Tag: #publicspending

Fiscal deficit on course to exceed £300bn in 2020-21

The UK reported a £19.1bn fiscal deficit in February 2021, bringing the total shortfall over eleven months to £278.8bn. Public sector net debt is up by £333.0bn at £2.13tn.

The latest public sector finances released on Friday 19 March reported a deficit of £19.1bn for February 2021, as COVID-related spending continued to weigh on the public finances. This brought the cumulative deficit for the first eleven months of the financial year to £278.8bn, £228.2bn more than the £50.6bn reported for the same period last year.

The reported deficit for the eleven months excludes £27.2bn in potential business loan write-offs that the Office for Budget Responsibility (OBR) has included in its forecast deficit of £354.6bn for the full financial year.

Falls in VAT, corporation tax and income tax receipts and the waiver of business rates were the principal driver of lower tax revenues over the last eleven months, while large-scale fiscal interventions have resulted in much higher levels of expenditure. Net investment is greater than last year (mostly as planned), while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,131.2bn or 97.5% of GDP, an increase of £333.0bn from the start of the financial year and £347.2bn higher than in February 2020. This reflects £54.2bn of additional borrowing over and above the deficit, much of which has been used to fund coronavirus loans to businesses and tax deferral measures.

The cash outflow (the ‘public sector net cash requirement’) for the month was £11.4bn, increasing the cumulative total cash outflow this financial year to £322.3bn. This is a significant swing from the cumulative net cash inflow of £10.9bn reported for the equivalent eleven-month period in 2019-20.

The combination of receipts down 5%, expenditure up 27% and net investment up 21% has resulted in a deficit for the eleven months to February 2021 that is around five times as much as the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 27%.

Alison Ring, ICAEW Public Sector Director said: “Today’s numbers are in line with expectations, with the deficit for the past 11 months reaching £278.8bn. This means we are on track for public sector net borrowing to exceed £300bn for the full year once a potential £27bn in bad debts that have not yet been recorded are factored in.

“Our eyes are now focused on what possible tax measures, in addition to the planned corporation tax rise, the government might use to start rebuilding the public finances.”

Table: public sector finances month ended 28 February 2021. Analyses deficit of £19.1bn for month and variances from same month last year. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: public sector finances 11 months ended 28 February 2021. Analyses deficit of £278.8bn and change in net debt of £333.03bn and variances from same period last year, together with net debt of £2,131.2bn or 97.5% of GDP. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the 11 months to 28 February 2021. Click on link at the end of the post to ICAEW article for a readable version of the table.
Table: month by month analysis of receipts, expenditure, interest, net investment and the fiscal deficit for the prior year. Click on link at the end of the post to ICAEW article for a readable version of the table.

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first ten months from £270.6bn to £259.7bn and increasing the reported deficit for 2019-20 from £57.1bn to £57.7bn.

This article was originally published by ICAEW.

ICAEW chart of the week: global military spending

19 March 2021: The UK’s Integrated Review is the inspiration for this week’s chart, illustrating the 20 countries around the world that spend the most on their militaries.

Chart showing global military spending in 2019 led by USA (£526bn) and China (£200bn) followed by 18 other countries - see text below the chart for details.

The UK Government launched its Integrated Review of Security, Defence, Development and Foreign Policy on 16 March 2021, setting out a vision for the UK’s place in the world following its departure from the European Union and in the context of increasing international tensions and emerging security threats.

At the core of the Integrated Review is security and defence, and ICAEW’s chart of the week illustrates one aspect of that by looking at military spending around the world. 

The chart shows spending by the top 20 countries, which together comprise in the order of £1.2tn of estimated total military spending of around £1.4tn to £1.5tn globally in 2019 – an almost textbook example of the 80:20 rule in action.

More than a third of the total spend is incurred by just one country – the USA – which spent in the order of £526bn in 2019 converted at current exchange rates. The next biggest were China and India at £200bn and £50bn respectively, although differences in purchasing power mean that they can afford many more soldiers, sailors and aircrew for the same amount of money. This is followed by Saudi Arabia (£45bn), Russia (£41bn), France (£38bn), the UK (£38bn), Germany (£38bn), Japan (£34bn), South Korea (£33bn), Australia (£21bn), Italy (£20bn), Canada (£17bn), Israel (£16bn), Brazil (£14bn), Spain (£13bn), Turkey (£11bn), the Netherlands (£9bn), Iran (£9bn) and Poland (£9bn).

Exchange rates affect the relative orders of many countries in the list, for example between Russia, France, the UK and Germany which can move up or down according to movements in their currencies, while there are a number of caveats over the estimates used given the different structures of armed forces around the world and a lack of transparency in what is included or excluded in defence budgets in many cases.

In addition, the use of in-year military spending does not necessarily translate directly into military strength. Military capabilities built up over many years or in some cases (such as the UK) over many centuries need to be taken into account, as do differing levels of technological development and spending on intelligence services, counter-terrorism and other aspects of security. Despite these various caveats, estimated military spending still provides a useful proxy in understanding the global security landscape and in particular highlights the UK’s position as a major second-tier military power – in the top 10 countries around the world.

Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy sets out some ambitious objectives for security and defence, which it summarises as follows: “Our diplomatic service, armed forces and security and intelligence agencies will be the most innovative and effective for their size in the world, able to keep our citizens safe at home and support our allies and partners globally. They will be characterised by agility, speed of action and digital integration – with a greater emphasis on engaging, training and assisting others. We will remain a nuclear-armed power with global reach and integrated military capabilities across all five operational domains. We will have a dynamic space programme and will be one of the world’s leading democratic cyber powers. Our diplomacy will be underwritten by the credibility of our deterrent and our ability to project power.”

The estimates of military spending used in the chart were taken from the Stockholm International Peace Research Institute (SIPRI)’s Military Expenditure Database, updated to current exchange rates.

This chart was originally published by ICAEW.

Crown Consultancy gains traction as UK government spending soars

19 January 2021: Plans for an in-house government consultancy sound sensible, but will insourcing really deliver value for money for taxpayers?

The UK government spends hundreds of millions of pounds on consultants each year for services ranging from strategic advice to service delivery. While ministers and senior civil servants often comment they feel too much is spent on consultants, there continues to be a stream of new contracts awarded to the major professional service firms and consultancy practices.

This is a particularly high-profile issue in the context of the huge amounts of pandemic-related contracts awarded over the course of the last year.

Recent examples include bringing in procurement specialists and forensic accountants to sort out the audit trail for panic purchases of personal protective equipment or using a range of IT consultants to help rapidly design and build new border and customs systems following the UK’s exit from the EU Customs Union and Single Market.

In practice, there are many reasons why a government department – or any organisation for that matter – might want to engage external consultants. They can provide expertise not available in-house, as well as providing a flexible resource that can be mobilised quickly to achieve critical objectives. After more than a decade of tightening budgets in the public sector, it is unsurprising there is a limit to how many of the existing team can be diverted from day-to-day activities in order to (say) implement a major new IT system, transform the organisation or respond to a global crisis such as a pandemic.

Partly that is sensible human resource management. It does not make sense to employ hundreds, if not thousands, of staff across the civil service ‘just in case’ their expertise might be needed on a future project. At the same time, it also makes sense to bring in experience gained elsewhere from experts who know what works and what doesn’t.

Using external service providers also enables resources to be mobilised quickly and at scale. Again, a capability most organisations will not have – or normally need to have – internally. There are also other benefits, such as the ability to change team members at will, charge contractual penalties for non-performance or the ability to sue over poor service or bad advice: options generally not available when employing in-house teams.

However, those benefits come at a cost. Not only are salaries for consultants generally higher than those of staff in the public sector, but there is a premium on top to cover technical resources, overheads, insurance and margin that together mean than the per-hour rate can be a significant multiple of the cost of in-house staff, even when the civil services’ own overheads are factored in. 

Justifying this premium can be difficult, particularly in major projects involving very large teams of consultants. Another perceived issue can be where individual consultants are former civil servants apparently being re-employed at a much greater cost, even if that comes with technical and other resources not available when they were on the payroll.

A recent report by the Public Accounts Committee argues that the extensive use of consultants is driven by an underlying lack of skills in the civil service, with the development of fourteen cross-government functions (such as the Project Delivery Service and the Government Finance Function) not having had the desired effect of strengthening internal capabilities sufficiently to reduce the need to bring in external consultancy support.

One solution that has often been mooted (and is now being considered more actively) is to establish an in-house consultancy organisation. This would have the scale to be able to employ technical experts and experienced consultants to help deliver priorities across the whole of government, both centrally and locally.

Of course, this is not a new phenomenon and there are a range of consultancy services already in existence inside the government. Examples include the Government Legal Department (originally the Treasury Solicitor’s Department, founded in 1876), the Government Actuary’s Department (founded in 1919) and the consultancy arm of the Government Property Agency (founded 2018). These all provide expert advice and support that government departments and agencies can utilise as needed, with any profit that might be generated coming back to the exchequer to be reinvested in public services.

The proposals for a Crown Consultancy ‘firm’ within government would be different both in terms of scale and also in the range of activities it would cover. Such an organisation would have many benefits in being able to utilise existing expertise within the civil service more effectively, while also bringing in private sector expertise and experience to bear on difficult challenges. There would also be opportunities to provide a wider range and depth of experience for civil servants with secondments as part of their development, providing career opportunities not currently available, particularly in technical specialities.

There are a number of hurdles to be overcome in establishing a Crown Consultancy. One of the more significant will be how to address pay disparities that may make it difficult to recruit individuals with the skills and experience required. Another will be in replicating the tools, techniques and resources that private sector firms have spent decades creating and that enable them to mobilise quickly to meet client needs.

Plans remain at an early stage, but of course, there are a number of external consultants available that can help move them forward!

This article was originally published by ICAEW.

A difficult winter ahead for the public finances

23 December 2020: The UK public sector incurred a £31.6bn deficit in November, bringing the total shortfall over eight months to £240.9bn. Debt reached an all-time high of £2.1tn.

Commenting on the latest public sector finances for November 2020, published on Tuesday 22 December 2020 by the Office for National Statistics (ONS), Alison Ring sector director at ICAEW, said: 

“A slightly more optimistic forecast for GDP from the Office for Budget Responsibility last month resulted in the UK’s debt to GDP ratio being revised downwards, despite public sector debt having reached an all-time high of £2.1tn in November. However, this optimism may prove to have been premature, with reports suggesting another national lockdown in the new year and disruption in international trade foretelling a potentially difficult winter ahead for the economy and the public finances. 

Prospects for the spring will depend on how quickly the vaccine can be rolled out, whether testing and tracing can deliver rapid and reliable results, and the extent to which disruption at borders now and after 1 January can be minimised.”

Public sector finances for November

The latest public sector finances reported a deficit of £31.6bn in November 2020, a cumulative total of £240.9bn for the first eight months of the financial year. This is £188.6bn more than the £52.3bn recorded for the same period last year.

Falls in VAT, corporation tax and income tax drove lower receipts, while large-scale fiscal interventions resulted in much higher levels of expenditure. Net investment is greater than last year, as planned, while the interest line has benefited from ultra-low interest rates.

Public sector net debt increased to £2,099.8bn or 99.5% of GDP, an increase of £301.6bn from the start of the financial year and £303.0bn higher than in November 2019. This reflects £60.7bn of additional borrowing over and above the deficit, most of which has been used to fund coronavirus loans to business and tax deferral measures.

Table of results for the month of November and for the 8 months then ended, together with variances against the prior year. Click on the link at end of post to visit the original ICAEW article for a readable version.

The combination of receipts down 8%, expenditure up 29% and net investment up 26% has resulted in a deficit for the eight months to November 2020 that is over four times the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March, despite interest charges being lower by 26%. The cumulative deficit is approaching five times as much as for the same eight-month period last year.

Cash funding (the ‘public sector net cash requirement’) for the month was £20.7bn, bringing the cumulative total this financial year to £295.8bn, compared with £14.9bn for the same eight-month period in 2019. 

Interest costs have fallen despite much higher levels of debt, with extremely low interest rates benefiting both new borrowing to fund government cash requirements and borrowing to refinance existing debts as they have been repaid.

The deficit remains on track to approach the £393.5bn forecast for the financial year to March 2021 by the Office for Budget Responsibility in the Spending Review once bad debts not yet recognised on coronavirus loans are included.

Upwards revisions to GDP based on the latest Office for Budget Responsibility forecasts have reduced the debt to GDP ratio for this and previous months to below 100% of GDP. However, the likelihood of a further national lockdown in the new year and for disruption in international trade with the end of the EU transition period could depress prospects for GDP growth in 2021.

Table of results each of the 8 months to November 2020. Click on the link at end of post to visit the original ICAEW article for a readable version.
Table of results each of the 8 months to November 2019 and of the 12 months ended 31 March 2020. Click on the link at end of post to visit the original ICAEW article for a readable version

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates and changes in methodology. These had the effect of reducing the reported fiscal deficit in the first seven months from the £214.9bn reported last time to £209.3bn and increasing the reported deficit for 2019-20 from £56.1bn to £57.4bn.

This article was originally published by ICAEW.

Test and trace in England falls short despite £22bn budget

11 December 2020: Despite achieving significant increases in testing activity, the Department of Health and Social Care’s test and trace service failed to meet recommended effectiveness rates, according to the NAO.

The rapid scale-up of COVID-19 test and trace service saw 23 million tests carried out, 630,000 of 850,000 people testing positive reached and 1.4 million of their contacts traced up to 4 November. However, at 66% the close contact trace rate is below the 80% needed to be effective.

The National Audit Office (NAO) has issued an interim report on the NHS Test and Trace Service set up by the Department of Health and Social Care (DHSC or the Department) to test for COVID-19 and to trace close contacts of those testing positive. 

The NAO reports that between 28 May and 4 November 2020, only 41% of test results were provided within the target time of 24 hours and only 66% of close contacts of those testing positive were reached and asked to self-isolate, compared with the 80% rate recommended by the Scientific Advisory Group for Emergencies (SAGE) for an effective test and trace system.

Test and trace programmes are a core public health response in epidemics that can be used with other measures, such as social distancing, barriers (such as masks) and handwashing, to reduce infections. At the start of the COVID-19 outbreak, Public Health England carried out comprehensive testing and tracing on the relatively low numbers of initial infections, but this was suspended at the start of the first national lockdown in mid-March. The Department scaled-up testing capacity from April onwards and on 28 May 2020 launched the NHS Test and Trace Service covering England.

The NAO’s key findings include:

  • The Department has achieved significant increases in testing activity, set up a national contact tracing service scratch and has tested millions of people.
  • The delivery model chosen for the national test and trace programme, which excluded local public health teams from the response, was only documented in a retrospective business case written in September 2020.
  • The Department spent £4bn up to October 2020, around £2bn less than forecast, due to underspending on laboratories, machines and mass testing. The total budget for 2020-21 is now £22bn with a significant expansion in mass testing planned in the remaining months of the financial year ending in March 2021.
  • 407 contracts worth £7bn have been signed with 217 public and private organisations, with a further 154 contracts worth £16bn expected to be signed by next March (this includes spend going into the next financial year). An internal government review of test and trace systems in 15 other countries confirmed that the UK approach was atypical, as although some countries had used private sector outsourcing to increase testing capacity, none had done so to increase tracing capacity, which was generally built up from existing public health expertise.
  • Connecting discrete services provided by different organisations into an effective end-to-end process has been challenging, with the initial focus on creating a ‘minimum viable process’ shifting to refining, integrating and stabilising the process so it operates reliably at scale.
  • Accountability is unclear, with the executive chair of the test and trace service reporting directly to the Prime Minister and the Cabinet Secretary, bypassing normal reporting lines within the Department.
  • There are now 593 testing sites and 15 laboratories, with plans to add a further 15 lighthouse laboratories and two high-capacity ‘mega-laboratories’ in January 2021. Testing capacity expanded rapidly in line with the public target of 500,000 available tests per day on 31 October, but the average number of tests since May has been only 68% of capacity, below the 85% expected level. The ambition is to increase testing capacity to 800,000 tests a day by the end of January.
  • Turnaround of test results peaked in June with 93% of community (pillar 2) test results provided in 24 hours, but this had deteriorated to 14% around mid-October before improving to 38% by the beginning of November. Turnaround times for hospital and care homes have consistently been about 90%, albeit measured on a different basis.
  • The Department did not plan for a sharp rise in testing demand in early autumn when schools and universities reopened, resulting in the number of tests available being limited, longer turnaround times and extra assistance being commissioned.
  • Initial problems in sharing data with local authorities have now been largely resolved, but there are a number of significant data risks to be managed pending a planned upgrade of contact tracing software scheduled for January 2021.
  • High reported levels of non-compliance with self-isolation rules represent a key risk to the success of test and trace, and national and local government have been trying to increase public engagement.

The NAO concludes by commenting that although a rapid scale-up in activity has been achieved with new infrastructure and capacity built from scratch, issues with implementation and potentially the initial choice of delivery model mean that the government is not yet achieving its objectives.

The NAO also highlights the most significant risks remaining, including in how to increase utilisation of testing capacity, manage spikes in testing demand and expand the use of local authority public health teams. There are challenges to be overcome in delivering mass testing across the country, increasing public engagement to improve compliance with self-isolation and in ensuring contracts awarded contain sufficient flexibility to respond to changing requirements at reasonable cost.

Finally, the NAO stresses the importance of embedding strong and sustainable management structures, controls and lines of accountability, addressing arrangements where accountability does not clearly align with organisational and strategic objectives in other aspects of the government’s COVID-19 response.

Alison Ring, director for public sector at ICAEW, commented: “While the need to move quickly in response to an out-of-control pandemic was always likely to prove extremely challenging, the NAO has highlighted how consequential the initial decisions made under pressure can be. 

The NAO hints (without being explicit) that the choice to exclude local public health teams and local expertise from the initial roll-out of national test and tracing was a major mistake that the government is still struggling to recover from. They also do not sound entirely comfortable with the governance arrangements for the test and trace service and intend to look at value-for-money and contract management in their second report expected in spring 2021.

Despite an eye-watering £22bn price tag, the investment in test and trace will be worthwhile if it saves lives ahead of the roll-out of vaccines and enables restrictions on our freedom and on economic activity to be lifted as quickly as possible in 2021.”

Read the full report here.

This article was originally published on the ICAEW website.

ICAEW chart of the week: Spending Review 2020

In the wake of the government’s Spending Review, this week’s chart focuses on the bigger picture and looks at the scale of public spending in relation to the size of the overall economy.

Spending Review 2020: Public spending as % of GDP 2019-20: Department spending 17.0% + other spending 12.3% + welfare 10.3% + covid 0.2% = 39.8% 2020-21: 19.3% + 13.3% + 11.5% + 12.2% = 56.3% 2021-22: 19.5% + 12.4% + 10.6% + 2.6% = 45.1% 2022-23: 19.2% + 12.2% + 10.6% = 42.0% 2023-24: 19.2% + 12.1% + 10.5% = 41.8% 2024-25: 19.3% + 12.1% + 10.5% = 41.9% 2025-26: Departmental spending 19.3% + other spending 12.0% + welfare 10.5% = 41.8%

There was a lot of substance in the Spending Review 2020 announced this week, with a lot more going on under the surface with – for example – the launch of the National Infrastructure Strategy. However, we thought we would focus on the bigger picture for the #icaewchartoftheweek and to look at the scale of public spending in relation to the size of the overall economy.

Of course, the current financial year has seen a massive expansion in the amount of public spending – up from £884bn or 39.8% of GDP of £2,218bn in 2019-20 to a revised budget of £1,165bn or 56.3% of GDP of £2,069bn. The combination of higher spending and a smaller economy this year makes for an eye-watering percentage.

Next financial year will see further COVID support measures adding to public spending, but the key takeaway from the chart is that public spending is expected to persist at around 42% of GDP from 2022-23 onwards, reflecting a permanently smaller economy following the pandemic combined with slightly higher spending in real terms. This is 2% higher than the just under 40% seen in 2019-20 and 3%-4% higher than the 38%-39% longer-run average.

Around half of the increase in departmental spending seen in the chart relates to capital investment in line with the government’s infrastructure plans, while the remainder relates to operational spending with more for health, education and defence being partially offset by the reduction in development spending and the one-off public sector pay freeze.

With scope for substantial reductions in public spending seen to be limited, there are two main routes for covering this increase in costs – economic growth to boost the size of the economy or higher taxes. The government will be hoping that its increase in capital investment will help to deliver on the former, but it appears increasingly likely that tax rises will be needed over the course of the coming decade.

This chart was originally published on the ICAEW website.

Spending Review 2020: public finances dominated by COVID aftermath

26 November 2020: The Office for Budget Responsibility presented its latest economic and fiscal forecasts to accompany yesterday’s Spending Review. As expected, the forecasts were far from pretty.

In its latest economic and fiscal outlook, the Office for Budget Responsibility (OBR) confirmed that economic and fiscal damage from the pandemic is severe and will have a lasting effect. 

The fiscal watchdog now expects to see a sea of red ink across the first half of the coming decade: a £394bn deficit (19% of GDP) this year and the UK still running a fiscal deficit of over £100bn in five years’ time. This will be a decade after the point at which a previous Chancellor, George Osborne, hoped to have eliminated the deficit completely.

This is the highest ever fiscal deficit experienced in peacetime by the UK and reflects an additional £21bn for the cost of extending the furlough scheme across the winter and £30bn in anticipated write-offs of CBILS and other lending packages.

The fiscal pain is expected to continue into the next financial year starting on 1 April 2021, with the government planning an additional £55bn in COVID-related spending. This is offset to an extent by £10bn in lower departmental budgets, partly as a consequence of the one-year public sector pay freeze. The government says that despite this, ‘core day-to-day department spending’ is growing at 3.8% a year on average in real terms from 2019-20 to 2021-22.

Deficit to remain high for years to come

Table 1 below highlights how the deficit is forecast to be £164bn next year and to remain at over £100bn over the rest of the forecast period. This is despite GDP recovering in 2021-22 to the same level as last year (about 4% lower once inflation is taken into account) with the Chancellor hoping for strong growth to continue into 2022-23 before returning to trend after that.

Table 1 - OBR November 2020 summary economic and fiscal forecasts to 2025-26. Click on link to ICAEW website for a readable version of this table.

The Spending Review boasts that it includes £100bn of central government capital investment in 2021-22, a £27bn real-terms increase compared with 2019-20. This reflects planned increases in previous budgets, with no new funding included in yesterday’s announcement. There are concerns about how deliverable the government’s capital investment plans are, with the OBR increasing its estimate for capital budget underspends and scaling back expectations of local authority and public corporation capital expenditure by £4bn in 2021-22 and by £3bn in subsequent years. These are both likely to reduce any positive impact that may come from the £4bn ‘levelling up fund’ announced by the Chancellor

Table 2 summarises the changes between the pre-pandemic forecasts presented in the Spring Budget in March 2020 and the latest forecasts published yesterday.

Table 2 - OBR November 2020 changes since March 2020 pre-pandemic forecasts Click on link to ICAEW website for a readable version of this table.

Table 3 illustrates how debt is expected to increase from £1.8tn in March 2020 to £2.3tn in March 2021 and to continue to grow to £2.8tn by March 2026, in excess of 100% of GDP throughout the next five years.

Fortunately for the government, the cost of the additional borrowing required to fund the deficit has continued to fall dramatically, with central government debt interest falling from £37bn in 2019-20 to £18bn in 2021-22, before gradually rising to £29bn in 2025-26.

Table 1 - OBR November 2020 public sector net debt to 2025-26 Click on link to ICAEW website for a readable version of this table.

Martin Wheatcroft FCA, external adviser to ICAEW on public finances, commented: “The Spending Review was pretty much as expected, with COVID-related spending extended into the next financial year and the trailed public sector pay freeze allowing the government to maintain its capital investment ambitions.

However, buried in the detail is an expectation by the OBR that it will be difficult to deliver those plans on schedule. Combined with lower capital expenditure by local government and public corporations, the hoped-for economic boost could prove elusive.

With the spending side buttoned-down for now, the focus will move to how the Chancellor plans to close the gap between receipts and spending, with the prospect of tax rises on the horizon. It is important the government takes this opportunity to develop a long-term fiscal strategy to address the long-term unsustainability of the public finances that needed addressing even before the pandemic added to the scale of the challenge.”

This article was originally published on the ICAEW website.

What is tomorrow’s Spending Review all about?

Major fiscal events can be confusing for those not familiar with the public finances – this brief explainer may help.

The primary purpose of the Spending Review announcement tomorrow by the Chancellor will be to set out the UK Government’s departmental spending plans for the 2020-21 financial year that starts on 1 April 2021, but there is a lot more going on than that.

Before going further, it is important to distinguish between the one-year Spending Review that will be presented and the three-year Comprehensive Spending Review (CSR) that was originally planned. The CSR has unfortunately been deferred until next year because of the uncertain economic outlook following the arrival of the coronavirus, with the Chancellor Rishi Sunak choosing to set department budgets for only the coming financial year. These budgets will have been based on bids submitted by each department that will have been pared back following extensive negotiations across Whitehall.

The process for establishing multi-year departmental budgets has now been deferred for the third year running, with the calling of the General Election last year resulting in Sajid Javid’s one-year Spending Round in 2019 and Brexit-related uncertainty resulting in one-year departmental spending allocations within Philip Hammond’s 2018 Budget. Although perhaps understandable on each individual occasion, the lack of medium-budget certainty for several years is far from ideal in terms of good financial management!

An important innovation last year was the setting of departmental capital budgets for two years rather than just one to provide greater certainty around capital programmes with long lead times. We are anticipating this will also be the case this time, although ICAEW has suggested extending capital budgets a further year in our letter to the Chief Secretary to the Treasury (the minister within HM Treasury with responsibility for public spending) in order to provide more certainty for long-term infrastructure projects.

Another exception to the shorter time horizon for this year’s Spending Review is the multi-year settlement for the Ministry of Defence announced last Thursday, which provides an additional £4bn a year over the next four years on top of the existing commitment to increase the defence budget by 0.5% in excess of inflation. This will underpin the Integrated Defence & Security Review expected to be published in early 2021.

Although headlined as a spending announcement, tomorrow’s statement will also constitute one of the two annual fiscal events where the Office for Budget Responsibility (OBR) is required by law to publish its Economic and Fiscal Outlook (EFO) containing financial forecasts for the next five years. These are not expected to be very pretty, with the coronavirus pandemic spreading red ink across not only the public finances this year, but also dragging down expected revenues and increasing spending in future years. These forecasts will also be much more uncertain than is normal, which might be one reason the Chancellor has not chosen to describe this event as an Autumn Statement.

The EFO will cover not only planned spending by central government departments – known as departmental expenditure limits (DEL) – but also welfare, interest and other types of expenditure driven by economic conditions – known as annually managed expenditure (AME). Combined with expectations for tax and other receipts in 2020-21, it will roll these forecasts forward a further four years to 2024-25 to provide a five-year forecast for the fiscal deficit (the shortfall between receipts and spending) and public debt. There will be even greater caveats than normal not only in the forecasts but also in the estimate for the remainder of the current financial year.

This is not a full-blown Budget and so we do not expect to see many permanent tax changes beyond a few that were announced last week, although the Chancellor could take this opportunity to extend some temporary tax measures in addition to the extension of £1m Annual Investment Allowance temporary cap to the end of 2021. For example, he is likely to be considering whether or not to extend relief from business rates currently scheduled to end in March 2021 into the next financial year. There could also be an announcement about National Insurance thresholds for next year.

Fiscal events are often accompanied by other publications, with the long-delayed National Infrastructure Strategy anticipated to set out how the Government plans to deliver the ‘Ten Point Plan for a Green Industrial Revolution’ announced by the Prime Minister last week. Making the Government’s ambitious infrastructure investment plans a reality will take a lot more than just allocating money in a Spending Review spreadsheet; it will also be critical to have a clear strategy, faster decision making, strong delivery capabilities, and the right framework for attracting private sector investment. ICAEW’s response to the Infrastructure Finance Review last year addressed many of these issues.

Other updates are likely to include a revised remit for the Debt Management Office (DMO) to raise funds over the course of the rest of the financial year and progress reports on HM Treasury projects such as the Balance Sheet Review.

In summary, Wednesday’s announcement will still be very important despite the delay in the Budget until the spring and the deferral of the CSR to next year.

TermDescription
Spending ReviewOn this occasion, the setting of budgets for central government departments for 2021-22 and capital budgets for 2021-22 and 2022-23.
2020-21The current financial year – from 1 April 2020 to 31 March 2021.
2021-22The next financial year – from 1 April 2021 to 31 March 2022.
Autumn or Spring StatementThe second major fiscal event each year after the Budget at which the Chancellor presents an update on the public finances. This can sometimes include new tax and spending measures but is not required to. Tomorrow’s announcement is technically an Autumn Statement in addition to the Spending Review.
BudgetThe primary fiscal event each year in which the Chancellor of the Exchequer sets out plans for tax, spending and borrowing to finance government activities for the coming financial year and medium-term forecasts for the public finances. The Budget planned for this autumn was postponed until March 2021.
Chancellor of the ExchequerRishi Sunak MP, the cabinet minister and head of HM Treasury responsible for the economic matters and for the public finances.
Chief Secretary to the TreasurySteve Barclay MP, the most senior minister at HM Treasury after the Chancellor, with primary responsibility for public spending and for negotiating the Spending Review with departments.
Comprehensive Spending Review (CSR)A multi-year set of departmental operating and capital budgets, typically covering three years. A CSR was planned for 2020 but has been delayed until next year.
DebtPublic sector net debt (PSND) is the primary measure of financial position used by the Government within the National Accounts. It comprises debt owed to external parties less cash and other liquid financial assets and excludes some debt-like liabilities such as private-finance initiative embedded lease obligations and non-liquid loan receivables. The majority of public debt is raised by the Debt Management Office (DMO) selling government bonds (principally gilts) to professional investors. National Savings & Investments also raises money by taking retail deposits from the public.
DeficitThe fiscal deficit, officially known as public sector net borrowing (PSNB), is the primary measure of financial performance used by the Government. It is the shortfall between receipts and total managed expenditure calculated in accordance with statistics-based National Accounts rules. Despite its official name it does not equal the movement in public sector net debt as it excludes borrowing for other purposes (such as to fund lending to businesses) in addition to cash timing differences. The Government uses a modified form of the deficit that excludes the state-owned NatWest Group (formerly The Royal Bank of Scotland).
DEL and AMEDepartment expenditure limits and annually managed expenditure, being the two categories government spending is divided into. DEL comprises programme and administration costs incurred by central government departments, while AME consists of other types of expenditure such as welfare, interest, devolved administrations, local government and a number of other activities. DEL and AME are both net of ancillary income such as fees and charges and are measured in accordance with UK Government-specific ‘resource accounting’ rules that differ from both operating and capital expenditure reported in financial statements under International Financial Reporting Standards and the fiscal numbers reported in the National Accounts under international statistical standards.
Resource DEL and Resource AMEThe government equivalent of expenditure, net of ancillary income.
Capital DEL and Capital AMEThe government equivalent of capital expenditure, net of proceeds from the sale of assets.
Economic and Fiscal Outlook (EFO)A set of economic and financial forecasts prepared by the independent Office for Budget Responsibility (OBR) that combines extrapolations of government spending plans from the most recent Spending Review with projections for tax and other receipts, welfare spending, interest and other costs. The fiscal forecast usually comprises a revised estimate for the current financial year and projections for the next five financial years based on the economic assumptions determined by the OBR.
Economic growthAn increase in GDP in excess of the GDP deflator.
GDPGross Domestic Product, an estimate of the total value of transactions within the UK economy.
GDP deflatorA measure of inflation across all sectors of the economy (including government) that is used in the economic and fiscal forecasts. It differs from other measures of inflation such as the consumer price index (CPI), the consumer-price index including housing (CPIH) and the retail prices index (RPI).
Public sectorThe UK Government and the Scottish, Welsh and Northern Irish devolved administrations and bodies they directly control (central government), regional and local authorities, police & crime commissioners, fire services, Transport for London and bodies they control (local government), and the Bank of England and government-owned businesses (public corporations).
Supply EstimatesThe formal process of obtaining Parliamentary approval for government spending each year. These convert the budgets agreed with the Treasury for both DEL and AME each year and convert them into a formal legal authorisation to incur expenditure. Supplementary Supply Estimates during the course of the financial year are sometimes needed if budgets need to be adjusted upwards.
Total managed expenditure (TME)The combination of expenditure and net investment (capital expenditure less depreciation) measured in accordance with the statistics-based National Accounts rules.
Whole of Government Accounts (WGA)Consolidated financial statements for the public sector prepared in accordance with International Financial Reporting Standards. The WGA recognises a wider range of assets and liabilities than are reported in the fiscal numbers and an accounting loss that includes long-term pension costs, nuclear decommissioning, clinical negligence and other costs that are excluded from the fiscal deficit.

This article was originally published on the ICAEW website.

COVID tips Croydon Council over the edge into bankruptcy

17 November 2020: Croydon Council has gone into section 114 ‘bankruptcy’ following years of overspending, losses on commercial investments and the effects of the coronavirus pandemic. What went wrong?

Croydon Council issued a section 114 notice on Wednesday 11 November 2020, the first local authority to do so since Northamptonshire County Council went bust in 2018.

The move by Lisa Taylor, Croydon’s finance director and section 151 officer, followed pre-pandemic losses of £163m in 2019-20 and £221m in 2018-19 and the publication last month of a highly critical public interest report by external auditor Grant Thornton. A central government commissioned governance review is underway.

The public interest report was highly critical of how Croydon Council has run its finances over the last few years, with findings including the use of capital funding to cover operating losses, £545m borrowed over a three-year period – much of which was used to invest in commercial properties – and serious failings in governance in addressing the financial situation facing the council. Grant Thornton reported that General Fund and Earmarked General Fund reserves had reduced from £58.2m at 31 March 2016 to £16.6m at 31 March 2020, and conclude with the following statement:

“Had the Council implemented strong financial governance, responded promptly to our previous recommendations and built up reserves and addressed the overspends in children’s and adult social care, it would have been in a stronger position to withstand the financial pressures as a result of the COVID-19 pandemic. The Council needs to urgently address the underlying pressures on service spends and build a more resilient financial position whilst also addressing the long-term financial implications of the capital spending and financing strategy together with the oversight of the Council’s group companies.”

The section 114 notice places a stop on non-statutory expenditures, resulting in the potential closure of some local services, redundancies to save costs and increasingly strained calls to the Ministry for Housing, Communities & Local Government (MHCLG) asking for a bailout. It highlights a budget gap of at least £30m and additional risks of £37m or more.

Croydon is not alone in suffering from significant cuts in funding over the last decade and cost pressures in adult and child social care provision in particular. However, weak financial governance, a failure to address cost pressures, inadequate reserve levels and increased balance sheet risk from debt-financed commercial property investments have all made it more vulnerable to a crisis.

Although it is perhaps not surprising that Croydon has failed, given the issues highlighted by its external auditors, more section 114 notices are likely over the coming months as even well-run councils struggle to cover income shortfalls. 

The government will also be concerned about the number of councils planning to cut local services and investment in their local economies over the next few years, just as it is hoping to rebuild the economy and deliver on its levelling up agenda.

This article was originally published on the ICAEW website.

ICAEW writes to Chief Secretary on Spending Review priorities

16 November 2020: Alison Ring, ICAEW’s director for public sector, has written to the Chief Secretary to the Treasury ahead of the Spending Review to stress the importance of investment in infrastructure, data and financial management.

The government has announced that the Spending Review will take place on 25 November 2020 but with the uncertainties caused by coronavirus, it has decided to restrict this to only one year instead of the previously planned three-year time horizon.

In the letter to Steve Barclay MP, Chief Secretary to the Treasury, ICAEW stresses how vital it is the government moves forward with its ambitious programme of infrastructure investment, and that projects are not delayed by the postponement of the Budget until next year and the reduction of the scope of the Spending Review to one year.

Commenting on the letter Alison Ring OBE FCA, ICAEW’s director for public sector said: “The 2020 Spending Review comes at a critical time for the UK and its public finances and will quite rightly focus on the government’s current spending plans for the coming financial year starting in April 2021 and capital budgets for the following year. Well-targeted support will be critical to ensure as strong a recovery from the coronavirus pandemic as possible. 

Our letter to the Chief Secretary focuses on the importance of budgetary certainty to ensure infrastructure projects are green-lit now rather than risking further delays because of the restriction in Spending Review time horizon. The long-delayed National Infrastructure Strategy is urgently needed if the government’s ambitions to level up economic prosperity and deliver carbon neutrality are to be achievable.

The government also has ambitious plans to improve the way government works, with the recently published National Data Strategy setting out how digital innovation will be key. We comment in the letter how the importance of high-quality financial skills, finance processes and risk management to delivering better outcomes and ensuring value for money for taxpayers should not be underestimated. The government does not have the best of records in undertaking major transformation programmes, and we caution the Chief Secretary against under-resourcing the planning stages of these projects. 

Finally, we hope that the government will use the delays in the Budget and the later years of the Spending Review to think about the longer term and how to put the public finances on a sustainable path. Even before the pandemic and the huge amounts of additional borrowing being undertaken this year, the Office for Budget Responsibility had reported that the strains on public services, more people living longer, and growing debts and other public liabilities were not being addressed. A comprehensive long-term fiscal strategy is needed to look beyond the immediate and establish a sustainable framework for the public finances for the next quarter of a century.”

The letter to the Chief Secretary to the Treasury focuses on three key areas, all of which ICAEW believes are essential to re-balancing economic opportunity and performance across the UK and to achieving carbon neutrality, as well as being key to driving the post-pandemic economic recovery in 2021 and the decade ahead.

Sustainable infrastructure investment

The shortening of the Spending Review period risks causing uncertainty in departmental capital budgets and the potential for further delays in getting infrastructure projects underway. ICAEW believes that establishing capital budgets for 2023-24, as well as 2022-23, would help departments to be confident in carrying out the groundwork for these projects so that they can be implemented as soon as possible.

The National Infrastructure Strategy is more urgent than ever to reduce regional inequalities and deliver on the ‘levelling up’ agenda.

Data and financial management

ICAEW welcomes the publication of the recent National Data Strategy and the commitment to rethinking how government works set out in the Chief Secretary’s speech of 28 July – digital innovation and better use of data will be key to delivering improved public services at a lower cost. However, sufficient resources must be provided to the initial stages of these projects – the experience of ICAEW members is that underinvestment in planning is one of the major causes of project failure.

Relatively small amounts invested in improving the quality of financial information needed to support effective decision-making, in more efficient and effective finance systems and processes, and in enhancing financial controls such as fraud prevention and detection are likely to be paid back many times over.

A long-term fiscal strategy

One benefit of the delay in the Budget and the deferral of the second two years of the Spending Review is the additional time this will give the government time to think about the longer term and how to put the public finances on a sustainable path. 

This is more pressing than ever as strains on public services increase, people live longer, and debt and other public sector liabilities continue to grow. 

A comprehensive strategy setting out a framework for taxes, welfare and public services over the next quarter of a century would provide an opportunity for sustainable reform to deliver a robust public balance sheet, a more resilient government machine, and a stronger and more prosperous economy. 

This article was originally published on the ICAEW website.