“Despite its impact on the government’s interest bill, there is a major benefit to inflation in that it helps bring down the debt-to-GDP ratio more quickly, providing the Chancellor more space to intervene to help with the cost of living,” Martin Wheatcroft, public finance adviser to ICAEW, explains.
According to the OBR, the new measures announced in the Spring Statement, along with the existing package announced previously, should offset around a third of the increase in costs that households are facing, leaving them with the burden of the other two-thirds, Wheatcroft says. “I think we should expect further measures from the Chancellor in the summer or autumn as the impacts on households become more apparent.”
Wheatcroft adds that it is likely that some of the announcements included in the Spring Statement were brought forward to ease tensions with backbenchers. “With members of his own party pressing for a delay in the NIC increase, I suspect the Chancellor felt pressure to bring forward measures that he may have been saving for later in the year, in particular his planned cut to income tax in 2024 and a tax plan that was likely set for a summer release ahead of the Autumn Budget.”
February’s £13.1bn deficit was offset by revisions to prior month estimates, boosting public finances and putting further pressure on the Chancellor to provide more help to households and businesses facing rapidly rising prices.
The public sector finances for February 2022, released on Tuesday 22 March 2022, reported a deficit for the month of £13.1bn. This was an improvement of £2.4bn from the deficit of £15.4bn reported for February 2021, but £12.8bn worse than the £0.4bn deficit reported for February 2020.
The cumulative deficit of £138.4bn for the first 11 months of the 2021/22 financial year was £0.1bn less than that reported last month, as the £13.1bn deficit for February was offset by £13.2bn in revisions to prior month estimates.
Public sector net debt increased by £6.6bn from £2,320.2bn at the end of January to £2,326.8bn or 94.7% of GDP at the end of February, with tax and loan recoveries partly offsetting the deficit for the month. Despite that, debt is £192.4bn higher than at the start of the financial year and £533.7bn higher than March 2020.
The year-to-date deficit of £138.4bn compares with a cumulative deficit for the first 11 months of the financial year of £290.9bn in 2020/21 and £48.7bn in 2019/20. This was £25.9bn below the forecast published by the Office for Budget Responsibility alongside last October’s Autumn Budget and Spending Review 2021, with higher-than-forecast tax receipts being partially offset by higher-than-forecast interest charges on index-linked debt. Both are driven by higher rates of inflation, which takes more time to feed through to non-interest expenditure. This suggests that the deficit for the full year could end up somewhere in the region of £30bn below the official forecast of £183bn.
Cumulative receipts in the first 11 months of the 2021/22 financial year amounted to £826.0bn – £104.7bn or 15% higher than a year previously but £69.3bn or 9% above the level seen in the first 11 months of 2019/20. At the same time, cumulative expenditure excluding interest of £846.2bn was £65.1bn or 7% lower than the same period last year, but £127.4bn or 18% higher than two years ago.
Interest amounted to £69.2bn in the eleven months to 28 February 2022, which was £29.4bn or 74% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £17.8bn or 35% more than in the equivalent 11-month period ended 29 February 2020.
Cumulative net public sector investment up to February 2022 was £49.0bn. This was £12.1bn or 20% below the £29.7bn reported for the first 11 months of last year, which included around £17bn of COVID-19 related lending that the government does not expect to recover. Investment was £13.8bn or 39% more than two years ago, principally reflecting greater capital expenditures, including on HS2.
The increase in debt of £192.4bn since the start of the financial year comprises the cumulative deficit of £138.4bn and £54.0bn in other borrowing. The latter has been used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses via the British Business Bank (including bounce-back and other coronavirus loans), student loans and other cash requirements, net of the recovery of taxes deferred last year and loan repayments.
Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, says: “Today’s numbers show the impact inflation is having on the public finances as it continues to drive both tax receipts and interest costs higher. The deficit for the financial year is expected to be around £30bn lower than October’s official forecast of £183bn, while tomorrow’s Spring Statement forecasts could see a smaller deficit next year than the £62bn expected before the pandemic.
“Uncertainty about the impact of the war in Ukraine on the UK means it will be extremely difficult for the Chancellor to gauge the level of intervention needed to support households and businesses facing rocketing energy prices if he’s to avoid a recession that could permanently damage the economy and the public finances, and still leave room for tax cuts in the Autumn Budget.”
Caution is needed with respect to the numbers published by the Office for National Statistics (ONS), which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the 10 months to January 2022 by £13.2bn from £138.5bn to £125.3bn and reducing the deficit for the year ended 31 March 2021 by £4.1bn from £321.9bn to £317.8bn.
Our chart this week looks at Europe’s natural gas supply and its current reliance on Russian gas to keep homes warm, businesses operating and gas-fired power plants generating.
Europe’s gas supply in 2020 amounted to 494 billion cubic metres (bcm) of natural gas, comprising 213bcm (43%) of domestic production (principally from the North Sea), 158bcm (32%) imported from Russia, and 123bcm (25%) imported from other sources.
For this purpose, Europe excludes Russia, Belarus and Ukraine and these numbers also don’t take account of movements into and out of gas storage. For reference, 1bc) = 38.2 petajoules (PJ) = 10.6 terawatt hours (TWh) = 36.2trn British Thermal Units (BTU).
The biggest users of gas are Germany, the UK, Italy, Netherlands and France, which consumed approximately 94bcm, 80bcm, 71bcm, 44bcm and 40bcm respectively, together adding up to 329bcm or 67% of the total. Other western European countries consumed 93bcm of gas in 2020, including Spain (32bcm), Belgium (18bcm), Austria (9bcm), Portugal (6bcm), Greece (6bcm), Ireland (5bcm), Norway (5bcm), Switzerland (4bcm) and Denmark (3bcm).
Eastern European countries consumed 72bcm, including Poland (22bcm), Romania (12bcm), Hungary (11bcm), Czechia (9bcm), Slovakia (5bcm) and Bulgaria (3bcm). The Baltic states together consumed 4bcm.
Domestic production of 213bcm includes 116bcm from Norway, 41bcm from the UK and 24bcm from the Netherlands, almost all of which was supplied through a network of pipelines starting under the North Sea. The next largest producer was Romania with 9bcm.
The majority of Russia’s supply (around 140bcm) was sent through pipelines into eastern Europe, Germany and Italy, and from there onto western European countries. The balance of around 18bcm was supplied by tankers filled with liquefied natural gas (LNG).
Some of the remaining imports were also supplied by pipelines, in particular from Algeria, Libya and Turkey, but the majority was purchased as LNG on the world market from suppliers including the USA, Qatar, Kuwait, UAE, Nigeria and Trinidad & Tobago among others.
Removing Russia from the gas supply chain will not be easy, especially as the largest consumer of gas – Germany – has no LNG terminals and currently relies on pipelines for almost all of its gas supply.
Our chart of the week puts the spotlight on defence, illustrating how the UK’s regular forces have more than halved over the past 40 years. The big question is, are further reductions planned over the next few years still realistic in light of the invasion of Ukraine by Russia?
The post-Cold War ‘peace dividend’ has been reflected in a decline in defence spending over the past 40 years, accompanied by fewer soldiers, aviators, sailors and marines, as illustrated by our chart of the week. This shows how regular force numbers have fallen from 338,800 on 1 April 1981 (comprising 166,000 in the Army, 74,300 in the Royal Navy, including the Royal Marines, and 93,500 in the Royal Air Force) to 149,280 on 1 April 2021 (comprising 82,230 soldiers, 33,850 sailors and marines and 33,200 aviators).
There has been a small rise in numbers in the past couple of years as improvements to recruitment have helped bring the armed forces up to its planned complement.
The substantial falls in service personnel numbers since the 1980s have been accompanied by significant reductions in the numbers of tanks, ships and aircraft in operation – although technological and warfare developments mean that modern defence equipment is much more powerful than its predecessors. The two Queen Elizabeth-class aircraft carriers recently commissioned by the Royal Navy are a case in point.
The numbers in the chart exclude Army, Navy and Air Reserves of 37,420, Ghurkas of 4,010 and other military personnel of 8,170, at 1 April 2021. Also not included are civilians working for the Ministry of Defence or for the security services, who are also important parts of the UK’s national defence and security capability.
Last year’s Integrated Review of Security, Defence, Development and Foreign Policy included plans for greater investment in military equipment and cyber warfare, but it also set out further reductions in regular force numbers, with the Army expected to reduce to fewer than 75,000 by 2024.
Whether these plans will be revised in the context of a war in Europe remains to be seen, but it seems likely that the government will, at the very least, need to re-evaluate its plans. This may have implications for public finances as pressure will probably grow for spending on defence to increase from the £46bn – just under 2% of GDP – budgeted in the current financial year.
However, as the pandemic has perhaps demonstrated, the costs of being inadequately prepared for future eventualities – both in lives and money – could end up being significantly greater in the long run.
January’s public sector finance surplus of £2.9bn was driven by a boost to tax revenues as inflation drove up VAT receipts and self assessment income grew, putting further pressure on Chancellor Rishi Sunak to increase support to households facing huge rises in energy prices.
The public sector finances for January, released on 22 February, reported a surplus for the month of £2.9bn. This was an improvement of £5.4bn from the deficit of £2.5bn reported for January 2021, but £7bn smaller than the £9.9bn surplus reported for January 2020.
Total receipts were £97.9bn in January, up from £76.0bn in the previous month.
Public sector net debt fell from £2,339.7bn at the end of December to £2,317.6bn or 95% of GDP at the end of January, with tax and loan recoveries supplementing the surplus for the month. Despite that, debt is £210.7bn higher than at the start of the financial year and £524.5bn higher than in March 2020.
The cumulative deficit for the first 10 months of the financial year was £138.5bn, compared with £278.7bn and £48.4bn for the same period last year and the year before that respectively.
This was £17.7bn below the forecast published by the Office for Budget Responsibility (OBR) alongside last October’s Autumn Budget and Spending Review 2021, although higher than forecast tax receipts were partially offset by higher than forecast interest charges on index-linked debt. Both are driven by higher rates of inflation, which takes more time to feed through to non-interest expenditure.
Cumulative receipts in the first 10 months of the 2021/22 financial year amounted to £741bn, £93.3bn or 14% higher than a year previously, but only £56.1bn or 8% above the level seen in the first 10 months of 2019/20. At the same time, cumulative expenditure excluding interest of £776.7bn was £58.8bn or 7% lower than the same period last year, but £122.2bn or 19% higher than two years ago.
Interest amounted to £59.6bn in the 10 months to January 2022, £25.4bn or 74% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £12.8bn or 27% more than in the equivalent 10-month period ended 31 January 2020.
Cumulative net public sector investment up to January 2022 was £43.2bn. This was £13.5bn or 24% below the £56.7bn reported for the first 10 months of last year, which included around £17bn of COVID-19-related lending that the government does not expect to recover. Investment was £11.3bn or 35% more than two years ago, principally reflecting greater capital expenditures, including on HS2.
The increase in debt of £183.2bn since the start of the financial year comprises the cumulative deficit of £138.5bn and £44.7bn in other borrowing. The latter has been used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses via the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the recovery of taxes deferred last year and loan repayments.
Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The strong tax receipts reported today will provide a welcome respite for the public finances, reducing the shortfall in the government’s income compared with its expenditure from previous forecasts. However, the deficit is still on track to be the third highest ever recorded in peacetime, while public debt is more than half a trillion pounds higher than it was at the start of the pandemic.
“The challenge for Sunak will be balancing the strong pressures on him to increase the support package for households facing rapidly rising energy costs and retail prices, with the need to strengthen the resilience of the public finances in the face of a great deal of economic uncertainty and increasing global security concerns. The Chancellor will be acutely aware that while inflation is adding to tax revenues today it will go on to add to public spending tomorrow”.
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the nine months to December 2021 from £146.8bn to £141.4bn and increasing the deficit for the year ended 31 March 2021 from £321.8bn to £321.9bn.
GDP statistics have become much more exciting, with low but steady growth in per capita GDP before the pandemic giving way to large swings as the economy adjusts to a major shock.
GDP for the fourth quarter of 2021 was calculated to be £596bn by the ONS in its first estimate of this statistic measuring economic activity in the UK, bringing the provisional estimate for the full year to £2,318bn for the 2021 calendar year. On a per capita basis, this was equivalent to approximately £8,820 per person for the fourth quarter and £34,330 per person for the year.
The ICAEW chart of the week looks at how quarterly GDP has changed in real-terms over the past few years on a seasonally adjusted basis – demonstrating how boring GDP statistical releases were in the ‘before times’. Then, a relatively steady average per capita increase of approximately 0.3% each quarter reflected the low but steady level of economic growth that has been seen since the financial crisis. The arrival of the pandemic has seen all that change, with a collapse in GDP during the last half of 2020, followed by a stop-and-start recovery over the past few quarters, with provisional GDP estimate growing by 0.9% in the fourth quarter – faster than the pre-pandemic years, but slower than the revised 1.0% reported for Q3 and the 5.5% rise in Q2 of 2021.
The change in real-terms quarterly GDP per head in 2020 and 2021 illustrated by the chart were -2.7%, -19.5%, +17.4%, +1.3% and -1.3%, +5.5%, +1.0%, +0.9% respectively. It is, of course, always important to note that the statistics reported by the ONS are subject to frequent revision, especially when trying to count up the trillions of transactions entered into each quarter in a large and complex economy like the UK’s. The population estimates used for calculating per capita amounts are also likely to be revised, in particular once the results of the 2021 census are finalised in a few months’ time.
Despite the recovery in the last three quarters, GDP and GDP per capita remained below their peaks in the third quarter of 2019 and more significantly below the trend the economy was on.
With rapidly rising inflation, supply chain disruptions and uncertainty regarding how society will transition from a coronavirus pandemic to an endemic, the likelihood is that quarterly GDP releases are likely to continue to be observed with some excitement by economists (and the rest of us) for some time to come.
We take a look at the Great Britain National Insurance Fund, illustrating how the balance in the fund grew from the equivalent of 4.2 months of annual payments to 4.6 months over the course of 2020-21.
One of the many myths about the UK’s public finances is around the use of the word ‘fund’. This is often assumed to imply there is a pot of money set aside to cover spending requirements, when in practice it tends to refer to a budget allocation. An example is the National Productivity Investment Fund that was announced in 2016, which turned out to refer to unallocated amounts within the government’s budget for capital expenditure over several years.
Despite this terminology there are some actual ‘funds’ that have a legal basis and which have money in them, such the Contingencies Fund, where cash of £425bn passed through its accounts in response to the pandemic last year (up from £17bn in the previous year). However, net assets remained unchanged by this tidal wave of money at just £2m, highlighting how many such funds are principally mechanisms to facilitate the flow of money around government on the way to its intended destination.
The Great Britain National Insurance Fund and the Northern Ireland National Insurance Fund are perhaps the most well known of these funds, being the source of payments for the state pension and contributory welfare benefits. Surprisingly, there is a balance in these funds, which caused some excitement in a House of Lords debate last year when a peer decided that this was a pot of money that could be used to fund more spending.
Before getting too excited, it is important to understand that although the £42bn in the Great Britain National Insurance Fund sounds like a large amount of money, the reality is that it is more akin to a float, representing less than five months’ worth of annual payments from the fund and a relatively small fraction of the trillions of pounds in future payments expected to be paid out of the fund over the next quarter of a century and beyond. Likewise for the £1bn in the Northern Ireland National Insurance Fund.
In addition, when you delve into the accounts, you discover that most of the balances are invested in HM Treasury’s Debt Management Account, which are in effect intercompany balances (or ‘intra-government’ to be more technically accurate).
As our chart illustrates, the Great Britain National Insurance Fund had a balance of £37bn on 1 April 2020, equivalent to about 4.2 months of expenditure in the 2019/20 financial year. National Insurance receipts in Great Britain (ie, not including Northern Ireland) amounted to £140bn during 2020/21, including £3bn from other tax receipts to make up for contributions not received for those on statutory maternity, paternity, parental or bereavement pay.
Some £26bn of the national insurance contributions was deducted and sent off to help pay for the NHS, reducing the amount added to the fund to £114bn, while payments from the fund during the year amounted to £109bn. The latter comprised £100.4bn for the state pension, £5.2bn to cover contributory welfare benefits (employment and support allowance and jobseeker’s allowance), £0.9bn in administration costs, £0.8bn in bereavement and maternity allowances, £0.7bn in transfers to the Northern Ireland equivalent fund, £0.5bn in redundancy payments and £0.2bn in other payments.
The £5bn or so of surplus was added to the balance of the fund, taking it to £42bn at 31 March 2021, equivalent to 4.6 months of annual payments.
To be fair to the noble lord concerned, it might well be possible to use some of the money in the fund by reducing the effective float balance by a month or two, at least on a one-off basis. However, in the context of public spending in excess of £1.2tn a year and public sector net debt of £2.3tn, it is not likely to go that far!
Our chart this week is based on the Institute for Government’s recently published Whitehall Monitor 2022, illustrating how the government has already started on many of the major projects that form part of the Levelling Up White Paper.
On 31 January 2022, the Institute for Government (IfG) published its latest annual Whitehall Monitor, an authoritative compendium of analysis about the functions and effectiveness of central government that makes for compelling reading and contains some great charts to bring to life what would otherwise be pretty dry content.
Our chart this week draws on a couple of the IfG’s charts from pages 60 and 61 in the 2022 edition that take a look at the activities of the Infrastructure and Projects Authority (IPA). One of the IPA’s key roles is to support central government departments with their most expensive and complex projects. As the chart highlights, there was a sizeable jump in 2021 with 97 new projects added to the 87 existing projects brought forward from previous years, bringing the estimated whole-life cost of the projects being supported by the IPA to £542bn, up from £448bn in 2020.
According to the IfG, the major projects portfolio includes infrastructure developments such as the creation of a Midlands Rail Hub, large-scale programmes to improve public services such as the recruitment of 20,000 police officers by 2023, and military projects such as building a new medium-lift helicopter. This is the largest number of new items added to the portfolio in a single year since the publication of the IPA’s first annual report in 2013, with many of the projects now branded as part of the Levelling Up agenda. For comparison, fewer than 20 projects were added to the portfolio each year between 2018 and 2020. The government is currently managing 184 major projects – about 1.5 times as many as it did the year before and the portfolio is now at its largest size since 2015.
From a conventional perspective it may seem strange that the government started many of the projects in its just published Levelling Up White Paper as much as a year before setting out the plan that they form part of, but in practice the main components, such as new investment in transport infrastructure outside London and the South East, have been known for some time – as has the additional capital expenditure funding that has been provided to departmental budgets. What is new is the insight into the metrics that the government intends to use to assess the effectiveness of its levelling up plans by 2030, with 12 key objectives to be achieved.
However, as discussed in ICAEW’s Autumn Budget and Spring Budget coverage last year, much tighter budget settlements for day-to-day spending mean that departments could struggle to deliver major projects successfully given all the other pressures they are under as well as rapidly rising input costs, with the IfG commenting that: “Ministers should be careful to maintain enough administrative resources in their departments to help officials undertake these projects well, on time and to budget.”
The chart illustrates how following the IPA’s inception in 2013, there were 155 existing projects carried forward into 2014 and 44 new projects that year, a total of 199 with a whole-life cost of £399bn. This was followed by 188 projects in 2015 (150 existing and 38 new) of £489bn, 143 in 2016 (112 + 31) of £436bn, 143 in 2017 (107 + 36) of £455bn, 133 in 2018 (115 + 18) of £423bn, 133 in 2019 (114 + 19) of £442bn, 125 in 2022 (108 + 17) of £448bn and 184 projects in 2021 (87 existing + 97 new) with a whole-life cost of £542bn.
The IfG says: “Major reform is needed for government to respond to crises like the pandemic while simultaneously delivering long-term policy goals. Whitehall Monitor 2022 reveals how the government has been handling the Covid crisis while at the same time trying to make progress on priorities such as levelling up and hitting net zero. New employment support schemes and the vaccination programme were delivered rapidly, but progress on pre-pandemic priorities was limited.”
The report also warns that without fundamental reform – such as clarifying ministerial and civil service accountability, better data, improving transparency and ensuring a targeted workforce plan underpins its goal of up to 55,000 civil service job cuts by 2025 – government will continue being knocked off course when faced with shocks to the system. The IfG concludes that whatever happens as a result of the prime minister’s current troubles, with a looming cost-of-living crisis, ongoing COVID-19 challenges, and crunch Brexit deadlines and decisions ahead, 2022 will bring further strain.
The Levelling Up White Paper sets out some big aspirations, but the jury is still out as to whether they can be delivered.
Our chart this week looks at the fiscal forecast for the final quarter of the government’s financial year ending in March 2022.
The December 2021 public sector finances published by the Office for National Statistics (ONS) on Tuesday 25 January provided numbers for the first three quarters of the current financial year. As our chart this week illustrates, this leaves the final quarter still to go, with £13bn of headroom against the official forecast prepared by the Office for Budget Responsibility (OBR) at the time of the Autumn Budget and Spending Review 2021 back in October.
To put the current fiscal year into context, our chart shows how the deficit of £55bn in 2019/20 comprised quarterly deficits of £23bn for April to June 2019, £12bn for July to September 2019 and £23bn for October to December 2019 less a surplus of £3bn for January to March 2020. Although there was some impact from the pandemic on the last month of that financial year, it broadly provides an indication of a ‘normal’ pattern of deficits across the year, with the second quarter and more especially the fourth quarter benefiting from self assessment tax receipts – the latter despite typically higher levels of capital expenditure in the run up to the end of the financial year.
This was followed by the first full year of the pandemic and associated lockdowns which saw tax receipts fall significantly and expenditures rise dramatically, resulting in an unprecedented peacetime deficit of £322bn in 2020/21, comprising £133bn, £77bn, £66bn and £46bn for the four quarters respectively.
The current forecast is also on course for a pretty eye-watering deficit, which despite being substantially below that seen last year is forecast to be as much as £183bn. The provisional numbers for the first three quarters of 2021/22 of £61bn, £41bn and £45bn respectively are currently £13bn below the October forecast, implying an equivalent amount of headroom for the final quarter, assuming the OBR’s forecast deficit of £23bn for the fourth quarter proves to be accurate.
In practice, it would be surprising if the fourth quarter did come in on target other than by coincidence. Better than expected tax revenues are expected to continue to reduce the deficit over the final quarter but this is likely to be offset to a greater or lesser extent by higher interest costs on index-linked debt driven by rising inflation. There are also significant uncertainties around expenditures given the continuation of pandemic restrictions into January and the potential for further interventions to support businesses and individuals struggling financially as a consequence.
There have been suggestions that this headroom of £13bn is a ‘windfall’ that the Chancellor should use to support households expected to be hit by a greater than 50% rise in energy prices from April 2022 as discussed in last week’s chart of the week.
However, this perspective has also been contradicted by Carl Emmerson, Deputy Director at the Institute for Fiscal Studies (IFS), who is reported to have commented: “While borrowing last month was in line with the Budget forecast, over the first nine months of 2021/22 it is now £13bn below that forecast for the same period in the October Budget – £147bn instead of the £160bn expected in October. The latest improvement to borrowing over this period has been driven by higher-than-expected corporation tax being paid by some very large companies.
“Some have suggested better borrowing figures provide the Chancellor room to act on the cost of living by, for example, delaying the rise in National Insurance contributions planned for April. The truth is these figures make no difference to that calculation. Mr Sunak certainly could find money to delay tax rises or find other one-off ways of supporting living standards such as uprating benefits in April with a more up-to-date measure of inflation. But the long-run pressures on public services, especially health and social care, remain just the same and tax rises are likely to be needed if these are to be met. If he acts now on the cost of living, Mr Sunak will also need to find a credible means of committing to taking tough action on the public finances in the not too distant future.”
Even if the deficit does come in below the official forecast of £183bn, it will still be at a much higher level than that expected before the pandemic, when the forecast deficits for 2019/20, 2020/21 and 2021/22 were £47bn, £55bn and £67bn respectively compared with the much larger numbers reported in our chart. A variance of £13bn is also relatively small in the context of the £547bn increase in public sector net debt between March 2020 and December 2021.
All this suggests that the next fiscal event scheduled for 23 March 2022 is likely to take on even more importance as the Chancellor seeks to navigate between the rock of fiscal responsibility and a hard place of a cost of living crisis.
December’s deficit of £16.8bn saw both a rise in tax revenues and in interest on inflation-linked debt as pressure grows on the Chancellor to address energy price hikes and rising prices in the shops. The public sector finances for December 2021 released on Tuesday 25 January 2022 reported a monthly deficit of £16.8bn. This was £7.6bn lower than the £24.4bn reported for December 2020 but £11bn higher than the £5.8bn deficit reported for December 2019.
This brings the cumulative deficit for the first nine months of the financial year to £146.8bn compared with £276.1bn and £58.4bn for the same period last year and the year before that respectively.
Public sector net debt increased from £2,321.8bn at the end of November to £2,339.9bn or 96% of GDP at the end of December. This is £205.5bn higher than at the start of the financial year and an increase of £546.8bn from March 2020. As a proportion of GDP, debt is the highest it has been since March 1963, almost 60 years ago.
The deficit for the month was in line with the revised forecast for 2021/22, published by the Office for Budget Responsibility (OBR) alongside last October’s Autumn Budget and Spending Review 2021, although higher than forecast interest charges on index-linked debt offset the benefit of higher than forecast tax revenues.
Cumulative receipts in the first three quarters of the 2021/22 financial year amounted to £641.4bn, £82.8bn or 15% higher than a year previously, but only £44.2bn or 7% above the level seen in the first three quarters of 2019/20. At the same time, cumulative expenditure excluding interest of £700.5bn was £52.4bn or 7% lower than the first nine months of 2020/21, but £113.4bn or 19% higher than the same period two years ago.
Interest amounted to £53bn in the nine months to December 2021, £20.5bn or 63% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £10.6bn or 25% more than in the equivalent nine months ended 31 December 2019.
Cumulative net public sector investment in the three quarters to December 2021 was £34.7bn. This was £14.6bn or 30% less than the £49.3bn reported for the first nine months of last year, which included around £17bn of COVID-19-related lending that the government does not expect to recover. Investment was £8.6bn or 33% more than two years ago, principally reflecting greater capital expenditures, including on HS2.
The increase in debt of £205.5bn since the start of the financial year comprises the deficit of £146.8bn and £58.7bn in other borrowing. The latter was used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses overseen by the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the receipt of taxes deferred last year and loan repayments.
Martin Wheatcroft FCA, external advisor on public finances to ICAEW, said: “Today’s numbers highlight the impact inflation is having on the public finances, with higher tax revenues collected in December offset by the rising cost of index-linked debt. We expect interest charges to increase further in the next few months as the time lag on index-linked debt catches up with the current 7.5% rate of RPI.
“With borrowing costs low and headroom in forecasts for the next financial year, the temptation will be to delay fixing the public finances in order to tackle the immediate hit to household budgets from anticipated energy prices hikes and higher prices in the shops, so pressure on the Chancellor to postpone or phase in April’s national insurance rise is likely to grow.”
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the eight months to November 2021 from £136bn to £130bn and the deficit for the year ended 31 March 2021 from £321.9bn to £321.8bn.
