Tag: #uk

Setting a new direction for local authority accounts

The Levelling Up, Housing and Communities Committee has delivered a landmark report that will transform local authority financial statements, says ICAEW’s Alison Ring.

While the focus for many of us at the moment is on a rather depressing English roulette game of guessing which local authority will be the next to issue a section 114 ‘bankruptcy’ notice, you may be forgiven for having missed the landmark nature of the House of Commons Levelling Up, Housing and Communities Committee report ‘Financial Reporting and Audit in Local Authorities’. 

Admirably concise (for such reports) at 45 pages, the report has quite rightly attracted headlines for the elements focused on the local audit crisis in England – and the increasingly urgent actions that are needed to resolve it. We at ICAEW are equally frustrated at the slow pace of the response and continue to urge the government to prioritise getting local authority audits back on track as quickly as possible. 

So far, so expected. The Committee adds to the chorus of voices already calling for the government to address and reduce the backlog of audited accounts, as well as to take action in the longer term to prevent backlogs from happening again. The report highlights delays in putting the new system leader for local audit onto a statutory basis and calls for enabling legislation to be brought forward as soon as possible.

What makes this report so important is that it has not stopped there, instead going under the hood of the local authority financial reporting and audit system to come up with transformational recommendations on how local authority accounts can be improved to properly support democracy and accountability in a way that they aren’t doing now.

Fundamental weaknesses

The principal focus of the report is on addressing: “… fundamental weaknesses in the accounts themselves that are hampering the efforts of members of the public and other stakeholders to use them in holding local authorities to account”. 

The Committee highlights the impenetrability of local authority financial statements as being a core issue, commenting that stakeholders who might want to use the information in the accounts encounter significant challenges in finding and understanding the information they need. As a result, many stakeholders do not use the accounts at all. Local authority accounts and audit are therefore not adequately fulfilling their role in supporting local democracy and accountability.

The Committee also quotes Rob Whiteman, Chief Executive of the Chartered Institute of Public Finance and Accountancy (CIPFA), who commented in his evidence to the inquiry that if people do not understand the accounts, they may also believe the accounts to be opaque and untrustworthy. My boss Iain Wright, Managing Director for Reputation and Influence at ICAEW, also gave evidence to the inquiry in which he stated that council taxpayers want to know how their money is being spent, and ultimately local authority accounts are the best way of being able to distil that.

Five purposes of accounts

One of the key issues identified by the Committee is a lack of clarity around the purpose of accounts, with the report quoting evidence from Alison Scott, Shared Director of Finance for Three Rivers District Council and Watford Borough Council, who stated: “At the moment, the statement of accounts tries to be all things to all people and, in doing that, gains lots of complexity. It almost loses its focus as to who it is supposed to be being produced for and who its focus is on.”

The Committee answers that by setting out five purposes that it believes accounts should fulfil to adequately support local democracy and accountability: 

  1. To be a credible public record.
  2. Provide accountability for spending. 
  3. Enable conclusions to be reached on value for money.
  4. Provide information to run local authorities.
  5. Alert stakeholders of actual and potential issues.

The Committee believes these purposes will ultimately focus local authority accounts on their role as vital tools for upholding local democracy and accountability. 

ICAEW concurs in the need for clarity around the purposes of the accounts and believes these proposals will provide much needed clarity to government, standard setters, preparers and regulators in how financial statements should be designed and presented. A new foundation that will be critical in helping users understand what is going on so that stakeholders can read and use the accounts to hold local authorities to account.

The Committee makes some specific recommendations to align local authority accounts with the five purposes, including introducing a standardised statement of service information and costs (as recommended by the Redmond Review); decoupling pension statements from the accounts; ensuring that auditors consider and conclude on the value for money achieved by local authorities; and encouraging more consistent use of auditors’ existing powers to sound early warnings. It also called for the government to work with CIPFA to make the Accounting Code freely available to all possible users.

A much more significant recommendation is the Committee’s call for the Department of Levelling Up, Housing and Communities to undertake an immediate review into existing legislation that places requirements on the contents and format of local authority accounts (including statutory overrides), with a view to ensuring they align with the five purposes as set out above. 

The report comments that not a single stakeholder, witness or piece of written evidence expressed to the inquiry that one of the purposes of the accounts was to provide a baseline for the council tax calculation. The Committee did not consider council tax setting to be one of the main purposes of the accounts, questioning whether this could be better done outside of the accounts as part of a separate process.

A landmark report

I believe this report marks a decisive turn in what local authority annual financial reports should look like and how they can be used much more effectively to hold local authorities to account, improve decision-making and governance, and ensure value for money provided by local and national taxpayers. 

We can only hope that it will be as effective as the Public Administration and Constitutional Affairs Committee’s report ‘Accounting for Democracy’ was to making central government accounts much more accessible to parliamentarians and other users.

If I have one (or is that two?) quibble(s) it is that the report does not sufficiently emphasise the role of councillors in holding local authorities to account and the role of finance teams in helping them to do so effectively.

Despite that small caveat, this is a landmark report that sets a new direction for local authority accounts and audit to support local democracy and accountability. By establishing clarity around the purpose of accounts the Committee has provided a foundation on which the whole system can be rebuilt.

Alison Ring is Director Public Sector and Taxation, ICAEW.

This article was written by Martin Wheatcroft (on behalf of ICAEW) together with Alison Ring, and was originally published in Room 151 and subsequently by ICAEW.

Gap between public sector income and spending reaches £116bn

Latest public sector finance numbers reveal a challenging fiscal backdrop for both government and opposition ahead of a general election.

The monthly public sector finances for November 2023 released by the Office for National Statistics (ONS) on Thursday 21 December 2023 reported a provisional deficit for the month of £14bn and revised the year-to-date deficit up by £4bn, bringing the cumulative deficit for the first two-thirds of the financial year to £116bn, £24bn more than in the same eight-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “These numbers confirm that the government’s financial difficulties are continuing to mount, with the shortfall between income and public spending reaching an unsustainable £116bn for the first two-thirds of the financial year, surpassing the £100bn milestone and providing a challenging fiscal backdrop for both the government and the opposition ahead of a general election.

“While the Prime Minister and the Chancellor continue to search for cost savings to free up capacity for further pre-election tax cuts, the opposition will be concerned about the fiscal legacy it would inherit if it were to take power. 

“The deteriorating state of the UK’s public services is a big concern for all politicians given that it implies a need for substantial tax rises after the general election, irrespective of who wins.”

Month of November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of November 2023 was £14bn, made up of tax and other receipts of £86bn less total managed expenditure of £100bn, up 5% and 3% respectively compared with November 2022. 

This was the fourth highest November deficit on record since monthly records began in 1997, following monthly deficits of £15bn, £22bn and £15bn in November 2010, 2020, and 2022 respectively.

Public sector net debt as of 30 November 2023 was £2,671bn or 97.5% of GDP, up £30bn during the month and £132bn higher than at the start of the financial year.

Table titled 'Public sector finance trends: November 2023' Eight months to Nov 2019, Nov 2020, Nov 2021, Nov 2022 and Nov 2023 respectively. £bn except where stated. Receipts: 530, 491, 574, 648, 682 Expenditure: (522), (661), (610), (635), (676) Interest: (41), (30), (46), (83), (90) Net investment: (22), (46), (31), (22), (32) Subtotal line Deficit: (55), (246), (113), (92), (116) Other borrowing: 5, (67), (83), (4), (15) Total line above Debt movement: (50), (313), (196), (96), (131) Total line below Net debt: £1,827bn, £2,128bn, £2,348bn, £2,477bn, £2,671bn Net debt / GDP: 83.4%, 99.1%, 98.5%, 95.7%, 97.5%.

Eight months to November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first two thirds of the financial year to November 2023 was £116bn, £24bn more than the £92bn deficit reported for the first eight months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £682bn and total managed expenditure of £798bn, up 5% and 8% respectively compared with April to November 2022.

Inflation benefited tax receipts for the first eight months compared with the same period in the previous year, with income tax up 10% to £156bn and VAT up 8% to £134bn. Corporation tax receipts were up 10% to £62bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 3% to £114bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £9bn and the total for all other taxes was up just 3% to £132bn, much less than inflation, as economic activity slowed. Non-tax receipts were up 11% to £75bn, primarily driven by higher investment income.

Total managed expenditure of £798bn in the eight months to November 2023 can be analysed between current expenditure excluding interest of £676bn, up £41bn or 6% over the same period in the previous year, interest of £90bn, up £7bn or 8%, and net investment of £32bn, up £10bn or 45%.

The increase of £41bn in current expenditure excluding interest was driven by a £21bn increase in pension and other welfare benefits (including cost-of-living payments), £14bn in higher central government pay and £7bn in additional central government procurement spending, less £1bn in net other changes.

The rise in interest costs for the eight months of £7bn to £90bn comprises a £20bn or 43% increase to £67bn for interest not linked to inflation as the Bank of England base rate rose, partially offset by an £13bn or 37% fall to £23bn for interest accrued on index-linked debt from lower inflation than last year.

The £10bn increase in net investment spending to £32bn in the first eight months of the current year reflects high construction cost inflation amongst other factors that saw a £13bn or 21% increase in gross investment to £75bn, less a £3bn or 8% increase in depreciation to £43bn. 

The cumulative deficit of £116bn for the first two-thirds of the financial year is £8bn below the Office for Budget Responsibility (OBR)’s official forecast of £124bn for the full financial year as compiled in November 2023 for the Autumn Statement. The deficit for the last third of the financial year is normally much smaller than for the first two-thirds because of self assessment tax returns arriving in January that boost tax receipts.

Balance sheet metrics

Public sector net debt was £2,671bn at the end of November 2023, equivalent to 97.5% of GDP.

The debt movement since the start of the financial year was £131bn, comprising borrowing to fund the deficit for the eight months of £116bn plus £15bn in net cash outflows to fund lending to students, businesses and others net of loan repayments and working capital movements.

Public sector net debt is £856bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,133bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 30 November 2023, comprising £1,565bn in non-financial assets and £1,054bn in non-liquid financial assets minus £2,671bn of net debt (£303bn liquid financial assets – £2,974bn public sector gross debt) and other liabilities of £663bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

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

The latest release saw the ONS revise the reported deficit for the seven months to October 2023 up by £4bn from £98bn to £102bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of October 2023 was revised down by 1.2 percentage points from 97.8% to 96.6% as a consequence of updated estimates of GDP.

The ONS also revised up its estimates for the deficit for the financial years to March 2023 and 2022 respectively, by £3bn to £131bn for 2022/23 and by £2bn to £124bn for 2021/22.

This article was originally published by ICAEW.

ICAEW chart of the week: Incorporations and dissolutions

My chart for ICAEW this week illustrates how company dissolutions continue to outpace incorporations as the economy remains in first gear.

Column chart titled 'Incorporations and dissolutions' with two-column comparisons over five years. 2019: 670,575 incorporations and 671, 501 dissolutions 2020: 758,012 and 536,564 2021: 762,278 and 807,049 2022: 778,219 and 876,521 2023: 801,831 and 825,980 7 Dec 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Companies House incorporations and dissolutions, 7 Dec 2023'.

A key indicator for the health of the economy is the comparison between how many companies are created each year and the number that are dissolved, and our chart this week illustrates how these compare over the last four years up until 1 December 2023.

In 2019 there were 670,575 company incorporations and 671,501 dissolutions (391,066 compulsorily and 280,435 voluntarily), a net contraction in the number of companies of 926, consistent with the rather tepid economy we were experiencing in the year before the pandemic.

The numbers for 2020 were distorted by the pandemic, with incorporations rising to 758,012 and dissolutions falling to 536,564 (275,933 compulsorily and 260,631 voluntarily) – a net increase of 221,448. The rise in incorporations was no doubt contributed to by people deciding to start new businesses during lockdown, although bulk incorporations may also have been a factor. The significant fall in companies dissolved in 2020 compared with the previous year reflects government support on offer during the pandemic that propped up many companies that would otherwise have failed during 2020.

Incorporations rose further to 762,278 in 2021 and 778,219 in 2022, but these gains were more than offset by a sharp rise in dissolutions, which jumped to 807,049 (508,448 compulsorily and 289,604 voluntarily) in 2021 and 876,521 (572,646 compulsorily and 304,875 voluntarily) in 2022 as government support was withdrawn and reality caught up with many companies. Extremely high energy costs and high inflation were key factors in the demise of many businesses over this period. The net decrease in the number of companies was 44,771 in 2021 and 98,202 in 2022.

The number of companies incorporated during the first 11 months of 2023 was 801,831, a 9% rise on the equivalent period last year, while 825,980 companies were dissolved (539,643 compulsorily and 286,337 voluntarily), a rise of less than 1%. This has narrowed the gap to a contraction of 24,149 companies in the first 11 months of 2023.

While these numbers may be accurate to the nearest digit (unlike most sample-based statistics), their meaning for the economy is much less precise. Many companies are incorporated but never go on to trade, while some incorporations are merely a corporate wrapper around an existing business, or with personal service companies they can be a conversion of economic activity from one legal form to another. Unfortunately, companies are also sometimes incorporated for fraudulent purposes. Similarly, companies are wound up for a range of reasons and not just because they are all the consequence of failing businesses.

Despite that, they do provide a helpful indicator on what is going on with the economy, as the ‘cycle of business life’ is played out. For example, in theory it should be positive that even after a post-pandemic ‘shakeout’ the total number of companies over the period from 2019 to 1 December 2023 has grown by 53,300.

This may also be a statistic worth watching in 2024 as Companies House uses its new powers to weed out companies in the register. Just how significant will the introduction of new verification procedures and more active enforcement activity be to numbers of companies being incorporated and dissolved each year?

This chart was originally published by ICAEW.

ICAEW chart of the week: Exploding debt

My chart for ICAEW this week takes a look at how UK public debt has exploded since the financial crisis to more than quintuple from £0.6trn in March 2008 to a projected £3.1trn in March 2029.

Exploding debt Step chart showing how UK public sector net has changed between March 2008 and the projected position in March 2029. [debt bars shaded orange, changes shaded in purple] March 2008: £0.6trn Financial crisis: +£0.7trn March 2012: £1.3trn Austerity years: +£0.5trn March 2020: £1.8trn Pandemic / energy crisis: +£0.9trn March 2024: £2.7trn [bar colours shaded by 50% to indicate the following are projected numbers] Latest plan: +£0.4trn March 2029: £3.1trn 30 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: OBR, 'Public finances databank - Nov 2023'.

As illustrated by our chart this week, the sums borrowed by the government since the financial crisis of a decade and half ago have been truly astonishing. 

In March 2008, the official measure of net debt for the UK public sector was less than £0.6trn. During the financial crisis, government borrowing totalled £0.7trn over a four-year period, causing public sector net debt to more than double to £1.3bn in March 2012. 

The eight austerity years saw government cut spending on public services to a significant degree but still borrow a further £0.5trn to see net debt reach £1.8trn in March 2020 – arguably not mending the roof while the sun was shining. This was then followed by an exceptional amount of borrowing during four years of pandemic and energy crisis (including the current financial year) that is expected to see net debt increase by a total of £0.9trn to reach £2.7trn in March 2024.

The Autumn Statement 2023 on Wednesday 22 November saw the Chancellor set out his latest plan for the UK public finances over the next five financial years. This includes a further £0.4trn of borrowing, with public sector net debt projected to amount to £3.1trn in March 2029 – more than quintuple the net amount owed by the UK state 21 years earlier in March 2008.

This assumes that the government can stick to its borrowing plans – many commentators have suggested that planned cuts in spending on public services are unrealistic, meaning more borrowing if taxes are not to rise.

The £2.5trn increase in debt between 2008 and 2029 comprises £2.2trn in borrowing to fund 21 years of deficits (the annual shortfall between receipts and spending) and £0.3trn in other borrowing to fund government lending (such as student loans) and working capital requirements.

As a share of the economy, the increase is less dramatic but still significant – rising from a net debt to GDP ratio of 35.6% in March 2008, to 74.3% in March 2012, to 85.2% in March 2020, to an anticipated 97.9% in March 2024. However, the good news is that net debt / GDP is expected to fall to 94.1% in March 2029 as inflation and economic growth offset the additional borrowing.

The worry for this (or any alternative) government is that while borrowing levels in the OBR’s forecast spreadsheet for the next five years appear manageable and are (just) within the current fiscal rules, the numbers assume that we don’t enter another recession or other economic crisis in that time. Otherwise, we could see debt exploding again.

This chart was originally published by ICAEW.

Public sector net debt hits an unprecedented £2.6trn

Monthly public sector finances for October saw spending continue to exceed receipts by a large margin, even if by less than was predicted earlier in the year.

The Office for National Statistics (ONS) released the month public sector finances for October on Tuesday 21 November 2023. It reported a provisional deficit for the month of October of £15bn, bringing the cumulative deficit for the first seven months of the year to £98bn, £22bn more than in the same period last year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Although it is positive that the cumulative deficit to October of £98bn is less than the £115bn predicted by the OBR, cash going out continues to exceed cash coming in by a very large margin. Public sector net debt has now exceeded £2.6 trillion for the first time, which is a staggering new record.  

“Tomorrow’s Autumn Statement will see the OBR revise and roll forward its forecast, giving the Chancellor so-called headroom to cut taxes or increase spending. But in reality there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”

Month of October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of October 2023 was £15bn, made up of tax and other receipts of £85bn less total managed expenditure of £100bn, up 3% and 6% respectively compared with October 2022. 

This was the second highest October deficit on record since monthly records began in 1993, following a monthly deficit of £18bn in October 2020 at the height of the pandemic.

Public sector net debt as of 31 October 2023 was £2,644bn or 97.8% of GDP, the first time it has exceeded £2.6trn – only eight months after it first reached £2.5trn.

Seven months to October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the seven months to October 2023 was £98bn, £22bn more than the £76bn deficit reported for the first seven months of 2022/23. This reflected a widening gap between tax and other receipts for the seven months of £595bn and total managed expenditure of £693bn, up 5% and 8% respectively compared with April to October 2022.

Inflation benefited tax receipts for the first seven months compared with the first half of the previous year, with income tax up 10% to £137bn and VAT up 9% to £117bn. Corporation tax receipts were up 12% to £55bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 4% to £99bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £8bn and the total for all other taxes was up just 3% to £115bn, much less than inflation as economic activity slowed. Non-tax receipts were up 10% to £63bn, primarily driven by higher investment income.

Total managed expenditure of £693bn in the seven months to October 2023 can be analysed between current expenditure excluding interest of £587bn, up £39bn or 7% over the same period in the previous year, interest of £76bn, up £4bn or 5%, and net investment of £30bn, up £9bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £20bn increase in pension and other welfare (including cost-of-living payments), £12bn in higher central government pay, £6bn in additional central government procurement spending, plus £1bn in net other changes.

The rise in interest costs for the seven months of £4bn to £76bn comprises a £18bn or 53% increase to £52bn for interest not linked to inflation as the Bank of England base rate rose, mostly offset by an £14bn or 37% fall to £24bn for interest accrued on index-linked debt from lower inflation than last year.The £9bn increase in net investment spending to £30bn in the first seven months of the current year reflects high construction cost inflation amongst other factors that saw a £11bn or 17% increase in gross investment to £65bn, less a £2bn or 6% increase in depreciation to £35bn. 

Public sector finance trends: October 2023 Table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the seven months to October 2023 plus net debt and net debt / GDP at 31 October 2023. Receipts: £466bn (Oct 2019), £425bn (Oct 2020), £500bn (Oct 2021), £565bn (Oct 2022), £595bn (Oct 2023) Expenditure: (£457bn), (£582bn), (£536bn), (£548bn), (£587bn) Interest: (£38bn), (£26bn), (£41bn), (£72bn), (£76bn) Net investment: (£20bn), (£42bn), (£28bn), (£21bn), (£30bn) [line above subtotal] Deficit: (£49bn), (£225bn), (£105bn), (£76bn), (£98bn) Other borrowing: £5bn, (£61bn), (£61bn), £5bn, (£7bn) [line above total] Debt movement: (£44bn), (£286bn), (£166bn), (£71bn), (£105bn) [line below total] Net debt: £1,821bn, £2,101bn, £2,319bn, £2,454bn, £2,644bn. Net debt / GDP: 82.1%, 99.3%, 97.5%, 95.5%, 97.8%

The cumulative deficit of £98bn is £17bn lower than the Office for Budget Responsibility (OBR)’s official forecast of £115bn for the first seven months of 2023/24 as compiled in March 2023. The OBR is expected to revise its forecast for the full year deficit down from £132bn in tomorrow’s Autumn Statement, but it is still on track to be more than double the £50bn projection for 2023/24 set out in the official forecast from a year earlier (March 2022). 

Balance sheet metrics

Public sector net debt was £2,644bn at the end of October 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £105bn, comprising borrowing to fund the deficit for the seven months of £98bn plus £7bn in net cash outflows to fund lending to students, businesses and others net of loan repayments together with working capital movements.

Public sector net debt is £829bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,106bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£716bn on 31 October 2023, comprising £1,565bn in non-financial assets, £1,029bn in non-liquid financial assets, £2,644bn of net debt (£305bn in liquid financial assets less public sector gross debt of £2,949bn) and other liabilities of £666bn. This is a £102bn deterioration from the -£614bn reported for 31 March 2023.

Revisions

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

The latest release saw the ONS revise the reported deficit for the six months to September 2023 up by £1.7bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of September 2023 was revised down by 1.4 percentage points from 97.8% to 96.4% as a consequence of updated estimates of GDP.

This article was originally published by ICAEW.

ICAEW chart of the week: Pensioners dilemma

The ‘elephant in the room’ of growing numbers of pensioners and what that will mean for the long-term prospects of the public finances is likely to be avoided yet again at next week’s Autumn Statement.

Pensioners dilemma Two column chart with lines between them showing projected changes in the UK population between 2023 and 2043. 2023: 68.1m (left hand column) Change: +4.0m (+6%) 2043: 72.1m (right hand column) Split into two bars in each column. Pensioners (in purple) 2023: 12.4m Change: +3.3m (+27%) 2043: 15.7m Everyone else 2023: 56.7m Change +0.7m (+1%) 2043: 56.4m

My chart for ICAEW this week is on the ‘elephant in the room’ that haunts fiscal events such as next week’s Autumn Statement – the rapidly rising number of pensioners that is driving some of the biggest line items in the national budget: pensions, health and social care.

This fiscal event is unlikely to be any different, with the Chancellor expected to focus most of his statement on short-term measures to free up headroom for pre-election tax cuts at a time of stagnant economic growth.

Any substantive discussion on the long-term prospects for the public finances is likely to be absent beyond a continued commitment to seeing the debt to GDP ratio start to fall within the next five years. How he – or more likely his successors – might be able to avoid having to raise taxes significantly in the coming decades to pay for the cost of pensions, health and social care for many more people, living longer, sometimes less healthy lives, is unlikely to be at the core of what is announced.

To illustrate the dilemma facing policymakers and the public, our chart shows how pensioners represent 3.3m out of the 4.0m projected increase in the size of the UK population between 2023 and 2043. The total population of the UK is projected to increase by 6% from 68.1m in 2023 to 72.1m in 2043, with the number of pensioners expected to increase by 27% from 12.4m this year to 15.7m in 20 years’ time. 

The number of non-pensioners is expected to increase by 0.7m or 1% from 55.7m to 56.4m, with net inward migration of 5.0m over that period offsetting what would otherwise be a significant fall in the numbers below retirement age. (Not shown in the chart is a projected 3% rise in the working age population and a 7% fall in the number of children.)

The projected 27% rise in the number of pensioners is despite a planned increase in the state pension age from age 66 to age 67 in 2027, one of the few long-term steps the government has taken to mitigate the fiscal effects of rising pensioner numbers. However, increasing the retirement age doesn’t directly impact health and social care costs, as well as being partly offset by the cost of supporting increasing numbers of people out of work between traditional retirement age and the age at which they can take their state pension.

Given the significance of the demographic challenge to the public finances, there is very little public debate on what to do, especially as the current policy of cutting the proportion of spending going on public services outside of health appears increasingly unsustainable. 

Spending on defence and security (the traditional budget to raid) is already close to the NATO minimum and appears likely to need to increase given the global security situation, while extracting further savings from other public services seems extremely unlikely, especially given the reluctance of successive governments to put in the level of upfront and ongoing capital investment that might make operational savings possible.

The irony is that, unlike the game-theory scenario of the prisoners’ dilemma that makes optimal decision-making difficult for two prisoners who can’t communicate with each other, there is no theoretical restriction on the ability of policymakers to talk to the public about the pensioners dilemma and to have a proper debate about that might mean for taxes and public services in the long term.

Read more: ICAEW Autumn Statement 2023 hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: Coronavirus

My chart this week looks at one of the big questions being looked at by the UK COVID-19 Inquiry: why did the UK experience one of the highest death rates in the developed world?

Coronavirus Column chart showing deaths per million population, with each column broken into 2020, 2021, 2022 and 2023 (to 2 Nov) components. Year components only labelled for the UK Japan - 603 (28 in 2020, 120 in 2021, 316 in 2022, 139 in 2023 up to 2 Nov) Australia - 893 (35, 58, 587, 212) Canada - 1,395 (397, 382, 498, 118) Ireland - 1,848 (451, 761, 480, 156) Germany - 2,099 (564, 848, 576, 111) France - 2,599 (983, 938, 580, 98) Italy - 3,259 (1,247, 1,078, 805, 129) USA - 3,365 (1,041, 1,381, 786, 157) UK - 3,421 (1,382, 1237, 583, 219) Greece - 3,635 (451, 1,524, 1,393, 267) 9 Nov 2023. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: Our World In Data, ‘COVID-19 data explorer’ / WHO, ‘Covid-19 dashboard’.

My chart for ICAEW this week is on the coronavirus pandemic and how, according to World Health Organisation (WHO) data as summarised by Our World in Data’s Covid-19 Data Explorer, the UK suffered one of the highest death rates in the developed world.

According to the official statistics, there were 3,421 deaths per million population attributed to COVID-19 in the UK between 1 January 2020 and 2 November 2023. This compares with 603 deaths per million in Japan, 893 in Australia, 1,395 in Canada, 1,848 in Ireland, 2,099 in Germany, 2,599 in France, 3,259 in Italy, 3,365 in the US and 3,635 in Greece.

Not shown in the chart are the total number of cumulative deaths attributed to COVID-19 (ie before dividing by the population) of 74,694 in Japan, 23,289 in Australia, 53,297 in Canada, 9,281 in Ireland, 174,979 in Germany, 167,985 in France, 192,406 in Italy, 1.14m in the USA, 230,974 in the UK, and 37,738 in Greece.

Both Our World In Data and the WHO give warnings about the data, especially given difficulties in identifying which deaths were caused by the coronavirus (especially in 2020 before testing was widely available), whether deaths are recorded when they happened or when they were reported, and differences in how countries attribute deaths to causes. 

Despite those factors, these statistics give an overall impression of how badly the coronavirus affected different countries, especially when combined with other data, such as excess mortality (also not shown in the chart). According to Our World In Data, the cumulative difference between total deaths reported from all causes and projected deaths (based on an extrapolation from the years prior to the pandemic) changes the rankings for the countries in our chart, improving the UK’s position to an extent with the US has more excess deaths proportionately than the UK, and Italy more than Greece. Australia has the lowest level of excess deaths for these countries, below Japan, while France is between Canada and Ireland.

The chart also illustrates the deaths per million of population by year, highlighting how for the UK this was 1,382 in 2020, 1,237 in 2021, 583 in 2022, and 219 in 2023, up to 2 November 2023.

The UK COVID-19 Inquiry is looking at much more than the number of deaths as it considers how coronavirus affected all of us over the past few years, how people were affected, including short- and long-term impacts on health and how people died, as well as the impact on the economy and our lives more generally of COVID-19 – and the UK Government’s response to it.

This chart was originally published by ICAEW.

ICAEW chart of the week: Inflation by month

My chart this week looks at how September’s inflation rate of 6.7% is made up by month, and why a big drop in the annual rate is predicted next month.

Inflation by month Step chart showing monthly inflation from October 2022 to September 2022 adding up to annual inflation of +6.7% for the year to September 2023. Oct 2022 +2.0% Nov 2022 +0.4% Dec 2022 +0.4% Jan 2023 -0.6% Feb 2023 +1.1% Mar 2023 +0.8% Apr 2022 +1.2% May 2023 +0.7% Jun 2023 +0.1% Jul 2023 -0.4% Aug 2023 +0.3% Sep 2023 +0.5% Year to Sep 2023 +6.7% 19 Oct 2023. Chart by Marin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation, UK: September 2023'.

The Office for National Statistics (ONS) reported on 18 October 2023 that the annual rate of consumer price inflation (CPI) for the year to September 2023 was 6.7%.

Our chart this week illustrates how this is made up of monthly inflation rates from October 2022 through September 2023 of +2.0%, +0.4%, +0.4%, -0.6%, +1.1%, +0.8%, +1.2%, +0.7%, +0.1%, -0.4%, +0.3% and +0.5% respectively.

As well as highlighting how the monthly inflation rate can bounce around from month to month, including a couple of times where prices went down, it shows how a big jump in the consumer prices index of +2.0% in October 2022 is a significant component in the annual rate reported for the year to September 2023.

This provides an insight into what is likely to happen to inflation when it is reported next month. Instead of a large rise in domestic energy prices (a 17% increase in the cost of electricity and a 37% increase in the cost of domestic gas between September and October 2022 according to the ONS) that drove the +2.0% reported a year ago, the expectation is that energy prices will drop between September and October 2023 following Ofgem’s decision to reduce the energy price cap by 7% for the current quarter.

When the +2.0% monthly increase from October 2022 drops out of the index to be replaced by a much smaller monthly increase for October 2023 (or even potentially a monthly decrease), the annual rate of inflation should reduce significantly – potentially to as low as the 5.3% ‘halved’ rate of inflation aspired to by the Prime Minister.

For a broader insight into the UK economy, read ICAEW’s economic update October 2023: where next for interest rates?

This chart was originally published by ICAEW.

ICAEW chart of the week: UK births and deaths

My chart this week looks at how deaths in the UK are expected to exceed births within just a couple of years – a major change in our demographic story.

UK births and deaths Line chart showing projected births and deaths for years to June 2024 through to June 2044. Births: 667,000 in the year to June 2024, falling slightly to 662,000 in the year to June 2031, before gradually rising to 718,000 in the year to June 2044. Deaths: 650,000 in the year to June 2024 rising to cross with the line for births in 2026 and continue to rise to 797,000 in the year to June 2044. Source: ONS, '2020-based interim projections (June 2022) - UK births and deaths in the year to June'.

The big drivers of population change in the UK (and in many other developed countries) have been a declining birth rate and more people living longer, resulting in a growing population even before taking account of net inward migration.

However, that growth is starting to slow as the birth rate has declined as a proportion of the overall population – absent migration, it is expected to start to go into reverse as the death rate rises, driven by the bulge in the population constituted by the ‘baby boomer’ generation reaching their 60s and 70s.

As illustrated by my chart this week, the number of births is expected to fall slightly over the next few years (from 667,000 in the year to June 2024 and 668,000 in the year to June 2024 to 662,000 in the year to June 2031) before gradually rising to 718,000 in the year to June 2044. At the same time deaths are expected to rise throughout the period, from 650,000 in the year to June 2024 to 797,000 in the year to June 2044.

The projection is for births of 667,000 and deaths of 665,000 in the year to June 2026, a small net increase of 2,000, before reversing after that to reach 80,000 more deaths than births in the year to June 2044.

The population is still expected to grow, despite this shift from (to use the statistical terminology) ‘natural’ growth in the population (births exceeding deaths) to ‘natural’ contraction (deaths exceeding births). This is because the ONS has assumed net inward migration will continue at an average of 245,000 a year for most of the projection period, resulting in a projected growth in the population of 4.0m people or 6% (from 68.1m to 72.1m) over the next 20 years, in contrast with the 8.4m or 14% increase in the UK’s population over the past two decades.

Without inward migration, the likelihood is that the gap between deaths and births would be even larger than illustrated in our chart, given that a proportion of the children expected to be born will be the children of migrants.

This change in the demographics of the UK will have significant implications for the debate about migration over the coming decades, especially if the population absent migration is shrinking by 80,000 a year by 2044 as projected by the ONS. 

There are also implications for the public finances as, even with net inward migration, population growth is expected to be less than 0.3% a year over the next two decades instead of the 0.7% a year seen over the past 20 years. Not only will that reduce the potential for economic growth, but it will reduce the opportunities for efficiencies of scale in public spending that have been possible in previous decades.

The demographic tale of the 20th century in the UK was one of a rapidly growing population as many more children survived into adulthood, life expectancy increased significantly and migration offset a declining birth rate. The 21st century looks like being a very different story.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK registered businesses

My chart this week looks at the 1.5% drop in the number of VAT- and PAYE-registered businesses in the year to 31 March 2023.

Column chart with two columns for March 2022 (left) and March 2023 (right). Total registered businesses - 2,767,700 (March 2022) and 2,726,830 (March 2023). Companies - 2,058,886 and 2,039,920 Sole proprietors - 427,710 and 413,160 Partnerships - 181,010 and 172,890 Non-profits & public sector - 100,095 and 100,860.

On 27 September 2023, the Office for National Statistics (ONS) published data on the 2,726,830 businesses that were registered for VAT and/or PAYE in the UK as of March 2023, a 1.5% fall from the 2,767,700 businesses that were registered a year previously. 

As illustrated by our chart this week, the number of VAT- and PAYE-registered companies fell by 0.9% from 2,058,885 to 2,039,920, sole proprietorships fell by 3.4% from 427,710 to 413,160, and partnerships fell by 4.5% from 181,010 to 172,890. 

Bucking the trend were non-profit bodies, mutual associations and public sector organisations, which rose by 0.8% from 100,095 to 100,860. The latter comprised 88,375 non-profit bodies and mutuals, 9,030 local authority entities, 3,280 central government entities and 175 public corporations and other publicly owned businesses, as of March 2023.

Not shown in the chart are in the order of 2.8m ‘unregistered’ businesses that are not registered for VAT or PAYE. Most of these are self-employed individuals, sole traders, or one-person companies that generate revenue below the VAT threshold of £85,000 and do not have any payrolled employees.

The number of registered businesses in March 2023 by industry group are comprised as follows: 

  • 415,250 professional, scientific and technical (down 3.7% on March 2022); 
  • 402,165 motor trades (-2.8%); 
  • 377,585 construction (+0.7%);
  • 226,285 business administration and support services (-1.1%); 
  • 187,360 information and communication (-4.5%); 
  • 184,420 arts, entertainment, recreation and other services (+2.0%);
  • 174,830 accommodation and food services (-0.2%); 
  • 151,710 production (-1.8%);
  • 141,390 agriculture, forestry and fishing (-0.8%)
  • 128,600 transport and storage including postal (-6.9%);
  • 113,785 (+2.8%) property, 109,095 health (+2.8%);
  • 59,210 finance and insurance (-2.0%);
  • 47,340 education (+1.3%); and
  • 7,805 public administration and defence (+0.4%).

There were 2,115,105 businesses with between zero and four employees as of March 2023, followed by 313,780 (five to nine employees), 157,955 (10-19), 86,285 (20-49), 27,660 (50-99). 15,135 (100-249) and 10,910 (250+).

By turnover band, the numbers as of March 2023 were: 445,020 (£0-£49,999); 563,610 (£50,000-£99,999); 846,615 (£100,000-£249,999); 367,315 (£250,000-£499,999); 222,155 (£500,000-£999,999); 123,995 (£1m-£2m); 85,655 (£2m-£5m); 32,100 (£5m-£10m); 29,080 (£10m-£50m); and 9,285 (£50m+).

The fall in the number of businesses in 2022/23 is perhaps not surprising given the significant amount of support provided to many businesses during the pandemic, which will have delayed the normal process of business closure during the previous two years. Meanwhile, the cost-of-living and energy crises will have also made it difficult for some businesses to survive in the year to March 2023. Even though energy prices have come down, the cost-of-living crisis and consequent reductions in consumer demand could see further businesses fail during 2023/24.

Find out more: ONS: UK business – activity, size and location 2023.

This chart was originally published by ICAEW.