A trillion-pound Autumn Budget driven by tax and spending

The Chancellor used tax rises to start repairing the public finances but spending pressures could derail his hopes for a pre-election tax giveaway in 2023 or 2024.
Wednesday’s Autumn Budget and Spending Review saw total public spending settle permanently above a trillion pounds a year, as additional spending increases more than offset the end of temporary COVID-19 interventions.

Table setting out headline numbers for the six financial years from 2021-22 to 2026-27. These comprise taxes and other income, total managed expenditure, deficit, other borrowing, change in debt, opening net debt and closing net debt, plus closing net debt / GDP.

Click on link at the end of this article to the version of this article on the ICAEW website which has a readable version of this table.

A ‘Boris Budget’ – full of fizz and capital spending announcements

Despite Rishi Sunak’s avowed commitment to a small state and low taxes, the Autumn Budget reality featured both higher taxes and higher spending, and the Spending Review focused on addressing the many pressures bearing down on public services.

The Chancellor benefited from a faster rebound in the economy due to the vaccination programme, as well as being helped by the time lag between inflation benefiting the revenue line and when it starts to feed through into public spending. Combined with the health and social care levy and other tax rises, this provided him with the budgetary capacity to increase spending on health, reverse previously announced cuts in departmental spending, and still reduce borrowing.

This led the Resolution Foundation to label this a ‘Boris Budget’, reflecting the reputedly more generous instincts of Prime Minister Boris Johnson as compared with his Chancellor.

The Office for Budget Responsibility (OBR)’s high-level analysis was that the Chancellor used around half the £50bn net benefit from forecast revisions and tax rises in 2022-23 to increase spending, with the balance reducing the deficit from £107bn to £83bn. However, the Institute for Fiscal Studies (IFS) points out that, apart from health and social care, the additional spending mostly reversed planned cuts made during the November 2020 and March 2021 Budgets that were always going to be difficult to achieve in practice.

The good news from better economic forecasts, including the OBR’s revision of its estimate of the permanent scarring effect on the economy from 3% to 2%, was offset by concerns over the impact of inflation on living standards and the impact of the ending of the temporary uplift in universal credit on those on low incomes.

Higher inflation will also put public sector budgets under pressure as higher wage settlements and supplier costs start to eat into the spending increases awarded as part of the Spending Review. Clearing backlogs built up over the course of the pandemic will absorb further amounts, while there is also a risk that construction worker shortages and rising construction costs will make it difficult to deliver on the capital programmes announced in such a flurry over the weekend before the Budget announcement.

Unemployment – the dog that didn’t bark

One of the key reasons for the better economic situation than was expected at the start of the pandemic is that unemployment has not gone up significantly. The contribution of the furlough schemes and business support has been hugely significant to this outcome, not only by supporting workers and businesses during successive lockdowns but more importantly preserving businesses and the jobs for workers to return to as pandemic restrictions have been lifted.

Unemployment may still increase following the ending of the furlough schemes in September, but any increase is likely to be significantly smaller than the potential more than doubling in unemployment rates that some had anticipated at the start of the first lockdown.

Modest tax reforms overshadowed by higher tax rates, fiscal drag and a major ‘tax’ cut

Perhaps the most radical ‘tax’ change announced in the Autumn Budget was not a formal tax at all. The reduction in the universal credit taper rate from 63% to 55% is in effect a significant tax cut on those on the lowest incomes, even if it still leaves poorer households on higher effective marginal rates than those earning over £150,000 a year. It also does not make up for the removal of the temporary £20 a week boost to universal credit that has already started to hit many of the poorest households this month.

Higher inflation benefits the public finances by increasing fiscal drag as tax allowances reduce in value in real terms, bringing more people into the scope of income tax or onto higher tax bands. This is a hidden tax increase that brings in more for the government without it needing to increase headline rates.

Of course, the government did that as well. The headline rates of employee national insurance, employer national insurance and dividend tax were increased by 1.25% in the coming year, even if in subsequent years the health and social care levy will appear on payslips and PAYE statements as a separate tax in its own right.

Modest reforms to business rates (principally more frequent revaluations), alcohol duties, and air passenger duties were relatively light touch compared with the previously announced health and social care levy and the planned 6% increase in the main corporation tax rate, even if banks saw a reduction of 5% in the bank levy on corporate profits to offset some of that increase.

More money for health and the criminal justice system, but less for the armed forces

The Spending Review saw extra money for health (funded by the new health and social care levy) where demographic pressures continue to drive demand in addition to dealing with the costs of the pandemic and the backlog of treatments that have built up.

The criminal justice system also received a substantial settlement (4.1% on average over three years), but this will not be sufficient to restore spending to the level before austerity. Indeed, the IFS has calculated that with the exception of the Department for Health & Social Care, the Home Office and the Department for Education, all other departments will continue to spend less in real terms than they did in 2009-10.

One surprise in the detail was the flat current spending settlement for the Ministry of Defence over the coming three years, implying a further cut in spending in real terms on the armed forces, which are expected to contract even further than they have done already. While equipment spending is up as part of a ‘more drones, fewer soldiers’ policy, this is one area where additional settlements in the next couple of Budgets appear more likely than not.

Higher levels of capital investment targeted at boosting regional economic growth

A big credit to the Chancellor is that despite the many challenges facing the public finances following the pandemic he has not scaled back the government’s capital investment programme. While it is the case that his two immediate predecessors pencilled in the substantial increases that we are now seeing, it is the current Chancellor who is delivering on them. There are significant boosts in investment in economic infrastructure, housing, research & development and digitising government amongst other areas.

Open questions remain in areas such as transport, where the long-awaited Integrated Rail Plan was not published with the Spending Review as expected. However, the £7bn pre-announced for regional rail upgrades demonstrates how much can be done with a bigger pot of money for investment.

The step-change in the level in capital budgets – from £70bn in 2019-20 to £107bn in 2022-23 is remarkable. The one concern will be whether the relatively flat capital budget allocations in subsequent years will mean investment starts to fall in real terms again, possibly ‘pulling the plug’ on the economic benefits of investment just as the economy recovers from the pandemic.

New fiscal rules: a cautious approach to repairing the public finances

The Chancellor announced two new fiscal rules: a current budget balance target and a declining debt to GDP ratio; although they were accompanied by subsidiary rules, including a 3% of GDP cap on investment spending and a commitment to return overseas development assistance to 0.7% of GDP once budget balance is achieved.

In effect, they provide a fiscally conservative framework of generating sufficient tax revenues to cover day-to-day spending, while allowing a certain amount of borrowing for investment. While debt should still grow – and is expected to reach over £2.5tn during the forecast period, the debt to GDP ratio should start to fall as the economy grows over time.

These changes confirm that George Osborne’s ambition to eliminate the fiscal deficit completely has been abandoned, replaced by a Gordon Brown-style current budget balance target. This is calculated under the statistics-based National Accounts fiscal framework, which for example excludes the long-term cost of public sector pensions; the government is still planning to continue to lose money on an accounting basis under IFRS.

The forward-looking current-budget balance accompanies the Chancellor’s other principal fiscal rule with is to reduce the ratio of public sector net debt to GDP, although again this uses a target based on fiscal measures that do not include other liabilities in the public sector balance sheet.

Even there, the Chancellor adopted a non-GASP (non-Generally Accepted Statistical Practice) measure to target (public sector net debt excluding the Bank of England) that excludes some central bank liabilities, which rather strangely means that money used to finance premiums paid to private investors for gilts purchased by the Bank of England is excluded from the formal fiscal targets.

Irrespective of the precise KPIs used in the fiscal rules, the overall approach is one of repairing the public finances gradually over time. Higher rates of economic growth would enable that to be accelerated, but the government has as yet been unable to identify how to get back onto the pre-financial crisis levels of productivity improvements that would be required to make this possible. In the meantime, the fiscal rules provide a framework in which tax rises to fund public spending are more likely, in particular to fund increases in the health, social care and the state pension costs driven by more people living longer.

There are many risks to the Chancellor keeping to his fiscal rules over the forecast period, especially as there is relatively little headroom within the current forecasts according to the OBR and the IFS. There are also risks from recessions over a longer period.

A weaker but more transparent public balance sheet

The pandemic has seen the liability side of the public balance sheet rise significantly, with £2.2tn rising to £2.5tn in debt adding to similar amounts of liabilities for public sector pensions and other obligations including nuclear decommissioning and clinical negligence.

Higher gearing in a balance sheet already in negative territory increases the exposure of the public finances to changes in interest rates and inflation, providing a higher risk profile for the public finances. For example, the OBR has estimated that a 1% increase in interest rates would add £25bn to interest costs each year – approaching more than twice the amount raised by the health and social care levy.

One positive aspect of the Autumn Budget and Spending Review announcement was a greater amount of balance sheet analysis, providing improved insights into how the government is managing the public balance sheet and into the risks facing the public finances. This includes much more granular detail on contingent liabilities.

Pre-election tax cuts have been promised, but will they happen?

The Chancellor was very clear in telling his backbenchers and the country that he would like to cut taxes before the next election, demonstrating his and the government’s commitment to lowering taxes.

For many commentators, this seemed a contradictory statement to make at the same time as presenting a fiscal event where the government is in the process of raising taxes to their highest level since the 1950s.

In practice, the Chancellor has some capacity to cut taxes based on the current forecasts and he will be hoping that the post-pandemic recovery is better than anticipated, enabling him to be even more generous.

However, as our recent article on the long-term pressures facing the public finances highlighted, the prospects of reversing the entirety of recent tax increases are remote. Long-term fiscal pressures continue to imply higher taxes will be needed absent much stronger economic growth than is anticipated, while there are plenty of economic storm clouds on the horizon including a potential cost-of-living crisis this winter.

This article was originally published by ICAEW.

Autumn Budget & Spring Statement: Tough choices facing public finances

More tax, more investment, more spending, less borrowing. ICAEW’s Public Sector experts examine the Spending Review and Autumn Budget 2021 announcements.
The centre piece of the Spending Review and Autumn Budget 2021 was the already announced major tax and spending increase from the health and social levy, while a series of pre-announcements of (mostly) capital investment programmes obscured some relatively tough spending settlements for departmental current budgets.

As expected, the Office for Budget Responsibility revised its forecasts for economic growth upwards, reducing its estimate of the permanent scarring effect on the economy from 3% to 2%. The revised forecasts were a big contributor in reducing the forecast deficit for the 2022/23 financial year commencing in April by £24bn from £107bn to £83bn.

The reduction in the expected deficit next year was after absorbing £10bn from the effects of higher inflation on debt interest costs and an extra £27bn allocated to the Spending Review in 2022/23 over and above the £15bn provided by the health and social care levy. However, there is no supplementary pot for COVID-19 measures from April 2022 onwards, leaving departments to absorb any further costs arising from within their budget allocations.

By folding COVID-19 funding into the Spending Review for 2022/23 to 2024/25 in this way, the Chancellor was able to report real-terms increases in resource as well as capital departmental budgets. However, spending pressures remain intense and many departments are likely to need to find cuts in specific areas if they are to meet demands on public services, catch up on backlogs built up during the pandemic as well as cover the cost of what are likely to be higher public sector wage settlements than have been seen for many years.

Total departmental resource expenditure (RDEL) in the Spending Review increased from a March 2021 forecast of £393bn, £410bn and £427bn for 2022/23, 2023/24 and 2024/25 to £435bn, £443bn and £454bn respectively. The changes comprise £15bn, £12bn and £14bn from the health and social care levy announced in September 2021 and a further £27bn, £21bn and £13bn in the Spending Review. The total compares with the £385bn allocated in the current financial year excluding £70bn allocated for COVID-related spending.

Capital investment (CDEL) in the Spending Review has been set at £107bn, £111bn and £112bn in each of the three financial years ending 31 March 2023, 2024, and 2025, pretty much in line with previous announcements from earlier in the year. This still reflects a substantial increase when compared with the £99bn estimate for the current year, the £94bn for last year, and the £70bn recorded in 2019-20.

Welfare spending (outside the Spending Review) is expected to increase from £247bn in 2021-22 to £254bn next year, principally a consequence of inflation more than offsetting a £2bn saving from not continuing with the £20 universal credit uplift, and a £5bn saving from suspending the triple lock.

Total managed expenditure (TME) is expected to fall from £1,115bn in the last financial year to £1,045bn in both the current financial year and next year, before rising to £1,081bn in 2023/24, £1,108bn in 2024/25, £1,148bn in 2025/26 and £1,192bn in 2026/27. At the same time tax and other income is expected to increase from a pandemic-low of £795bn last year, to £862bn this year and £962bn next year, before increasing to £1,020bn, £1,061bn, £1,102bn and £1,148bn in the four following years.

The deficit is expected to fall from £320bn in 2020/21 to £183bn this year to £83bn in 2022/23, before falling to £62bn, £46bn, £46bn and £44bn in 2023-24 through 2026/27. Unlike the Chancellor’s two predecessors, the government is no longer planning to eliminate the deficit completely and instead is aiming to target a current budget surplus by 2023/24 – continuing to borrow to fund capital investment.

Public sector net debt is expected to increase from £1,793bn (84% of GDP) before the pandemic in March 2020 to £2,136bn (97%) in March 2021 to £2,369bn (98%) at the end of this financial year, before gradually rising to £2,561bn (98%) in March 2024, before stabilising in cash terms after that point but falling as a proportion of GDP to 88% by March 2027.

Despite the upbeat nature of the Budget announcement in the House of Commons, the Chancellor made some tough choices, while key announcements such as the Integrated Rail Plan and the Levelling Up White Paper were deferred into the future.

Alison Ring, Director of Public Sector and Taxation for ICAEW, commented: “The statement from the Chancellor was full of fizz, with capital investment across the country and additional funding provided for the five key Spending Review priorities of levelling up; net zero; education, jobs and skills; health; and crime and justice; partially offset by falls in COVID-19 funding.

“The tough decision to raise taxes through the health and social care levy gave the Chancellor more money to address some of the more immediate spending pressures of an ageing population, and the consequences of the pandemic. However, despite improved transparency on the government’s balance sheet, the Budget today left many questions about how he plans to get the public finances back under control over the longer-term.”

This article was originally published by ICAEW.

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.

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.

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.

Where is the infrastructure for delivering infrastructure?

19 October 2020: How can the UK deliver on its ambitious infrastructure plans without a national infrastructure strategy, a comprehensive multi-year spending review, or an infrastructure investment bank?

It seems that everyone agrees that investing more in infrastructure is critical to the future prosperity of the UK, but how do we actually deliver those ambitions on the ground? 

After decades of underinvestment that has seen the UK fall behind many other developed, and even some developing countries, there is a great deal of consensus that a substantial amount of new investment is needed in both economic and social infrastructure right across the country. An investment-led recovery is also increasingly seen as essential to repair the economic damage caused by the coronavirus pandemic.

The UK does not score that well with only one relatively short high-speed railway, low broadband speeds across most of the country, severely congested roads, poor public transport networks outside London and the South East, a collapsing nuclear energy programme, underinvestment in hospitals, schools and care homes, and a failure to deliver enough houses. The fading glory of the on-time and on-budget delivery of the 2012 Olympics seems a long-time ago, as does the admittedly controversial PFI investment boom of the early 2000s.

A successful infrastructure programme requires many elements, starting with a clear national strategy setting out what needs to be built and how. Budget allocations for publicly funded infrastructure and a financial framework for privately funded infrastructure need to be in place well in advance. Financial institutions are required to provide finance for major infrastructure projects and to the businesses constructing them. An efficient planning system is needed that balances the economic benefits of building new assets with other interests.

Despite the enthusiasm for new investment from across the political spectrum, many of the building blocks are not yet in place. The National Infrastructure Strategy has been delayed several times and is still not published. The coronavirus pandemic has delayed the planned three-year Spending Review by yet another year, with a more limited one-year Spending Round expected this November instead. Similarly, we are still awaiting the outcome of the Infrastructure Finance Review that is expected to provide a new financial framework for private sector participation in infrastructure projects, as well as an anticipated UK successor to the European Investment Bank (EIB).

Despite this, there are some bright spots. Behind the scenes, there is a major upgrade underway of the UK’s energy transmission and distribution networks that is seeing tens of billions invested in improving the resilience and flexibility of the UK’s energy plumbing. And the UK has become a world leader in offshore wind power, with decisions taken a decade ago starting to bear fruit.

How can the UK deliver on ambitious plans to achieve carbon-neutrality while ensuring a reliable and secure energy supply, become a digital superpower and ‘level up’ deprived regions all at the same time? 

This is one of the more important debates we need to have – after all the very future of the country is at stake.

Join Katie Black, Director for Policy at the National Infrastructure Commission, Melanie Onn, Deputy Chief Executive for Renewable UK, Iain Wright, Director for Business and Industrial Strategy at ICAEW and Alison Ring, Director for Public Sector at ICAEW, to discuss the UK’s infrastructure plans at an ICAEW webinar on Thursday 22 October at 11am.

To read ICAEW’s submission to the Infrastructure Finance Review click here.

This article was originally published on the ICAEW website.

Chief Secretary brands Treasury ‘new radicals in government’

3 August 2020: Chief Secretary to the Treasury Steve Barclay delivered his first speech last week, providing fresh detail on the plan for the Spending Review.

Steve Barclay’s first speech as Chief Secretary, delivered to thinktank Onward on Tuesday 28 July 2020, set out how he believes Treasury can be an accelerator of change in government.

He sees the Spending Review as a significant moment in the lifecycle of any government, but with the current review being conducted against the backdrop of the most challenging peacetime economic circumstances in living memory.

Despite that, the Government believes the recovery from this pandemic can be a moment for national renewal, with the Spending Review acting as the mechanism to deliver the Prime Minister’s ambition to ‘level up’ the country.

As a constituency MP, Barclay said he has run up against a system that is slow and siloed. By way of an example, he asked why there is a seven-year gap between funding being agreed for a road scheme and the first digger arriving? Or why it takes a decade to decide to produce a full business case on whether to re-open eight miles of railway track?

The lack of upfront clarity on outcomes, the slow speed of delivery and the variable quality of data within government are all areas the Spending Review provides an opportunity to challenge.

The Chief Secretary stressed that to ‘level up’ the country properly, the Government needs to ensure that Treasury decision-making better reflects the UK’s economic geography, with more balanced judgments taking into consideration the transformative potential of investment to drive localised growth.

He drew on the speed of change during the pandemic, with the furlough scheme taking just one month from being announced to being opened for applications when normally such schemes take months – years even – to deliver.

He asked if the wheels of government can be made to spin this fast in a crisis, with all the added pressures of lockdown, why can’t it happen routinely?

Time to level up

The Chief Secretary stated that the actions being taken to support businesses and jobs during the pandemic are the right thing to do, even though it comes at a cost. The cost of inaction would be far greater, he claimed.

Even though the Prime Minister has made it clear that austerity is not the answer to navigating a much-changed economic landscape, departments will have to make tough choices in the months ahead.

The commitment to reviewing the Green Book investment manual was reiterated with changes planned to allow room for more balanced judgments on investments to reduce inequality and drive localised growth.

During the speech, Barclay listed several priorities for government in the Spending Review:

  • accelerating the UK’s economic recovery;
  • levelling-up opportunity across the country;
  • improving public services; and
  • making the UK a scientific superpower.

Outcomes, speed and data

To achieve these objectives, the Chief Secretary focused on three key approaches: outcomes, speed and data.

On outcomes, the Spending Review would try to tie expenditure and performance more closely together, with Treasury having clearer sight of both intended outcomes and subsequent evaluation of their delivery. 

For some of the most complex policy challenges, this will involve breaking the silos between departments, and pilot projects are currently being used to test innovative ways of bringing the public sector together.

On speed, Barclay noted that this is a ‘hallmark of the digital era’. Programmes need to start with robust goals and the temptation to repeatedly change plans has to be resisted if the UK is to bring down capital costs that are typically between 10% and 30% higher than in other European countries. A new Infrastructure Delivery Task Force (known as Project Speed) will be established to cut down the time it takes to develop, design and deliver vital projects.

This will involve more standardisation and modularisation between projects, for example in speeding housing construction. The Spending Review will seek to accelerate the adoption of Modern Methods of Construction and explicitly link funding decisions to schemes that priorities it.

On data, the Chief Secretary believes that government is behind the curve when it comes to obtaining, analysing, and enabling access to open data. It remains the case that decisions still rely heavily on spreadsheets from departments rather than data directly sourced in real time. Work has already begun to incentivise departments and arms-length bodies to supply higher quality standardised data and to support the Treasury to better interrogate this data.

Building this will involve sorting out the data architecture as well as the data sets, and the Spending Review will focus on addressing legacy IT and investing in the data infrastructure needed to become a “truly digital government”.

The new radicals

Barclay concluded with stressing the importance of taking risks, setting ambitious goals and experimenting with ways of delivery, even if failure is a possibility. He wants to move beyond a simple yes/no approach to public spending and instead bring together people, ideas and best practice from inside and outside government.

He concluded: “This is an opportunity for the Treasury to capture the ‘can do’ attitude shown by civil servants during the COVID pandemic and make it permanent. To be the new radicals, leading change across government.

“Done well, we can move on from an era of spreadsheets. We can create a smarter and faster culture in Whitehall. And we can ensure that Britain does indeed bounce back from this crisis stronger and better than before.”

Speech by Steve Barclay MP, Chief Secretary to the Treasury, on 28 July 2020.

This article was originally published by ICAEW.

Spending Review suspension sensible, but avoid more delays

2 April 2020: ICAEW has called the delay to the UK Government’s 2020 Spending Review a ‘sensible move’ in the current climate, but warned that any further delays pose a major risk to infrastructure projects and economic recovery.

The 2020 Spending Review, scheduled to be completed by July this year, has been delayed to enable the government to remain focused on responding to the ongoing coronavirus outbreak. It is likely that the 2020 Spending Review will now be moved to November to coincide with the Autumn Budget, adding a further delay of at least four months to the process.
The last three-year Spending Review was in 2015, covering the financial years 2016-17, 2017-18 and 2018-19. The anticipated 2018 Spending Review never took place and departmental budgets were instead ‘rolled over’ into 2019-20, while the Spending Review in 2019 was also cancelled and replaced by an interim Spending Round that set out current spending by departments for one financial year (2020-21) and capital investment plans for two financial years (2020-21 and 2021-22).
Based on the overall spending envelope set out in the Spring Budget 2020, the Spending Review this year is expected to set out detailed financial budgets for each government department for a three-year period (from 2021-22 to 2023-24) and four years for capital investment (to 2024-25), enabling public bodies to plan ahead and get the best value for money for the taxpayer.
Alison Ring, Director, Public Sector for ICAEW said: “The latest delay is completely understandable given the huge ramifications for the economy and the public finances of the coronavirus emergency. It makes sense for the Chancellor and the Treasury to redeploy resources to deal with the coronavirus now and to re-evaluate spending plans later when there is a clearer view on the financial impact.
One concern is the risk this further delay poses to infrastructure projects, given how important they will be to a successful economic recovery. The need to plan and design infrastructure well in advance means that delays in authorising funding could have a significant knock-on effect to when projects are eventually delivered, and to the boost they can give to the economy. 
The Chancellor should give some thought to providing assurances to departments about capital funding in 2021-22 and 2022-23 so that they have sufficient certainty to green-light projects sooner rather than later.
The Chancellor should also consider the Government’s approach to Spending Reviews. There are many arguments in favour of holding five-year Spending Reviews every three years, rather than three-year Spending Reviews every five years.”
For more information:

This article was originally published by ICAEW.