My chart of the week for ICAEW highlights the big rush in UK public sector capital expenditure in the final quarter of each financial year, prompting us to ask why March is the best time of the year to build new assets.
Over the years, the process for delivering capital expenditure in the public sector in the UK has had a pretty bad reputation. The anecdote goes that the first quarter is spent arguing about budgets, in the second everyone goes on holiday, and it is only in the third quarter that programmes finally get up and running, before everything stops for the Christmas break. The final quarter is then a mad rush to spend the remaining budget before the end of the financial year.
Unfortunately, there does appear to be some support for this conjecture when we take a look at the actual numbers.
According to the public sector finance release for December 2024, together with the latest Office for Budget Responsibility forecast for the current financial year to March 2025, public sector gross capital formation (in effect capital expenditure) is lowest in the first quarter, picks up in the second (despite the summer holidays), rises slightly again in the fourth (despite the Christmas break) and then explodes in the fourth quarter of each financial year (despite winter).
Our chart shows capital expenditure in 2022/23 of £85.3bn comprised £14.4bn in Q1 (Apr-Jun), £18.4bn in Q2 (Jul-Sep), £20.2bn in Q3 (Oct-Dec) and £32.3bn in Q4 (Jan-Mar). A similar pattern occurs in 2023/24 when a total £102.7bn of capex was incurred, with £18.6bn in Q1, £22.8bn in Q2, £24.2bn in Q3, and £37.1bn in Q4. Meanwhile in the current 2024/25 financial year, £20.4bn was incurred in Q1, £23.8bn in Q2, and £25.8bn in Q3, with a forecast of £39.0bn in Q4 to reach a forecast total of £109.0bn.
In practice the fourth quarter jump is principally seen in the final month of the financial year, as seen in 2023/24 when fourth quarter capital expenditure of £37.1bn consisted of £9.6bn in January 2024 (£1.0bn more than the monthly average capital expenditure of £8.6bn that financial year), £10.2bn in February 2024 (£1.6bn more than the monthly average), and £17.3bn in March 2024 (£8.7bn more than the monthly average).
This pattern is a stubbornly consistent feature of the public finances in the UK, even after numerous attempts within government to improve capital budgeting and delivery processes. For example, departments are able to carry over some of their capital budgets to future years, which in theory should reduce the incentive to spend every last penny of their allocation in-year. The new spending review process coming into force this summer should also help by setting out a four-year capital budget for 2026/27 to 2029/30, providing much greater forward certainty for investment programmes and (in theory) reducing the concern of future budgets disappearing if the current year budget is not spent in full.
Of course, it is possible that our concerns about the quality of government’s investment delivery process are not fully justified. There could after all be some very good practical reasons as to why March is the best time of the year for carrying out public capital works!
My chart for ICAEW this week highlights how the number of pensioners in the UK is expected to increase by 14% over the next 10 years. This will have major implications for the public finances.
The Office for National Statistics (ONS) published its latest population projections for the UK on 28 January 2025.
Extrapolated from the 2021 Census in England, Wales and Northern Ireland and the 2022 Census in Scotland, the ONS’s principal projection is for the UK population to increase by 5% over the next decade from a projected 69,868,000 in June 2025 to 73,426,000 in June 2035. This is on the basis of 132,000 more deaths than births in total over the next 10 years (6,979,000 versus 6,847,000) and net inward migration of 369,000 a year on average.
Our chart highlights how the number of pensioners is expected to increase by 14% over the next 10 years, from a projected 12,614,000 this summer to 14,424,000 in 2035, despite an increase in the state retirement age from 66 to 67.
The main driver of this increase is an additional 2,677,000 people aged 66 or more, reflecting 8,522,000 people passing the age of 66 over the 10 years to June 2035, plus 28,000 from net inward migration (119,000 in and 91,000 out), less 5,873,000 deaths
This 21% increase is partially offset by a 7% reduction for the 867,000 66-year-olds who will still be waiting for their state pension in June 2035 as a result of the planned rise in the state retirement age from 66 to 67 between 2026 and 2028.
Over the same period the ONS is projecting a 7% fall in the number of children from 12,272,000 in June 2025 to 11,434,000 in June 2035, and a 6% increase in the size of the working age population from 44,982,000 to 47,569,000. The latter would have been a 4% increase if not for the statutory increase in the state pension age to 67.
The ONS stresses that its national population projections are not forecasts and do not attempt to predict potential changes in international migration in particular. It also notes that demographic assumptions for future fertility and mortality are based on observed demographic trends, which is no guarantee that these trends might not change in the future.
Despite those caveats, the projected increase in the number of pensioners is one of the more likely areas of the projections to turn into reality. This is because almost all of those future pensioners are alive today and already living in the country, while mortality rates tend to change gradually over time.
A much more significant factor relates to the ONS’s long-term assumption for net inward migration of 340,000. While this is unlikely to affect the anticipated number of pensioners in a decade’s time, it will have a significant impact on the projected ratio between the number of pensioners and those of working age.
Either way, the projected rise in the number of pensioners compared with the size of the working-age population over the coming decade will have major implications for the public finances.
Tax receipts will fall proportionately as retirees leave the workforce faster than new workers join. State pension payments will increase, even before taking account of the ratchet effect of the pension triple-lock on the amount payable to each pensioner. Health care and adult social care costs will rise substantially given how skewed these costs are to older generations. And pension credit, housing benefit and other welfare benefits that go to poorer pensioners are also likely to increase.
Successive governments, including the current administration, have worked on the basis that they should be able to afford the higher costs of many more people living for longer in retirement through a combination of gradual rises in the state pension age (long hoped for but not delivered), higher levels of economic growth, and cuts in other areas of public spending such as the defence budget.
With the number of pensioners increasing much faster than the government can raise the state pension age (given the decade or more advance notice that needs to be given), relatively low levels of economic growth even in more optimistic scenarios, calls for an increase in the defence budget and significant cost pressures affecting many other public services, the big question will be the extent to which taxes will have to go up even further over the next 10 years if the promises made by successive governments over the last century are to be kept.
Boost from self assessment tax receipts not enough to prevent a deficit in July as Chancellor searches for cost savings in the run up to the Autumn Budget.
The monthly public sector finances for July 2024 released by the Office for National Statistics (ONS) on Wednesday reported a provisional deficit for the first four months of the 2024/25 financial year of £51.4bn, £4.7bn worse than budgeted.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “Today’s data shows that the customary boost from self assessed tax receipts in July was not enough to prevent a deficit of £3.1bn, higher than budgeted, as cost pressures drove up public spending. Debt increased to £2,746bn or 99.4% of GDP at the end of July, up £5.9bn from the end of June 2024.
“The government is now in crisis control mode as it searches for savings to offset significant unbudgeted cost overruns in this financial year, with the cumulative deficit to July 2024 standing at £51.4bn, £4.7bn more than budgeted.
“Rumours that the government is looking at significant cuts in public investment programmes this year to keep within budget are concerning, given the importance to economic growth of infrastructure and the urgent need for upfront investment in technology to fix poorly performing public services. Our hope is that the Chancellor will be able to take a more strategic view in her Autumn Budget in October and in the Spending Review in the spring.”
Month of July 2024
There was a shortfall between receipts and spending of £3.1bn in the month of July 2024, £1.8bn higher than in July 2023 and £3.0bn worse than the budgeted deficit of £0.1bn.
Taxes and other receipts amounted to £99.4bn in July 2024, up £10.3bn or 12% from the previous month driven by self assessment income tax receipts in July, in line with the trend last year. Receipts were £2.0bn or 2% higher than in the same month last year, in contrast with total managed expenditure of £102.5bn, which was £3.8bn or 4% higher than in July 2023.
Financial year to date
The shortfall between receipts and spending of £51.4bn for the four months to July 2024 was £0.5bn better than in the same period last year, but £4.7bn over budget.
Cumulative taxes and other receipts amounted to £359.3bn in the first third of the financial year, up 2% compared with the same period last year, while total managed expenditure was 2% higher at £410.7bn. This is illustrated by Table 1, which highlights how cuts to employee national insurance rates have been offset by higher income tax, VAT, corporation tax, and non-tax receipts.
Total managed expenditure for the first four months of £410.7bn was also up by 2% compared with April to July 2023, but this reflected spending on public services up 4%, welfare spending up 6% and gross investment up 10% driven by overruns and construction cost inflation being offset by lower energy-support subsidies and lower debt interest.
The reduction in debt interest of £6.1bn compared with the first four months of last year was driven by a £26.5bn swing in indexation on inflation-linked debt that more than offset a £20.4bn increase in interest on variable and fixed-rate debt.
Table 1: Summary receipts and spending
Apr-Jul 2024 £bn
Apr-Jul 2023 £bn
Change %
Income tax
89.9
86.4
+4%
VAT
67.9
66.0
+3%
National insurance
53.5
58.3
-8%
Corporation tax
34.0
31.6
+8%
Other taxes
73.5
72.1
+2%
Other receipts
40.5
37.5
+8%
Total receipts
359.3
351.9
+2%
Public services
(212.2)
(204.8)
+4%
Welfare
(103.1)
(97.5)
+6%
Subsidies
(10.6)
(14.0)
-24%
Debt interest
(46.6)
(52.7)
-12%
Gross investment
(38.2)
(34.8)
+10%
Total spending
(410.7)
(403.8)
+2%
Deficit
(51.4)
(51.9)
-1%
Table 2 summarises how public sector net borrowing (PSNB) to fund the deficit of £51.4bn combined with borrowing of £4.4bn to fund working capital movements, student loans and other financing requirements increased debt by £55.8bn during the first four months of the financial year. As a result, public sector net debt grew to £2,745.9bn on 31 July 2024, which is £931bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic.
The ratio of net debt to GDP ratio is at the highest it has been since the 1960s, having increased by 1.3 percentage points from 98.1% on 1 April 2024 to 99.4% on 31 July 2024. Borrowing to fund the deficit was equivalent to 1.9% of GDP and other borrowing was equivalent to 0.2%, an increase of 2.1% before being offset by 0.8% from the effect of inflation and economic growth on GDP (usually referred to as ‘inflating away’). Lower inflation this year means this effect is less pronounced than in the same period last year.
Table 2: Public sector net debt and net debt/GDP
Apr-Jul 2024 £bn
Apr-Jul 2023 £bn
PSNB
51.4
52.3
Other borrowing
4.4
(11.4)
Net change
55.8
40.9
Opening net debt
2,694.1
2,539.7
Closing net debt
2,745.9
2,580.6
PSNB/GDP
1.9%
2.0%
Other/GDP
0.2%
(0.4%)
Inflating away
(0.8%)
(1.5%)
Net change
1.3%
0.1%
Opening net debt
98.1%
95.7%
Closing net debt
99.4%
95.6%
Public sector net worth, the new balance sheet metric launched by the ONS last year, was -£740bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,746bn of net debt (£343bn liquid financial assets – £3,089bn public sector gross debt) and other liabilities of £669bn. This is a £67bn deterioration from the start of the financial year and is £123bn more negative than in July 2023.
Revisions and other matters
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. This includes local government, where monthly data is based on budget or high level estimates in the absence of monthly data collection.
The latest release saw the ONS reduce the reported deficit for the first three months of the financial year by £1.5bn from £49.8bn to £48.3bn as estimates were revised for new data.
First quarter shortfall between receipts and spending of almost £50bn emphasises the significant challenges facing the Chancellor as she puts together her first Budget.
The monthly public sector finances for June 2024 released by the Office for National Statistics (ONS) on Friday 19 July 2024 reported a provisional deficit for the first three months of the 2024/25 financial year of £49.8bn, £1.1bn better than a year previously but £3.2bn worse than budgeted.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, says: “This is the first set of public sector finance data since the new government was elected, and today’s numbers set out the size of the obstacle the UK’s leaders face.
“£14.5bn was borrowed to finance the deficit in June, which although £3.2bn less than in June 2023, brought the total for the first three months of the financial year to £49.8bn, slightly worse than expectations. The latest numbers also highlighted the growing amount of public debt, which stood at 99.5% of GDP or £2,740bn on 30 June 2024. Although total debt interest was lower than last year because of the effect of lower inflation on inflation-linked debt, interest on the bulk of debt continues to rise.
“The high level of debt – and the associated interest bill – means that the new Prime Minister and Chancellor will be faced with some very difficult decisions over the coming months as they decide which elements of their programme to prioritise, and which will have to wait.”
Month of June 2024
Taxes and other receipts amounted to £88.2bn in June 2024, up 2% compared with the same month last year, while total managed expenditure was 2% lower at £102.7bn. This resulted in a reduction of £3.2bn from a fiscal deficit of £17.7bn in June 2023 to £14.5bn in June 2024.
Financial year to date
Taxes and other receipts amounted to £258.0bn in the three months to June 2024, up 1% compared with the same month last year, while total managed expenditure was 1% higher at £307.8bn. This resulted in a reduction of £1.1bn from a fiscal deficit of £50.9bn for the first quarter of 2023/24 to £49.8bn for the first quarter of 2024/25. However, this is £3.2bn more than the £46.6bn for the first quarter included in the Spring Budget 2024.
Table 1 analyses receipts for the first quarter of the financial year, highlighting how cuts to employee national insurance rates have been offset by higher income tax, corporation tax, and non-tax receipts.
Table 1: Summary receipts and spending
Three months to
Jun 2024 (£bn)
Jun 2023 (£bn)
Change (%)
Income tax
58.1
56.1
+4%
VAT
49.9
49.6
+1%
National insurance
39.7
43.4
-9%
Corporation tax
25.3
23.4
+8%
Other taxes
54.9
54.1
+1%
Other receipts
30.1
27.7
+9%
Total receipts
258.0
254.3
+1%
Public services
(158.8)
(152.6)
+4%
Welfare
(76.9)
(73.7)
+4%
Subsidies
(7.8)
(11.3)
-31%
Debt interest
(35.2)
(41.1)
-14%
Gross investment
(29.1)
(26.5)
+10%
Total spending
(307.8)
(305.2)
+1%
Deficit
(49.8)
(50.9)
-2%
Table 1 also shows how total managed expenditure for the first quarter of £307.8bn was up by 1% compared with April to June 2023, with higher spending on public services and welfare offset by lower energy-support subsidies and lower debt interest. The reduction in the latter of £5.9bn was driven by a £9.2bn reduction in indexation on inflation-linked debt that more than offset a £3.3bn or 44% increase in interest on variable and fixed-rate debt.
Table 2: Public sector net debt
Three months to
Jun 2024 (£bn)
Jun 2023 (£bn)
Deficit
(49.8)
(50.9)
Other borrowing
3.9
(7.7)
Debt movement
(45.9)
(58.6)
Opening net debt
(2,694.1)
(2,539.7)
Closing net debt
(2,740.0)
(2,598.3)
Net debt/GDP
99.5%
96.7%
Public sector net debt was £2,740bn or 99.5% of GDP on 30 June 2024, just under £46bn higher than at the start of the financial year. At 99.5%, the debt to GDP ratio is the highest it has been since the 1960s.
The increase in the first quarter reflects borrowing to fund the deficit of just under £50bn minus close to £4bn in net cash inflows from loan recoveries and working capital movements in excess of lending by government.
Public sector net debt is £142bn or 5% higher than a year previously, equivalent to an increase of 2.8 percentage points in relation to the size of the economy. It is £925bn or 51% more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £1,712bn or 167% more than the £1,028bn net debt amount as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last two decades.
Public sector net worth, the new balance sheet metric launched by the ONS in 2023, was -£726bn on 31 May 2024, comprising £1,613bn in non-financial assets and £1,070bn in non-liquid financial assets minus £2,740bn of net debt (£340bn liquid financial assets – £3,080bn public sector gross debt) and other liabilities of £669bn. This is a £53bn deterioration from the start of the financial year and is £77bn more negative than the -£649bn net worth number for June 2023.
Revisions and other matters
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 increase the reported deficit for the first two months of the financial year by £1.8bn from £33.5bn to £35.3bn as estimates were revised for new data. More significantly, public sector net debt at the end of May 2024 was reduced by £16.3bn to £2,726.6bn to correct for omitted data on Bank of England repo transactions during the current financial year. This reduced the reported debt to GDP ratio for May 2024 by 0.7 percentage points from 99.8% of GDP to 99.1%.
My chart for ICAEW this week looks at how negative economic growth per capita over the last five years may have contributed to the recent change in government.
My chart this week is on the change in quarterly GDP over the past five years, analysing the change between GDP as calculated by the Office for National Statistics (ONS) of £549bn in the first quarter of 2019 and £688bn in the first quarter of 2024, a net increase of £139bn.
Inflation, at 4% a year on average over the past five years, was the largest contributor to the change, being £120bn out of £139bn of the increase. An increase in population of more than 0.6% a year added a further £22bn, but this was offset by £3bn from negative economic growth per capita of 0.1% on average over the past five years.
Breaking down the £19bn change resulting from economic growth (0.5% a year on average), between population change and economic growth per capita in this way highlights how net inward migration has been one of the most significant drivers of the UK economy over the past five years.
While there are multiple reasons why the electorate decided to vote in a new government in the recent UK general election, the £41 reduction in quarterly GDP per capita over the past five years after adjusting for inflation – and the associated drop in living standards – to £9,994 per person in 2024 Q1 is likely to have been one of them.
The good news is that the next five years may be better, with monthly GDP up by 0.40% over the course of April and May 2024. This can be broken down between an estimated population growth of 0.16% and an increase in monthly GDP per capita over the two months of 0.24%, a positive sign, especially in the light of the latest ICAEW Business Confidence Monitor reporting that business confidence has risen to its highest level in over two years.
My chart for ICAEW this week suggests that the public sector is less productive than it was, but difficulties in measuring productivity make it hard to say for sure.
According to the Office for National Statistics, public sector productivity has not recovered following the pandemic and is now lower than it was in 1997, despite technological advances since then.
My chart highlights how public sector productivity fell between 1997 and 2010 as spending and investment increased – a fall of 3.3% or 0.25% a year on average over 13 years – before climbing during the austerity years until 2019 – an improvement of 7.5% or 0.8% a year over nine years. The pandemic led to productivity collapsing as public services were severely disrupted before partially recovering, with productivity flat between 2022 and 2023 – overall a net drop of 6.3% or 1.6% a year on average over four years.
Overall, this means public sector productivity as measured by the ONS has fallen by 2.6% or 0.1% a year on average over the last 26 years. It is important to note that these changes do not cover all of the public sector – in some areas such as defence spending, productivity (value of outputs / cost of inputs) is assumed to be a constant 1, reflecting how difficult and subjective it would be to attempt to measure our military preparedness for war.
Despite that, the picture shown by this metric aligns with our more general understanding of what happened in these periods. The decline in productivity between 1997 and 2010 as the then Labour government improved pay and conditions for public sector employees makes sense, while the austerity policies of the Coalition and Conservative governments between 2010 and 2019 constrained the cost of delivering public services. And the pandemic resulted in many public services being closed or curtailed, and we know that many public services – particularly the NHS and schools – are still struggling to recover from the pandemic.
The chart provokes questions about how well this statistic values outputs given that while it is very easy to measure inputs, it is less easy to assess the value produced. For example, larger class sizes might give rise to an apparent productivity improvement as measured (more children taught for the same input of teaching time), but this may not capture any deterioration in quality that may result.
Not only is the quality of outputs difficult to measure in calculating productivity, but it also doesn’t measure outcomes, often much more important than outputs. In the health context this is whether the patient survives rather than how many operations were performed, for education it means how well-equipped our young people are for the world rather than how many hours they spent in a classroom, and for the criminal justice system how few crimes are committed rather than how many criminals are prosecuted.
Public sector productivity is an important metric, even if an imperfect one. It is helpful to understand how well public service activities are being delivered from a cost perspective – and how there is a need for improvement. But it doesn’t tell us whether those activities are improving our well-being, growing our economy, improving our environment, or building our resilience as a nation.
Now that the dust has settled on last month’s Spring Budget, ICAEW has published a more detailed analysis on the implications for the public finances.
ICAEW’s Fiscal Insight on the Spring Budget 2024 provides an analysis of the key numbers, risks to the Office for Budget Responsibility forecast, tax measures, forecast revisions since the 2023 Autumn Statement, the fiscal position in the 2024/25 Budget year, borrowing over the next five years, the calculation of underlying debt, the £1.2trn that HM Treasury needs to raise from debt investors, and our conclusions on what the numbers mean for the public finances.
Key points highlighted in the report include:
Headlines
Modest improvement in forecasts and small tax increases ‘pay for’ national insurance cut.
Headroom of £9bn against the Chancellor’s primary fiscal rule is tiny compared with risks.
End of low-cost borrowing is hampering investment in infrastructure and public services.
Weak economy, high debt, demographic challenges, underperforming public services.
No long-term fiscal strategy.
Key numbers
Tax and other receipts of £1,139bn in 2024/25, equivalent to £1,375 per person per month.
Public spending of £1,226bn in 2024/25, equivalent to £1,480 per person per month.
Deficit projected to fall by a quarter to £87bn in 2024/25 and gradually to £39bn in 2028/29.
Headline debt expected to reach £2.8trn by March 2025 and £3.0trn by March 2029.
Underlying debt/GDP forecast to increase from 88.8% to 93.2% and then fall to 92.9%.
Conclusions
Difficult choices on spending deferred until after the general election.
Post-election tax increases likely, irrespective of who wins the general election.
A badly designed fiscal rule driving poor decisions and unrealistic spending forecasts.
Predicted reduction in the deficit to below 2% of GDP by 2027/28 is unlikely to occur.
Further pre-election tax cuts could affect credibility with debt markets.
Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, is quoted in the Fiscal Insight as follows:
“The principal story of the Spring Budget has been how the Chancellor was able to find room for tax cuts while still meeting his fiscal targets to ‘bring down debt and the deficit’.
“This is a frustrating narrative as it misses the bigger picture of public finances that are on an unsustainable path, with little sign of a long-term fiscal strategy to address demographic change, growing balance sheet liabilities, underperforming public services, rising debt interest, or resilience against future economic shocks.
“Debt is high and projected to be even higher in five years’ time than it is today. ‘Headroom’ is tiny in context of trillions of pounds of tax receipts and public spending over the next five years and forecasts that don’t reflect government practice in freezing fuel duties nor likely spending increases from the now postponed Spending Review.
“And we have a fiscal target that discourages essential infrastructure investment while at the same time never needing to be achieved as it is rolled forward each year.
“All of our fiscal eggs are now in a basket labelled ‘hope’ [for economic growth].”
Fiscal Insight
Read the full Fiscal Insight report, which provides detailed analysis on the Spring Budget’s implications for the public finances.
My chart for ICAEW this week looks at how retail sales have increased by 19.5% over the past five years, comprising a 1.4% fall in volumes and a 21.2% increase in prices.
The latest statistics from the Office for National Statistics (ONS) up to February 2024 highlight how retail sales in Great Britain (England, Wales and Scotland) have been on a rollercoaster ride over the past five years as the pandemic, then the cost-of-living crisis, battered the economy.
As our chart of the week illustrates, changes in retail sales can be split between volumes and prices, with growth in retail sales of 19.5% over the five years to February 2024 consisting of a 1.4% fall in volumes and a 21.2% increase in prices.
Our chart also shows how retail sales have increased by year, starting with a 0.8% increase in retail sales in the year to February 2020 (from a 0.2% fall in volumes and a 1% increase in prices) before the first pandemic lockdown the following month. That first year of the pandemic to February 2021 resulted in a 4.4% decline in sales (a 3.3% fall in volumes and a 1.1% reduction in prices) as we cut back on spending, followed by a massive 15.4% jump in retail sales in the year to February 2022 (7% from higher volumes and 7.8% from higher prices) as the nation emerged and started to spend heavily.
The cost-of-living crisis was behind a 5% increase in retail sales in the year to February 2023, as although prices rose 9.6% as inflation accelerated, households cut back on what they bought in response to drive a 4.2% fall in retail volumes.
Retail sales were up by a more modest 2.3% in the year to February 2024, comprising a 0.3% fall in volumes and a 2.6% increase in prices as inflation moderated.
Evening out the ups and downs gives an average increase in retail sales of 3.6% a year over the last five years, comprising an average fall of 0.3% a year in volumes and an average increase of 3.9% in prices.
This is not as positive a picture for retail business as the numbers might imply. Although it appears that retailers are selling slightly less overall at much higher prices, our chart doesn’t reflect the substantial increases many have seen in their input costs over the same period.
For more ICAEW analysis on the economy, click here.
Only a small improvement in the year-to-date deficit of £107bn reported in the penultimate monthly public finance release for 2023/24 over the same period a year ago.
The monthly public sector finances for February 2024 released by the Office for National Statistics (ONS) on Thursday 21 March 2024 reported a provisional deficit for the month of £8bn, while at the same time revising the year-to-date deficit up by £2bn. This increased the cumulative deficit for the first 11 months of the financial year to £107bn, £5bn less than in the same period last year.
The deficit for the first 11 months of 2023/24 is slightly ahead of the £114bn full-year estimate made by the Office for Budget Responsibility (OBR) in its latest fiscal forecasts that accompanied the Spring Budget 2024 earlier this month.
Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation, said: “The numbers for February saw the public finances return to deficit following January’s self-assessment-driven surplus, bringing the cumulative deficit to £107bn for the first 11 months of the financial year. This is a £5bn improvement on the same period last year, with lower cost of living support payments and lower interest on index-linked debt as inflation has fallen, but it is still higher than is comfortable.
“Chancellor Jeremy Hunt’s aim to cut the deficit by a quarter to £87bn in the coming financial year will be challenging to achieve given much-higher-than-inflation rises to the state pension, benefits and the minimum wage, while pressure to find extra money for defence, local government and public services is only likely to grow as the general election approaches.”
Month of February 2024
The fiscal deficit of £8bn for the month was £3bn lower than in February 2023, but slightly higher than some predictions.
Taxes and other receipts amounted to £95bn, up 8% compared with the same month last year, while total managed expenditure was 4% higher at £103bn.
Public sector net debt as of 31 January 2024 was £2,659bn or 97.1% of GDP, £12bn higher than at the start of the month and £120bn higher than at the start of the financial year.
Eleven months to February 2024
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first 11 months of the 2023/24 financial year to February 2024 was £107bn, £5bn less than the amount reported for the first 11 months of 2022/23.
This reflected a year-to-date shortfall between tax and other receipts of £995bn and total managed expenditure of £1,102bn, each up 6% compared with the corresponding numbers for April 2022 to February 2023.
Inflation benefited tax receipts for the first 11 months compared with the same period in the previous year, with income tax up 11% to £249bn and VAT up 6% to £181bn. Corporation tax receipts were up 18% to £93bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £163bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, in addition to the cut in employee national insurance implemented in January. Council tax receipts were up 6% to £39bn, but stamp duty on properties was down by 24% to £12bn, while the total for all other taxes was up by just 1% at £153bn as economic activity slowed. Non-tax receipts were up 10% to £105bn, primarily driven by higher investment income and higher interest charged on student loans.
Total managed expenditure of £1,102bn in the 11 months to February 2024 can be analysed between current expenditure excluding interest of £935bn, interest of £114bn and net investment of £53bn, compared with £1,049bn in the same period in the previous year, comprising £893bn, £125bn and £31bn respectively.
The increase of £42bn or 5% in current expenditure excluding interest was driven by a £33bn increase in pension and other welfare benefits (including cost-of-living payments), £19bn in higher central government pay, and £11bn in additional central government procurement spending, less £18bn in lower subsidy payments (principally relating to energy support schemes) and £3bn in net other changes.
The fall in interest costs for the 11 months of £11bn or 9% to £114bn comprises a £23bn or 46% reduction to £27bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £12bn or 16% increase to £87bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.
The £22bn increase in net investment spending to £53bn in the first 11 months of the current financial year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 17% increase in gross investment to £112bn, less a £4bn or 7% increase in depreciation to £59bn.
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The cumulative deficit of £107bn for the first 11 months of the financial year is £5bn below the OBR’s November 2023 forecast of £112bn for the same period but slightly higher than it should be to be consistent with the updated £114bn full year estimate for 2023/24 in its March 2024 forecast.
The OBR’s March 2024 forecast predicts an £87bn deficit in the next financial year commencing in April (2024/25) a reduction of approximately a quarter compared with the current financial year.
Balance sheet metrics
Public sector net debt was £2,659bn at the end of February 2024, equivalent to 97.1% of GDP.
This is an increase since the start of the financial year of £120bn, comprising borrowing to fund the deficit for the 11 months of £107bn plus an additional £13bn of borrowing to fund lending to students, businesses and others, net of loan repayments and working capital movements.
Public sector net debt is £844bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,124bn more than the £535bn 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 -£668bn on 29 February 2024, comprising £1,596bn in non-financial assets and £1,062bn in non-liquid financial assets minus £2,659bn of net debt (£319bn liquid financial assets – £2,977bn public sector gross debt) and other liabilities of £667bn. This is a £65bn deterioration from the -£613bn 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 10 months to January 2024 up by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as revise the calculation of the public sector net debt to GDP ratio at 31 January 2024 from 96.5% to 96.8% as GDP estimates were updated in line with the latest OBR forecasts.
The ONS also revised its estimate for the deficit for the financial year to March 2023 (2022/23), down by £1bn to £128bn.
My chart for ICAEW this week takes a look at how average earnings have risen over the last decade and how they compare with the headline rate of inflation.
According to the Office for National Statistics (ONS), average weekly earnings including bonuses on a seasonally adjusted basis increased by 5.5% between January 2023 and January 2024 to £672 (equivalent to £2,912 per month). This is 1.5 percentage points higher than the rate of consumer price inflation (CPI) over the same 12-month period of 4.0%.
While this might seem positive for the theoretical ‘average’ worker, this follows a 6.2% increase in the preceding year to January 2023, 3.9 percentage points lower than the corresponding 10.1% increase in consumer prices.
Our chart this week takes these numbers back a decade, with CPI of 0.3%, 0.3%, 1.8%, 3.0%, 1.8%, 1.8%, 0.7%, 5.5%, 10.1% and 4.0% respectively in the years from January 2015 through to January 2024. Average earnings increased by 1.4%, 2.8%, 1.7%, 2.6%, 3.8%, 3.1%, 4.3%, 5.1%, 6.2% and 5.5% respectively over the same period, giving rise to net differences of +1.1%, +2.5%, -0.1%, -0.4%, +2.0%, +1.3%, +1.3%, +3.6%, -0.4%, -3.9% and +1.5%.
Overall, wages have increased faster than inflation over the last decade, up 43.2% compared with a 32.8% increase in the CPI Index, equivalent to average rises of 3.7% a year and 2.9% a year respectively – or a net 0.8 percentage point a year improvement in average wages over CPI.
Private sector wages have risen faster at 45.7% over ten years (3.8% a year on average), while public sector wages have gone up by 33.7% (2.9% a year on average), only marginally ahead of CPI (by 0.07% a year). Of course, averages are just that and individual and household experiences will differ significantly.
This comparison would not be approved of by the statistical authorities, who prefer the consumer prices including housing (CPIH) measure of inflation to headline CPI. However, CPIH was up 31.7% over the past decade to January 2024 (or 2.8% a year on average), so while the numbers might have been slightly different in individual years if we had used CPIH in the chart, the increase in average wages over 10 years is only slightly better – by 1.1% in total or 0.1% a year on average.
Assuming inflation falls to below 2% later this year as predicted, the picture for the coming year is likely to show a significant positive variance for earnings, especially given the 9.8% increase in the minimum wage scheduled for April. This should have the effect of pushing up average earnings, unless something very surprising happens to wages further up the income scale.
For more ICAEW analysis on the economy, click here.
