#tax – Martin Wheatcroft

Government deficit hits £100bn in the first half of the financial year

Revisions and corrections help reduce the budget overrun to £7bn for the six months to September 2025, but the outlook remains bleak.

The UK government deficit hit £100bn in the six months to September 2025, according to the latest Office for National Statistics’ (ONS) monthly public sector finances release for September 2025, published on 21 October 2025.

The report also revealed a provisional shortfall between receipts and public spending of £20bn last month. The deficit for the month was £1bn higher than the previous year, in line with the budget. The cumulative deficit was £12bn higher than the first half of 2024/25, and £7bn more than budgeted.

Month of September 2025

Provisional receipts and total public spending for September – £95bn and £115bn respectively – were each 8% more than the previous year.

Current spending included depreciation of £108bn, comparable to the £108bn monthly average in the first five months of the financial year. Net investment was £7bn, higher than the £4bn monthly average investment between April and August 2025.

Excluding net investment, the current budget deficit for the month was £13bn – £2bn more than in the same month last year, £1bn more than budgeted. This was offset by a £1bn underspend on net investment.

Six months to September 2025

The provisional deficit for the six months to September 2025 was £12bn (14%) more than in the same six months last year. This was £7bn higher than budget, which can be analysed as a £13bn budget overrun on the current budget deficit (current receipts less current spending), less a £6bn underspend on net investment.

Table 1 highlights the changes in year-to-date receipts, up 7% overall on last year’s equivalents. These increases were mostly driven by factors such as inflation and fiscal drag from frozen tax allowances. The 20% increase in national insurance revenues reflects the increase in employers’ national insurance.

The 9% increase in current spending over the year has been driven by public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

Net investment of £28bn in the first six months of 2025/26 was £1bn, or 4% higher than the same period last year. Capital expenditure of £46bn was up by £2bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £18bn were up by £1bn, offset by depreciation of £36bn, up by £2bn.

Table 1 Summary receipts and spending

6 months to Sep	2025/26 £bn	2024/25 £bn	Change %
Income VAT	145	133	+9%
VAT	104	100	+4%
National insurance	98	82	+20%
Corporation tax	52	48	+8%
Other taxes	115	112	+3%
Other receipts	63	62	+2%
Current receipts	577	537	+7%

Public services	(363)	(334)	+9%
Welfare	(155)	(146	+6%
Subsidies	(18)	(17)	+6%
Debt interest	(77)	(67)	+15%
Depreciation	(36)	(34)	+6%
Current spending	(649)	(598)	+9%

Current deficit	(72)	(61)	+18%

Net investment	(28)	(27)	+4%

Deficit	(100)	(88)	+14%

Budget for the rest of the financial year

The deficit is budgeted to be £118bn for the full year ending 31 March 2026, comprising £93bn in the first half of the year to September 2025 and £25bn in the second half of the year.

Borrowing and debt

Table 2 summarises government borrowing in the first six months of the financial year, taking public sector net debt to a provisional £2,916bn on 30 September 2025. This comprised £100bn in public sector net borrowing (PSNB) to fund the deficit and a further £6bn to fund government lending and working capital requirements.

The table also illustrates how the debt-to-GDP ratio increased by 1.6 percentage points, from a revised 93.7% of GDP at the start of the financial year to 95.3% on 30 September 2025, with incremental borrowing of £106bn, equivalent to 3.5% of GDP. It was partly offset by 1.9 percentage points due to inflation and economic growth adding to GDP.

Table 2 Public sector net debt and net debt/GDP

6 months to Sep	2025/26 £bn	2024/25 £bn
PSNB	100	88
Other borrowing	6	(14)
Net change	106	74
Opening net debt	2,810	2,686
Closing net debt	2,916	2,760

PSNB/GDP	3.3%	3.1%
Other/GDP	0.2%	(0.5%)
Inflating away	(1.9%)	(2.7%)
Net change	1.6%	(0.1%)
Opening net debt/GDP	93.7%	94.4%
Closing net debt/GDP	95.3%	94.3%

Public sector net debt on 30 September 2025 of £2,916bn comprised gross debt of £3,368bn less cash and other liquid financial assets of £452bn.

Public sector net financial liabilities were £2,565bn, comprising the net debt plus other financial liabilities of £715bn, less illiquid financial assets of £1,066bn. Public sector negative net worth was £908bn – net financial liabilities of £2,565bn less non-financial assets of £1,657bn.

Revisions

Caution is needed with ONS figures, which are repeatedly revised as estimates are refined, and gaps in the underlying data are filled. This includes local government, where numbers are updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

This month, the ONS revised down the previously reported deficit for the five months to August 2025 by £4bn, including a £2bn error correction for understated VAT receipts. The ONS also increased the reported deficit for the previous financial year (2024/25) by £4bn to £150bn to incorporate estimates of local government actual expenditure.

More significantly, the ONS revised its methodology for calculating economic activity, resulting in an increase in GDP of 1%. Doing so causes historical percentages for deficit and debt as a proportion of GDP to be revised downwards. This includes a 1.1 percentage reduction in public sector net debt/GDP at the start of the financial year on 1 April 2025, from the previously reported 94.8% to the 93.7% shown in Table 2.

Martin Wheatcroft, external advisor on public finances to ICAEW, said that public finances were broadly as expected, with the £20bn deficit for the month in line with budget.

“Borrowing to fund the deficit was a fraction under £100bn in the six months to September, the second-highest half-year deficit on record after the pandemic year. This was despite a narrowing of the year-to-date budget overrun to £7bn, as a consequence of error corrections and other revisions to previous months. In addition, statistical revisions to the size of the economy resulted in around a percentage point fall in the ratio of public sector net debt to GDP.”

Tepid economic growth and high debt interest costs will continue to weigh on prospects for the rest of the financial year, he added. “The revisions do very little to alter the bleak outlook for the public finances that is driving the need for a significant fiscal correction in the Autumn Budget 2025.”

This article was written by Martin Wheatcroft for ICAEW and was originally published by ICAEW.

Public finances turn ugly just as Chancellor needs good news

Weaker receipts than expected combined with prior month corrections resulted in a £12bn year-to-date budget overrun in the August monthly public finances.

The monthly public sector finances release for August 2025 published by the Office for National Statistics (ONS) on 19 September reported a provisional shortfall between receipts and total public spending of £18bn in August 2025 and £84bn for the five months then ended. These were £6bn and £12bn over budget respectively and £4bn and £16bn higher than in the same periods in 2024.

Martin Wheatcroft, external adviser on public finances to ICAEW, says: “This month’s public finance numbers took a turn for the worse as not only did weaker than expected receipts drive a £6bn budget overrun in August, but revisions to prior months added a further £6bn to the deficit to turn a broadly neutral position a month ago into a £12bn year-to-date budget overrun for the first five months of the 2025/26 financial year.

“These numbers are far from helpful to a Chancellor in desperate need of some good financial news, adding to the prospect of even higher tax rises in the Autumn Budget 2025 than previously feared.”

Month of August 2025

Receipts of £93bn in August 2025 were £5bn or 5% higher than the same month last year, while total public spending was £111bn, £8bn or 8% more than in August 2024. The latter can be analysed between current spending including depreciation of £107bn, slightly below the £108bn monthly average in the first four months of the financial year, and net investment of £4bn, in line with the monthly average incurred between April and July 2025.

Excluding net investment, the current budget deficit for the month of £14bn represented a £4bn deterioration over the current budget deficit of £10bn in the same month last year, highlighting how receipts have failed to keep pace with increases in current spending.

The overall £18bn fiscal deficit for the month was £6bn over budget and £4bn more than in August 2024.

Five months to August 2025

Table 1 highlights how year-to-date receipts of £477bn were up 6% on last year’s equivalents. This included income tax receipts, up 8% from a combination of inflation and fiscal drag from frozen tax allowances, and national insurance receipts, up 18% as a consequence of the increase in employer national insurance from April 2025. VAT receipts were flat year-on-year, in effect a 3% to 4% fall after taking account of consumer price inflation, highlighting the weak economic conditions facing the UK.

Meanwhile, the 8% increase over last year in current spending including depreciation to £539bn in the first five months to August 2025 has principally been driven by public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

This included a £7bn or 12% increase in debt interest to £64bn, which comprised a £6bn increase in indexation on inflation-linked debt as inflation resurged and a £1bn increase in interest on variable and fixed-interest debt. The latter reflects a higher level of debt compared with a year ago being partially offset by a lower Bank of England base rate.

The resulting current budget deficit of £62bn to August 2025 was 29% higher than the £48bn for the same five months last year, a major concern given that the government’s plan was to reduce the cumulative current budget deficit to £47bn at this point.

Net investment of £22bn in the first five months of 2025/26 was £2bn or 10% higher than the same period last year with capital expenditure of £39bn up by £3bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £13bn up by £1bn, offset by depreciation of £30bn up by £2bn.

The overall provisional deficit for the five months to August 2025 of £84bn is £16bn or 24% more than in the same five months last year and £12bn higher than budget. The latter can be analysed as a £15bn budget overrun on current receipts less current spending for the year-to-date, less a £3bn saving on net investment.

Table 1: Summary receipts and spending

5 months to Aug	2025/26 £bn	2024/25 £bn	Change %
Income tax	122	113	+8%
VAT	84	84	–
National insurance	80	68	+18%
Corporation tax	43	40	+7%
Other taxes	96	93	+3%
Other receipts	52	51	+2%
Current receipts	477	449	+6%

Public services	(301)	(276)	+9%
Welfare	(129)	(122)	+6%
Subsidies	(15)	(14)	+7%
Debt interest	(64)	(57)	+12%
Depreciation	(30)	(28)	+7%
Current spending	(539)	(497)	+8%

Current deficit	(62)	(48)	+29%

Net investment	(22)	(20)	+10%

Deficit	(84)	(68)	+24%

Borrowing and debt

Table 2 summarises how the government borrowed £99bn in the first five months of the financial year to take public sector net debt to a provisional £2,909bn on 31 August 2025. This comprised £84bn in public sector net borrowing (PSNB) to fund the deficit and a further £15bn to fund government lending and working capital requirements.

The table also illustrates how the debt to GDP ratio increased by 1.6 percentage points from 94.8% of GDP at the start of the financial year to 96.4% on 31 August 2025, with incremental borrowing of £99bn, equivalent to 3.3% of GDP, being partly offset by 1.7 percentage points from the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

Table 2: Public sector net debt and net debt/GDP

5 months to Aug	2025/26 £bn	2024/25 £bn
PSNB	84	68
Other borrowing	15	7
Net change	99	75
Opening net debt	2,810	2,686
Closing net debt	2,909	2,761

*PSNB/GDP*	*2.8%*	*2.4%*
Other/GDP	0.5%	0.2%
Inflating away	(1.7%)	(2.3%)
*Net change*	*1.6%*	*0.3%*
Opening net debt/GDP	94.8%	95.6%
*Closing net debt/GDP*	*96.4%*	*95.9%*

Public sector net debt on 31 August 2025 of £2,909bn comprised gross debt of £3,339bn less cash and other liquid financial assets of £430bn.

Public sector net financial liabilities were £2,550bn, comprising net debt of £2,909bn plus other financial liabilities of £715bn less illiquid financial assets of £1,074bn.

Public sector negative net worth was £893bn, being net financial liabilities of £2,550bn less non-financial assets of £1,657bn.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government, where the numbers are only updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

This month was no different, with the ONS revising the previously reported deficit for the four months to July 2025 up by £6bn, as well as updating prior year numbers for the annual results of the Bank of England and several other public bodies as well as other typical annual updates such as revised student loan calculations.

More significantly, the ONS revised reported deficits back to 1998 for methodology and classification changes and back to 2011 for local government outturn numbers that had not previously been incorporated. The reported deficits for 2020/21 and 2021/22 were decreased by £3bn and £2bn to £311bn and £120bn respectively, 2022/23 remained unchanged at £127bn, 2023/24 was increased by £2bn to £134bn, and 2024/25 was reduced by £2bn to £146bn.

This article was written by Martin Wheatcroft for ICAEW and was originally published by ICAEW.

Little comfort for Chancellor as public finances stay in line

Borrowing to fund the deficit in the first four months of the financial year of £60bn was in line with expectations.

The monthly public sector finances release for July 2025 published by the Office for National Statistics (ONS) on 21 August reported a provisional shortfall between receipts and total public spending of £60bn for the four months ended 31 July 2025. This is in line with budget and £7bn more than in the same period last year.

Martin Wheatcroft, External Adviser on Public Finances to ICAEW, says: “This month’s ‘not bad’ result may provide a small amount of relief to a Chancellor under significant pressure.

“The monthly deficit for July was slightly better than expected, while the cumulative result for the first third of the financial year was almost exactly in line with the Office for Budget Responsibility’s prediction at the time of the Spring Statement 2025.

“Unfortunately, this does not change the dismal outlook for the public finances and the rising costs of public services, welfare provision and debt interest that means the Chancellor is again having to work out how she can ask Parliament to authorise higher levels of taxation.”

Month of July 2025

Receipts of £108.8bn in July 2025 were £9.2bn or 9% higher than in July 2024 and also higher than the £92.6bn average for the first three months of the financial year, principally as a result of a boost from income tax self-assessment collections in the month.

Meanwhile, current spending including depreciation of £105.5bn in July was £6.0bn or 6% more than in the same month a year previously. This was slightly lower than the £108.0bn monthly average incurred during April to June 2025.

The result was a current budget surplus for the month of £3.3bn, a £3.2bn improvement over the current budget surplus of £0.1bn in the same month last year.

Net investment of £4.4bn in July 2025 was £0.9bn more than the £3.5bn incurred in July 2024 and slightly higher than the £4.2bn average incurred during the three months to June 2025.

The provisional fiscal deficit for July 2025 was therefore £1.1bn, £1.0bn less than the £2.1bn budget for the month and a £2.3bn improvement over the £3.4bn deficit in July 2024.

Four months to July 2025

Table 1 highlights how year-to-date receipts of £387bn were up 7% on last year’s equivalents, with income tax receipts up 8% from a combination of inflation and fiscal drag from frozen tax allowances, and national insurance receipts up 19% as a consequence of the increase in employer national insurance that was implemented in April 2025.

Meanwhile, the 8% increase over last year in current spending including depreciation to £430bn in the first four months to July 2025 was primarily as a consequence of public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

This included a £6bn or 13% increase in debt interest to £53bn, which comprised a £5bn increase in indexation on inflation-linked debt as inflation resurged and a £1bn increase in interest on variable and fixed-interest debt. The latter was primarily the result of a higher level of debt compared with a year ago partially offset by a lower Bank of England base rate.

The resulting current budget deficit of £43bn to July 2025 was 16% higher than for the same four months last year.

Net investment of £17bn in the first four months of 2025/26 was £1bn or 6% higher than the same period last year. Capital expenditure of £30bn was up by £1bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £11bn were up by £2bn, less depreciation of £24bn that was up by £2bn compared with the same four month period a year prior.

The consequence is a provisional deficit for the first third of the 2025/26 financial year of £60bn, which is £7bn or 13% more than in the same four month period last year. Despite being almost exactly in line with budget (only £0.1bn higher) this is the third-highest April-to-July deficit since monthly records began in 1993 (after 2020/21 and 2021/22 during the pandemic).

Table 1: Summary receipts and spending

4 months to July	2025/26 £bn	2024/25 £bn	Change %
Income tax	100	93	+8%
VAT	70	67	+4%
National insurance	64	54	+19%
Corporation tax	35	32	+9%
Other taxes	76	74	+3%
Other receipts	42	41	+2%
Current receipts	387	361	+7%

Public services	(239)	(221)	+8%
Welfare	(103)	(97)	+6%
Subsidies	(11)	(11)	–
Debt interest	(53)	(47)	+13%
Depreciation	(24)	(22)	+9%
Current spending	(430)	(398)	+8%
Current deficit	(43)	(37)	+16%
Net investment	(17)	(16)	+6%
Deficit	(60)	(53)	+13%

Borrowing and debt

Table 2 summarises how the government borrowed £81bn in the first third of the financial year to take public sector net debt to a provisional £2,891bn on 31 July 2025. This comprised £60bn in public sector net borrowing (PSNB) to fund the deficit and £21bn to fund government lending activities and working capital movements.

The table also illustrates how the debt to GDP ratio increased from 94.8% of GDP at the start of the financial year to 96.1% on 31 July 2025, with the incremental borrowing partly offset by the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

Table 2: Public sector net debt and net debt/GDP

4 months to July	2025/26 £bn	2024/25 £bn
PSNB	60	53
Other borrowing	21	(1)
Net change	81	52
Opening net debt	2,810	2,686
Closing net debt	2,891	2,738

PSNB/GDP	2.1%	1.9%
Other/GDP	0.7%	–
Inflating away	(1.5%)	(1.9%)
Net change	1.3%	–
Opening net debt/GDP	94.8%	95.6%
Closing net debt/GDP	96.1%	95.6%

Public sector net debt on 31 July 2025 of £2,891bn comprised gross debt of £3,309bn less cash and other liquid financial assets of £418bn.

Public sector net financial liabilities were £2,525bn, comprising net debt of £2,891bn plus other financial liabilities of £707bn less illiquid financial assets of £1,073bn. Public sector negative net worth was £899bn, being net financial liabilities of £2,525bn less non-financial assets of £1,626bn.

Revisions

The latest release saw the ONS revise the previously reported deficit for the three months to June 2025 up by £1bn. The ONS also revised up its estimate of GDP in the first quarter of the financial year, resulting in a 0.4 reduction in the opening debt to GDP ratio on 1 April 2025 from 95.2% to 94.8% and the debt to GDP ratio for 30 June 2025 from 96.2% to 95.8%.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

ICAEW chart of the week: climate change and the public finances

My chart for ICAEW this week looks at how climate change is now expected to make the OBR’s dire predictions for the public finances even worse.

A line chart on climate change and the public finances, with three curved lines for public sector net as a share of GDP over fifty years. with labels from March 2034 onwards.

Bottom line: Baseline public sector net debt/GDP. Falls from just under 100% of GDP to 90% of GDP in March 2034 and then rises to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively.

Middle line: Baseline + climate change (below 3°C scenario). Rises from 94% of GDP in March 2034 (label not shown) to 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively.

Top line: Baseline + climate change + economic shocks. Rises from 104% in March 2034 to 134%, 187%, 275% and then 398% in March 2074.

18 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: OBR, 'Fiscal risks and sustainability', Sep 2024 and Jul 2025 reports.

ICAEW’s chart of the week is on climate change this week, illustrating how it could add a further 74 percentage points to the Office for Budget Responsibility (OBR)’s already disheartening baseline projection for public sector net debt of 274% of GDP to reach 348% of GDP, or potentially 398% if economic shocks are included.

The baseline projection, published by the OBR in September 2024, showed public sector net debt as a proportion of the size of the economy falling from just under 100% of GDP to 90% of GDP in March 2034 and then rising to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively.

One of the main drivers of the baseline projection is the expected rise in spending on pensions, health and social care as more people live longer, sometimes less healthy lives, combined with a falling fertility rate that means there will be proportionately fewer working age adults to pay the taxes needed to fund that rise.

Incorporating the OBR’s new central projection for climate change, public sector net debt would be 94% of GDP in March 2034 (not shown in the chart because of a lack of space between lines) and then 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively. Adding potential economic shocks on top would increase the projection for public sector net debt/GDP to 104% in March 2034 rising to 134%, 187%, 275% and then 398% in March 2074.

The September 2024 baseline projection included the loss of fuel duty receipts from the phasing out of petrol and diesel vehicles between now and 2050, but the OBR in its recent July 2025 fiscal and sustainability report has looked in more detail at both the incremental costs of transitioning to net zero and the damage that is likely to result from a much warmer and wetter climate in several different scenarios.

OBR’s central ‘below 3°C’ scenario is based on global average temperatures rising by 2.9°C above pre-industrial levels by 2100, of which weather and other damage associated with a much warmer and wetter climate is projected to add 17 percentage points to accumulated debt over the next half century from direct and indirect costs and revenue losses. Climate damage is also expected to result in slower economic growth that would add 27 percentage points over 50 years by reducing the denominator in the debt to GDP ratio. The government’s share of transition costs (including lower tax receipts from higher private sector spending) is projected to add 7 percentage points, while there is a 22 percentage point impact from the incremental debt interest that would be incurred on a higher level of debt.

This is before taking account of recessions and other potential economic shocks, which based on historical patterns are expected to add 10% of GDP to public sector net debt every decade or so.

The chart does not reflect other risks identified by the OBR in its latest report, where it reports that the exposures to the public finances have increased since its assessment last year. One risk they did look at in some detail is the prospect of higher interest rates on government borrowing on the basis that demand for gilts reduces as the Bank of England winds down its holdings of gilts (quantitative tightening) and defined benefit pension schemes gradually sell their holdings of gilts to fund pension payments. This risk might be mitigated by selling shorter-dated gilts, although shorter maturities would make the public finances less resilient by increasing the amount of debt needing to be refinanced each year.

The OBR’s dismal assessment of the prospects for the public finances highlights just how difficult a financial position the UK finds itself in, with a lot to do (and some luck needed) if it is to be restored to a sustainable path. At the same time, the costs of climate change are now becoming that much more apparent as extreme weather events and other climate-related costs start to show up in public finance and insurance data.

For more information about the role of the accountancy profession in climate change, visit ICAEW’s climate hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: Pensioners on the rise

My chart for ICAEW this week highlights how the number of pensioners in the UK is expected to increase by 14% over the next 10 years. This will have major implications for the public finances.

Step chart. Starts with a projected UK population aged 66 or more in 2025 of 12,614,000 (21%), adds 2,677,000 over the next 10 years, then a reduction of 867,000 (7%) from the change in the state retirement age to equal a UK population aged 67 or more of 4,424,000 (+14%) in 2035.

31 Jan 2025. Chart by Martin Wheatcroft FCA. Source: ONS, 'Principal population projection (2022-based), Jan 2025'.

The Office for National Statistics (ONS) published its latest population projections for the UK on 28 January 2025.

Extrapolated from the 2021 Census in England, Wales and Northern Ireland and the 2022 Census in Scotland, the ONS’s principal projection is for the UK population to increase by 5% over the next decade from a projected 69,868,000 in June 2025 to 73,426,000 in June 2035. This is on the basis of 132,000 more deaths than births in total over the next 10 years (6,979,000 versus 6,847,000) and net inward migration of 369,000 a year on average.

Our chart highlights how the number of pensioners is expected to increase by 14% over the next 10 years, from a projected 12,614,000 this summer to 14,424,000 in 2035, despite an increase in the state retirement age from 66 to 67.

The main driver of this increase is an additional 2,677,000 people aged 66 or more, reflecting 8,522,000 people passing the age of 66 over the 10 years to June 2035, plus 28,000 from net inward migration (119,000 in and 91,000 out), less 5,873,000 deaths

This 21% increase is partially offset by a 7% reduction for the 867,000 66-year-olds who will still be waiting for their state pension in June 2035 as a result of the planned rise in the state retirement age from 66 to 67 between 2026 and 2028.

Over the same period the ONS is projecting a 7% fall in the number of children from 12,272,000 in June 2025 to 11,434,000 in June 2035, and a 6% increase in the size of the working age population from 44,982,000 to 47,569,000. The latter would have been a 4% increase if not for the statutory increase in the state pension age to 67.

The ONS stresses that its national population projections are not forecasts and do not attempt to predict potential changes in international migration in particular. It also notes that demographic assumptions for future fertility and mortality are based on observed demographic trends, which is no guarantee that these trends might not change in the future.

Despite those caveats, the projected increase in the number of pensioners is one of the more likely areas of the projections to turn into reality. This is because almost all of those future pensioners are alive today and already living in the country, while mortality rates tend to change gradually over time.

A much more significant factor relates to the ONS’s long-term assumption for net inward migration of 340,000. While this is unlikely to affect the anticipated number of pensioners in a decade’s time, it will have a significant impact on the projected ratio between the number of pensioners and those of working age.

Either way, the projected rise in the number of pensioners compared with the size of the working-age population over the coming decade will have major implications for the public finances.

Tax receipts will fall proportionately as retirees leave the workforce faster than new workers join. State pension payments will increase, even before taking account of the ratchet effect of the pension triple-lock on the amount payable to each pensioner. Health care and adult social care costs will rise substantially given how skewed these costs are to older generations. And pension credit, housing benefit and other welfare benefits that go to poorer pensioners are also likely to increase.

Successive governments, including the current administration, have worked on the basis that they should be able to afford the higher costs of many more people living for longer in retirement through a combination of gradual rises in the state pension age (long hoped for but not delivered), higher levels of economic growth, and cuts in other areas of public spending such as the defence budget.

With the number of pensioners increasing much faster than the government can raise the state pension age (given the decade or more advance notice that needs to be given), relatively low levels of economic growth even in more optimistic scenarios, calls for an increase in the defence budget and significant cost pressures affecting many other public services, the big question will be the extent to which taxes will have to go up even further over the next 10 years if the promises made by successive governments over the last century are to be kept.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public finances per capita

My chart for ICAEW this week divides some very big numbers for the public finances by an estimated 69.2m people living in the UK to highlight how UK public spending is now in excess of £1,500 per person per month.

Column chart showing UK public sector receipts and spending per capita for 2024/25.

Left hand column: Taxes £1,235 per month + Other receipts £150 per month = Receipts per capita £1,385 per month.

Right-hand column: Pensions and welfare £445 per month + Health and social care £370 per month + Education £160 per month + Other public services £410 per month + Interest £150 per month = Spending per capita £1,535 per month.

According to the Autumn Budget 2024, the UK public sector expects to bring in £1,149bn and spend £1,276bn in the financial year ended 31 March 2025 (2024/25). At more than a trillion pounds a year in each case, these are very big numbers that can be difficult to comprehend.

My chart of the week attempts to make these numbers more understandable by averaging them over an estimated UK population of 69.2m for the current financial year and dividing them by 12 to arrive at per person per month equivalents (rounded to the nearest £5).

On this basis, total receipts are expected to average £1,385 per month for each person living in the UK in 2024/25, comprising £1,235 a month from tax receipts (£1,025bn in total) and £150 a month in other receipts (£124bn).

Not shown in the chart is the approximately £940 per person per month on average – just over two-thirds of total receipts – that comes from the top five taxes: income tax £375 per month, VAT £245 per month, employer national insurance £135 per month, corporation tax £120 per month, and employee national insurance £65 per month.

Public spending is expected to average £1,535 per person per month in 2024/25, comprising approximately £445 per month on pensions and welfare, £370 per month on health and social care, £160 per month on education, £410 per month on other public services, and £150 per month on debt interest, based on forecast total spending in 2024/25 of £370bn, £307bn, £134bn, £340bn, and £125bn respectively.

Spending on welfare

Welfare spending includes (but is not limited to) approximately £170 per person per month to cover the cost of paying the state pension, around £105 per month to pay for universal credit (including housing benefit), and in the order of £75 per month to fund disability and illness benefits.

Per capita spending on health and social care comprises close to £290 per person per month on the NHS, £55 on social care and £25 on public health, health research and other health-related spending.

Education costs each of us an average of £160 per month, of which approximately £115 per month pays for schools, £35 funds university and higher education (including just over £10 for student loans that are not expected to be repaid) and around £10 per month goes on further education, training and other.

The £410 per month cost of other public services includes in the region of £85 per month on defence and security, approximately £75 per month on roads and railways, £65 on industry and agriculture, nearly £60 per month on public order and safety, £15 per month on dealing with waste, and around £10 per month on international development and aid. This leaves approximately £100 per month to pay for all the other services that central and local government provide, including 11p per person per month for the Royal Family and palaces.

These numbers are averages and of course the amounts individuals pay in taxes and receive either in pensions and welfare benefits or in public services will vary significantly. For example, while health and social care spend is £370 per month when spread over the whole population, average spending on teenagers and those in their 70s are estimated to be significantly different from each other at £130 per month and £700 per month respectively.

Forecast per capita taxes and other receipts of £1,385 per month fall short of planned public spending of £1,535 per month to give rise to an expected deficit of approximately £150 per month funded by borrowing, being £127bn in total in 2024/25, divided by the estimated population of 69.2m. As a consequence, public debt now exceeds £2.8tn, equivalent to just under £41,000 for each person living in the UK, or somewhere in the region of £98,000 per household.

Navigating the public finances can be difficult at the best of times, but it is often helpful to translate the huge numbers you hear on the news into per capita equivalents to make sense of them. £1bn when spread across the UK population works at being equivalent to just over £1.20 per month.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK long-term fiscal projections

The OBR’s latest fiscal risks and sustainability report projects that public debt could reach 274% of GDP in 50 years’ time, or 324% if likely economic shocks are included.

Our chart this week is on the long-term fiscal projections included in the Office for Budget Responsibility’s (OBR) latest fiscal risk and sustainability report published on 12 September 2024.

The OBR suggests that – without action to improve productivity, increase taxes, cut spending, bring in more people or do more to tackle climate change – public sector net debt is projected to rise to 274%, or potentially 324% if likely economic shocks are included.

As the chart illustrates, debt to GDP was 98% at the end of 2023/24 and the baseline projection shows this falling over the coming decade to 90% by 2033/34, and then gradually increasing to 100% of GDP in 2043/44, 130% in 2053/54, 188% in 2063/64, and then 274% in 2073/74.

Experience tells us to expect an economic shock such as a recession every decade or so, and so the OBR also reports a ‘baseline with shocks’ scenario that sees the debt to GDP ratio reaching 100% of GDP in 2033/34, 120% in 2043/44, 160% in 2053/54, 228% in 2063/64, and then 324% in 2073/74.

The projections reflect long-term pressures on the public finances from the post-economic crisis slowdown in economic growth, an ageing population, the effects of climate change, and higher defence spending.

They are, of course, dependent on the assumptions used in their calculation, especially reproductivity growth, net inward migration, the health of the population, and the degree of rise in global temperatures. They also assume that the previous government’s plans to cut public spending significantly over the next five years are adopted by the incoming government, which is considered to be unlikely given that most economic commentators thought these plans were unrealistic even if there had not been a change in government.

Alternative scenarios prepared by the OBR include a better health scenario that results in a 44% lower debt to GDP ratio in 2073/74, a worse health scenario that increases debt by 49% of GDP, a higher rise in global temperatures to 2℃ that increases debt by 23% and to 3℃ that increases debt by 33%.

The good news is that all of these projections are completely unrealistic.

They are based on extrapolating from current tax and spending policies, without taking account of any actions that governments might take in the future to raise taxes, cut spending or develop the economy. It is extremely unlikely that future governments would be willing, or even able, to finance such large fiscal deficits over the next 50 years.

The bad news is that in consequence taxes are likely to go up.

While there are options to mitigate pressures on the public finances by cutting spending on public services or cutting the level of benefits such as the state pension, these are likely to be politically and practically difficult to achieve. Similarly, immigration remains a politically charged issue and encouraging higher levels of net inward migration significantly more than the 315,000 a year assumed from 2028/29 onwards might be challenging.

The OBR suggests a ‘fiscal tightening’ of 1.5% each decade would be necessary to return debt to its pre-pandemic level of approximately 80% of GDP. If accomplished through tax rises alone, this would see tax levels increase from a projected 37% of GDP in 2027/28 to around 43% of GDP in 2073/24.

Avoiding either of these outcomes – unsustainable debt or ever-increasing levels of taxation – will require productivity growth to increase significantly. So, if you have any good ideas on how to achieve higher productivity that no one else has thought of (preferably without increasing public spending too much), please write to the Chancellor at 11 Downing Street as she would probably be interested to hear them.

This chart was originally published by ICAEW.

Government enters crisis control mode to curb public spending

Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.

The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.

“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.

“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”

Month of July 2024

There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.

Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023.

Financial year to date

The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.

Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts.

Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.

The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.

Table 1: Summary receipts and spending

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn	Change %
Income tax	89.9	86.4	+4%
VAT	67.9	66.0	+3%
National insurance	53.5	58.3	-8%
Corporation tax	34.0	31.6	+8%
Other taxes	73.5	72.1	+2%
Other receipts	40.5	37.5	+8%
Total receipts	359.3	351.9	+2%

Public services	(212.2)	(204.8)	+4%
Welfare	(103.1)	(97.5)	+6%
Subsidies	(10.6)	(14.0)	-24%
Debt interest	(46.6)	(52.7)	-12%
Gross investment	(38.2)	(34.8)	+10%
Total spending	(410.7)	(403.8)	+2%

Deficit	(51.4)	(51.9)	-1%

Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.

The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.

Table 2: Public sector net debt and net debt/GDP

	Apr-Jul 2024 £bn	Apr-Jul 2023 £bn
PSNB	51.4	52.3
Other borrowing	4.4	(11.4)
Net change	55.8	40.9
Opening net debt	2,694.1	2,539.7
Closing net debt	2,745.9	2,580.6
*PSNB/GDP*	*1.9%*	*2.0%*
Other/GDP	0.2%	(0.4%)
Inflating away	(0.8%)	(1.5%)
*Net change*	*1.3%*	*0.1%*
Opening net debt	98.1%	95.7%
*Closing net debt*	*99.4%*	*95.6%*

Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.

Revisions and other matters

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. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.

The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.

Q1 public finances confirm challenging position for new government

First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.

The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.

Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face.

“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.

“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”

Month of June 2024

Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.

Financial year to date

Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.

Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)	Change (%)
Income tax	58.1	56.1	+4%
VAT	49.9	49.6	+1%
National insurance	39.7	43.4	-9%
Corporation tax	25.3	23.4	+8%
Other taxes	54.9	54.1	+1%
Other receipts	30.1	27.7	+9%
Total receipts	258.0	254.3	+1%
Public services	(158.8)	(152.6)	+4%
Welfare	(76.9)	(73.7)	+4%
Subsidies	(7.8)	(11.3)	-31%
Debt interest	(35.2)	(41.1)	-14%
Gross investment	(29.1)	(26.5)	+10%
Total spending	(307.8)	(305.2)	+1%
Deficit	(49.8)	(50.9)	-2%

Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.

Table 2: Public sector net debt

Three months to	Jun 2024 (£bn)	Jun 2023 (£bn)
Deficit	(49.8)	(50.9)
Other borrowing	3.9	(7.7)
Debt movement	(45.9)	(58.6)
Opening net debt	(2,694.1)	(2,539.7)
Closing net debt	(2,740.0)	(2,598.3)
Net debt/GDP	99.5%	96.7%

Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.

The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.

Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.

Revisions and other matters

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

The latest release saw the ONS increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.

This article was originally published by ICAEW.

New government to inherit tough public finances

Public sector net debt has passed £2.7tn for the first time. In May the debt increased by £49bn from £2,694bn to £2,743bn, 51% higher than it was in March 2020 at the start of the pandemic.

The monthly public sector finances for May 2024 released by the Office for National Statistics (ONS) on Friday 21 June 2024 reported a provisional deficit for the first two months of the 2024/25 financial year of £33.5bn, £1.5bn better than the £35.0bn predicted by the Office for Budget Responsibility (OBR) and £0.4bn higher than in April and May 2023.

An ICAEW spokesperson said: “Today’s numbers show that public sector net debt continues to grow, up from £2.69tn in April to £2.74tn in May, the first time it has exceeded £2.7tn.

“Net debt is now 51% higher than it was at the start of the pandemic in March 2020, and 167% higher than it was in March 2010, pushed up by the spikes in spending during the pandemic and to offset energy bills, as well as borrowing to fund day-to-day spending and investment. High borrowing costs and the financial consequences of more people living longer mean that the public finances are significantly weaker and less resilient than they were 14 years ago.

“When the country goes to the polls on 4 July, the reality is that whoever wins power will inherit an extremely challenging fiscal position that will hamper their ability to turn the country around.”

Month of May 2024

Taxes and other receipts amounted to £85.1bn in May 2024, up 2% compared with the same month last year, while total managed expenditure was also 2% higher at £100.1bn.

The resulting fiscal deficit of £15.0bn for the month was £0.8bn higher than in May 2023.

Financial year to date

As summarised in Table 1, total receipts in April and May 2024 of £170.4bn were 2% higher than in the same two months last year, with the cuts to employee national insurance rates offset by higher income tax, corporation tax, and non-tax receipts.

Table 1: Summary receipts and spending

Two months to	May 2024 £bn	May 2023 £bn	Change %
Income tax	38.2	36.8	+4%
VAT	33.9	33.6	+1%
National insurance	25.9	28.2	-8%
Corporation tax	16.6	15.5	+7%
Other taxes	36.0	35.2	+2%
Other receipts	19.8	18.5	+7%
Total receipts	170.4	167.8	+2%
Public services	(108.3)	(104.5)	+4%
Welfare	(51.4)	(49.1)	+5%
Subsidies	(5.2)	(7.8)	-33%
Debt interest	(21.4)	(21.6)	-1%
Gross investment	(17.6)	(17.9)	-2%
Total spending	(203.9)	(200.9)	+1%
Deficit	(33.5)	(33.1)	+1%

Table 1 also shows how total managed expenditure for the two months of £203.9bn was up by more than 1% compared with April and May 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and marginally lower debt interest. The latter was driven by significantly lower indexation on inflation-linked debt offsetting the much higher rates of interest payable on variable rate and refinanced fixed-rate debt.

Table 2: Public sector net debt

Two months to	May 2024 £bn	May 2023 £bn
Deficit	(33.5)	(33.1)
Other borrowing	(10.2)	2.1
Debt movement	(43.7)	(31.0)
Opening net debt	(2,699.2)	(2,539.7)
Closing net debt	(2,742.9)	(2,570.7)
Net debt/GDP	99.8%	96.1%

Public sector net debt as of 31 May 2024 was £2,743bn or 99.8% of GDP, just under £44bn higher than at the start of the financial year. The increase reflects borrowing to fund the deficit of £33.5bn and £10.2bn borrowed to fund lending by government and other cash requirements, net of loan recoveries.

Public sector net debt was £172bn or 7% higher than a year previously, and 3.7 percentage points higher in relation to the size of the economy.

Public sector net debt is £928bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,715bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last 14 years.

Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,074bn in non-liquid financial assets minus £2,743bn of net debt (£300bn liquid financial assets – £3,043bn public sector gross debt) and other liabilities of £670bn. This is a £47bn deterioration from the start of the financial year and is £95bn more negative than the -£631bn net worth number for May 2023.

Revisions and other matters

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

The latest release saw the ONS reduce the reported deficit for April 2024 by £2.1bn from £20.5bn to £18.4bn and revise the deficit for the year to March 2024 up by £0.7bn from £121.4bn to £122.1bn as estimates of tax receipts and expenditure were updated for better data.

This article was originally published by ICAEW.