Health Secretary recapitalises NHS with £13.4bn write-off

3 April 2020: Surprise move puts NHS trusts into a much stronger financial position, saving them hundreds of millions in interest payments every year.

The Health Secretary Matt Hancock has announced that he is writing off £13.4bn of debts owed by NHS trusts at 1 April 2020.

These write-offs will save the NHS trusts concerned hundreds of millions in interest each year, providing an immediate financial boost to hospitals across the country. It will also put them on a sounder footing for the long-term, without the need to find cash to repay these debts in the future.

Although the transaction is described by the Government as neutral to the public finances because the loans concerned are all internal within the Department of Health & Social Care, it will increase the £130bn annual cost of the NHS going forward to the extent that interest charges and debt repayments no longer flow back to the Exchequer.

The department also announced that it is introducing new funding arrangements for the NHS with a ‘simpler internal payment system’ to help NHS trusts in responding to COVID-19.

The loans being written off principally relate to borrowing to fund deficits (interim revenue debts and working capital loans) and borrowing to finance shortfalls in capital funding (interim capital debts). ‘Normal course of business’ loans and external debts embedded in private-finance initiative (PFI) contracts will continue as liabilities of the NHS trusts concerned.

The debt write-offs will take the form of a capital contribution with outstanding loan balances at 1 April 2020 converted into equity, adding £13.4bn to the net assets of the 107 NHS trusts affected.

The pressures that the NHS is under from the coronavirus have highlighted the problems with the existing funding model and the Health Secretary has also written to NHS trusts letting them know that should they need extra cash during the coronavirus emergency that this will also be provided as an equity injection, rather than building up new debts.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented:

“Although writing off debts owed by the NHS has no net effect on the public finances in theory as the balances are all internal to government, it will have very real-world effects on the ground. By relieving NHS trusts of a significant financial burden, the Government is putting each of them into a much better financial position to deal with the coronavirus and to invest in services for patients.

The news that funding arrangements for the NHS are being revisited is also welcome. Many of these debts arose because of an overcomplicated system of funding that meant that many hospitals were not receiving sufficient income to cover their operating costs. A simpler funding model will make a big difference to the ability of NHS trusts to manage their finances effectively and hence the quality of the health care that they can provide.”

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:

ICAEW, ‘Fiscal Insight – Spending Round 2019’.

This article was originally published by ICAEW.

Government watchdog sounds COVID-19 fraud risk alarm

31 March 2020: the Government Counter Fraud Function has published new guidance for public bodies about fraud arising from the actions taken to address the coronavirus emergency.

Unfortunately, fraud is inevitable given the relaxation in scrutiny over emergency payments made by public bodies to support individuals and businesses affected by the current crisis. But there are still steps that can be taken to minimise fraud where possible.

The guidance sets out five overarching principles for public bodies to apply to counter potentially fraudulent activity in delivering emergency programmes:

1. Accept that there is an inherently high risk of fraud, and it is very likely to happen.

2. Integrate fraud control resources into policy and process design.

3. Work together with fraud control teams to implement low friction counter measures to prevent fraud risk where possible.

4. Carry out targeted post-event assurance to look for fraud, ensuring access to fraud investigation resources.

5. Revisit the control framework when emergency payments shift into longer term services – especially where large sums are invested.

The guidance is intended to support government departments, local authorities and other public bodies to move quickly to provide financial support to those affected, whilst doing what is possible to address the inevitable frauds that will be committed. It recommends ensuring that consistent data is collected from those applying and receiving payments and putting in place robust claw back agreements to recover funds that are paid out incorrectly.

The advice makes clear that public bodies will need to put in place post-event assurance processes to review the payments being made now.

Alison Ring, Director, Public Sector for ICAEW, commented: “It is important that public bodies move as quickly as they can to support individuals and businesses in distress but despite that, there is a lot they can do to minimise the potential for fraud. Where possible, implementing existing fraud prevention measures in the time available, combined with extensive post-transaction scrutiny and assurance to be carried out later.

The need for appropriate open access provisions, allowing public bodies to verify transactions at a later date and recover fraudulent claims where possible, will be an important component to both deferring fraud in the first place as well as detecting fraud afterwards.”

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.

ICAEW chart of the week: Forecast deficit doubles in a week

20 March 2020: Emergency spending measures added to Spring Budget measures drives forecast deficit for 2020-21 to double in a week.

Forecast deficit pre-budget £40bn + Budget £15bn = OBR forecast £55bn - base rate £3bn + Covid I £12bn + Covid II £20bn = Latest forecast £84bn

20 March 2020. Chart research by Martin Wheatcroft FCA, design by Sunday. ©ICAEW 2020
Source: HM Treasury, ‘Spring Budget 2020’, and emergency announcements on 11 and 17 March 2020.

Three fiscal events within a period of a week is pretty much unprecedented. Two of these were on Wednesday 11 March when an expansionary Spring Budget was accompanied by a £12bn package of emergency measures. Less than a week later, the Chancellor announced a £20bn package of additional financial support, together with an initial £330bn in loans and guarantees to keep the economy operating.

As the #icaewchartoftheweek illustrates, this means that the forecast deficit for 2020-21 has more than doubled, from £40bn before the Budget to £84bn now.

It looks increasingly likely that the fiscal deficit in the coming year will exceed £100bn, potentially by a significant margin. Just a 2% drop in tax revenues would be enough to take the deficit over that level, even before the impact on welfare spending of job losses and income reductions, or the cost of writing down any loans or guarantees that are not repaid. Further financial support packages from the Chancellor over the weeks and months ahead are also likely.

Sit tight. This is going to be a bumpy ride for the public finances.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spring Budget 2020

13 March 2020: Forecast deficits increase with new spending announced in the Spring Budget, even before the impact of the coronavirus.

Forecast deficit before and after the Budget. 2020-21: £40bn to £55bn, 2021-22: £38bn to £67bn, 2022-23: £35bn to £61bn, 2023-24: £33bn to £60bn, 2024-25: £58bn.

13 March 2020. Chart research by Martin Wheatcroft FCA, design by Sunday. ©ICAEW 2020
Source: HM Treasury, ‘Spring Budget 2020’. 2020-21 excludes £12bn additional funding in response to the coronavirus.

The sheer scale of the Spring Budget 2020 spending announcements are difficult to comprehend, but the #icaewchartoftheweek makes an attempt by illustrating their effect on the fiscal deficit compared with the previous forecast.

The budgeted deficit in the coming financial year is expected to increase by £15bn to £55bn, even before taking account of the emergency £12bn to respond to the coronavirus that was decided after the forecasts were finalised. The deficit is also expected to be much greater than the previous forecast in each of the subsequent years, albeit there was no previous official forecast for 2024-25.

The increase in the deficit in 2020-21 of £15bn reflects higher spending of £19bn less £1bn in higher taxes and £3bn in other forecast revisions. The spending increases in the subsequent four years are even greater, with an extra £46bn on average a year before taking account of £7bn a year in higher taxes, £8bn a year from the indirect boost to the economy that the incremental spending and investment should provide, as well as an average of £3bn a year in other forecast revisions.

The big uncertainty is how much the UK and global economies will be affected by the coronavirus pandemic in addition to the existing economic headwinds and changes in the trading relationships with other countries in the EU and elsewhere in 2021. These risks could potentially reduce tax revenues significantly, leading to even greater fiscal deficits than those presented by the Chancellor on Wednesday.

For more on Budget 2020 visit ICAEW’s dedicated Budget Hub. For the latest news and advice for accountants on the Covid-19 outbreak visit ICAEW’s Coronavirus hub.

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.

ICAEW Fiscal Insight: General Election 2019

On 12 December 2019, voters have the opportunity to focus on the big challenges of sustainability, technology and the public finances as they elect a government for the next four and a half years.

ICAEW have published a Fiscal Insight on the General Election 2019 manifesto proposals of the Conservatives, the Labour Party, the Liberal Democrats and the Green Party.

All the political parties are promising to increase taxes, public spending and investment. The Conservatives are promising the least, but they have deferred significant decisions. Other parties propose spending a lot more, with Labour planning to nationalise utilities. There are new fiscal rules, but questions about whether they would be adhered to.

This is in the context of public finances that are on a financially unsustainable path and – disappointingly – none of the parties set out a long-term fiscal strategy. There are significant risks around the achievability of all the party manifesto plans, with the projected deficit in 2023–24 of £62bn (Conservatives), £118bn (Labour), £76bn (Liberal Democrats) or £133bn (Greens).

Read the Fiscal Insight on the ICAEW website.

ICAEW chart of the week: First half fiscal deficit

H1 2018-19 -£33.2bn fiscal deficit + £4.5bn growth + £1.8bn RBS dividends - £3.0bn lower revenues - £10.4bn higher spending = -£40.3bn fiscal deficit for H1 2019-20.

The ONS published the fiscal numbers for the first half of the UK Government’s 2019-20 financial year this morning, with the #icaewchartoftheweek illustrating the changes in comparison with the first half of last year.

If revenues had increased in line with economic growth then the deficit would have reduced by £4.5bn (net of the effect of inflation on both revenues and expenditures). Unfortunately, tax receipts have been relatively weak, coming in £3.0bn below growth, with higher national insurance and council tax receipts being more than offset by lower corporation tax, income tax, inheritance tax, fuel duties, excise duties, and stamp duty.

The Government’s preferred measure of the deficit (which excludes government-owned banks) did benefit from £1.8bn in dividends from the Royal Bank of Scotland.

Expenditures were £10.4bn higher than the first half of last year, reflecting more spending on public services (including the NHS), Brexit preparations, a growth in the size of the civil service, and a £3bn or so increase in capital investment.

This means that there is a shortfall of £40.3bn between receipts of £395.5bn and expenditures of £435.7bn in the first half of this financial year, compared with £33.2bn for the same period last time, when receipts were £384.2bn and expenditures totalled £417.4bn. (The first half deficit last year was originally reported as £19.9bn. This was subsequently revised down to £19.3bn before £13.9bn in accounting changes, including irrecoverable student loans.)

Fortunately for the Chancellor, the deficit tends to be much lower in the second half of the year given the boost from self-assessment tax declarations in January. Despite this the deficit could exceed £50bn this year if trends continue, a big disappointment for those who had hoped to continue on the path to eliminating the deficit.

With warning signs over the economy flashing, these numbers do not provide an auspicious backdrop for the Budget on Wednesday 6 November when the Chancellor is hoping to announce a number of major tax cuts.

For further information go to:

ONS – Public sector finances, September 2019

OBR – Commentary on the Public Sector Finances: September 2019.

ICAEW chart of the week: Welsh Government Budget

Chart: Welsh Government Budget 2019-20. Funding £20.6bn, Spending £20.6bn

This week’s #icaewchartoftheweek is on the subject of the Welsh Government’s Budget for the current financial year.

Officially a £19.4bn Budget to cover £16.3bn in Resource spending and £3.1bn in Capital investment, there is a further £1.2bn of spending funded by EU grants and other income to make a total of £20.6bn overall for 2019-20.

The largest element of funding comes from Whitehall in the form of a £13.7bn block grant, together with £1.3bn from the National Insurance Fund and £1.1bn in business rates. The block grant is lower than it used to be as the Welsh Government is now entitled to a £2.1bn share of income taxes and £0.3bn in other devolved taxes, which is supplemented by £0.2bn in borrowing and £0.7bn in other resources, before taking account of £0.7bn or so in grants from the EU and £0.5bn in other income.

The Welsh NHS takes the majority of the £8.6bn health and social care budget, with the balance supplementing local council budgets for social care, while grants of £5.5bn to local government, include the redistribution of the £1.1bn of business rates income.

The education budget of £2.7bn does not include the main schools’ funding streams (which in Wales is provided by local authorities), but it does include a substantial proportion of post-16 education funding, including £0.8bn in student loans, £0.4bn in student support grants and £0.4bn for further education.

Around half of the £1.4bn economy and transport budget is on capital investment in infrastructure, while the £0.8bn of spending by other departments comprises £0.6bn on environment, energy and rural affairs, and £0.2bn on international relations and the Welsh language. Central services and administration expenditure of £0.9bn includes £86m for the Welsh Assembly, Ombudsman and Audit Office, while the Welsh Government has £0.6bn in unallocated reserves that it can deploy if needed.

While the Chancellor has indicated that there will be more money in 2020-21, that is a still half a year away, and the use of the term ‘First Supplementary Budget’ could be an indication that the Welsh Government might be looking to submit a further budget request before the end of the financial year!

ICAEW Fiscal Insight: Spending Round 2019

Cover photo with link to a pdf - ICAEW Fiscal Insight on the Spending Round 2019: an end to austerity?

Fiscal Insight – Spending Round 2019

On 4 September 2019, the Chancellor of the Exchequer announced the UK Government’s plans for departmental spending in 2020-21 in the Spending Round 2019.

This ICAEW Fiscal Insight analyses the effect of this announcement on the public finances and what this means for public services. Headlines include:

Planned departmental spending of £434.2bn in 2020-21

Departmental current spending up by £13.8bn or 4.1% to £352.3bn
Departmental capital spending up by £3.9bn or 5.0% to £81.9bn
This is £13.4bn more than set out in the March 2019 Spring Statement

Increases in current spending

£4.1bn for health, including £3.9bn for NHS England
£2.2bn for education, including £1.8bn for schools and £400m for further education
£1.3bn for law & order, including £750m for more police
£1.0bn for social care, with the prospect of a further £0.5bn from council tax precepts

Increases in capital investment

£2.2bn for transport, including HS2, Network Rail and Highways England
£1.9bn for international development

Effect on the public finances

Total managed expenditure in 2020-21 of £878.6bn, 2.4% more than this year
With student loan accounting change deficit is £46.2bn or 2.0% of GDP
Economic forecasts not refreshed, updating them would likely increase the deficit further
The government is likely to breach its fiscal targets for 2020-21

An end to austerity?

All departments’ current budgets will increase by at least inflation
Welfare spending is still being cut
The Spending Round is for one year only

The Spending Round marks a turning point for spending on public services, with all departmental budgets increasing by inflation at the very least. This is a significant change after a decade of cuts in most department budgets.

Click here to read the ICAEW Fiscal Insight on the Spending Round 2019.