Tag: #publicspending

ICAEW chart of the week: Canada Budget 2024

Our chart zooms across the Atlantic this week to take a look at Canada’s federal budget for 2024/25.

Canada Budget 2024 ICAEW chart of the week Column chart with three double columns 2023/24 Revenue C$465bn = Income tax C$319bn + GST and other taxes C$70bn + Other revenue C$76bn and Budgetary balance (C$40bn) Expenditure (C$505bn) = Government programmes (C$220bn) + Welfare benefits (C$120bn) + Provinces and territories (C$110bn) + Interest and actuarial losses (C$55bn) 2024/25 Revenue C$498bn = Income tax C$336bn + GST and other taxes C$76bn + Other revenue C$86bn and Budgetary balance (C$40bn) Expenditure (C$538bn) = Government programmes (C$225bn) + Welfare benefits (C$135bn) + Provinces and territories (C$121bn) + Interest and actuarial losses (C$57bn) 2028/29 Revenue C$586bn = Income tax C$389bn + GST and other taxes C$85bn + Other revenue C$112bn and Budgetary balance (C$20bn) Expenditure (C$606bn) = Government programmes (C$240bn) + Welfare benefits (C$162bn) + Provinces and territories (C$142bn) + Interest and actuarial losses (C$62bn)

Canada’s budget 2024 sets out the financial plans of the government of Canada for the year from 1 April 2024 to 31 March 2025 (2024/25). 

Like UK budgets, Canada’s budget 2024 is accompanied by financial projections for the four subsequent years to 2028/29. However, unlike the UK, Canada’s fiscal budget is prepared on an accruals basis, with a balance sheet including both financial and non-financial assets and liabilities, and a budgetary surplus or deficit that is equivalent to the accounting profit or loss in a private sector set of financial statements. 

Canada’s approach contrasts with the statistics-based system of national accounts that most other countries use for setting fiscal targets, including the UK. This is despite the UK adopting International Financial Reporting Standards (IFRS) in its consolidated (Whole of Government Accounts), departmental and other public body financial statements, and an accruals-based resource accounting system derived from IFRS for internal budgeting and performance management.

Our chart this week shows how Canada’s federal budgetary balance is expected to be in deficit by C$40bn in both 2023/24 and 2024/25, before reducing over the rest of the forecast period to reach C$20bn in 2028/29, equivalent to 1.4%, 1.3% and 0.6% of GDP in 2023/24, 2024/25 and 2028/29 respectively. Or £24bn, £24bn and £12bn if converted at the 1 April 2024 exchange rate of C$1.70 to £1.00.

Budget 2024 assumes an average increase in nominal GDP of 4.0% a year between 2024 and 2028, reflecting a combination of economic growth of 1.8% on average and projected GDP inflation of 2.1%. Economic growth is expected to reflect a 0.9% annual increase in labour supply (1.6% from growth in the working-age population less 0.6% from lower labour force participation, 0.1% from higher unemployment, and 0.1% from fewer hours worked) and 0.9% from improved productivity.

Total revenue is forecast to grow by 7.1% from C$465bn (£274bn) in 2023/24 to C$498bn (£293bn) in 2024/25 before rising by an average of 4.2% a year to C$586bn (£345bn) in 2028/29. This is equivalent to 16.1%, 16.6% and 16.7% of GDP in 2023/24, 2024/25 and 2028/29 respectively.

Around two-thirds of revenue comes from federal income tax, amounting to a budgeted C$225bn in 2024/25. A further 15% comes from other taxes, with the C$76bn in 2024/25 comprising C$54bn from goods and services tax (GST, the Canadian version of VAT), C$6bn from customs import duties, C$13bn from excise taxes and other duties, and C$2bn from other federal taxes. 

Other revenue is budgeted to amount to C$86bn in 2024/25 or 17% of total revenue, comprising C$30bn in employment insurance premiums, C$13bn from pollution pricing, C$9bn in revenues from Crown enterprises (net of Bank of Canada losses), C$3bn in foreign exchange revenues (principally returns on international reserves), and C$31bn in other income (including interest on tax receivables).

Total expenditure including net actuarial losses is expected to increase by 6.5% from C$505bn in 2023/24 to C$538bn (£316bn) in 2024/25 and then by an average of 3.0% a year to C$606bn (£356bn) in 2028/29. This is equivalent to 17.5%, 17.9% and 17.2% of GDP in 2023/24, 2024/25 and 2028/29 respectively.

Expenditure can be categorised between government programmes, welfare benefits, transfers to provinces, territories and municipalities, and interest and actuarial losses. 

In 2024/25, spending on government programmes is budgeted to amount to C$225bn (C$123bn in operating expenses and C$102bn in transfer payments), while major transfers to persons are expected to be C$135bn (comprising C$80bn in elderly benefits, C$28bn in child benefit payments and C$27bn in employment insurance benefits). 

Major transfers to provinces, territories and municipalities in 2024/25 of C$121bn comprise contributions of C$57bn for health care, C$25bn in equalisation payments to provinces, C$24bn for social programmes (social care, social assistance, post-secondary education, early years development, early learning and child care), C$5bn for territories, and C$2bn for community building, net of a C$7bn reduction in payments to Quebec (which acquired a greater share of taxes in the 1960s and 1970s), plus C$15bn in proceeds from pollution pricing returned to Canadians either directly or via provinces and territories.

Not shown in the chart is the projected balance sheet, with net liabilities expected to increase from an estimated C$1,216bn (£715bn) on 31 March 2024 to a budgeted C$1,255bn (£738bn) on 31 March 2025 and a projected C$1,372bn (£807bn) on 31 March 2029. The forecast balance sheet for 31 March 2025 comprises C$117bn (£69bn) in non-financial assets and financial assets of C$719bn (£423bn) less total liabilities of C$2,091bn (£1,230bn). 

Net liabilities are expected to increase more slowly than the size of the economy, resulting in the ratio of net liabilities to GDP falling from 42.1% to 41.9% to 39.0% over the same period.

The budget document also reports on the Canadian government’s long-term financial projections, with federal net liabilities expected to reduce to 9.0% of GDP by 2055-56 despite a projected increase in the budgetary deficit back up to 1.1% of GDP. This partly reflects an assumption that net immigration will continue at 0.9% a year, offsetting the effects of more people living longer and a fertility rate of 1.5 births per woman.

Perhaps unsurprisingly, affordable housing is the first area of focus for Budget 2024, with the federal government aiming to increase the number of new homes by 3.87 million by 2031, a net 2 million on top of the 1.87 million already expected to be built.

For more information, read the Canada Budget 2024 website.

For more information about the UK Spring Budget 2024, visit icaew.com/budget.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public sector productivity

My chart for ICAEW this week suggests that the public sector is less productive than it was, but difficulties in measuring productivity make it hard to say for sure.

According to the Office for National Statistics, public sector productivity has not recovered following the pandemic and is now lower than it was in 1997, despite technological advances since then.

My chart highlights how public sector productivity fell between 1997 and 2010 as spending and investment increased – a fall of 3.3% or 0.25% a year on average over 13 years – before climbing during the austerity years until 2019 – an improvement of 7.5% or 0.8% a year over nine years. The pandemic led to productivity collapsing as public services were severely disrupted before partially recovering, with productivity flat between 2022 and 2023 – overall a net drop of 6.3% or 1.6% a year on average over four years.

Overall, this means public sector productivity as measured by the ONS has fallen by 2.6% or 0.1% a year on average over the last 26 years. It is important to note that these changes do not cover all of the public sector – in some areas such as defence spending, productivity (value of outputs / cost of inputs) is assumed to be a constant 1, reflecting how difficult and subjective it would be to attempt to measure our military preparedness for war.

Despite that, the picture shown by this metric aligns with our more general understanding of what happened in these periods. The decline in productivity between 1997 and 2010 as the then Labour government improved pay and conditions for public sector employees makes sense, while the austerity policies of the Coalition and Conservative governments between 2010 and 2019 constrained the cost of delivering public services. And the pandemic resulted in many public services being closed or curtailed, and we know that many public services – particularly the NHS and schools – are still struggling to recover from the pandemic.

The chart provokes questions about how well this statistic values outputs given that while it is very easy to measure inputs, it is less easy to assess the value produced. For example, larger class sizes might give rise to an apparent productivity improvement as measured (more children taught for the same input of teaching time), but this may not capture any deterioration in quality that may result. 

Not only is the quality of outputs difficult to measure in calculating productivity, but it also doesn’t measure outcomes, often much more important than outputs. In the health context this is whether the patient survives rather than how many operations were performed, for education it means how well-equipped our young people are for the world rather than how many hours they spent in a classroom, and for the criminal justice system how few crimes are committed rather than how many criminals are prosecuted.

Public sector productivity is an important metric, even if an imperfect one. It is helpful to understand how well public service activities are being delivered from a cost perspective – and how there is a need for improvement. But it doesn’t tell us whether those activities are improving our well-being, growing our economy, improving our environment, or building our resilience as a nation.

This chart was originally published by ICAEW.

ICAEW chart of the week: Global military spending

While the UK commits to increasing its defence and security expenditure, our chart this week looks at military spending around the world, which has reached $2.4trn.

Column chart Global military spending ICAEW chart of the week Column 1: NATO USA $916bn UK $75bn Rest of NATO $360bn Total $1,351bn Column 2: SCO and CSTO China $296bn Russia $109bn India and other $106bn Total $511bn Column 3: Rest of the world Other US allies $304bn Ukraine $65bn Other countries $212bn Total $581bn 25 April 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: SIPRI Military Expenditure Database. Excludes Cuba, North Korea, Syria and Yemen. © ICAEW 2024

Our chart this week is based on the latter, with SIPRI reporting that global military expenditure has increased to $2,443bn in 2023, a 6.8% increase after adjusting for currency movements. SIPRI’s numbers are based on publicly available information, which means that some countries may be spending even more on their militaries that are included in the database. SIPRI was unable to obtain numbers for military spending by Cuba, North Korea, Syria, Yemen, Turkmenistan, Uzbekistan, Somalia, Eritrea, Djibouti, and Laos.

Military spending is the news this week following the announcement by the UK government that it will commit to spending 2.5% of GDP on defence and security, the recent vote by the US Congress to provide $95bn in military aid to Ukraine ($61bn), Israel ($26bn) and Taiwan and others in the Indo-Pacific ($8bn), and the release of the Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database for 2023.

More than half of that spending is incurred by NATO, with total military spending of $1,351bn, comprising $916bn by the US, $75bn by the UK and $360bn by other NATO members. Of the latter, $307bn was spent by the 23 members of the EU that are also members of NATO (including $67bn by Germany, $61bn by France, $36bn by Italy, $32bn by Poland and $24bn by Spain), while $53bn was spent by the other seven members (including $27bn by Canada and $16bn by Türkiye).

The Shanghai Cooperation Organisation (SCO) and the Collective Security Treaty Organisation (CSTO) are partially overlapping economic and military alliances convened by China and Russia respectively. China has the biggest military with $296bn spent in 2023, while Russia spent $109bn and other members spent $106bn (of which India spent $84bn).

We have categorised the rest of the world between other US allies which spent $304bn in 2023 (including $76bn by Saudi Arabia, $50bn by non-US members of the Rio Pact, $50bn by Japan, $48bn by South Korea, $32bn by Australia, $27bn by Israel and $17bn by Taiwan), Ukraine which spent $65bn, and $212bn spent by other countries for which SIPRI has data.

The numbers do not take account of the differences in purchasing power, particularly on salaries. That means China and India, for example, can employ many more soldiers, sailors and aircrew than NATO countries can for the same amount of money.

The Ukraine number also excludes $35bn in military spending funded by the US ($25bn) and other partners ($10bn) during 2023 that was not part of its national budget.

Global military spending is expected to increase further in 2024 as the international security situation deteriorates. This includes NATO members that plan to increase their defence and security spending to meet or exceed the 2% of GDP NATO minimum guideline set in 2014 to be achieved by 2024.

This includes the UK, which now plans to increase its spending on defence and security from 2.35% of GDP in 2023/24 to 2.5% of GDP by 2028/29, with suggestions from defence sources that setting a target of 3% of GDP may be necessary at some point in the next decade.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public spending crunch

Public spend as a share of the economy must fall over the next five years to make the sums add up – a big challenge for the next government.

Step chart: Public spending crunch ICAEW chart of the week Change in total public spending compared to change in nominal GDP 2025/26: -1.1% 2026/27: -0.7% 2027/28: -1.1% 2028/29: -0.7% Cumulative: -3.6% 11 April 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Spring Budget 2024'; OBR, 'Economic and Fiscal Outlook 2024'; ICAEW calculations. ©️ ICAEW 2024

My recently published in-depth Fiscal Insight into the Spring Budget 2024 highlights how the UK’s public finances are in a weak position, with difficult choices on spending deferred and post-election tax rises likely, irrespective of who wins the general election.

My chart for ICAEW this week illustrates how total public spending is forecast to fall by 3.6% as a share of national income between the first and final year of the fiscal forecast. This is equivalent to a 1.6 percentage point reduction in total managed expenditure from a budget of 44% of GDP in 2024/25 to a forecast of 42.4% of GDP in 2028/29.

At a reduction of 1.1% in 2025/26, 0.7% in 2026/27, 1.1% in 2027/28 and 0.7% in 2028/29, this may not sound that large – after all surely there must be some efficiencies that can be found in a budget of £1.2trn, or £1.4trn by 2028/29?

However, this doesn’t take account of the fact that around half of public spending goes on welfare, health and social care spending, where costs are principally driven by people living longer, the triple-lock state pension guarantee, and increasing levels of ill-health. And another 10% or so goes on interest, where costs are driven by no-longer-very-low interest rates on a growing level of debt.

Nor does it allow for the significant pressures facing many public services that are likely to need additional funding to address. This includes the deteriorating international security situation that has prompted recent calls for defence and security spending to increase from 2% to 3% of GDP, underperformance across a range of public services from the criminal justice system to potholes to HMRC service standards, local authorities that are struggling financially, and crumbling infrastructure (in some cases literally) – among many others. There is also little sign of the scale of investment that would be needed to transform the delivery of public services to achieve sustainable cost reductions while maintaining or improving service quality.

It is perhaps unsurprising that the government decided to postpone the three-year Spending Review scheduled for 2024 until after the general election, given how the Office for Budget Responsibility has highlighted how the 2021 Spending Review led to a departmental spending increase of £32bn a year, or around 1.2% of GDP. A similar revision to current spending plans would have more than absorbed the amounts used for tax cuts in the Autumn Statement 2023 and the Spring Budget 2024, or pushed up borrowing levels even higher than are currently planned.

If we are lucky, there will be more detail on each party’s tax and spending plans in their manifesto documents. Then again…

Read more in the ICAEW Fiscal Insight: Spring Budget 2024 or visit our Spring Budget 2024 hub for our extensive coverage of its tax and public finance implications.

This chart 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.

ICAEW chart of the week: Spring Budget 2024

Our chart this week takes a look at the effect of the Spring Budget 2024 on the public finances.

Double step chart: Spring Budget 2024 ICAEW chart of the week 2028/29 forecast deficit Nov 2023 forecast: £35bn Forecast revisions: -£1bn Tax cuts: +£13bn Tax rises: -£6bn Other changes: -£2bn Mar 2024 forecast: £39bn 2024/25 budgeted fiscal deficit Nov 2023 forecast: £85bn Forecast revisions: -£10bn Tax cuts: +£14bn Tax rises: -£0bn Other charges: -£2bn Mar 2024 forecast: £87bn 7 Mar 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Spring Budget 2024'; OBR, 'Economic and Fiscal Outlook, Mar 2024'. (c) ICAEW 2024

This week’s chart summarises the changes announced in the Spring Budget 2024, analysing the changes in the budgeted fiscal deficit for 2024/25 and the forecast fiscal deficit for 2028/29 since the forecasts that accompanied the Autumn Statement 2023 last November.

As the chart illustrates, the budgeted deficit for 2024/25 of £85bn anticipated in November has been revised up to £87bn, comprising forecast revisions reducing the deficit of £10bn, followed by tax cuts of £14bn increasing the deficit, offset by tax rises of close to zero and other changes of £2bn reducing the deficit.

The chart also shows the changes to the final year of the forecast period, with the forecast of deficit £35bn at the time of the Autumn Statement 2023 reduced by £1bn from forecast revisions, increased by £13bn to fund tax cuts, reduced by £6bn from tax rises and £2bn from other changes to reach a new forecast for the deficit in 2028/29 of £39bn.

The good news for the Chancellor was the improvement in the public finances in the earlier years of the forecast, with interest rate expectations coming down from last year. This resulted in an improvement in the forecasts of £16bn in 2024/25 and £14bn in 2028/29, offset by the effect of lower inflation expectations on tax and other receipts of £2bn and £13bn respectively to result in net forecast revisions of £10bn and £1bn respectively. The lower inflation assumption has a bigger impact over time as there is a compounding effect on tax and other receipts.

This allowed the Chancellor to announce a two-percentage point cut in national insurance pushing up the deficit by £10bn in 2024/25 and £11bn in 2028/29, together with freezes in fuel and alcohol duties, changes in the high-income child benefit charge, an increase in the VAT threshold from £85,000 to £90,000, and a four-percentage point cut in capital gains tax on property sales from 28% to 24%. The latter change is expected to increase tax receipts by a few hundred million pounds a year as it is expected to encourage more property sales, with higher volumes offsetting lower tax on each sale. Overall, these other tax cuts push up the deficit by £4bn in 2024/25 and £2bn in 2028/29.

The forecast revisions weren’t enough to allow the Chancellor to cover the cost of cutting taxes, and so he also announced some tax rises. These include the introduction of a duty on vaping and an increase in tobacco duty, an extension of the energy profits levy to March 2029, and changes in the tax treatment of ‘non-doms’. These have a relatively small effect in 2024/25 but build up to a reduction in the deficit around £6bn a year by 2028/29. 

Other changes of £2bn in 2024/25 comprised £1bn in other policy measures and £1bn in indirect benefits to the economy from the Chancellor’s announcements in 2024/25, while the £2bn in 2028/29 reflected £1bn from improvements in tax collection, £1bn in other measures, and £2bn from indirect benefits to the economy, offset by £1bn from interest on increased borrowing, and £1bn to be invested in public sector productivity.

In summary, these are relatively tiny changes in the outlook for the public finance in the context of £1.2trn of public spending each year and public sector net debt that is still on track to exceed £3.0trn by the end of the forecast period in March 2029.

Even relatively small changes in economic assumptions, in spending plans, or in tax policies could have a significant impact on the fiscal forecasts, especially those for 2028/29.

For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.

This chart was originally published by ICAEW.

ICAEW chart of the week: Pre-Budget deficit forecast

While tax cuts will likely headline next week’s Spring Budget, debt markets will be questioning plans to reduce the deficit by constraining public spending.

Step chart: Pre-Budget deficit forecast ICAEW chart of the week Deficit - purple Higher spending (excluding interest) - orange Higher receipts (net of interest) - blue 2024/25: £85bn deficit Step 1: +£13bn higher spending -£21bn higher receipts Step 2: +£10bn higher spending - £19bn higher receipts Step 3: +£5bn higher spending - £24bn higher receipts Step 4: +£7bn higher spending - £21bn higher receipts 2028/29: £35bn

Last week’s chart of the week looked at the pre-Budget forecast for debt and the very low level of headroom the Chancellor had against his primary fiscal rule of seeing debt falling by the final year of the forecast period.

Our chart this week is on the ‘P&L’ side of the equation, illustrating how the Chancellor’s plan at the time of the Autumn Statement 2023 was to bring down the deficit by constraining growth in public spending to less than the level of growth in tax and other receipts.

The starting point is the deficit of £85bn for the financial year ending March 2025 (2024/25) forecast by the Office for Budget Responsibility last November, with spending (excluding interest) expected to increase by less each year than receipts (net of interest): by £13bn and £21bn respectively in 2025/26, £10bn and £19bn in 2026/27, £5bn and £24bn in 2027/28, and £7bn and £21bn in 2089/29, to reach a projected deficit of £35bn in 2028/29. 

If achieved, this would see the deficit reduce to the equivalent of 1.6% in 2027/28 and 1.1% of GDP in 2028/29, the first time the deficit would come in below 2% of GDP since 2002/03, a quarter of a century earlier.

Although the increases in taxes and other receipts may seem substantial, they are broadly in line with the projected growth in the size of the economy, with ‘fiscal drag’ from the freezing of several key tax allowances mitigating the effect of tax cuts announced last November. Meanwhile, planned spending increases are relatively small in the context of the overall public finances, equivalent to real terms rises in public spending excluding interest of 1.1%, 0.8%, 0.4% and 0.5% respectively.

This relatively low level of increase in spending may seem surprising in the context of demographic changes that are pushing up spending on pensions, health and social care, a deteriorating international security situation, the severe financial difficulties facing many local authorities, and the pressure many other public services are under, not to mention the need to increase investment in infrastructure if the economy is to return to growth.

The Institute for Fiscal Studies has questioned whether the Chancellor’s spending plans are realistically achievable, given that they imply significant cuts in the budgets of unprotected departments over the course of the forecast period. These are unlikely to be deliverable in practice.

A modest boost to public finances reported in the current financial year, together with moderating interest rate expectations, are expected to provide the Chancellor with capacity to cut taxes while still meeting his fiscal rules. But debt investors will be wondering how much an incoming government – irrespective of which party wins power – will actually be able to raise taxes to fully cover expected spending-plan revisions. Not raising taxes sufficiently in the first Budget after the election would likely lead to the next government needing to borrow even more at a time when the Bank of England is flooding debt markets with gilts as it unwinds quantitative easing.

For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.

This chart was originally published by ICAEW.

ICAEW chart of the week: Pre-Budget debt forecast

My chart for ICAEW this week looks ahead to the Spring Budget and asks how much headroom the Chancellor will have available for tax cuts or higher spending while still meeting his fiscal targets.

Pre-Budget debt forecast ICAEW chart of the week Step chart showing underlying debt to GDP ratio in year from 2022/23 to 2028/29 with steps showing the change between each year. Legend: Increase (purple) Decrease (green) Underlying debt/GDP (orange) 2022/23: 84.9% (very top of bar shown only) +4.1% increase 2023/24: 89.0% +2.6% 2024/25: 91.6% +1.1% 2025/26: 92.7% +0.5% 2026/27: 93.2% - (flat) 2027/28: 93.2% -0.4% decrease - with a box pointing to this bar stating 'Fiscal headroom £13bn' 2028/29: 92.8% 22 Feb 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: OBR, 'Economic and Fiscal Outlook, Nov 2023'. (c) ICAEW 2024

The Chancellor is currently getting ready for his Spring Budget on Wednesday 6 March 2024, with rumours, leaks and misinformation swirling around ahead of what will be a keenly watched event – quite probably the last fiscal event before the general election.

As our chart illustrates, the Office for Budget Responsibility (OBR) at the time of the Autumn Statement last November projected that the ratio of underlying debt to GDP would increase in the current financial year (2023/24) and further over the first four years of the forecast period, before starting to fall in the final year (2028/29).

Underlying debt is defined as public sector net debt (PSND) excluding Bank of England liabilities (PSNDexBoE). This alternative metric avoids distortion in the headline measure of debt caused by £170bn of Term Funding Scheme loan receivables not netted against related Bank of England liabilities that will reduce PSND as these loans are repaid, even though net financial assets and liabilities are not changing.

The projected increases are +4.1% from 84.9% at March 2023 to 89.0% at the end of 2023/24, +2.6% to 91.6% in 2024/25, +1.1% to 92.7% in 2025/26 and +0.5% to 93.2% in 2026/27, before staying flat in 2027/28 and then falling -0.4% to 92.8% in March 2029. 

The fall in 2028/29 projected by the OBR in November provided the Chancellor with £13bn of fiscal headroom in the final year of the forecast. In theory this meant he could have planned to spend more, or cut taxes, by up to £13bn in 2028/29 and still met his primary fiscal target, which is for underlying debt/GDP to be declining in the final year of the fiscal forecast period.

Building such a relatively small amount of headroom into a forecast – less than four days of total government spending – is perhaps surprising given the high degree of uncertainty in predicting future receipts, spending and borrowing, not to mention GDP. These numbers can all move by tens of billions between forecasts, as the economic situation changes and policy and budgetary decisions are made. 

GDP can be especially variable, with the Office for National Statistics making frequent revisions to its estimates, sometimes many years later. Several commentators also believe the numbers for planned public spending from April 2025 onwards are unrealistic and that there will be a need to revise these numbers upwards in subsequent fiscal events.

Although there has been a modest boost to the public finances in the reported numbers for the first 10 months of the current financial year, underlying debt/GDP at January 2023 was 88.1%, on track to end the financial year at close to the 89.0% in the November OBR forecast.

The news that the UK had entered recession in the last quarter of 2023 will not have been positive for the Chancellor in his search for additional headroom but, despite this, it is believed that the forecasts will improve sufficiently to allow him some capacity to either increase the total amounts allocated to public spending, or announce tax cuts, while still keeping with his fiscal targets. Of these options, tax cuts are considered much more likely. 

Either way, underlying debt/GDP will be expected to be higher in five years’ time – potentially even higher than in previous forecasts. From a fiscal target perspective, what is important is whether the ratio is falling in the fifth year of the forecast period, not the overall change in the level between now and then.

For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.

This chart 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.