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: Age profile of monthly public spending

Chart: £902 at age 0, £1,505 at 10, £889, £618, £639, £742, £761 at age 60, £1,761 at 70, £2,246, £3,296, £3,515 at age 100.

With the General Election in full swing, the #icaewchartoftheweek is on one of the principal drivers of public spending: age.

As data from the Office for Budget Responsibility illustrates, public spending on the young increases as the population is educated, but then falls back to a low of around £600 per month at around age 28, after which spending per person starts to increase gradually over working lives until retirement age. From that point on, not only is there a significant increase in welfare spending as the state pension kicks in, but the costs of health care, and then adult social care start to increase dramatically.

With the number of people in the UK aged 70 or more expected to increase by 58% over the next 25 years, total public spending will increase accordingly, especially with all political parties promising to protect and improve the state pension, health provision and adult social care.

The number of people under the age of 70 projected by the ONS to increase by only around 2% over that same period, or potentially even fall by around 7% if net inward migration is lower than expected, while further cuts in public services are apparently off the table with the ‘end of austerity’. The implication is that taxes will need to rise, that social provision in retirement will need to be cut, or for there to be a resumption in austerity policies (or a combination of all three).

Unfortunately, none of the major political parties appear to have a fiscal strategy that extends beyond the next five years, with only limited measures to address the big financial challenges of more people living longer. This is disappointing given that relatively small actions taken now could make a big difference to the financial position of the nation in 25 years’ time.

This election, voters have the opportunity to focus on the big challenges of sustainability, technology and the public finances. To find out more, visit GE2019 – It’s More Than a Vote.

ICAEW chart of the week: Public sector capital expenditure

Chart: Capex (real-terms) £61.5bn (3.5% of GDP) in 2009-10, to £64.1bn in 2011-12, down to £49.2bn (2.6%) in 2013-14, up to £60.0bn (2.9%) in 2017-18.

With apologies for the delay because of being away, this week’s #ICAEWchartoftheweek is on public sector capital expenditure (capex), something that all the political parties in the #GE2019 have promised to increase – in some cases by very significant amounts!

As part of ICAEW’s It’s More Than A Vote campaign, ICAEW will be analysing the political party manifestos over the next few weeks, including the potential implications for the public finances.

One area that all the major parties appear to agree on is the need to increase investment in infrastructure and other assets, which is why we thought we would look at the last nine years of capital expenditure reported in the Whole of Government Accounts (WGA), prepared under International Financial Reporting Standards. This differs from public sector investment in the National Accounts, with the latter including capital grants and other transactions that do not result in the creation of publicly-owned fixed assets.

As the chart illustrates, capital expenditure in 2017-18 of £60.0bn was lower than the £64.1bn incurred in 2011-12 after adjusting for inflation and to include Network Rail, the government owned railway infrastructure company prior to 2014-15 when it was incorporated into the WGA). As a proportion of the economy, capex in 2017-18 was 2.9% of GDP, a smaller ratio than the 3.5% calculated for 2011-12.

Only around £16bn (0.8% of GDP) of the amount spent in 2017-18 went into infrastructure assets (principally transport infrastructure such as roads and railways), with in the order of £24bn (1.2%) going into land & buildings, including hospitals and schools. Approximately £9bn (0.4%) was spent on military equipment, with the balance of £11bn (0.5%) invested in other public sector assets, ranging from tangible fixed assets such as plant & equipment, IT hardware, vehicles and furniture & fittings, as well as intangible fixed assets such as software.

Capex comprises a relatively small proportion of total expenditures (capital and non-capital) of £1.0tn reported in the WGA for 2017-18. As a consequence, even relatively small incremental amounts will constitute proportionately large increases in capital budgets in the next few years.

Whether these plans will be deliverable is another question, given that traditionally the government has struggled to spend all its capital budgets, not to mention the difficulties there will be in finding all the workers necessary for a major expansion in construction activity.

It’s More Than A Vote

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.

ICAEW chart of the week: Spending Round 2019: an ‘end to austerity’?

Spending Round 2019 £330.8bn + inflation £6.1bn + reclass £1.6bn + increases £13.8bn = £352.3bn

On 4 September 2019, the Chancellor of the Exchequer announced the UK Government’s plans for departmental spending for the next financial year, 2020-21; as illustrated by the #ICAEWchartoftheweek.

This was unusual, as the announcement was not accompanied by a Budget setting out how those plans would be funded, nor by updated economic forecasts to indicate the expected effect on the overall public finances. This is also the second year running that the three-year Spending Review has been delayed and replaced by a one-year plan.

The primary announcement was for an increase of £13.8bn in departmental current spending in the next financial year (2020-21), a 4.1% real-terms increase over the current financial year. This was £11.7bn more than had been previously included in public finance forecasts and increases ‘Resource DEL excluding depreciation’ to £352.3bn.

There is an extra £4.1bn for health, £1.0bn for social care, £2.2bn for education, £1.3bn for law & order, £0.7bn for defence and security, £0.6bn for devolved administrations, and £1.3bn in other increases. The latter includes £0.4bn for transport, £0.2bn for the Nuclear Decommissioning Authority, £0.1bn for international development, £0.1bn for the next census, £0.1bn for the Department for Work & Pensions, £68m for air quality, biodiversity and animal health, £54m to tackle homelessness, and £46bn for the Birmingham Commonwealth Games.

The Chancellor also announced that departmental capital spending would increase by £3.9bn or 5.0% in real terms. This is £1.7bn more than had previously been announced and increases ‘Capital DEL’ to £81.9bn. There is £2.2bn for transport infrastructure (including HS2, other rail projects and road building), £1.9bn in additional international development investment, £0.5bn for the defence equipment programme, and £0.5bn for Scotland, Wales and Northern Ireland, partially offset by £1.2bn in lower reserves and other changes.

Although department current spending is expected to rise by 4.1%, and capital spending by 5.0%, the overall increase in total managed expenditure in 2020-21 is a 2.4% rise to £865.2bn, with annually managed expenditure (‘AME’) relatively flat in real-terms. With the cost of pensions rising ahead of inflation, this implies further cuts in the welfare budget, and so this may not be the full ‘end to austerity’ claimed by the Chancellor.

The uncertain economic outlook also causes concern. A recession, whether or not induced by Brexit, could have adverse consequences for the public finances, raising the worrying prospect of a return to austerity in the three-year Spending Review now scheduled for next year.

ICAEW chart of the week: Schools budget up £14bn, or is it £1.2bn?

English schools budget 2020-21 +£2.6bn, 2021-22 +£4.8bn, 2022-23 +£7.1bn

The Prime Minister’s announcement of a ‘£14bn package’ of more money was welcome news for English schools as they prepare to re-open their doors after the summer holidays.

Unfortunately, as is common with government announcements, there is a tendency to add several years together to give a bigger headline, exacerbated this time by the inclusion of inflation to make the headline even bigger!

In reality the announcement is a lot less exciting, as illustrated by the #ICAEWchartoftheweek. The announced increase in the 5-16 schools’ budget in three years’ time of £7.1bn (from £45.1bn in 2019-20 to £52.2bn in 2022-23) turns out to be £3.6bn, or an average of £1.2bn a year after taking account of inflation and the expected growth in the number of school pupils of around 2% over that time.

This is still very good news for schools trying to manage within constrained budgets, but (as the IFS and others have reported) the increase will still be insufficient to restore real-terms per pupil funding to the levels seen before the financial crisis. A 12% increase in pupil numbers since 2009-10 has seen budgets squeezed as funding has been constrained to inflation-only increases for most of the last decade.

Ironically, the Chancellor wasn’t able to take advantage of the same trick in his announcement the following day of £400m for further education and sixth forms, despite the fact that this was proportionately a bigger increase. The announcement was only for one year, so he couldn’t add multiple years together to create a bigger headline, and HM Treasury no doubt held the line about not adding in inflation.

Either way, these announcements are indication of how the fiscal approach is changing after a decade of austerity and struggling public services. This week’s Spending Review will give us a few more clues about the direction of public spending, although if (as rumoured) the Budget is postponed then we may not find out what the plans for taxes and borrowing to fund these increases until the Spring.