Tag: #uk

ICAEW chart of the week: UK gilt issues

1 May 2020: The unsung heroes at the Debt Management Office (DMO) have swung into action as the UK Government has started to burn through cash at an astonishing rate, as illustrated by the #icaewchartoftheweek.

Chart. Cash raised 2019-20: £10bn, £10bn, £10bn, £13bn, £8bn, £12bn, £12bn, £12bn, £10bn, £13bn, £12bn, £15bn. Cash raised 2020-21: April £58bn.

The DMO, the low-profile unit within HM Treasury responsible for the national debt, raised an astonishing £58bn from selling gilt-edged government securities in April, compared with an average of £11bn obtained each month in the financial year to March. The size and frequency of gilt auctions went from an average of £2.6bn from one auction a week in 2019-20 to £3.2bn from four auctions a week in April.

The scale of the challenge became apparent in March as the Government announced a series of eye-watering fiscal interventions, with the DMO going overdrawn by £18.5bn to keep the Government supplied with cash in advance of ramping up gilt auctions in April.

Fortunately, the DMO is able to finance the Government at ultra-low rates of interest at the moment, with auctions oversubscribed and yields on 10-year gilts at just over 0.3% during the course of April. If maintained, the incremental cost of the additional £384bn in public sector net debt in 2020-21 set out by the Office for Budget Responsibility in its coronavirus reference scenario would be less than £2bn a year.

A legacy of debt for future generations to deal with, but – at least for now – a relatively cheap burden to service.

This chart of the week was originally published by ICAEW.

ICAEW chart of the week: deficit and debt

17 April 2020: The #icaewchartoftheweek is on the ‘coronavirus reference scenario’ put together by the Office for Budget Responsibility (OBR).

Fiscal deficit 2020-21: £55bn Budget 2020 + £130bn lower receipts +£88bn higher spending = £273bn. Net debt: £1,819bn Budget 2020 +£384bn more borrowing = £2,203bn.

It suggests that the deficit for the current fiscal year could end up somewhere in the region of £273bn, around five times as much as the official Spring Budget forecast of £55bn, while public sector net debt could exceed £2.2tn by 31 March 2021, £384bn more than previously expected.
 
This scenario, which the OBR stresses is not a forecast, is based on a three-month lockdown followed by restrictions for a further three months, resulting in a 35% contraction in the economy in the second quarter of 2020, before bouncing back relatively quickly to leave the economy 13% smaller in 2020 than in 2019.
 
Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.
 
This is only of one many potential scenarios, but what is clear is that whatever actually happens, the damage to the public finances from the coronavirus pandemic will be extremely severe.
 
We can (and will) worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.

This chart was originally published by ICAEW.

OBR: deficit could reach £273bn or more

15 April 2020: a report from the Office for Budget Responsibility (OBR) indicates that the fiscal deficit could increase to £273bn in 2020-21, but it cautions that this is only one of many plausible scenarios.

The OBR has produced its first analysis of the potential economic and fiscal impact of the coronavirus, based on a three-month lockdown followed by restrictions for a further three months. 

At the same time, the International Monetary Fund has warned that the global economic contraction underway is likely to be the worst since the Great Depression, dwarfing the financial crisis twelve years ago.  

In its ‘coronavirus reference scenario’, the OBR indicates that the UK economy could fall by 35% in the second quarter of 2020, before bouncing back to leave the economy 13% smaller in 2020 than in 2019. 

The consequence would be an increase in the deficit for the fiscal year ending 31 March 2021 to £273bn or 14% of GDP, while public sector net debt could be £384bn higher than budgeted for, reaching £2.2tn or 95% of GDP by the end of the fiscal year.

The OBR says that the economic impact of the coronavirus will derive much less from people falling ill or dying, than from the public health restrictions and social distancing required to limit its spread, severely reducing demand and supply at the same time. That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending.

Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025. 

The OBR analysis assumes that increased public spending, tax cuts and holidays, loans and guarantees, and actions taken by the Bank of England, designed to support household incomes and to limit business failures and layoffs, will help prevent greater economic and fiscal damage in the long term. However, it warns that the longer the disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ with adverse consequences for future deficits and for fiscal policy.

The International Monetary Fund (IMF) now predicts that the global economy will contract by 3.0% in 2020, much worse than the 0.1% contraction seen during the financial crisis in 2009 and a cut of 6.3% from its previous prediction in January. The IMF prediction is based on a shallower, but longer recession than the OBR’s scenario for the UK. Overall, the IMF believes that the cumulative output loss in 2020 and 2021 from the pandemic could be as much as $9tn.

Alison Ring, Director, Public Sector for ICAEW, commented: “The analysis published by the OBR is not a forecast, but the scenario it presents is pretty startling; making clear that whatever actually happens, the damage to public finances from the coronavirus pandemic will be extremely severe.

“While the OBR suggests that the economy and tax receipts could recover relatively quickly, the additional debt burden will weigh on the public finances for many years for come.”

Fiscal deficit 2020-21: £55bn Spring Budget +£130bn lower receipts +£88bn higher spending = £273bn Reference scenario. Net debt: £1,819bn +£384bn = £2,203bn.

This article was originally published by ICAEW.

ICAEW chart of the week: Public sector employment

Headcount / FTEs - Health and social work: 1,925,000 / 1,657,000; Education 1,500,000 / 1,105,000; Public administration 1,056,000 / 897,000; HM Forces and Police: 402,000 / 391,000; Other 505,000 / 464,000.

The #icaewchartoftheweek is about public sector employment, illustrating how just under 5.4m people work for public bodies in the UK or around 4.5m full-time equivalents (FTEs). This is 16.5% of the total UK workforce of 32.8m as of last September on a seasonally-adjusted basis.

The largest employer in the public sector is the NHS, with a headcount of 1.7m out of the 1.9m who work in the health and social work sector (1.5m FTEs). Included in the million or so people who work in public administration is the 451,000-strong Civil Service (419,000 FTEs) with most of the remaining 605,000 working for local authorities and non-departmental public bodies (FTEs 478,000).

Total public sector headcount has started to increase again in recent years with NHS and non-NHS headcount up 6.8% and 0.6% respectively over a nadir of 5.2m three years ago (up 2.5% overall), compared with an increase of 3.8% and a fall of 12.1% respectively over the previous seven years (down 7.8% overall between September 2009 and December 2016).

With increasing demand on the NHS from more people living longer and the ‘end of austerity’ we should expect to see further increases in public sector employment over the next few years.

ICAEW chart of the month: UK international trade

Imports £718bn: EU £369bn, EFTA £34bn, USA £87bn, Other Americas £26bn, Asia-Pacific £138bn, Other £64bn. Exports £673bn: EU £297bn, EFTA £29bn, USA £133bn, Other Americas £29bn, Asia-Pacific £108bn, Other £77bn.

With recent changes in ICAEW communications, the ICAEW Public Sector team has started an #icaewchartofthemonth to complement the #icaewchartoftheweek.

The first #icaewchartofthemonth was published on the ICAEW’s Insights Hub (icaew.com/insights) on Friday 31 January 2020 and is on the UK’s international trade. It highlights how important the £718bn in imports and £673bn in exports in the year to 30 September 2019 are to the economy of the UK.

As the UK Government starts to negotiate new trade arrangements with countries around the world, the EU will be the highest priority. Imports into the UK of £369bn represent 51% of total imports and exports to the 27 EU countries of £297bn are 44% of total exports. This is followed by the USA, where imports of £87bn and exports of £133bn represent 12% and 20% respectively.

Trade relationships with countries in the Asia-Pacific region will also be very important, in particular China (imports £60bn and exports £39bn), Japan (£17bn and £15bn) and the 10-country Association of South East Asian Nations (£22bn and £19bn).

https://www.icaew.com/insights/features/2020/jan-2020/uk-international-trade

ICAEW chart of the week: Q4 retail sales

Chart: 2018 Q4 retail sales £121.3bn + inflation (1.4%) £1.7bn + sales growth (0.9%) £1.1bn = £124.1bn 2019 Q4 retail sales.

Concerned about the state of the UK economy? Then the latest retail sales numbers will not have helped, with fourth quarter sales in the UK mainland just 0.9% higher after inflation over a year earlier, as illustrated by the #icaewchartoftheweek.

With population growth still estimated to be running at around 0.6% a year, this implies that retail sales per capita in Q4 (at around £635 per month) were just 0.3% higher after inflation than the same period in 2018.

Sales in Q4 of £124.1bn comprised £41.3bn on food, drink and tobacco, £21.3bn on clothing and footwear, £19.6bn on household goods, £11.5bn on automotive fuel and £30.4bn on other non-food purchases. On a per capita basis, this is equivalent to approximately £210 per person per month on food, drink and tobacco, £110 on clothing and footwear, £100 on household goods, £60 on automotive fuel and £155 on other non-food purchases.

This low level of growth on a year earlier reflects a slow-down in retail activity in the fourth quarter of 2019, with the Office for National Statistics reporting that Q4 sales were 0.9% lower than the third quarter on a seasonally-adjusted basis.

This will feed into fourth quarter GDP, which will not be good news for the Chancellor as he puts together what is being rumoured to be a radical first Budget in March – a weak economy will reduce his room for manoeuvre to reform the tax system while boosting public spending at the same time.

ICAEW chart of the week: Post-GE2019 fiscal deficits

With the General Election now complete, the Office for Budget Responsibility (OBR) was able to release a restated version of its March 2019 fiscal forecasts this morning, reflecting technical revisions to the way the fiscal numbers are calculated, in particular that of student loans. This enables us to update the numbers set out our GE2019 Fiscal Insight on the party manifestos as best we can, given that the OBR has not deigned to include either the changes to public spending announced in the Spending Round 2019 nor the tax and spending changes in the Conservatives manifesto.

As illustrated by the #icaewchartoftheweek, the revised baseline forecast for the fiscal deficit is now £50bn for the current fiscal year, followed by £59bn next year in 2020-21, £58bn in 2021-22 and 2022-23 and £60bn in 2023-24.

It was frustrating that the OBR scheduled their publication of these revised numbers for the first day of the General Election purdah period making it vulnerable – as happened – to being pulled. A day earlier and that would not have happened! Ideally, these revisions would have been published as soon as practical after the publication by the ONS of their revisions to historical numbers in September.

It would have been even better if the OBR had been able to update their economic forecast too, given that the current baseline is still based on an economic and fiscal analysis from nine-months ago. With weak economic growth over the first half of the financial year, it is likely that the OBR will cut its forecasts for tax revenues over the forecast period when it does get round to updating them, resulting in higher deficits – even before taking account of suggestions that the Conservative GE2019 winners plan to announce a splurge of more capital expenditures in the Spring Budget in February.

Unfortunately, we won’t see an updated long-term forecast until at least July 2020, when the OBR is scheduled to publish its next fiscal sustainability report on the prospects for the public finances.

ICAEW chart of the week: Age profile of monthly public spending

Chart: £902 at age 0, £1,505 at 10, £889, £618, £639, £742, £761 at age 60, £1,761 at 70, £2,246, £3,296, £3,515 at age 100.

With the General Election in full swing, the #icaewchartoftheweek is on one of the principal drivers of public spending: age.

As data from the Office for Budget Responsibility illustrates, public spending on the young increases as the population is educated, but then falls back to a low of around £600 per month at around age 28, after which spending per person starts to increase gradually over working lives until retirement age. From that point on, not only is there a significant increase in welfare spending as the state pension kicks in, but the costs of health care, and then adult social care start to increase dramatically.

With the number of people in the UK aged 70 or more expected to increase by 58% over the next 25 years, total public spending will increase accordingly, especially with all political parties promising to protect and improve the state pension, health provision and adult social care.

The number of people under the age of 70 projected by the ONS to increase by only around 2% over that same period, or potentially even fall by around 7% if net inward migration is lower than expected, while further cuts in public services are apparently off the table with the ‘end of austerity’. The implication is that taxes will need to rise, that social provision in retirement will need to be cut, or for there to be a resumption in austerity policies  (or a combination of all three).

Unfortunately, none of the major political parties appear to have a fiscal strategy that extends beyond the next five years, with only limited measures to address the big financial challenges of more people living longer. This is disappointing given that relatively small actions taken now could make a big difference to the financial position of the nation in 25 years’ time.

This election, voters have the opportunity to focus on the big challenges of sustainability, technology and the public finances. To find out more, visit GE2019 – It’s More Than a Vote.

ICAEW chart of the week: Public sector capital expenditure

Chart: Capex (real-terms) £61.5bn (3.5% of GDP) in 2009-10, to £64.1bn in 2011-12, down to £49.2bn (2.6%) in 2013-14, up to £60.0bn (2.9%) in 2017-18.

With apologies for the delay because of being away, this week’s #ICAEWchartoftheweek is on public sector capital expenditure (capex), something that all the political parties in the #GE2019 have promised to increase – in some cases by very significant amounts! 

As part of ICAEW’s It’s More Than A Vote campaign, ICAEW will be analysing the political party manifestos over the next few weeks, including the potential implications for the public finances.

One area that all the major parties appear to agree on is the need to increase investment in infrastructure and other assets, which is why we thought we would look at the last nine years of capital expenditure reported in the Whole of Government Accounts (WGA), prepared under International Financial Reporting Standards. This differs from public sector investment in the National Accounts, with the latter including capital grants and other transactions that do not result in the creation of publicly-owned fixed assets.

As the chart illustrates, capital expenditure in 2017-18 of £60.0bn was lower than the £64.1bn incurred in 2011-12 after adjusting for inflation and to include Network Rail, the government owned railway infrastructure company prior to 2014-15 when it was incorporated into the WGA). As a proportion of the economy, capex in 2017-18 was 2.9% of GDP, a smaller ratio than the 3.5% calculated for 2011-12.

Only around £16bn (0.8% of GDP) of the amount spent in 2017-18 went into infrastructure assets (principally transport infrastructure such as roads and railways), with in the order of £24bn (1.2%) going into land & buildings, including hospitals and schools. Approximately £9bn (0.4%) was spent on military equipment, with the balance of £11bn (0.5%) invested in other public sector assets, ranging from tangible fixed assets such as plant & equipment, IT hardware, vehicles and furniture & fittings, as well as intangible fixed assets such as software.

Capex comprises a relatively small proportion of total expenditures (capital and non-capital) of £1.0tn reported in the WGA for 2017-18. As a consequence, even relatively small incremental amounts will constitute proportionately large increases in capital budgets in the next few years.

Whether these plans will be deliverable is another question, given that traditionally the government has struggled to spend all its capital budgets, not to mention the difficulties there will be in finding all the workers necessary for a major expansion in construction activity.

It’s More Than A Vote

ICAEW chart of the week: monthly GDP estimates to September 2019

Chart: Monthly GDP estimates. Sep 2018 +0.02%, +0.25%, +0.20%, -0.29%, +0.48%, +0.28%, +0.04%, -0.49%, +0.21%, +0.11%, +0.31%, -0.16%, Sep 2019 -0.07%.

The ONS announced today that the real-terms change in quarterly GDP for Q3 (July to September 2019) was +0.3%, a turnaround from the contraction of -0.2% seen in Q2.

The #icaewchartoftheweek looks instead at the seasonally adjusted monthly changes in GDP over the last year. This is a view that the ONS tends not to highlight because it highlights one of the issues with GDP, which is the inherent difficultly in estimating it accurately. It prefers to remove the rockiness in the monthly numbers by averaging the results over longer periods, such as its headline three-month rolling estimates reported in the media today; a number that is still subject to revision, but to a lesser extent than that for individual months.

The monthly contraction of -0.07% in September may therefore not make the headlines, but it is the principal reason why expectations of 0.4% for quarterly growth were 0.1% too high. Most economists expected the economy to be flat this month, rather than the small contraction in the statistics released this morning.

Revisions may have a significant impact on the October monthly GDP estimates scheduled to be released two days before the general election on 10 December 2019. A flat October with no revisions would see the three-month rolling GDP number fall to 0.0%, while a further contraction could see quarterly growth turn negative, a potentially significant contributor to the public debate in the couple of days before the polling booths open.

Perhaps the main conclusion that can be drawn is not about the specific monthly changes themselves, but rather how the economy is so weak that a very small change either in actual economic activity, or in statistical data collection, can easily move the numbers from positive to negative or vice-versa.

A rather dismal perspective to hold onto as the debate rages and claim and counterclaim are made.