+8%
Total receipts359.3351.9+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
PSNB51.452.3
Other borrowing4.4(11.4)
Net change55.840.9
Opening net debt2,694.12,539.7
Closing net debt2,745.92,580.6
PSNB/GDP1.9%2.0%
Other/GDP0.2%(0.4%)
Inflating away(0.8%)(1.5%)
Net change1.3%0.1%
Opening net debt98.1%95.7%
Closing net debt99.4%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.

A new dawn for local government has broken, has it not?

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.

This article was written on behalf of ICAEW by Martin Wheatcroft in conjunction with Alison Ring, and was originally published in Room 151 and subsequently (with some minor changes) by ICAEW.

Q1 public finances confirm challenging position for new government

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 toJun 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%.

This article was originally published by ICAEW.

New government to inherit tough public finances

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 toMay 2024
£bn		May 2023
£bn		Change
%
Income tax38.236.8+4%
VAT33.933.6+1%
National insurance25.928.2-8%
Corporation tax16.615.5+7%
Other taxes36.035.2+2%
Other receipts19.818.5+7%
Total receipts170.4167.8+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 toMay 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.

This article was originally published by ICAEW.

ICAEW publishes in-depth Fiscal Insight on the Spring Budget

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.

For further coverage, including more detailed information about tax measures, visit ICAEW’s Spring Budget 2024 site by clicking here.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

Fiscal deficit still too high for comfort

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.

Table: Public sector finance trends: February 2024 11 months to Feb 2020 | 2021 | 2022 | 2023 | 2024 £bn Receipts: 756 | 719 | 835 | 937 | 995 Expenditure: (721) | (906) | (836) | (893) | (935) Interest: (53) | (40) | (71) | (125) | (114) Net investment: (36) | (62) | (48) | (31) | (53) Deficit: (54) | (289) | (120) | (112) | (107) Other borrowing: 20 | (53) | (77) | (9) | (13) Debt movement: (34) | (342) | (197) | (121) | (120) Net debt: 1,811 | 2,157 | 2,349 | 2,502 | 2,659 Net debt / GDP: 84.5% | 97.4% | 96.0% | 94.8% | 97.1%
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.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

Modest boost to public finances won’t stop taxes rising

Prior month revisions boost public finances despite worse than expected self assessment receipts, as a think tank says tax cuts in the Budget will be sandwiched between tax rises in the years before and after.

The monthly public sector finances for January 2024 reported a provisional surplus for the month of £17bn, slightly less than expected, while at the same time revising the year-to-date deficit down. 

The figures, released by the Office for National Statistics (ONS) yesterday, show a cumulative deficit for the first 10 months of the financial year to £97bn, £3bn less than in the same period last year. The year-to-date variance against the Office for Budget Responsibility (OBR)’s Autumn Statement forecast improved from £5bn last month to £9bn this month. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “Lower self assessment tax receipts than expected in January were offset by revisions to numbers from previous months to improve the overall financial picture.

“This small improvement helps only a little with an extremely weak fiscal position facing the Chancellor as he approaches the Budget, with questions already being asked about whether existing plans to cut public spending in the near term are realistically achievable. Rumours that the Chancellor is thinking about further reductions in public spending to fund tax cuts will therefore need to be balanced with his ability to maintain credibility with debt markets.”

The Resolution Foundation reported that likely net tax cuts in the coming financial year of around £10bn are sandwiched between £20bn of tax rises that have already been implemented in the current financial year – including threshold freezes and the corporation tax rate rise from 19% to 25% – and £17bn in net tax rises that have been pre-announced up to 2027/28 (primarily from threshold freezes and stamp duty land tax).

The think tank’s pre-Budget analysis estimates that the cut in national insurance announced in November plus around £10bn in potential new tax cuts to be announced in the Budget would result in a net reduction in taxes of just under £10bn for 2024/25 after taking account of threshold freezes and other tax changes.

The Resolution Foundation analysis does not take account of the normal pattern that sees governments typically raise taxes in the first Budget after a general election, which is even more likely this time around given what many commentators believe are unrealistic spending assumptions for 2025/26 onwards. 

Month of January 2024

Self assessment tax receipts were lower than expected in January 2024, with the fiscal surplus of £17bn for the month coming in at £9bn better than last year but £2bn less than the OBR’s Autumn Statement projection.

Taxes and other receipts amounted to £120bn, up 4% compared with January 2023, while total managed expenditure was £103bn, down 5%.

Public sector net debt as of 31 January 2024 was £2,646bn or 96.5% of GDP, £41bn lower than 31 December but £107bn higher than at the start of the financial year.

Ten months to January 2024

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first five sixths of the 2023/24 financial year to January 2024 was £97bn, £3bn less than the £100bn deficit reported for the first ten months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £901bn and total managed expenditure of £998bn, up 6% and 5% compared with April 2022 to January 2023.

Inflation benefited tax receipts for the first 10 months compared with the same period in the previous year, with income tax up 11% to £224bn and VAT up 6% to £165bn. Corporation tax receipts were up 17% to £85bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023. 

Meanwhile,national insurance receipts were up by just 1% to £148bn 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, as well as the cut in national insurance implemented in January. 

Council tax receipts were up 6% to £36bn, but stamp duty on properties was down by 25% to £11bn and the total for all other taxes was flat at £137bn as economic activity slowed. Non-tax receipts were up 10% to £95bn, primarily driven by higher investment income and higher interest charged on student loans.

Total managed expenditure of £998bn in the ten months to January 2024 can be analysed between current expenditure excluding interest of £846bn, interest of £105bn and net investment of £47bn, compared with £949n in the same period in the previous year, comprising £810bn, £114bn and £25bn respectively.

The increase of £36bn or 4% in current expenditure excluding interest was driven by a £28bn increase in pension and other welfare benefits (including cost-of-living payments), £18bn in higher central government pay and £10bn in additional central government procurement spending, less £13bn in lower subsidy payments (principally relating to energy support schemes) and £7bn in net other changes.

The fall in interest costs for the ten months of £9bn or 8% to £105bn comprises a £23bn or 50% reduction to £23bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £14bn or 21% increase to £82bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.

The £21bn increase in net investment spending to £47bn in the first ten months of the current 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 19% increase in gross investment to £101bn, less a £4bn or 8% increase in depreciation to £54bn.

Public sector finance trends: January 2024

Table with fiscal numbers for the ten months to Jan 2020, Jan 2021, Jan 2022, Jan 2023 and Jan 2024, all in £bn. Receipts: 685 | 647 | 754 | 849 | 901 Expenditure: (588) | (746) | (686) | (722) | (761) Interest: (44) | (33) | (55) | (103) | (97) Net investment: (26) | (51) | (35) | (16) | (37) [subtotal] Deficit: (61) | (270) | (123) | (108) | (119) Other borrowing: 3 | (67) | (85) | (8) | (27) [total] Debt movement: (58) | (337) | (208) | (116) | (146) Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686 Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £97bn for the first 10 months of the financial year is £9bn below the OBR’s November 2023 forecast of £106bn for that same period. The OBR is forecasting deficits of £6bn and £12bn in February and March to result in a full year forecast of £124bn, or £115bn if the £9bn forecast variance persists. 

Balance sheet metrics

Public sector net debt was £2,646bn at the end of January 2024, equivalent to 96.5% of GDP.

The debt movement since the start of the financial year is £107bn, comprising borrowing to fund the deficit for the ten months of £97bn plus £10bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £831bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,108bn 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 -£677bn on 31 January 2024, comprising £1,584bn in non-financial assets and £1,047bn in non-liquid financial assets minus £2,646bn of net debt (£303bn liquid financial assets – £2,949bn public sector gross debt) and other liabilities of £662bn. This is a £62bn deterioration from the -£615bn 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 nine months to December 2023 down by £6bn from £119bn to £113bn as estimates of tax receipts and expenditure were updated for better data and the correction of errors in HMRC reporting, while the debt to GDP ratio at the end of December 2023 was revised up by 0.5 percentage points from 97.7% to 98.2% as GDP estimates were updated.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £129bn for 2022/23.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and it was originally published by ICAEW.

Public finances beat forecast amid tough economic landscape

Year-to-date deficit of £119bn is £5bn lower than latest Office for Budget Responsibility forecast – but is still £11bn worse than this time last year.

Public sector finances for December 2023, released by the Office for National Statistics (ONS) on Tuesday, reported a provisional deficit of £8bn – less than expected – while at the same time revising the year-to-date deficit down by £5bn. This brought the cumulative deficit for the first three-quarters of the financial year to £119bn, £11bn more than in the same nine-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments: “Today’s numbers show a cumulative deficit of £119bn for the first three-quarters of the financial year, the fourth highest on record. This should be close to the total at the end of the tax year, as income from self-assessment tax receipts in January is likely to offset deficits in February and March. At £5bn less than the Office for Budget Responsibility’s latest forecast, the Chancellor will be pleased by this marginal improvement in fiscal headroom just when he needs it most.

“However, the Chancellor will still be concerned by the tough economic landscape, with disappointing retail sales data for the final quarter of 2023 and an unexpected rise in inflation last month, and what that might mean for the fiscal forecasts. He is under significant pressure to cut taxes ahead of the general election, but will be all too aware of the need for greater investment in public services and infrastructure if he is to be able to lay the foundations for economic growth in the next Parliament. The risk of local authorities going bust will also be on his mind as he seeks to generate positive economic vibes going into the general election campaign.”

Month of December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of December 2023 was £8bn, made up of tax and other receipts of £89bn less total managed expenditure of £97bn, up 6% and down 3% respectively compared with December 2022. 

This was the lowest December deficit since 2019, principally because interest on Retail Prices Index-linked debt fell from £14bn in December 2022 to close to zero in December 2023.

Public sector net debt as at 31 December 2023 was £2,686bn or 97.7% of GDP, up £15bn during the month and £146bn higher than at the start of the financial year.

Nine months to December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first three quarters of the financial year to December 2023 was £119bn, £11bn more than the £108bn deficit reported for the first nine months of 2022/23. 

This reflected a year-to-date shortfall between tax and other receipts of £776bn and total managed expenditure of £895bn, both up 6% compared with April to December 2022.

Inflation benefitted tax receipts for the first nine months compared with the same period in the previous year, with income tax up 10% to £178bn and VAT up 7% to £150bn. Corporation tax receipts were up 18% to £76bn, 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 £132bn 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. 

Council tax receipts were up 6% to £33bn, but stamp duty on properties was down by 27% to £10bn and the total for all other taxes was down by 3% to £112bn as economic activity slowed. Non-tax receipts were up 11% to £84bn, primarily driven by higher investment income and higher interest receivable on student loans.

Total managed expenditure of £895bn in the nine months to December 2023 can be analysed between current expenditure excluding interest of £761bn, interest of £97bn and net investment of £37bn, compared with £841bn in the same period in the previous year, comprising £722bn, £103bn and £16bn respectively.

The increase of £39bn or 5% in current expenditure excluding interest was driven by a £24bn increase in pension and other welfare benefits (including cost-of-living payments), £15bn in higher central government pay and £8bn in additional central government procurement spending, less £6bn in lower subsidy payments (principally relating to energy support schemes) and £2bn in net other changes.

The fall in interest costs for the nine months of £6bn to £97bn comprises an £18bn or 39% fall to £28bn for interest accrued on index-linked debt from a lower rate of inflation, partially offset by a £12bn or 21% increase to £69bn for interest not linked to inflation from higher interest rates.

The £21bn increase in net investment spending to £37bn in the first nine months of the current 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 £11bn or 42% reflects high construction cost inflation, among other factors, which saw a £14bn or 20% increase in gross investment to £85bn, less a £3bn or 7% increase in depreciation to £48bn.

Public sector finance trends: December 2023

Table showing fiscal numbers for the nine months to Dec 2019, 2020, 2021, 2022 and 2023. Receipts: 597 | 560 | 653 | 733 | 776 Expenditure: (588) | (746) | (686) | (722) | (761) Interest: (44) | (33) | (55) | (103) | (97) Net investment: (26) | (51) | (35) | (16) | (37) [subtotal] Deficit: (61) | (270) | (123) | (108) | (119) Other borrowing: 3 | (67) | (85) | (8) | (27) [total] Debt movement: (58) | (337) | (208) | (116) | (146) Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686 Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £119bn for the first three-quarters of the financial year is £5bn below the Office for Budget Responsibility (OBR)’s November 2023 forecast of £124bn for the nine months to December 2023. The OBR is also forecasting a full year forecast of £124bn as it expects self-assessment tax receipts in January to offset projected deficits in February and March 2024. 

Balance sheet metrics

Public sector net debt was £2,686bn at the end of December 2023, equivalent to 97.7% of GDP.

The debt movement since the start of the financial year is £146bn, comprising borrowing to fund the deficit for the nine months of £119bn plus £27bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £871bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,330bn 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 -£715bn on 31 December 2023, comprising £1,584bn in non-financial assets and £1,049bn in non-liquid financial assets minus £2,686bn of net debt (£296bn liquid financial assets – £2,982bn public sector gross debt) and other liabilities of £662bn. This is a £100bn deterioration from the -£615bn 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 eight months to November 2023 down by £5bn from £116bn to £111bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of November 2023 was revised down by 0.1 percentage points from 97.5% to 97.4%.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £130bn for 2022/23.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and it was originally published by ICAEW.

Gap between public sector income and spending reaches £116bn

Latest public sector finance numbers reveal a challenging fiscal backdrop for both government and opposition ahead of a general election.

The monthly public sector finances for November 2023 released by the Office for National Statistics (ONS) on Thursday 21 December 2023 reported a provisional deficit for the month of £14bn and revised the year-to-date deficit up by £4bn, bringing the cumulative deficit for the first two-thirds of the financial year to £116bn, £24bn more than in the same eight-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “These numbers confirm that the government’s financial difficulties are continuing to mount, with the shortfall between income and public spending reaching an unsustainable £116bn for the first two-thirds of the financial year, surpassing the £100bn milestone and providing a challenging fiscal backdrop for both the government and the opposition ahead of a general election.

“While the Prime Minister and the Chancellor continue to search for cost savings to free up capacity for further pre-election tax cuts, the opposition will be concerned about the fiscal legacy it would inherit if it were to take power. 

“The deteriorating state of the UK’s public services is a big concern for all politicians given that it implies a need for substantial tax rises after the general election, irrespective of who wins.”

Month of November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of November 2023 was £14bn, made up of tax and other receipts of £86bn less total managed expenditure of £100bn, up 5% and 3% respectively compared with November 2022. 

This was the fourth highest November deficit on record since monthly records began in 1997, following monthly deficits of £15bn, £22bn and £15bn in November 2010, 2020, and 2022 respectively.

Public sector net debt as of 30 November 2023 was £2,671bn or 97.5% of GDP, up £30bn during the month and £132bn higher than at the start of the financial year.

Table titled 'Public sector finance trends: November 2023' Eight months to Nov 2019, Nov 2020, Nov 2021, Nov 2022 and Nov 2023 respectively. £bn except where stated. Receipts: 530, 491, 574, 648, 682 Expenditure: (522), (661), (610), (635), (676) Interest: (41), (30), (46), (83), (90) Net investment: (22), (46), (31), (22), (32) Subtotal line Deficit: (55), (246), (113), (92), (116) Other borrowing: 5, (67), (83), (4), (15) Total line above Debt movement: (50), (313), (196), (96), (131) Total line below Net debt: £1,827bn, £2,128bn, £2,348bn, £2,477bn, £2,671bn Net debt / GDP: 83.4%, 99.1%, 98.5%, 95.7%, 97.5%.

Eight months to November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first two thirds of the financial year to November 2023 was £116bn, £24bn more than the £92bn deficit reported for the first eight months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £682bn and total managed expenditure of £798bn, up 5% and 8% respectively compared with April to November 2022.

Inflation benefited tax receipts for the first eight months compared with the same period in the previous year, with income tax up 10% to £156bn and VAT up 8% to £134bn. Corporation tax receipts were up 10% to £62bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 3% to £114bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £9bn and the total for all other taxes was up just 3% to £132bn, much less than inflation, as economic activity slowed. Non-tax receipts were up 11% to £75bn, primarily driven by higher investment income.

Total managed expenditure of £798bn in the eight months to November 2023 can be analysed between current expenditure excluding interest of £676bn, up £41bn or 6% over the same period in the previous year, interest of £90bn, up £7bn or 8%, and net investment of £32bn, up £10bn or 45%.

The increase of £41bn in current expenditure excluding interest was driven by a £21bn increase in pension and other welfare benefits (including cost-of-living payments), £14bn in higher central government pay and £7bn in additional central government procurement spending, less £1bn in net other changes.

The rise in interest costs for the eight months of £7bn to £90bn comprises a £20bn or 43% increase to £67bn for interest not linked to inflation as the Bank of England base rate rose, partially offset by an £13bn or 37% fall to £23bn for interest accrued on index-linked debt from lower inflation than last year.

The £10bn increase in net investment spending to £32bn in the first eight months of the current year reflects high construction cost inflation amongst other factors that saw a £13bn or 21% increase in gross investment to £75bn, less a £3bn or 8% increase in depreciation to £43bn. 

The cumulative deficit of £116bn for the first two-thirds of the financial year is £8bn below the Office for Budget Responsibility (OBR)’s official forecast of £124bn for the full financial year as compiled in November 2023 for the Autumn Statement. The deficit for the last third of the financial year is normally much smaller than for the first two-thirds because of self assessment tax returns arriving in January that boost tax receipts.

Balance sheet metrics

Public sector net debt was £2,671bn at the end of November 2023, equivalent to 97.5% of GDP.

The debt movement since the start of the financial year was £131bn, comprising borrowing to fund the deficit for the eight months of £116bn plus £15bn in net cash outflows to fund lending to students, businesses and others net of loan repayments and working capital movements.

Public sector net debt is £856bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,133bn 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 -£715bn on 30 November 2023, comprising £1,565bn in non-financial assets and £1,054bn in non-liquid financial assets minus £2,671bn of net debt (£303bn liquid financial assets – £2,974bn public sector gross debt) and other liabilities of £663bn. This is a £100bn deterioration from the -£615bn 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 seven months to October 2023 up by £4bn from £98bn to £102bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of October 2023 was revised down by 1.2 percentage points from 97.8% to 96.6% as a consequence of updated estimates of GDP.

The ONS also revised up its estimates for the deficit for the financial years to March 2023 and 2022 respectively, by £3bn to £131bn for 2022/23 and by £2bn to £124bn for 2021/22.

This article was originally published by ICAEW.

ICAEW chart of the week: Autumn Statement 2023

My chart for ICAEW this week illustrates how Chancellor Jeremy Hunt used almost all of the available upside from inflation and fiscal drag to fund his tax measures and a series of business growth initiatives.

Autumn Statement 2023 Step chart (waterfall diagram) showing the average change to 2023/24 to 2027/28 forecasts since the Spring Budget 2023. Forecast revisions (steps in orange): Inflation +$41bn Fiscal drag +£7bn Other changes +£4bn Debt interest -£21bn Welfare uprating -£13bn = Forecast revisions +£18bn (subtotal in purple) Policy measures (steps in blue): Tax measures -£11bn Spending and other -£6bn = Net changes +£1bn (total in purple) 23 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Autumn Statement 2023'; OBR, 'Economic and fiscal outlook, Nov 2023'.

The Autumn Statement 2023 on Wednesday 22 November featured a surprise tax cut to national insurance and a perhaps less surprising decision to make full expensing of business capital expenditure permanent.

As my chart illustrates, the forecasts for the deficit over the next five years benefited by £41bn a year on average in higher receipts from inflation, £7bn a year on average in additional ‘fiscal drag’ as higher inflation erodes the value of frozen tax allowances more quickly, and a net £4bn in other upward forecast revisions. These improvements to the forecasts were offset by an average of £21bn a year in higher debt interest and £13bn from the expected inflation-driven uprating of the state pension and welfare benefits, to arrive at a net improvement of £18bn a year on average over the five financial years from 2023/24 to 2027/28 before policy decisions.

In theory, these upward forecast revisions should be absorbed by more spending on public services as higher inflation feeds through into salaries and procurement costs. However, the Chancellor has chosen to (in effect) sharply cut public spending and use almost all of the upward revisions to fund tax measures and business growth initiatives instead. These amounted to £11bn a year on average in tax changes and £6bn a year on average in spending increases and other changes to reduce the net impact to just £1bn a year on average over the five-year period.

The resulting net change of £1bn on average in forecasts for the deficit is to reduce the forecast deficit by £8bn for the current year (from £132bn to £124bn) and by £1bn for 2024/25 (to £85bn), with no net change in 2025/26 (at £77bn), an increase of £5bn in 2027/28 (to £68bn), and no net change for 2027/28 (at £49bn).

The main tax changes announced were the cuts in national insurance for employees by 2 percentage points from 12% to 10% and by 1 percentage point for the self-employed from 9% to 8%, reducing tax receipts by an average of £9bn over five years. This is combined with the effect of making full expensing permanent of £4bn – this change mainly affects the later years of the forecast (£11bn in 2027/28), although ironically the average is a better proxy for the long-term cost of this change, which the OBR estimates is around £3bn a year. 

Other tax changes offset this to a small extent. 

Spending and other changes of £6bn a year on average comprise incremental spending of £7bn a year plus £2bn higher debt interest to fund that spending, less £3bn in positive economic effects from that spending and from the tax measures above.

Although the cumulative fiscal deficit over five years has been revised down by £4bn, the OBR has revised its forecast for public sector net debt as of 31 March 2028 up by £94bn from to £3,004bn. This principally reflects changes in the planned profile of quantitative tightening and higher lending to students and businesses.

The big gamble the Chancellor appears to be making by choosing to opt for tax cuts now is that the OBR and Bank of England’s pessimistic forecasts for the economy are not realised – enabling him to find extra money in future fiscal events to cover the effect of inflation on public service spending. Otherwise, while it may be possible to cut public spending by as much as the Autumn Statement suggests, it is difficult to see how he can do so without a further deterioration in the quality of public services given he is not providing any additional investment in technology, people and process transformation to deliver sustainable efficiency gains.

This chart was originally published by ICAEW.