Tag: #uk

First quarter fiscal deficit in line as Chancellor ponders tax rises

Despite borrowing to fund the deficit in the first three months of the financial year of £58bn being in line with expectations, it was still the third-highest first quarter result on record.

The monthly public sector finances release for June 2025 published by the Office for National Statistics (ONS) on 22 July reported a provisional deficit of £21bn for the month of June and £58bn for the three months then ended. This is £4bn more and in line with budget respectively, and £7bn and £8bn more in each case than the first fiscal quarter a year ago.

Alison Ring OBE FCA CPFA, ICAEW Director of Public Sector and Taxation, says: “Even if borrowing to fund the deficit in the month of June was only a little higher than expected and was in line with expectations in the first three months of the financial year, the first quarter was still the third highest since monthly records began. This trajectory will not have lightened the Chancellor’s mood as she decides which taxes to put up in the Autumn Budget later this year. 

“The government has two big problems with the public finances: the short-term outlook – which is bad – and their long-term prospects – which are worse. Public spending continues to outpace tax receipts by a significant margin, while the OBR has reiterated its conclusion that the public finances are unsustainable over the next 25 to 50 years if this and future governments continue on the current path. 

“Unfortunately, the major challenges facing the public finances over the next quarter of a century and beyond means that this will not be the last time a chancellor of the exchequer needs to come back asking for more. Now is the time to stop kicking the can down the road and develop a comprehensive long-term fiscal strategy to put the public finances onto a sustainable path.”

Month of June 2025

The fiscal deficit for June 2025 was £21bn, £4bn more than budgeted and £7bn more than a year previously. According to the ONS, this was the second-highest June deficit since monthly records began in 1993, with only June 2020 during the pandemic being higher.

First quarter to June 2025

The deficit for the first three months of the 2025/26 financial year was £58bn, £8bn more than a year previously. Despite being in line with budget, this is the third-highest first quarter deficit since monthly records began (after the first quarter deficits in 2020/21 and 2021/22). 

Table 1 highlights how total receipts and total current spending in the three months to June 2025 of £278bn and £323bn were up 7% and 8% respectively, compared with the same period last year.

Receipts were boosted by the employer national insurance increase from April 2025 onwards in addition to the effect of fiscal drag on income tax caused by the continued freeze in personal tax allowances. Meanwhile, the increase in current spending over the past year was primarily as a consequence of public sector pay rises, higher supplier costs and rises in welfare benefits.

The increase in debt interest of £5bn to £42bn consisted of a £6bn increase in indexation on inflation-linked debt as inflation returned less a £1bn reduction in interest on variable and fixed-interest debt. The latter was primarily the effect of a lower Bank of England base rate offsetting a higher level of debt compared with a year ago.

Net investment of £13bn in the first quarter of 2025/26 was £1bn or 8% higher than the same period last year. Capital expenditure of £22bn was up by £1bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £9bn were up by £1bn, less depreciation of £18bn up by £1bn.

Table 1: Summary receipts and spending

3 months to June2025/26
£bn		2024/25
£bn		Change
%
Income tax6460+7%
VAT5250+4%
National insurance4841+17%
Corporation tax2624+8%
Other taxes5756+2%
Other receipts3130+3%
Current receipts278261+7%
Public services(178)(165)+8%
Welfare(77)(72)+7%
Subsidies(8)(8)–
Debt interest(42)(37)+14%
Depreciation(18)(17)+6%
Current spending(323)(299)+8%
Current deficit(45)(38)+18%
Net investment(13)(12)+8%
Deficit(58)(50)+16%

Borrowing and debt

Table 2 summarises how the government borrowed £64bn in the first quarter to take public sector net debt to £2,874bn on 30 June 2025. The movements comprised £58bn in public sector net borrowing (PSNB) to fund the deficit and £6bn to fund government lending activities and working capital movements.

The table also illustrates how the debt to GDP ratio increased from 95.2% of GDP at the start of the financial year to 96.3% on 30 June 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

3 months to June2025/26
£bn		2024/25
£bn
PSNB5850
Other borrowing6(3)
Net change6447
Opening net debt2,8102,686
Closing net debt2,8742,733
PSNB/GDP2.0%1.8%
Other/GDP0.2%(0.1%)
Inflating away(1.1%)(1.5%)
Net change1.1%0.2%
Opening net debt/GDP95.2%95.6%
Closing net debt/GDP96.3%95.8%

Public sector net debt on 30 June 2025 of £2,874bn comprised gross debt of £3,286bn less cash and other liquid financial assets of £412bn. 

Public sector net financial liabilities were £2,504bn, comprising net debt of £2,874bn plus other financial liabilities of £706bn less illiquid financial assets of £1,076bn. Public sector negative net worth was £878bn, being net financial liabilities of £2,504bn less non-financial assets of £1,626bn.

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.

The latest release saw the ONS revise the previously reported deficit for the two months to May 2025 down by £1bn and revise public sector net debt on 31 May 2025 up by £7bn.

For further information, read the public sector finances release for June 2025.

This article 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: Global GDP

My chart for ICAEW this week looks at the relationship between population and GDP around the world.

A three column chart each adding up to 100% with the central bar showing percentages of the global population, the left-hand bar showing percentages of market GDP. and the right-hand bar showing percentage of power-purchasing-parity (PPP) GDP. The bars are linked with lines to emphasise the relative proportions. US & Canada: Market GDP 29% - Population 5% - PPP GDP 16%. Europe: Market GDP 23% - Population 7% - PPP GDP 18%. China: Market GDP 17% - Population 17% - PPP GDP 20%. Rest of the world: Market GDP 24% - Population 28% - PPP GDP 30%. South Asia & China: Market GDP 7% - Population 43% - PPP GDP 16%. 27 Jun 2025. Chart by Martin Wheatcroft. Design by Sunday. Source: IMF, 'World Economic Outlook Database, Apr 2025'.

According to the latest World Economic Outlook Database published by the International Monetary Fund in April 2025, the 387m people that live in the US and Canada, some 5% of the global population of 8.1bn, are together expected to generate about 29% of global economic activity as measured by GDP converted at market exchange rates in 2025. 

The US – the largest economy in the world – is expected to generate 27% with 4.3% of the global population, while Canada with 0.5% of the world’s people represents 2% of the global economy.

My chart this week also shows how the US and Canada together constitute 16% of the global economy using GDP converted on a Purchasing-Power-Parity (PPP) basis that adjusts for the relative cost of living between countries. The US is the world’s second largest economy on this basis with 15% of total economic output, while Canada represents 1.3% of the total.

Europe’s 602m people are 7% of the global population (excluding Russia, but including Georgia) and are expected to generate around 23% of global economic output at market exchange rates in 2025 or around 18% on a PPP basis. 

This includes the 452m people or 5.6% of the total living in the EU that generate 18% of global output or 14% on a PPP basis, the second largest economy on a market exchange rate basis and the third largest after adjusting for purchasing power. Germany with 1% population generates 4.3% and 3% of market GDP and PPP GDP respectively, followed by France (0.8% generating 2.9% and 2.2%), Italy (0.7% generating 2.2% and 1.8%), Spain (0.6% generating 1.6% and 1.4%), the Netherlands (0.2% generating 1.2% and 0.7%) and Poland (0.5% generating 0.9% and 1%). 

Outside the EU, the 70m people in the UK, 0.9% of the world’s total, generate 3.4% of global economic activity on a market exchange rate basis and 2.2% on a purchasing power basis.

China’s 1.4bn people constitute 17% of the world’s population and generate 17% of market GDP, in effect the average level of global economic activity on a per capita basis at current exchange rates. However, on a cost-of-living adjusted basis, they are the world’s biggest economy at 20% of PPP GDP and above average on a per capita basis.

The chart groups the rest of East Asia, South East Asia, Oceania, the Middle East, Russia, Central Asia, Latin America and the Caribbean into a ‘rest of the world’ category with 2.3bn people or 28% of the world’s population. They generate 24% of the global economy on a market exchange rate basis and 30% on a purchasing power basis.

This category includes the 10 ASEAN countries in South East Asia that together make up 8.5% of the world’s population, 3.6% of market GDP and 6.4% of PPP GDP led by Indonesia (3.5%, 1.2% and 1.4%). Others include Japan (1.5% population, 3.6% market GDP and 3.3% PPP GDP), Russia (1.5%, 2.3% and 3.5%), Türkiye (1.3%, 1.1% and 1.8%), Mexico (1.6%, 1.6% and 1.6%), South Korea (0.6%, 1.6% and 1.6%), Australia (0.3%, 1.5% and 1%), Brazil (2.6%, 1.0% and 2.4%), Taiwan POC (0.3%, 1% and 0.8%) and Saudi Arabia (0.4%, 0.8% and 1%).

The final category is South Asia and Africa, which together include many of the poorest countries on Earth, with 43% of the global population but just 7% of the global economy based on market exchange rates and 16% on a cost-of-living adjusted basis.

South Asia’s 2bn people are 24.3% of the world’s population, generating 4.4% of market GDP and 10.3% of PPP GDP. This includes India’s 1.5bn people (17.9% of the global population generating 3.6% and 8.5% respectively), the world’s fifth largest national economy at market exchange rates behind the US, China, Germany and Japan, and the third largest on a PPP basis behind China and the US. It also includes Pakistan (3% of the world’s people generating 0.3% and 0.8% of economic activity) and Bangladesh (2.1% generating 0.4% and 0.9%).

Africa’s 1.5bn people constitute 18.3% of the world’s total, generating just 2.7% of market GDP and only 5.3% of PPP GDP. This includes South Africa (0.8%, 0.4% and 0.5%), Egypt (1.3%, 0.3% and 1.1%), Nigeria (2.9%, 0.2% and 0.8%), Ethiopia (1.4%, 0.1% and 0.2%) and the Democratic Republic of the Congo (1.3%, 0.1% and 0.1%).

The chart illustrates how economic activity, both before and after adjusting for purchasing power, is weighted towards the US and Europe, while South Asia and Africa have a long way to go to become as prosperous.

While this may seem a stiff mountain to climb economically, China’s transformation over the last 30 years provides an example of what is possible, especially as ageing populations in many developed countries reduce their ability to grow as quickly as those countries with much younger demographics such as in South Asia and Africa.

As they say, watch this space.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spending up

My chart for ICAEW this week looks at what the Spending Review 2025 does to total day-to-day spending and capital budgets over the next three years.

A step chart showing the Spending Review 2025 change in total departmental budgets over three years. 2025/26: Day-to-day spending £517bn + Capital investment £131bn = total £648bn. Inflation: +£38bn (+1.9% a year). Day-to-day spending: +£21bn (+1.3% a year). Capital investment: +£10bn (+2.4% a year). 2028/29: Day-to-day spending £568bn + Capital investment £149bn = total £717bn. 20 Jun 2025. Chart by Martin Wheatcroft. Design by Sunday. Source: HM Treasury. 'Spending Review 2025'.

Last week’s chart of the week looked at the winners and losers between departments in the Spending Review 2025. This week’s chart looks at the overall picture and the government’s different approaches between operating and capital expenditure.

As my chart this week illustrates, total departmental budgets for the current financial year ending on 31 March 2026 (2025/26) of £648bn are expected to rise to £717bn by 2028/29. This comprises departmental ‘day-to-day’ operating budgets of £517bn in 2025/26 that rise to £568bn in 2028/29 and departmental capital budgets going from £131bn to £149bn over the same period.

Inflation of 1.9% a year on average is expected to add £38bn a year to total departmental spending by the end of the three-year period, with a real-term increase in operating budgets of £21bn by 2028/29 or 1.3% a year on average, and a real-term increase in capital budgets of £10bn or 2.4% a year on average. 

In practice, the increase in day-to-day spending is not much of an increase at all given that ‘government inflation’ is often higher than the GDP inflator all-economy measure of inflation used in HM Treasury’s calculations. Pay awards and supplier price rises are likely to absorb a significant proportion of this additional money, with departments needing to find significant efficiency savings and productivity improvements if they are to avoid cuts to public services, let alone improve them. And, as our chart last week highlighted, several departments are in effect having their operating budgets cut over the spending review period. 

Unlike operating budgets, where total planned departmental spending increases each year broadly in line with inflation and the 1.3% average real-term increase, the average annual real-term increase of 2.4% a year in capital budgets over three years comprises a 6.9% real-term increase in 2026/27, a real-term cut of 0.2% in 2027/28, and a real-term increase of 0.7% in 2028/29. (There is also no increase after inflation in the fourth year to 2029/30, which would reduce the average annual increase over four years to 1.8%.)

This follows an 11.6% real-term increase in capital budgets in 2025/26 that was enabled by the Chancellor’s change to the fiscal rules in the Autumn Budget 2024. This gave the government more flexibility to borrow for capital investment, and the Chancellor chose to front load that investment, no doubt in the hope of accelerating the economic benefits of that investment and of improving public services more quickly than might be possible if spreading the increase more evenly over the spending review period.

Whether the government will be able to actually deliver its planned capital programmes as quickly as it might hope remains to be seen, as will whether that investment in turn actually results in stronger economic growth and better public services. Let’s hope it does, as we could definitely do with a boost.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spending Review 2025

My chart for ICAEW this week looks at the government’s priorities as expressed through departmental budgetary allocations over the next three years.

A bar chart showing the average annual real-term percentage increase in departmental spending over the three years to 2028/29. Defence +3.8%. Security +3.7%. Business & Trade +3.0%. Health +2.7%. Local Government. +2.6% (central funding +1.1%, balance from local taxation). Justice +2.0%. Overall average increase +1.5%. Science +0.9%. Education +0.8%. Devolved administrations +0.7%. Energy & New Zero +0.7%. Home Office +0.5%. Cabinet Office +0.4%. DWP -0.2%. Transport -0.5%. Culture, Media & Sport -1.4%. HMRC -1.5%. Hm Treasury -1.9%. Agriculture & Rural Affairs -2.3%. Foreign & Development -8.3%. Asylum -13.1%. 13 Jun 2025. Chart by Martin Wheatcroft. Design by Sunday. Source: HM Treasury, 'Spending Review 2025'.

The Spending Review 2025 establishes base operating budgets for government departments for the three financial years from 1 April 2026 (2026/27, 2027/28 and 2028/29) and base capital budgets for four financial years (extending to 2029/30).

Departmental budgets for the current financial year ending on 31 March 2026 (2025/26), total £648bn and are expected to rise to £678bn in 2026/27, £697bn in 2027/28, and £717bn in 2028/29, an increase of 10.6% over the three years or 3.4% a year. This is equivalent to an average increase of 1.5% a year in real terms after adjusting for inflation of 1.9% a year on average over the spending review period.

The totals can be analysed between operating or ‘day-to-day’ budgets of £517bn, £536bn, £552bn and £568bn in 2025/26, 2026/27, 2027/28 and 2028/29 respectively and capital budgets of £131bn, £143bn, £145bn and £149bn. These are real terms increases of 1.2% and 2.4% a year on average over three years. 

The capital budget in 2029/30 is £152bn, a cut in real terms that reduces the average annual increase in capital budgets over four years to 1.8% a year on average.

My chart this week highlights how the 1.5% average annual real increase over three years in total budgets (operating and capital) has been allocated across departments, starting with the Ministry of Defence, which leads the pack with an average increase in its budget of 3.8% a year, followed closely by the security services, with an average annual increase of 3.7%. This reflects the elevation of national defence and security to the top of the government’s priorities since the general election last year, even though this increase will only move defence and security spending from 2.3% of GDP currently to 2.6% of GDP by 2027, a long way off the proposed 3.5% of GDP new minimum to be discussed at the NATO summit.

Economic growth and the NHS are the next highest priorities for the government and so it is perhaps unsurprising that the Department of Business & Trade does well with an annual average increase of 3.0%, closely followed by the Department of Health & Social Care, which receives 2.7%. The latter is the biggest increase in cash terms, at £31bn in total or about £12bn more in 2028/29 after adjusting for inflation.

Local government finances are in a parlous state and so the government has pencilled in a 2.6% average annual increase in core budgets for local authorities in England over the next three years. However, it is only increasing central funding by 1.1% a year on average, implying the balance will need to be made by local taxation, principally council tax.

The Ministry of Justice has been awarded 2.0% a year on average as the government seeks to tackle significant backlogs in the courts, overcrowded prisons and significantly under-resourced probation services.

The Department of Science, Innovation and Technology has received a below average annual increase of 0.9% over the next three years, but this follows an almost 12% increase over the past two years as the government has sought to increase investment in research and development to boost economic growth.

Despite being a key priority for the government, the Department for Education has only received a 0.8% average annual increase, partly because of falling primary school rolls in line with a significant fall in the birth rate over the last decade.

The devolved administrations – Scotland (0.8%), Wales (0.7%) and Northern Ireland (0.5%) – are budgeted to receive an average of 0.7% a year over three years as a consequence of the Barnett formula that links UK national government spending in England to the block grants provided to each devolved administration, adjusted for relative changes in population among other factors.

The Department for Energy Security and Net Zero is budgeted to receive 0.7% on average over three years, although this translates into an average annual increase of 2.7% a year once the UK government’s one-off (but long running) investment in the Sizewell C nuclear power plant is excluded. The latter peaks in the spending review period, but then starts to fall.

The Home Office is scheduled to receive a below average increase of 0.5% a year, although the government notes that core police operating budgets should go up by 1.7% once the contribution from local taxation is factored in. This increase also excludes spending on asylum seekers, a big item within the Home Office budget that is expected to fall by a real term average of 13.1% a year over three years as the backlog in asylum claims is tackled and lower cost alternatives to housing claimants in hotels are found.

The Cabinet Office is expected to receive just 0.4% on average reflecting the contribution that planned efficiency savings are expected to contribute to administrative budgets. This is also the reason for the 0.2% a year real-terms fall in the Department for Work and Pensions (DWP) budget as automation helps reduce the cost of administering the welfare system.

The budget of the Department for Transport is expected to fall by 0.5% a year overall, but this partly reflects a fall in spending on High Speed 2 as it comes closer to completion. If that is excluded, the department’s budget is expected to increase by 0.5% a year on average. The actual increase in spending should be even higher, as the budget is net of passenger revenues that are expected to grow at a faster rate over the next three years.

Extra money for housing was found within the spending review, but this wasn’t enough to stop the budget for the Department of Housing, Communities and Local Government from shrinking by an annual average of 0.6% a year as other activities are cut back, while the Department for Culture, Media & Sport (-1.4% a year on average) has also been asked to cut back its activities.

HMRC (-1.5% a year) and HM Treasury (-1.9% a year) see their budgets reduced significantly, with digitisation and efficiency savings expected to contribute significant sums.

The Department for Farming, Agriculture, and Rural Affairs (-2.3%) is also expected to see significant cuts over the next three years, as is the Foreign, Commonwealth and Development Office (-8.3%), although in the latter case that is principally driven by the decision to reduce overseas development assistance from 0.5% of GDP to 0.3% of GDP although some will come from back office savings.

Not shown in the chart are small and independent bodies and the government legal function, which are together expected to increase by 0.4% a year on average, although this comprise a -0.5% annual reduction in the former and a 5.3% average annual increase in the latter. The net changes after inflation are a fall of less than £0.1bn and an increase of just over £0.1bn respectively, which are rounding errors in the hundreds and hundreds of billions of pounds spent by government departments each year. 

Reading the Spending Review 2025 is a good way of understanding the current government’s priorities expressed in financial terms. A lot more money for defence and the NHS, substantial sums for business and the justice system, and significant cuts in international development, asylum handling, agriculture and administration costs. There’s some money for transport and housing, but that’s offset by savings from HS2 and other activities.

This chart was originally published by ICAEW.

ICAEW chart of the week: NATO defence spending

Our chart this week looks at how much NATO members would need to spend to meet President Trump’s proposed new target of 5% of GDP for defence and defence-related expenditure.

A two column chart showing NATO defence spending. Left hand column - USA: £732bn defence spending in 2024, £67bn defence spending to 3.5% of GDP, and £342bn defence-related spending to 5.0% of GDP = £1,141bn total. Right hand column - Europe and Canada: £408bn defence spending in 2024, £36bn defence spending to 2.0% of GDP, £271bn defence spending to 3.5% of GDP, and £301bn defence-related spending to 5.0% of GDP. 6 June 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: NATO, 'Annual Report 2024'; ICAEW calculations.

According to NATO, the US and other NATO members spent 3.2% and 2.0% of GDP respectively on defence and security in 2024, with 21 countries meeting NATO’s target of a minimum spend of 2.0%, 10 countries falling short and one (Iceland) for which the guideline does not apply.

Our chart this week illustrates how those 10 countries falling short would need to have spent an additional £36bn in 2024 to reach the 2% of GDP minimum, while the US and NATO Europe and Canada members (including Türkiye) would have needed to spend a further £67bn and £271bn respectively to reach President Trump’s proposed new minimum of 3.5% of GDP.

The chart also shows how the US and other NATO members would need to spend £342bn and £301bn respectively on defence-related expenditure to reach a headline percentage of 5% of GDP. The definition of this spending has yet to be clarified and so it is difficult to know how much of this will be incremental and how much will be met by existing expenditure on infrastructure, security, law enforcement and other public services.

The consequence of a 5% headline target would have been total defence and defence-related expenditure of £2,157bn in 2024 numbers, comprising £1,141bn of spending by the US and £1,016bn of spending by other NATO members.

The 10 countries that would need to have spent more to meet the existing 2% NATO minimum in 2024 are Spain (£10bn), Canada (£9bn), Italy (£9bn), Belgium (£4bn), Netherlands (£2bn), Portugal (£1bn), Slovenia (£0.4bn), Luxembourg (£0.3bn), Croatia (£0.1bn) and Montenegro (£18m).

To reach a 3.5% defence expenditure target would require a substantial expansion in defence budgets with defence expenditure in the US going up by £67bn, Germany by £51bn, France by £37bn, the UK by £33bn, Italy by a further £28bn, Canada by a further £26bn, Türkiye by £15bn, Netherlands by a further £14bn, and Belgium by a further £8bn, with most other countries needing to increase their defence budget, too. 

The sole exception is Poland, which already spends more than 3.5% of GDP on defence (4.1% in 2024), while Estonia (3.4%), Latvia (3.4%), Lithuania (3.1%) and Greece (3.0%) each have much less far to go to reach a 3.5% of GDP target than most other NATO members.

According to NATO, the UK spent £66bn or 2.3% of GDP on defence and security in 2024, but this includes expenditure on the security services, counter-terrorism policing and war pensions in addition to ‘pure’ defence expenditure of £57bn or 2.0% of GDP. Whether, and to what extent, these extra elements will end up being reclassified from defence to defence-related expenditure is unclear, but if all of it was then that would add £9bn to the £33bn a year that the UK would need to find to meet a 3.5% defence expenditure target.

The key question will be how long NATO members are given to meet their new targets. The 2.0% minimum guideline was set in 2014 and provided 10 years for members to reach their new targets. Even then, not all of them achieved it.

It is likely to take years to recruit and train significant numbers of new soldiers, sailors and aircrew and procure major items of equipment such as tanks, ships, submarines and aircraft that would be commensurate with such a new target, so even if the money was available immediately (which it won’t be in most cases) most NATO members are likely to resist calls by the US to adopt a new target with effect from 2026.

Whatever happens, it is clear that most NATO members, including the UK, are going to need to increase spending on defence significantly over the next few years – and at a much faster pace than most of them have budgeted for. 

Tax rises and more borrowing are therefore likely to be on the agenda in many more countries than the UK alone.

This chart was originally published by ICAEW.

ICAEW chart of the week: Quarterly GDP over three years

Our chart this week looks at how quarterly GDP has risen from £610.3bn in the first quarter of 2022 to £738.6bn in the first quarter of 2025.

A step chart showing the change in quarterly GDP over the last three years. Left hand column: Quarterly GDP in 2022 of £610.3bn. Step 1: Inflation (GDP deflator) +£108.0bn or +17.7%. Step 4: Economic growth +£20.3bn or +2.8%. Right hand column: Quarterly GDP in 2025 Q1 of £738.6bn. Shaded box in the middle of the chart for steps 2 and 3 which are a breakdown of step 4. Step 2: Population growth +£23.7bn or +3.3bn. Step 3: Per capita economic growth -£3.4bn or -0.5%. 30 May 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'GDP first quarterly estimate, UK: Jan-Mar 2025'.

According to the Office for National Statistics (ONS), GDP was £738.6bn in the quarter from January to March 2025, £128.3bn or 21.0% higher than the £610.3bn reported for the same quarter three years ago.

Our chart of the week illustrates how quarterly GDP was £108.0bn or +17.7% higher in the first quarter of 2025 compared with the same quarter in 2022 as a result of inflation (using the GDP deflator measure) while economic growth contributed a further £20.3bn or +2.8%. 

The chart also breaks down economic growth over the past three years between a contribution from there being more people of £23.7bn or +3.3% and a decline in economic activity per person of £3.4bn or -0.5%.

Not shown on the chart are the changes by year, which comprised annual inflation of +8.2%, +4.1% and +4.5% and annual economic growth of +0.8%, +0.7% and +1.3% in 2022/23, 2023/24 and 2024/25 respectively, with the latter split between annual population growth of +1.2%, +1.1% and +1.0%, and annual per capita economic growth of -0.4%, -0.4% and +0.3%. 

Also not shown in the chart is economic growth over the last four quarters, which was +0.5%, +0.0%, +0.1% and +0.7% between the first and second quarters of 2024, the second and third quarters, the third and fourth quarters, and the fourth quarter of 2024 and the first quarter of 2025 respectively. These comprised quarterly population growth of +0.3%, +0.2%, +0.2% and +0.2% and quarterly per capita economic growth of +0.2%, -0.2%, -0.1% and +0.5%.

Lower levels of net inward migration are expected to reduce the rate of population growth over the next three years to closer to 0.5% a year, which means that growing the economy faster than inflation will depend on our ability to improve productivity and hence increase real economic activity per person. 

In theory, that should be eminently possible given how per capita economic growth averaged 2.4% per year for the 50 years before the financial crisis. Unfortunately, with per capita growth averaging just 0.6% a year over the past decade, productivity will need to increase significantly if we are to turn the situation around over the coming decade.

The good news is that a 21% increase in GDP means tax receipts should be that much higher. The bad news is that public spending has been going up, too.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK-EU trade in 2024

Our chart this week takes a look at trade between the UK and the EU in the light of the recent trade deal announced by the prime minister and the EU Council and Commission presidents.

A step chart showing the differences between UK imports from and UK exports to the EU in 2024. Left hand column: £50bn imports of agriproducts + £264bn imports of goods + £140bn imports of services = £454bn total UK imports from EU. Steps 1 to 3 in a shaded box, with Step 4 being a subtotal of steps 1 to 3. Step 1: -£33bn trade deficit on agriproducts. Step 2: -£107bn trade deficit on goods. Step 3: +£47bn trade surplus on services. Step 4: -£93bn overall trade deficit. Right hand column: £17bn exports of agriproducts + £157bn exports of goods + £187bn exports of services = £361bn total UK exports to EU. 23 May 2025. Chart by Martin Wheatcroft. Design by Sunday. Source: ONS, 'UK trade: goods and services publication tables'.

The European Union is the UK’s largest trading partner, with the UK importing goods and services from its 27 member countries worth £454bn at current market prices in 2024, and the UK exporting goods and services to EU countries worth £361bn.

UK imports from and exports to the EU represent 50% and 41% respectively of the UK’s total imports and exports of £906bn and £873bn in 2024. This is equivalent to 16% and 13% of estimated GDP in 2024 of £2,851bn, out of total imports and exports of 32% and 31% of GDP respectively.

Our chart this week analyses trade with the EU between £50bn, £264bn and £140bn in imports of agriproducts, other goods, and services, and £17bn, £157bn and £187 in exports of agriproducts, goods, and services. As the chart illustrates, the trade deficits on agriproducts and goods are £33bn and £107bn respectively, while there is a trade surplus on services of £47bn. Overall the UK imports £93bn more from the EU than it exports to the EU.

Agriproduct imports and exports of £50bn and £17bn (1.8% and 0.6% of GDP) consist of purchases and sales of food and live animals (£39bn and £11bn), beverages and tobacco (£9bn and £5bn), and animal and vegetable oils and fats (£2bn and £1bn). 

Goods imports and exports of £264bn and £157bn (9.3% and 5.5% of GDP) respectively comprise machinery and equipment (£127bn and £65bn), material manufactures and other manufactured goods (£67bn and £36bn), chemicals (£46bn and £28bn), energy (£15bn and £24bn), raw materials (£6bn and £3bn), and unspecified goods (£3bn and £1bn). With the exception of energy, we buy more goods from the EU than we sell them.

Services imports and exports of £140bn and £187bn (4.9% and 6.6% of GDP) during 2024 include business and professional services (£42bn and £67bn), travel and tourism (£53bn and £18bn), financial services (£11bn and £40bn), transport (£17bn and £16bn), IT services (£7bn and £21bn), intellectual property (£5bn and £16bn), and other services (£5bn and £9bn). We sell more to the EU than we purchase in services, with the main exception being travel and tourism, where holidays in Europe are a big factor.

The trade deal between the UK and the EU announced on 19 May 2025 primarily focuses on food and other agriproducts, a relatively small proportion of total trade between the UK and the EU. This perhaps explains why the anticipated benefits to the UK economy of the new trade deal are also relatively small at £9bn a year by 2040, just 0.3% of GDP. 

Most of our trade with the EU is in goods and services that, apart from energy, are not directly impacted by this deal. Despite that, the deal is expected to be positive for the farming and fishing communities that will be hoping to reverse a 19% drop in food exports since 2019. EU producers will also be hoping to reverse the 5% fall in their food exports to the UK over the same period. 

Taxpayers will also benefit from being able to avoid the cost of imposing restrictions on food and agricultural imports that were never fully implemented and will now no longer be needed.

While the economic benefits of the deal may be fairly small, as the saying goes: “Every little helps.”

ICAEW chart of the week: UK population

Our chart this week looks at how the number of people living in the UK is now expected to reach 70m this year.

A six column chart showing the UK population at five year intervals from September 2000 to September 2025. Sep 2000: 58.9m. Sep 2005: 60.5m. Sep 2010: 62.9m. Sep 2015: 65.2m. Sep 2020: 66.8m. Sep 2025 (projected): 70.0m. 16 May 2025. Chart by Martin Wheatcroft FCA. Decision by Sunday. Sources: Office for National Statistics; ICAEW extrapolation.

The latest unofficial estimate from the Office for National Statistics (ONS) for the number of people living in the UK in March 2025 is 69,708,000, which is on track to reach just over 70,000,000 people by the end of September.

Our chart of the week looks at how the UK population has changed over the past quarter of a century, from 58.9m, 60.5m, 62.9m, 65.2m and 66.8m in September 2000, 2005, 2010, 2015 and 2020 respectively to an extrapolated 70.0m for September 2025.

The net increase in each five-year period is 1.6m, 2.4m, 2.3m, 1.6m and a projected 3.2m to September 2005, 2010, 2015, 2020 and 2025 respectively, equivalent to average annual increases of 0.5%, 0.8%, 0.7%, 0.5% and 0.9%.

The net increases comprised somewhere in the region of 3.5m, 3.9m, 4.0m, 3.7m and a projected 3.4m births, less approximately 3.0m, 2.8m, 2.9m, 3.1m and a projected 3.4m deaths plus net inward migration estimated to be 1.1m, 1.3m, 1.2m, 1.0m and a projected 3.2m in the five years to September 2005, 2010, 2015, 2020 and 2025 respectively.

The large jump in net inward migration in the past five years has been the principal driver of an acceleration in the point at which the population is anticipated to reach 70m. This was projected to occur between 2028 and 2030 in 2010- to 2016-based principal population projections produced by the ONS, before a sharply declining birth rate pushed this out to 2032 and then 2038 in the 2018- and 2020-based projections. The anticipated date was then accelerated to 2027 in the 2021- and 2022-based principal population projections as the post-Brexit rise in immigration started to become apparent.

With births and deaths expected to mostly offset each other over the next five years, the UK population in September 2030 will depend almost entirely on the level of net inward or outward migration over the next five years. The last central projection from the ONS was for net inward migration of around 2.0m over that period, based on net inward migration falling to 340,000 a year by 2027, consistent with current economic and fiscal forecasts from the Office for Budget Responsibility (OBR). 

Of course, forecasts are almost always wrong and so the UK population is probably not going to be exactly 72.0m by September 2030. However, subject to a major revision to recent estimates of the actual numbers of people living in the UK, it does seem very likely that the UK population will reach 70.0m at some point this year.

This chart was originally published by ICAEW.

ICAEW chart of the week: End of the first quarter (century)

Our chart this week marks the end of the first fiscal quarter of the 21st century on 31 March 2025 by comparing it with the previous four quarters in the 20th century.

A five column chart showing changes in the public sector net debt to GDP ratio from 1 April 1900 to 31 March 2025 by quarter century. 1900s Q1: Borrowing of +£7bn or +184% of GDP less debt inflated away of -42% of GDP = +142% of GDP. 1900s Q2: +£18bn or +210% of GDP - 182% of GDP = +28% of GDP. 1900s Q3: +£26bn or +48% of GDP - 203% of GDP = -155% of GDP. 1900s Q4: +£301bn or +72% of GDP - 88% of GDP = -16% of GDP. 2000s Q1: +£2,461bn or +130% of GDP - 66% of GDP = +64% of GDP. 9 May 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: Bank of England, 'Historical public finances database'; OBR, 'Public finances databank'.

March 2025 marked the end of the first fiscal quarter of the 21st century, comprising the 25 financial years from 2000/01 to 2024/25. Our chart this week takes a look at how it compares with the previous four quarters in the 20th century.

Our chart starts with the first quarter of the 20th century that started on 1 April 1900 and ended on 31 March 1925 – the comparative period a century ago. Public sector net debt increased by £7bn (from just under £1bn to just under £8bn) and by 142 percentage points of GDP (from 33% of GDP to 175% of GDP) over the 25 years. 

As the chart illustrates, the increase in the net debt to GDP ratio reflected an increase in the numerator from borrowing of 184% of GDP, partially offset by 42% of GDP from the ‘inflating away’ effect of economic growth and inflation on the denominator. 

Almost all of the borrowing in the first quarter a century ago was incurred to finance the First World War, while the severe contraction in the UK economy after the war (partly because of the global ‘Spanish flu’ influenza pandemic) meant that the erosion of net debt as a share of GDP from economic growth and inflation was just 42% instead of the 84% it had been in the first 20 years of the century.

Around £15bn of the £18bn or 210% of GDP that was borrowed during the second quarter of the 20th century was during the Second World War years from 1940/41 to 1945/46. This was substantially offset by strong economic growth during the quarter (especially in the five years up to 1949/50 as the nation emerged from the war) that saw debt ‘inflated away’ by 182% of GDP. The consequence was an increase of just 28 percentage points in net debt as a share of GDP to 203% of GDP on 31 March 1950.

The third quarter of the 20th century saw the government borrow a further £26bn, resulting in net debt doubling to £52bn on 31 March 1975. However, net debt fell as a share of GDP by 155 percentage points to 48% of GDP, with borrowing of 48% of GDP being more than offset by a 203-percentage point reduction from economic growth and inflation increasing the denominator in the net debt/GDP ratio.

The last quarter of the 20th century saw a further reduction in the ratio of net debt to GDP of 16 percentage points, from higher borrowing of £301bn or 72% of GDP being offset by an 88% of GDP inflating away effect of economic growth and inflation. Net debt reached £353bn on 31 March 2000, equivalent to 32% of GDP.

The first quarter of the 21st century, based on provisional numbers for the year ended 31 March 2025, saw net debt/GDP increase by 64 percentage points, with £2,461bn or 130% of GDP borrowed over the past 25 years, taking net debt to £2,814bn and net debt/GDP to 96% of GDP after reflecting a 66% of GDP inflating away effect from economic growth and inflation.

One positive from these comparisons is that at least the latest quarter was not as bad as the comparative quarter a century ago. However, for a period of peacetime we still managed to borrow approaching ‘warlike’ sums to fund the costs of a financial crisis, a pandemic (although the comparative period had one of those too) and an energy crisis that all combined to increase public sector net debt massively. Meanwhile, lower levels of economic growth than in the second half of the 20th century mean that we have not inflated debt away as quickly as we might hope.

As we start the second quarter of the 21st century, the hope is that we can avoid wars, boost economic growth, control spending to keep borrowing under control and – at the same time – increase the speed at which debt is inflated away. Doing so will be essential if we are to move the public finances back onto a sustainable path.