Tag: #tax

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 toMay 2024
£bn		May 2023
£bn		Change
%
Income tax38.236.8+4%
VAT33.933.6+1%
National insurance25.928.2-8%
Corporation tax16.615.5+7%
Other taxes36.035.2+2%
Other receipts19.818.5+7%
Total receipts170.4167.8+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 toMay 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.

ICAEW chart of the week: General election 2024

This week’s chart for ICAEW is on manifesto costings, illustrating the scale of each party’s promises and how they expect to fund them.

General election 2024. ICAEW chart of the week. Column chart comprising 5 double columns (left with funding and right with costings). Party manifestos: sources of funding and costings 2028/29. Labour: - Tax rises £9bn | Spending cuts or efficiencies £1bn. - Spending increases £11bn. Conservatives: - Tax rises £5bn | Spending cuts or efficiencies £21bn. - Tax cuts £16bn | Spending increases £9bn. Liberal Democrats: - Tax rises £27bn | Spending cuts or efficiencies £6bn. - Spending increases £53bn. Reform UK: - Tax rises £14bn | Spending cuts or efficiencies £136bn. - Tax cuts £88bn | Spending increases £53bn. Green Party: - Tax rises £151bn | Spending cuts or efficiencies £12bn. - Spending increases £226bn. 20 June 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: GE 2024 party manifestos or manifesto costing documents, 2028/29 amounts. Reform UK numbers and £21bn of LibDem extra spending are annualised over five years. © ICAEW 2024.

My chart for ICAEW this week summarises the financial commitments in the manifestos of the five UK-wide political parties, together with how they propose to fund their plans.

The Labour Party

The Labour Party manifesto costings are the most cautious financially, with plans to find £9bn in 2028/29 from a combination of tax rises and tackling tax avoidance and evasion and £1bn or so in spending reductions to provide most of the funding for its spending commitments of £11bn.

The additional tax revenue proposed by Labour includes £5.2bn from increasing taxes on non-doms and tackling tax avoidance and evasion, £1.5bn from VAT and business rates on private schools, £1.2bn from extending windfall tax on oil and gas, and £0.6bn from increasing the tax rate on private equity carried interest. Spending reductions include £0.7bn from cutting spending on consultants, £0.4bn from increased collaboration between police forces, and £0.2bn from scrapping the Rwanda plan and ending the use of hotels for asylum seekers. 

Labour’s proposals for new spending comprise approximately £6bn for public services and £5bn a year in capital investment. The former includes £1.8bn for the NHS, £1.0bn for schools and young people (including £0.3bn for primary school breakfast clubs), £0.9bn for HMRC to tackle tax avoidance and evasion, £0.7bn for improving public service delivery and capability, £0.4bn for 13,000 neighbourhood and community PCSOs, and £0.2bn for asylum and border control. The latter includes £1.7bn for Great British Energy, £1.5bn for green investment programmes, £1.1bn for home insulation, and £0.3bn in incentives for green energy suppliers.

Labour’s proposals add up to £1bn in extra borrowing in 2028/29, although Labour suggest that they could add £3.5bn to borrowing in 2028/29, implying a further £2.5bn could be available for other priorities.

The Conservative Party

The Conservative Party’s plans are more ambitious, with plans to raise £5bn a year by 2028/29 from tackling tax avoidance and evasion and £21bn from spending cuts and efficiency savings, which they intend to use to fund tax cuts of £16bn and extra spending of £9bn.

Proposed spending cuts by the Tories comprise £11bn from cutting planned spending on welfare (principally disability benefits), £5bn from other cuts (£1.6bn R&D, £1.5bn regional development, £0.9bn from cutting ‘low value’ degrees, £0.4bn from visa changes, and £0.6bn in other measures), and £5bn from efficiency savings (£2.9bn civil service headcount, £1.1bn from quangos, £0.6bn consultancy and £0.4bn NHS managers).

Proposed tax cuts include £10bn per year by 2028/29 to halve employee national insurance, £1.7bn to abolish self-employed national insurance, £2.2bn to increase pensioner tax allowances, £1.2bn to reform the high-income child benefit charge, and £0.6bn to reduce stamp duty for first time buyers.

Unlike Labour, there is no additional investment in HMRC to help achieve the planned reduction in the tax gap, but there is £4.5bn in 2028/29 to increase defence spending to 2.44% of GDP (on its way to 2.5% by 2030/31), £2.0bn for national / community service, £1.4bn for the NHS, £0.8bn for 8,000 more police officers, and £0.7bn for apprenticeships.

The Liberal Democrats

The Liberal Democrats are more hopeful in that they believe they can find £7.2bn from tackling tax avoidance and evasion to supplement proposed tax rises of £19.7bn (£5.2bn capital gains tax, £4.3bn bank levies, £4.0bn aviation taxes, £2.1bn oil and gas, £2.1bn digital services tax, £1.4bn on share buybacks and £0.6bn other). The party also plans to find £5.8bn from spending cuts (£4.3bn asylum, £0.9bn free schools, and £0.6bn consultants).

The Lib Dems plan use this additional funding to spend an extra £32bn on public services in 2028/29 (£9.8bn NHS and social care, £6.7bn on defence, borders and international aid, £6.6bn on education and childcare, £4.1bn to tackle child poverty, £2.9bn for the devolved administrations, £1.0bn for farmers and the environment and £0.6bn for transport.

The balance of £20.7bn a year on average over five years for capital investment is expected to be funded mainly by additional borrowing, including £8.4bn to tackle climate change and protect the environment, £6.2bn for social housing, £1.9bn on school buildings, £1.9bn for the devolved administrations, £1.2bn on transport infrastructure, and £1.1bn for hospitals and other health facilities.

The Reform Party

The Reform UK costings in the ‘Our Contract with You’ are on a much bigger scale than everyone apart from the Green Party, with proposals to raise taxes by £14bn and cut spending by £136bn (10% of total public spending, or more once costs such as the state pensions are excluded) in order to fund an £88bn programme of tax cuts and £53bn a year in spending commitments.

The proposed spending cuts include a blanket £50bn a year in efficiency savings from cutting public service spending by 5% “without touching front line services”, £35bn from ceasing to pay interest to commercial banks on central bank deposits, £20bn from scrapping net zero, £15bn from cutting welfare benefits, £6bn from foreign aid, £5bn from reducing immigration and £5bn from stopping HS2 completely. The tax rises comprise a £10bn tax on renewable electricity generators and a £4bn immigration surcharge on employers, together with unquantified amounts from a 4% online delivery tax and a cut in entrepreneur’s relief to 5% that are netted off within the numbers below.

Reform UK plans to use these sums to cut personal taxes by £70bn (raise income tax threshold to £20,000, abolish VAT on energy bills, cut stamp duty, allow VAT reclaims for tourists, halve inheritance tax rate to 20% and raise threshold to £2m), cut business taxes by £18bn (reduce corporation tax to 15% and to zero for profits under £100,000, increase the VAT threshold to £150,000, abolish business rates for high street SMEs and create SME enterprise zones with zero tax when creating jobs).

Spending commitments include £17bn health and social care (a three-year basic rate tax holiday for NHS and social care staff, 20% tax relief on private healthcare and insurance, write-off medical student fees over 10 years and private treatment vouchers), £14bn for defence and veterans (2.5% of GDP with an aspiration to meet 3% after 2030), £8bn for children and families (including £5,000 transferrable marriage allowance and front loading of child benefit for ages 1-4), £5bn for police and courts (recruiting 40,000 new officers over five years), £5bn for education (including 20% tax relief on private school fees – and no VAT), and £4bn for agriculture, fishing and coastal communities 

The Green Party

The Green Party has the most ambitious set of proposals, with tax rises of £151bn and cost savings of £12bn together with £63bn in additional borrowing to fund incremental spending of £226bn in 2028/29. It has an expansive agenda that involves nationalising water and the Big 5 energy companies, investing large sums in the green transition, and spending a significant amount more on health and welfare.

Its proposed tax increases comprise £72bn in higher personal and wealth taxes, £70bn from a carbon tax and around £9bn from business taxation, with £12bn in savings from cancelling the Trident replacement and roadbuilding programmes. Its proposals include aligning capital gain tax rates and investment income with income tax, increasing national insurance above the upper earnings limit from 2% to 10%, restricting pension tax relief to the basic rate, reforming inheritance tax, and introducing a 1% wealth tax on individuals with assets above £10m and 2% above £1bn. It also wants to replace council tax and business rates with land value taxes.

If achieved, this would allow it to pay for £145bn in additional current spending of £145bn in 2028/29 and £81bn in extra capital investment. The former includes £46.4bn for health and social care, £27.2bn welfare, £20.1bn overseas aid, £13.2bn education, £11.9bn transport, £4.5bn nature, food and farming, and £21.7bn for other priorities. The latter includes £56.7bn for green investment, £10.5bn for social housing, £6.6bn for health and education, and £6.8bn for other capital expenditures.

Upcoming Spending Review does not feature

None of the parties addresses the ‘elephant in the room’ represented by the upcoming three-year Spending Review for 2025/26 to 2027/28 that is expected by the Institute for Fiscal Studies and others to identify up to £20bn per year of additional funding requirements to maintain public services at their current level.

Overcoming the current weak state of the public finances is likely to be first order of business for whichever party wins the election.

This chart was originally published by ICAEW.

ICAEW publishes in-depth Fiscal Insight on the Spring Budget

Now that the dust has settled on last month’s Spring Budget, ICAEW has published a more detailed analysis on the implications for the public finances.

ICAEW’s Fiscal Insight on the Spring Budget 2024 provides an analysis of the key numbers, risks to the Office for Budget Responsibility forecast, tax measures, forecast revisions since the 2023 Autumn Statement, the fiscal position in the 2024/25 Budget year, borrowing over the next five years, the calculation of underlying debt, the £1.2trn that HM Treasury needs to raise from debt investors, and our conclusions on what the numbers mean for the public finances.

Key points highlighted in the report include:

Headlines

  • Modest improvement in forecasts and small tax increases ‘pay for’ national insurance cut.
  • Headroom of £9bn against the Chancellor’s primary fiscal rule is tiny compared with risks.
  • End of low-cost borrowing is hampering investment in infrastructure and public services.
  • Weak economy, high debt, demographic challenges, underperforming public services.
  • No long-term fiscal strategy.

Key numbers

  • Tax and other receipts of £1,139bn in 2024/25, equivalent to £1,375 per person per month.
  • Public spending of £1,226bn in 2024/25, equivalent to £1,480 per person per month.
  • Deficit projected to fall by a quarter to £87bn in 2024/25 and gradually to £39bn in 2028/29.
  • Headline debt expected to reach £2.8trn by March 2025 and £3.0trn by March 2029.
  • Underlying debt/GDP forecast to increase from 88.8% to 93.2% and then fall to 92.9%.

Conclusions

  • Difficult choices on spending deferred until after the general election.
  • Post-election tax increases likely, irrespective of who wins the general election.
  • A badly designed fiscal rule driving poor decisions and unrealistic spending forecasts.
  • Predicted reduction in the deficit to below 2% of GDP by 2027/28 is unlikely to occur.
  • Further pre-election tax cuts could affect credibility with debt markets. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, is quoted in the Fiscal Insight as follows:

“The principal story of the Spring Budget has been how the Chancellor was able to find room for tax cuts while still meeting his fiscal targets to ‘bring down debt and the deficit’.

“This is a frustrating narrative as it misses the bigger picture of public finances that are on an unsustainable path, with little sign of a long-term fiscal strategy to address demographic change, growing balance sheet liabilities, underperforming public services, rising debt interest, or resilience against future economic shocks.

“Debt is high and projected to be even higher in five years’ time than it is today. ‘Headroom’ is tiny in context of trillions of pounds of tax receipts and public spending over the next five years and forecasts that don’t reflect government practice in freezing fuel duties nor likely spending increases from the now postponed Spending Review.

“And we have a fiscal target that discourages essential infrastructure investment while at the same time never needing to be achieved as it is rolled forward each year.

“All of our fiscal eggs are now in a basket labelled ‘hope’ [for economic growth].”

Fiscal Insight

Read the full Fiscal Insight report, which provides detailed analysis on the Spring Budget’s implications for the public finances.

For further coverage, including more detailed information about tax measures, visit ICAEW’s Spring Budget 2024 site by clicking here.

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

ICAEW chart of the week: Spring Budget 2024

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

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

ICAEW chart of the week: Pre-Budget deficit forecast

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

ICAEW chart of the week: Pre-Budget debt forecast

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

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

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

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

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

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

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

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

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

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

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

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

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

This chart was originally published by ICAEW.

Modest boost to public finances won’t stop taxes rising

Prior month revisions boost public finances despite worse than expected self assessment receipts, as a think tank says tax cuts in the Budget will be sandwiched between tax rises in the years before and after.

The monthly public sector finances for January 2024 reported a provisional surplus for the month of £17bn, slightly less than expected, while at the same time revising the year-to-date deficit down. 

The figures, released by the Office for National Statistics (ONS) yesterday, show a cumulative deficit for the first 10 months of the financial year to £97bn, £3bn less than in the same period last year. The year-to-date variance against the Office for Budget Responsibility (OBR)’s Autumn Statement forecast improved from £5bn last month to £9bn this month. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “Lower self assessment tax receipts than expected in January were offset by revisions to numbers from previous months to improve the overall financial picture.

“This small improvement helps only a little with an extremely weak fiscal position facing the Chancellor as he approaches the Budget, with questions already being asked about whether existing plans to cut public spending in the near term are realistically achievable. Rumours that the Chancellor is thinking about further reductions in public spending to fund tax cuts will therefore need to be balanced with his ability to maintain credibility with debt markets.”

The Resolution Foundation reported that likely net tax cuts in the coming financial year of around £10bn are sandwiched between £20bn of tax rises that have already been implemented in the current financial year – including threshold freezes and the corporation tax rate rise from 19% to 25% – and £17bn in net tax rises that have been pre-announced up to 2027/28 (primarily from threshold freezes and stamp duty land tax).

The think tank’s pre-Budget analysis estimates that the cut in national insurance announced in November plus around £10bn in potential new tax cuts to be announced in the Budget would result in a net reduction in taxes of just under £10bn for 2024/25 after taking account of threshold freezes and other tax changes.

The Resolution Foundation analysis does not take account of the normal pattern that sees governments typically raise taxes in the first Budget after a general election, which is even more likely this time around given what many commentators believe are unrealistic spending assumptions for 2025/26 onwards. 

Month of January 2024

Self assessment tax receipts were lower than expected in January 2024, with the fiscal surplus of £17bn for the month coming in at £9bn better than last year but £2bn less than the OBR’s Autumn Statement projection.

Taxes and other receipts amounted to £120bn, up 4% compared with January 2023, while total managed expenditure was £103bn, down 5%.

Public sector net debt as of 31 January 2024 was £2,646bn or 96.5% of GDP, £41bn lower than 31 December but £107bn higher than at the start of the financial year.

Ten months to January 2024

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first five sixths of the 2023/24 financial year to January 2024 was £97bn, £3bn less than the £100bn deficit reported for the first ten months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £901bn and total managed expenditure of £998bn, up 6% and 5% compared with April 2022 to January 2023.

Inflation benefited tax receipts for the first 10 months compared with the same period in the previous year, with income tax up 11% to £224bn and VAT up 6% to £165bn. Corporation tax receipts were up 17% to £85bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023. 

Meanwhile,national insurance receipts were up by just 1% to £148bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, as well as the cut in national insurance implemented in January. 

Council tax receipts were up 6% to £36bn, but stamp duty on properties was down by 25% to £11bn and the total for all other taxes was flat at £137bn as economic activity slowed. Non-tax receipts were up 10% to £95bn, primarily driven by higher investment income and higher interest charged on student loans.

Total managed expenditure of £998bn in the ten months to January 2024 can be analysed between current expenditure excluding interest of £846bn, interest of £105bn and net investment of £47bn, compared with £949n in the same period in the previous year, comprising £810bn, £114bn and £25bn respectively.

The increase of £36bn or 4% in current expenditure excluding interest was driven by a £28bn increase in pension and other welfare benefits (including cost-of-living payments), £18bn in higher central government pay and £10bn in additional central government procurement spending, less £13bn in lower subsidy payments (principally relating to energy support schemes) and £7bn in net other changes.

The fall in interest costs for the ten months of £9bn or 8% to £105bn comprises a £23bn or 50% reduction to £23bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £14bn or 21% increase to £82bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.

The £21bn increase in net investment spending to £47bn in the first ten months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 19% increase in gross investment to £101bn, less a £4bn or 8% increase in depreciation to £54bn.

Public sector finance trends: January 2024

Table with fiscal numbers for the ten months to Jan 2020, Jan 2021, Jan 2022, Jan 2023 and Jan 2024, all in £bn. Receipts: 685 | 647 | 754 | 849 | 901 Expenditure: (588) | (746) | (686) | (722) | (761) Interest: (44) | (33) | (55) | (103) | (97) Net investment: (26) | (51) | (35) | (16) | (37) [subtotal] Deficit: (61) | (270) | (123) | (108) | (119) Other borrowing: 3 | (67) | (85) | (8) | (27) [total] Debt movement: (58) | (337) | (208) | (116) | (146) Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686 Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £97bn for the first 10 months of the financial year is £9bn below the OBR’s November 2023 forecast of £106bn for that same period. The OBR is forecasting deficits of £6bn and £12bn in February and March to result in a full year forecast of £124bn, or £115bn if the £9bn forecast variance persists. 

Balance sheet metrics

Public sector net debt was £2,646bn at the end of January 2024, equivalent to 96.5% of GDP.

The debt movement since the start of the financial year is £107bn, comprising borrowing to fund the deficit for the ten months of £97bn plus £10bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £831bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,108bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£677bn on 31 January 2024, comprising £1,584bn in non-financial assets and £1,047bn in non-liquid financial assets minus £2,646bn of net debt (£303bn liquid financial assets – £2,949bn public sector gross debt) and other liabilities of £662bn. This is a £62bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

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

The latest release saw the ONS revise the reported deficit for the nine months to December 2023 down by £6bn from £119bn to £113bn as estimates of tax receipts and expenditure were updated for better data and the correction of errors in HMRC reporting, while the debt to GDP ratio at the end of December 2023 was revised up by 0.5 percentage points from 97.7% to 98.2% as GDP estimates were updated.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £129bn for 2022/23.

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

Public finances beat forecast amid tough economic landscape

Year-to-date deficit of £119bn is £5bn lower than latest Office for Budget Responsibility forecast – but is still £11bn worse than this time last year.

Public sector finances for December 2023, released by the Office for National Statistics (ONS) on Tuesday, reported a provisional deficit of £8bn – less than expected – while at the same time revising the year-to-date deficit down by £5bn. This brought the cumulative deficit for the first three-quarters of the financial year to £119bn, £11bn more than in the same nine-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments: “Today’s numbers show a cumulative deficit of £119bn for the first three-quarters of the financial year, the fourth highest on record. This should be close to the total at the end of the tax year, as income from self-assessment tax receipts in January is likely to offset deficits in February and March. At £5bn less than the Office for Budget Responsibility’s latest forecast, the Chancellor will be pleased by this marginal improvement in fiscal headroom just when he needs it most.

“However, the Chancellor will still be concerned by the tough economic landscape, with disappointing retail sales data for the final quarter of 2023 and an unexpected rise in inflation last month, and what that might mean for the fiscal forecasts. He is under significant pressure to cut taxes ahead of the general election, but will be all too aware of the need for greater investment in public services and infrastructure if he is to be able to lay the foundations for economic growth in the next Parliament. The risk of local authorities going bust will also be on his mind as he seeks to generate positive economic vibes going into the general election campaign.”

Month of December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of December 2023 was £8bn, made up of tax and other receipts of £89bn less total managed expenditure of £97bn, up 6% and down 3% respectively compared with December 2022. 

This was the lowest December deficit since 2019, principally because interest on Retail Prices Index-linked debt fell from £14bn in December 2022 to close to zero in December 2023.

Public sector net debt as at 31 December 2023 was £2,686bn or 97.7% of GDP, up £15bn during the month and £146bn higher than at the start of the financial year.

Nine months to December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first three quarters of the financial year to December 2023 was £119bn, £11bn more than the £108bn deficit reported for the first nine months of 2022/23. 

This reflected a year-to-date shortfall between tax and other receipts of £776bn and total managed expenditure of £895bn, both up 6% compared with April to December 2022.

Inflation benefitted tax receipts for the first nine months compared with the same period in the previous year, with income tax up 10% to £178bn and VAT up 7% to £150bn. Corporation tax receipts were up 18% to £76bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £132bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year. 

Council tax receipts were up 6% to £33bn, but stamp duty on properties was down by 27% to £10bn and the total for all other taxes was down by 3% to £112bn as economic activity slowed. Non-tax receipts were up 11% to £84bn, primarily driven by higher investment income and higher interest receivable on student loans.

Total managed expenditure of £895bn in the nine months to December 2023 can be analysed between current expenditure excluding interest of £761bn, interest of £97bn and net investment of £37bn, compared with £841bn in the same period in the previous year, comprising £722bn, £103bn and £16bn respectively.

The increase of £39bn or 5% in current expenditure excluding interest was driven by a £24bn increase in pension and other welfare benefits (including cost-of-living payments), £15bn in higher central government pay and £8bn in additional central government procurement spending, less £6bn in lower subsidy payments (principally relating to energy support schemes) and £2bn in net other changes.

The fall in interest costs for the nine months of £6bn to £97bn comprises an £18bn or 39% fall to £28bn for interest accrued on index-linked debt from a lower rate of inflation, partially offset by a £12bn or 21% increase to £69bn for interest not linked to inflation from higher interest rates.

The £21bn increase in net investment spending to £37bn in the first nine months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £11bn or 42% reflects high construction cost inflation, among other factors, which saw a £14bn or 20% increase in gross investment to £85bn, less a £3bn or 7% increase in depreciation to £48bn.

Public sector finance trends: December 2023

Table showing fiscal numbers for the nine months to Dec 2019, 2020, 2021, 2022 and 2023. Receipts: 597 | 560 | 653 | 733 | 776 Expenditure: (588) | (746) | (686) | (722) | (761) Interest: (44) | (33) | (55) | (103) | (97) Net investment: (26) | (51) | (35) | (16) | (37) [subtotal] Deficit: (61) | (270) | (123) | (108) | (119) Other borrowing: 3 | (67) | (85) | (8) | (27) [total] Debt movement: (58) | (337) | (208) | (116) | (146) Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686 Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £119bn for the first three-quarters of the financial year is £5bn below the Office for Budget Responsibility (OBR)’s November 2023 forecast of £124bn for the nine months to December 2023. The OBR is also forecasting a full year forecast of £124bn as it expects self-assessment tax receipts in January to offset projected deficits in February and March 2024. 

Balance sheet metrics

Public sector net debt was £2,686bn at the end of December 2023, equivalent to 97.7% of GDP.

The debt movement since the start of the financial year is £146bn, comprising borrowing to fund the deficit for the nine months of £119bn plus £27bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £871bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,330bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 31 December 2023, comprising £1,584bn in non-financial assets and £1,049bn in non-liquid financial assets minus £2,686bn of net debt (£296bn liquid financial assets – £2,982bn public sector gross debt) and other liabilities of £662bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

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

The latest release saw the ONS revise the reported deficit for the eight months to November 2023 down by £5bn from £116bn to £111bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of November 2023 was revised down by 0.1 percentage points from 97.5% to 97.4%.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £130bn for 2022/23.

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

ICAEW chart of the week: Autumn Statement 2023

My chart for ICAEW this week illustrates how Chancellor Jeremy Hunt used almost all of the available upside from inflation and fiscal drag to fund his tax measures and a series of business growth initiatives.

Autumn Statement 2023 Step chart (waterfall diagram) showing the average change to 2023/24 to 2027/28 forecasts since the Spring Budget 2023. Forecast revisions (steps in orange): Inflation +$41bn Fiscal drag +£7bn Other changes +£4bn Debt interest -£21bn Welfare uprating -£13bn = Forecast revisions +£18bn (subtotal in purple) Policy measures (steps in blue): Tax measures -£11bn Spending and other -£6bn = Net changes +£1bn (total in purple) 23 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: HM Treasury, 'Autumn Statement 2023'; OBR, 'Economic and fiscal outlook, Nov 2023'.

The Autumn Statement 2023 on Wednesday 22 November featured a surprise tax cut to national insurance and a perhaps less surprising decision to make full expensing of business capital expenditure permanent.

As my chart illustrates, the forecasts for the deficit over the next five years benefited by £41bn a year on average in higher receipts from inflation, £7bn a year on average in additional ‘fiscal drag’ as higher inflation erodes the value of frozen tax allowances more quickly, and a net £4bn in other upward forecast revisions. These improvements to the forecasts were offset by an average of £21bn a year in higher debt interest and £13bn from the expected inflation-driven uprating of the state pension and welfare benefits, to arrive at a net improvement of £18bn a year on average over the five financial years from 2023/24 to 2027/28 before policy decisions.

In theory, these upward forecast revisions should be absorbed by more spending on public services as higher inflation feeds through into salaries and procurement costs. However, the Chancellor has chosen to (in effect) sharply cut public spending and use almost all of the upward revisions to fund tax measures and business growth initiatives instead. These amounted to £11bn a year on average in tax changes and £6bn a year on average in spending increases and other changes to reduce the net impact to just £1bn a year on average over the five-year period.

The resulting net change of £1bn on average in forecasts for the deficit is to reduce the forecast deficit by £8bn for the current year (from £132bn to £124bn) and by £1bn for 2024/25 (to £85bn), with no net change in 2025/26 (at £77bn), an increase of £5bn in 2027/28 (to £68bn), and no net change for 2027/28 (at £49bn).

The main tax changes announced were the cuts in national insurance for employees by 2 percentage points from 12% to 10% and by 1 percentage point for the self-employed from 9% to 8%, reducing tax receipts by an average of £9bn over five years. This is combined with the effect of making full expensing permanent of £4bn – this change mainly affects the later years of the forecast (£11bn in 2027/28), although ironically the average is a better proxy for the long-term cost of this change, which the OBR estimates is around £3bn a year. 

Other tax changes offset this to a small extent. 

Spending and other changes of £6bn a year on average comprise incremental spending of £7bn a year plus £2bn higher debt interest to fund that spending, less £3bn in positive economic effects from that spending and from the tax measures above.

Although the cumulative fiscal deficit over five years has been revised down by £4bn, the OBR has revised its forecast for public sector net debt as of 31 March 2028 up by £94bn from to £3,004bn. This principally reflects changes in the planned profile of quantitative tightening and higher lending to students and businesses.

The big gamble the Chancellor appears to be making by choosing to opt for tax cuts now is that the OBR and Bank of England’s pessimistic forecasts for the economy are not realised – enabling him to find extra money in future fiscal events to cover the effect of inflation on public service spending. Otherwise, while it may be possible to cut public spending by as much as the Autumn Statement suggests, it is difficult to see how he can do so without a further deterioration in the quality of public services given he is not providing any additional investment in technology, people and process transformation to deliver sustainable efficiency gains.

This chart was originally published by ICAEW.

July public sector finances: a mixed set of results

Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.

The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.

“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”

Month of July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.

This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.

Four months to July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.

Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.

Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).

The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.

The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose. 

The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn. 

Public sector finance trends: July 2023

 Four months toJul 2019 (£bn)Jul 2020 (£bn) Jul 2021 (£bn) Jul 2022 (£bn) Jul 2023 (£bn)
 Receipts270234282320343
 Expenditure(259)(348)(310)(308)(334)
 Interest(24)(15)(23)(44)(51)
 Net investment(10)(26)(13)(11)(15)
 Deficit(23)(155)(64)(43)(57)
 Other borrowing 4 (66) (22) 5 10
 Debt movement(19)(221)(86)(38)(47)
 Net debt 1,7962,0362,2392,4202,579
 Net debt / GDP 80.1% 96.9% 97.7% 96.6% 98.5%
Source: ONS, ‘Public sector finances, July 2023’.


Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. The latest release saw the ONS revise the reported deficit for the three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.

The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

For further information, read the public sector finances release for July 2023.

This article was originally published by ICAEW.