#publicspending – Page 12 – Martin Wheatcroft

Public debt exceeds 100% of GDP for first time since 1963

22 June 2020: The fiscal deficit of £103.7bn for April and May 2020 is over six times as large as the £16.7bn reported for the same period last year.

The latest public sector finances for May 2020 published by the Office for National Statistics (ONS) on Friday 19 June 2020 reported a revised deficit of £48.5bn for April and a deficit of £55.2bn for May 2020.

Public sector net debt increased to £1,950.1bn or 100.9% of GDP, an increase of £173.2bn (up 20.5 percentage points) compared with April 2019. This is the first time the headline debt number has exceeded 100% of GDP since 1963, although the ONS cautions that the numbers for the deficit and for GDP are both subject to potentially significant revisions.

Table showing receipts, expenditure, net investment, deficit and public sector net debt. Details available on ICAEW article - click link at end of this post.

The deficit of £103.7bn for the two months to May is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March.

Cash funding (aka the ‘public sector net cash requirement’) for the two months was £143.5bn, compared with £1.8bn for the same period in 2019.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be revised as estimates are refined and gaps in the underlying data are filled.

Alison Ring, director of public sector for ICAEW, commented:

“Significant borrowing over recent months means that this is the first time in more than 50 years that debt has been larger than GDP. And though the furlough scheme to date has cost less than originally estimated, cash funding in April and May was more than in the previous three financial years combined.

These are major milestones for the public finances and demonstrate the unparalleled impact of coronavirus, even if this is not surprising given the huge amounts of financial support the government is providing to keep the economy going through lockdown.”

This article was originally published by ICAEW.

ICAEW chart of the week: PFI contracts past their peak

12 June 2020: PFI contract payments have started to decline following a peak of £10.2bn in 2019-20.

The #icaewchartoftheweek is on private finance initiative (PFI) contracts, illustrating how payments on the UK’s portfolio of over 700 ongoing PFI and PFI2 contracts reached a peak of £10.2bn in the financial year ended 31 March 2020.

Total payments are expected to fall over the years to come as contracts start to come to the end of their (in most cases) 25 to 30-year terms, with the majority scheduled to expire between 2025 and 2050.

The tailing off of payments reflects the lack of new PFI deals to replace expiring contracts since 2010, when PFI2 was introduced without much success and the announcement in 2018 that PFI was over. News is still awaited on whether a new model for public-private partnerships will be adopted to replace PFI, following on from the Infrastructure Finance Review.

In the meantime, the remaining 704 ongoing contracts still need to be managed, including ensuring assets are handed back to public sector in good condition. This will be a big challenge for public bodies, with the National Audit Office recommending that preparations start seven years in advance of the end of each PFI contract.

This chart was originally published by ICAEW.

ICAEW chart of the week: EU spending plans 2021-27

5 June 2020: European Commission proposes €2tn in spending over the next seven years, including a major stimulus package – as illustrated by the #icaewchartoftheweek.

Last week the European Commission submitted its formal proposal for the EU’s multiannual financial framework for 2021 through 2027. This is the outline budget that sets out the EU’s medium-term financial priorities and forms the starting point for each year’s budget.

The proposals include an annual budget for financial commitments of €167bn in 2021, rising to €192bn in 2027 – a total of €1,241bn including inflation or €1,100bn in 2018 prices. There is also a one-off €809bn (€750bn in 2018 prices) proposal for a ‘Next Generation’ economic recovery plan in the aftermath of the coronavirus pandemic, to be funded initially by borrowing.

Although the outline budget of €167bn for 2021 is smaller than the €173bn amended commitments budget for the current financial year, it is actually a significant increase once the departure of the UK is taken into account – at least assuming the UK-EU transition period is not extended for a further one or two years.

The largest area of spending is on regional and social development (‘cohesion and values’ in EU jargon), including programmes such as the European Development Fund, the European Social Fund, the Cohesion Fund and Erasmus.

This is followed by agriculture and environment, the majority of which relates to agricultural subsidies and rural development as well as environmental and climate action programmes.

Science, digital and single market includes spending on research and development (including Horizon), the European space programme, Connecting Europe (transport, energy and digitally), Digital Europe, and the operation of the single market.

Security and migration bring together ‘migration and border management’ with ‘resilience, security and defence’, while External includes the cost of development programmes (principally in neighbouring countries), humanitarian aid, and pre-accession assistance for candidate countries that have applied to join the EU.

Spending on institutions mainly comprises the administrative costs of the European Commission, the European Council and the European Parliament, together with other agencies, European Schools, and pensions.

These numbers are for spending commitments, being the maximum amounts that can be authorised in any one year. In practice, commitments can cover several years and the expenditures actually occurred in each year are typically a lower amount – for example, in 2020 budget expenditures are €155bn (including spending from previous year’s commitments), less than the €173bn commitment budget.

These numbers may seem pretty large, but with a population of 448 million, the spending proposals are equivalent to an average of just over €30 a month per person over the seven years, together with a one-off stimulus package costing a further €21 a month per person if spread over the same period.

This chart was originally published by ICAEW.

April public finances awash with red ink

27 May 2020: fiscal deficit of £62.1bn in April exceeds budget of £55bn for the whole of 2020-21.

The latest public sector finances for April 2020 published by the Office for National Statistics (ONS) reported a deficit of £62.1bn in April and a revision of £14.0bn to the deficit in the financial year to March 2020; a total of £76.1bn in costs and revenue losses reported since the previous monthly release.

Public sector net debt increased to £1,887.6bn or 97.7% of GDP, an increase of £118.4bn or 17.4 percentage points compared with April 2019.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues since the lockdown. The deficit of £62.1bn for the month of April is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget only a couple of months ago.

Table 1 summarises the results for April 2020, while Table 2 sets out the revised results for the financial year to 31 March 2020.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be revised as estimates are refined and gaps in the underlying data are filled.

Alison Ring, director of public sector for ICAEW, commented:

“The volume of red ink in April’s public finances is astonishing.

The scale of the damage from the coronavirus pandemic is only just starting to become apparent, particularly when you consider that the deficit in April alone is more than previous forecasts for the whole of 2020-21.

A full-year deficit of £300bn as suggested by the Office for Budget Responsibility looks increasingly plausible, with the only silver lining the ultra-low interest rates payable on the borrowing needed to finance it.”

This article was originally published by ICAEW.

OBR: deficit could reach £273bn or more

15 April 2020: a report from the Office for Budget Responsibility (OBR) indicates that the fiscal deficit could increase to £273bn in 2020-21, but it cautions that this is only one of many plausible scenarios.

The OBR has produced its first analysis of the potential economic and fiscal impact of the coronavirus, based on a three-month lockdown followed by restrictions for a further three months.

At the same time, the International Monetary Fund has warned that the global economic contraction underway is likely to be the worst since the Great Depression, dwarfing the financial crisis twelve years ago.

In its ‘coronavirus reference scenario’, the OBR indicates that the UK economy could fall by 35% in the second quarter of 2020, before bouncing back to leave the economy 13% smaller in 2020 than in 2019.

The consequence would be an increase in the deficit for the fiscal year ending 31 March 2021 to £273bn or 14% of GDP, while public sector net debt could be £384bn higher than budgeted for, reaching £2.2tn or 95% of GDP by the end of the fiscal year.

The OBR says that the economic impact of the coronavirus will derive much less from people falling ill or dying, than from the public health restrictions and social distancing required to limit its spread, severely reducing demand and supply at the same time. That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending.

Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.

The OBR analysis assumes that increased public spending, tax cuts and holidays, loans and guarantees, and actions taken by the Bank of England, designed to support household incomes and to limit business failures and layoffs, will help prevent greater economic and fiscal damage in the long term. However, it warns that the longer the disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ with adverse consequences for future deficits and for fiscal policy.

The International Monetary Fund (IMF) now predicts that the global economy will contract by 3.0% in 2020, much worse than the 0.1% contraction seen during the financial crisis in 2009 and a cut of 6.3% from its previous prediction in January. The IMF prediction is based on a shallower, but longer recession than the OBR’s scenario for the UK. Overall, the IMF believes that the cumulative output loss in 2020 and 2021 from the pandemic could be as much as $9tn.

Alison Ring, Director, Public Sector for ICAEW, commented: “The analysis published by the OBR is not a forecast, but the scenario it presents is pretty startling; making clear that whatever actually happens, the damage to public finances from the coronavirus pandemic will be extremely severe.

“While the OBR suggests that the economy and tax receipts could recover relatively quickly, the additional debt burden will weigh on the public finances for many years for come.”

Fiscal deficit 2020-21: £55bn Spring Budget +£130bn lower receipts +£88bn higher spending = £273bn Reference scenario. Net debt: £1,819bn +£384bn = £2,203bn.

This article was originally published by ICAEW.

Treasury announces extra £9.5bn for public services

14 April 2020: the Chancellor has increased the coronavirus emergency response fund to £14.5bn to cover the escalating costs of dealing with the pandemic.

Easter Monday saw Rishi Sunak announce an extra £9.5bn for the NHS and public services, adding to the £5bn already included in the emergency package announced with the Spring Budget on 11 March 2020.

This brings additional funding for the NHS and public services to £14.5bn, comprising £6.6bn for health services, £3.5bn to keep the railways running, £1.6bn for local authorities, and £0.9bn for food packages and other support for clinically vulnerable people, together with £1.9bn for the devolved administrations in Scotland, Wales and Northern Ireland.

Altogether, this brings the estimated cost of fiscal measures announced by the Government in response to the coronavirus pandemic to somewhere in the region of £95bn. In addition to the £14.5bn for the NHS and public services, £27bn has been announced in business rates discounts and small business grants, £5bn in enhancements to Universal Credit and housing benefit and £750m for charities. The costs of the employee furlough and self-employed income replacement schemes will depend on take-up, with estimates that these could cost around £40bn and £9bn respectively for their initial three-month terms.

This does not include the effect of collapsing tax revenues and higher welfare spending on the public finances, nor any potential costs from the £330bn of loans and guarantees being advanced to support business. As a consequence, the fiscal deficit this financial year is now almost certain to exceed £200bn, compared with the baseline of £55bn set out in the Spring Budget just over a month ago.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “This is probably not going to be the last announcement of additional funding for the NHS and public services this year given the extraordinary challenges posed by the coronavirus pandemic.

“It is positive that the Chancellor has made it clear that money will be made available to front-line services as needed, an important signal for budget holders conditioned by a decade of austerity to manage resources carefully, rather than to spend whatever it takes to achieve a critical objective.

“We can and will worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.”

This article was originally published by ICAEW.

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.