#uk – Page 17 – Martin Wheatcroft

ICAEW chart of the week: Balance of payments

Chart: Balance of payments 2018. Current account -£93bn (trade -£38bn, primary income -£29bn, secondary income -£26bn), capital account -£3bn, financial account +£96bn (investment +£77bn, errors and omissions +£19bn).

Although most of the focus on the balance of payments is on trade, i.e. imports and exports of goods and services, it is not the only element in the balance of payments equation, as the #icaewchartoftheweek illustrates.

Based on the 2019 Pink Book published by the Office for National Statistics last week, the balance of payments between the UK and the rest of the world in 2018 comprised a current account deficit of £93bn and a capital account deficit of £3bn, balanced by net inward investment of £77bn and errors and omissions of £19bn.

The current account deficit remains high by historical standards and was equivalent to 4.3% of GDP in 2018, up from 3.5% of GDP in 2017.

The current account deficit incorporates a trade deficit of £38bn, with imports of £680bn exceeding exports of £642bn. This reflects a surplus in services of £104bn that was more than outweighed by a deficit in goods of £142bn.

The primary income deficit of £29bn reflected £242bn in outflows – mainly investment income paid to foreign investors – less £213bn coming into the UK, while the secondary income deficit of £26bn reflects contributions to international institutions (including the EU), international development assistance, remittances and other net transfers.

Capital flows of £3bn reflect both sales of non-financial assets, and capital grants to other countries.

Inward investment of £178bn comprised direct investment in UK businesses of £28bn and £151bn of equity and debt investments, less a net £1bn movement in other forms of investment. Outward investments amounted to £101bn, with direct investments in foreign businesses of £29bn and £204bn in other movements (including currency changes), less net sales of £132bn of equity and debt investments.

Unfortunately, getting the balance of payments to actually balance is quite difficult and so the ONS has plugged the difference between the current, capital and financial accounts with £19bn in ‘errors and omissions’. The ONS will continue to revise the statistics over time, with the aim of improving the accuracy of the components reported.

Although the precise numbers will continue to be refined, the overall picture presented by the ONS is unlikely to change. The UK continues to buy more than it sells, pays out more to foreign investors than is earned from foreign investments, and transfers money to the rest of the world; with finance provided by foreign investors.

For more information about the Balance of Payments, visit UK Balance of Payments, The Pink Book: 2019.

ICAEW chart of the week: UK businesses

UK businesses: average revenue / person. No employees (4.8m people) £63k. Employers (22.7m people) £170k.

The #icaewchartoftheweek is on the 5.9m UK businesses reported by the Department for Business, Energy & Industrial Strategy (BEIS) to have been in operation at 1 January 2019, generating a total of £4.1tn in revenue each year.

According to the annual statistics published a couple of weeks ago, there are 4.5m businesses with no employees, generating an average revenue of £63k for the 4.8m person involved (this includes partnerships). This contrasts with the 1.4m businesses with employees with 22.7m people engaged at an average revenue of £170k per person.

Unsurprisingly, the 3.2m sole traders, freelancers, partnerships and personal companies not registered for VAT or PAYE (a total of 3.5m people engaged, generating an average revenue of £34k per person) have much lower average revenues than the 1.2m that are (1.3m, generating an average of £141k). Most part-time freelancers and self-employed contractors included in the former will have no need to register for VAT, while the latter will include VAT-registered consultants and other highly-paid individuals that are self-employed or employed via their own companies.

Most of the 1.4m employers are small businesses (up to 99 staff), employing 9.9m people with an average revenue of £149k per person (not shown in the chart). These include 141,135 businesses with only 1 employee (0.3m people generating an average of £83k), 751,205 businesses with 2-4 employees (2.1m, £158k), 399,365 with 5-19 employees (3.7m, £136k) and 96,505 businesses with 20-99 employees (3.8m, £162k).

There are 12,055 medium sized businesses with 100-249 employees (1.9m people in total, generating an average of £205k), while 7,685 large businesses employed 10.9m people at an average revenue of £182k per person.

There are some important caveats. Firstly, the numbers employed may include some double counting, as people can be involved in more than one business in different capacities. In addition, it is important to note that revenue is not the same as profit, and the numbers do not analyse the cost-structure of different sizes of business.

To see the underlying data, visit https://www.gov.uk/government/statistics/business-population-estimates-2019.

ICAEW chart of the week: Bank of England banknotes

Chart: 396 x £5: £2.0bn | 1,052 x £10: £10.5bn | 2,006m x £20: £40.1bn | 344m x £50: £17.2bn.

The confirmation last week of the new design for the Bank of England £20 banknote prompted the #icaewchartoftheweek to look at the value of banknotes in circulation.

There are just over 2bn paper £20 notes in circulation together worth £40.1bn, more in both number and value terms that the polymer £5 note (396m worth £2.0bn), polymer £10 note (1,052m worth £10.5bn) and the paper £50 note (over 344m worth £17.2bn). This amounts to a total of £69.8bn, not including £4.3bn in high value notes issued to Scottish and Northern Irish banks that in turn print their own banknotes.

On average there are approximately 6 five pound, 17 ten pound, 32 twenty pound and 5 fifty pound notes in circulation for each person living in the UK.

Replacing the existing £20 note with a new polymer design featuring a young J M W Turner will be a much bigger exercise than it was for the £5 and £10 polymer replacements, albeit it is unclear as to how many will be missing in action, having been lost down the back of sofas, hidden away in cupboards, or otherwise misplaced over the 12 and a half years that the current version has been in circulation.

The Bank of England has said the new polymer £20 note will start to be circulated on 20 February 2020. However, it has yet to announce a firm date for the final withdrawal of the current paper £20 note, likely to be in early 2021. Fortunately, Bank of England banknotes remain exchangeable forever.

For more information, visit www.bankofengland.co.uk/news/2019/october/the-new-20-note-unveiled or www.bankofengland.co.uk/statistics/banknote.

ICAEW chart of the week: Spending Round 2019: an ‘end to austerity’?

Spending Round 2019 £330.8bn + inflation £6.1bn + reclass £1.6bn + increases £13.8bn = £352.3bn

On 4 September 2019, the Chancellor of the Exchequer announced the UK Government’s plans for departmental spending for the next financial year, 2020-21; as illustrated by the #ICAEWchartoftheweek.

This was unusual, as the announcement was not accompanied by a Budget setting out how those plans would be funded, nor by updated economic forecasts to indicate the expected effect on the overall public finances. This is also the second year running that the three-year Spending Review has been delayed and replaced by a one-year plan.

The primary announcement was for an increase of £13.8bn in departmental current spending in the next financial year (2020-21), a 4.1% real-terms increase over the current financial year. This was £11.7bn more than had been previously included in public finance forecasts and increases ‘Resource DEL excluding depreciation’ to £352.3bn.

There is an extra £4.1bn for health, £1.0bn for social care, £2.2bn for education, £1.3bn for law & order, £0.7bn for defence and security, £0.6bn for devolved administrations, and £1.3bn in other increases. The latter includes £0.4bn for transport, £0.2bn for the Nuclear Decommissioning Authority, £0.1bn for international development, £0.1bn for the next census, £0.1bn for the Department for Work & Pensions, £68m for air quality, biodiversity and animal health, £54m to tackle homelessness, and £46bn for the Birmingham Commonwealth Games.

The Chancellor also announced that departmental capital spending would increase by £3.9bn or 5.0% in real terms. This is £1.7bn more than had previously been announced and increases ‘Capital DEL’ to £81.9bn. There is £2.2bn for transport infrastructure (including HS2, other rail projects and road building), £1.9bn in additional international development investment, £0.5bn for the defence equipment programme, and £0.5bn for Scotland, Wales and Northern Ireland, partially offset by £1.2bn in lower reserves and other changes.

Although department current spending is expected to rise by 4.1%, and capital spending by 5.0%, the overall increase in total managed expenditure in 2020-21 is a 2.4% rise to £865.2bn, with annually managed expenditure (‘AME’) relatively flat in real-terms. With the cost of pensions rising ahead of inflation, this implies further cuts in the welfare budget, and so this may not be the full ‘end to austerity’ claimed by the Chancellor.

The uncertain economic outlook also causes concern. A recession, whether or not induced by Brexit, could have adverse consequences for the public finances, raising the worrying prospect of a return to austerity in the three-year Spending Review now scheduled for next year.

ICAEW chart of the week: Schools budget up £14bn, or is it £1.2bn?

English schools budget 2020-21 +£2.6bn, 2021-22 +£4.8bn, 2022-23 +£7.1bn

The Prime Minister’s announcement of a ‘£14bn package’ of more money was welcome news for English schools as they prepare to re-open their doors after the summer holidays.

Unfortunately, as is common with government announcements, there is a tendency to add several years together to give a bigger headline, exacerbated this time by the inclusion of inflation to make the headline even bigger!

In reality the announcement is a lot less exciting, as illustrated by the #ICAEWchartoftheweek. The announced increase in the 5-16 schools’ budget in three years’ time of £7.1bn (from £45.1bn in 2019-20 to £52.2bn in 2022-23) turns out to be £3.6bn, or an average of £1.2bn a year after taking account of inflation and the expected growth in the number of school pupils of around 2% over that time.

This is still very good news for schools trying to manage within constrained budgets, but (as the IFS and others have reported) the increase will still be insufficient to restore real-terms per pupil funding to the levels seen before the financial crisis. A 12% increase in pupil numbers since 2009-10 has seen budgets squeezed as funding has been constrained to inflation-only increases for most of the last decade.

Ironically, the Chancellor wasn’t able to take advantage of the same trick in his announcement the following day of £400m for further education and sixth forms, despite the fact that this was proportionately a bigger increase. The announcement was only for one year, so he couldn’t add multiple years together to create a bigger headline, and HM Treasury no doubt held the line about not adding in inflation.

Either way, these announcements are indication of how the fiscal approach is changing after a decade of austerity and struggling public services. This week’s Spending Review will give us a few more clues about the direction of public spending, although if (as rumoured) the Budget is postponed then we may not find out what the plans for taxes and borrowing to fund these increases until the Spring.

ICAEW chart of the week: Housing sales

The ICAEW chart of the week this week is on the topic of the residential housing market, one of the swathe of economic statistics published by the Office for National Statistics last week.

While there is often great interest in what is happening to house prices, data on the number of transactions tends to get less publicity – despite perhaps being more important to the economy. After all, people moving home often generate a great deal of additional economic activity, such as redecorating and buying new furniture.

There were 856,000 housing sales in the year ended 30 September 2018, down from 948,000 in 2016 and 36% lower than the pre-crisis peak of 1,340,000 in 2007.

Much of the decline in the volume of transactions has been put down to the weak economic recovery, with low real family incomes making it difficult for many to buy, despite extremely low mortgage rates. Another culprit may be stamp duty, a friction in the housing market as it significantly increases the cost of moving home.

The total value of the transactions in 2018 was £253bn, meaning that the average price paid for house in England & Wales was £296,000.

The statisticians prefer to focus on the median value, which was £232,000 in 2018. The ONS uses this to calculate affordability, with the ratio to gross annual earnings at 7.83 in 2018, up from the 7.77 seen in 2017. Surprisingly this is higher than the 7.17 calculated for the peak in 2007, which in turn was significantly higher than the ratio of 4.13 back in 2000.

With politicians of all parties keen to increase housing supply, the hope is that more people will be able to get on the housing ladder and the volume of transactions will start to increase again. Whether that will actually happen remains to be seen.