My chart for ICAEW this week illustrates how the number of flights to and from UK airports has not fully recovered since the pandemic.
Our chart this week looks at how the number of flights departing and arriving from UK airports (including internal flights) has changed over the past five years.
According to numbers published by the Office for National Statistics (ONS) – based on data from EUROCONTROL – there were approximately 2,137,000 flights in 2019, 835,000 in 2020, 823,000 in 2021, 1,714,000 in 2022 and 1,931,000 in 2023.
This was equivalent to daily averages of 5,870, 2,282, 2,254, 4,695 and 5,290 in 2019, 2020, 2021, 2022 and 2023 respectively.
Despite reports that consumer demand for air travel has recovered to (or potentially even exceeded) pre-pandemic levels, the number of flights in 2023 was only 90% of that seen in 2019. This is believed to reflect changing travel patterns among business travellers, where video conferencing, corporate carbon reduction targets and cost-saving initiatives are all thought to have contributed to a significant reduction in business trips compared with pre-pandemic times.
For the airline industry, the loss of businesses paying higher prices for flexible bookings has been a key challenge that has caused airlines to focus on improving passenger load factors (ie, seat utilisation), promoting premium tickets to leisure travellers and, in some cases, rebalancing towards the budget carrier market.
With the number of flights in the second half of 2023 around 9% more than in 2022, the industry will be hoping for further growth in demand during 2024.
My chart for ICAEW this week looks at how the pound appreciated in value against the euro, US dollar, yuan and yen respectively during 2023.
My first chart of the week of 2024 for ICAEW looks back at 2023 and how sterling strengthened against the euro, US dollar, yuan and yen – the currencies of the four largest economies in the world – based on exchange rates reported by the Bank of England.
The smallest increase was against the principal currency of the European Union, our largest trading partner, with the sterling to euro exchange rate up by just over 2% from £1:00:€1.128 to £1.00:€1.154 between 30 December 2022 and 29 December 2023.
This contrasted with a 6% rise in sterling against the US dollar during 2023 from £1.00:$1.204 at the end of 2022 to £1.00:$1.275 at the end of 2023, a 9% rise against the Chinese yuan renminbi from £1.00:¥8.31 to £1.00: ¥9.08. Sterling increased, and a 13% increase against the Japanese yen from £1.00:¥159 to £1.00:¥180.
Exchange rate movements can be attributed to multiple factors, including relative rates of inflation and economic growth, interest rates, trade and investment flows, and fiscal credibility among others – both actuals and sentiment about prospects for the future. In sterling’s case, expectations that interest rates in the UK are likely to stay higher for longer than in other major economies is a key contributor to the rise in sterling over 2023, although this is only part of the story.
While sterling has appreciated over the last year against these and many other currencies, the pound is still much lower in value than 10 years ago, being down 4% against the euro compared with £1.00:€1.200 at the end of 2013, down 23% against the US dollar from £1.00:$1.653, and down 9% against the Chinese yuan from £1.00:¥10.01. The exception is the Japanese yen, where the rise this year has more than offset falls over the previous decade to leave sterling 4% higher against the yen than the exchange rate £1.00:¥173 on 31 December 2013.
My chart for ICAEW this week illustrates how company dissolutions continue to outpace incorporations as the economy remains in first gear.
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?
My chart for ICAEW this week illustrates how Chancellor Jeremy Hunt used almost all of the available upside from inflation and fiscal drag to fund his tax measures and a series of business growth initiatives.
The Autumn Statement 2023 on Wednesday 22 November featured a surprise tax cut to national insurance and a perhaps less surprising decision to make full expensing of business capital expenditure permanent.
As my chart illustrates, the forecasts for the deficit over the next five years benefited by £41bn a year on average in higher receipts from inflation, £7bn a year on average in additional ‘fiscal drag’ as higher inflation erodes the value of frozen tax allowances more quickly, and a net £4bn in other upward forecast revisions. These improvements to the forecasts were offset by an average of £21bn a year in higher debt interest and £13bn from the expected inflation-driven uprating of the state pension and welfare benefits, to arrive at a net improvement of £18bn a year on average over the five financial years from 2023/24 to 2027/28 before policy decisions.
In theory, these upward forecast revisions should be absorbed by more spending on public services as higher inflation feeds through into salaries and procurement costs. However, the Chancellor has chosen to (in effect) sharply cut public spending and use almost all of the upward revisions to fund tax measures and business growth initiatives instead. These amounted to £11bn a year on average in tax changes and £6bn a year on average in spending increases and other changes to reduce the net impact to just £1bn a year on average over the five-year period.
The resulting net change of £1bn on average in forecasts for the deficit is to reduce the forecast deficit by £8bn for the current year (from £132bn to £124bn) and by £1bn for 2024/25 (to £85bn), with no net change in 2025/26 (at £77bn), an increase of £5bn in 2027/28 (to £68bn), and no net change for 2027/28 (at £49bn).
The main tax changes announced were the cuts in national insurance for employees by 2 percentage points from 12% to 10% and by 1 percentage point for the self-employed from 9% to 8%, reducing tax receipts by an average of £9bn over five years. This is combined with the effect of making full expensing permanent of £4bn – this change mainly affects the later years of the forecast (£11bn in 2027/28), although ironically the average is a better proxy for the long-term cost of this change, which the OBR estimates is around £3bn a year.
Other tax changes offset this to a small extent.
Spending and other changes of £6bn a year on average comprise incremental spending of £7bn a year plus £2bn higher debt interest to fund that spending, less £3bn in positive economic effects from that spending and from the tax measures above.
Although the cumulative fiscal deficit over five years has been revised down by £4bn, the OBR has revised its forecast for public sector net debt as of 31 March 2028 up by £94bn from to £3,004bn. This principally reflects changes in the planned profile of quantitative tightening and higher lending to students and businesses.
The big gamble the Chancellor appears to be making by choosing to opt for tax cuts now is that the OBR and Bank of England’s pessimistic forecasts for the economy are not realised – enabling him to find extra money in future fiscal events to cover the effect of inflation on public service spending. Otherwise, while it may be possible to cut public spending by as much as the Autumn Statement suggests, it is difficult to see how he can do so without a further deterioration in the quality of public services given he is not providing any additional investment in technology, people and process transformation to deliver sustainable efficiency gains.
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.
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.
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.
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.
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.
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.
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.
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.
This week’s chart takes a look at recent revisions to GDP that have caused some consternation in the world of statistics.
Each year the Office for National Statistics (ONS) publishes the ‘Blue Book’ on the national accounts, its definitive analysis of economic activity over the course of the previous year. This analysis supersedes the preliminary and revised monthly and quarterly estimates issued up until that point, based on extensive analysis by the official statisticians.
The 2023 edition of the Blue Book is scheduled to be published on 31 October 2023. It will be eagerly pored over by economists in and outside government who will be eager to understand how the UK economy performed during 2022, and how this ‘final’ version of the 2022 numbers line up with those preliminary and revised estimates, just as they did last year when looking at GDP for 2021.
However, in the world of statistics numbers are never final. On 1 September 2023, the ONS announced methodological and data improvements to last year’s Blue Book – the numbers for 2021 and earlier years. These prior-period adjustments partly reflected a methodology change in the way the three different methods of calculating GDP (output, income and expenditure) are reconciled, but much more significant were revisions to the data used to calculate some of the key statistics, causing much wailing and gnashing of teeth by some prominent economic commentators as the narrative around the UK’s emergence from the pandemic changed.
As our chart this week illustrates, the revisions to GDP do not at first sight appear to be that significant. GDP for 2019 has been revised down by £4bn from the previously reported £2,238bn to a new official number of £2,234bn; GDP for 2020 is £6bn down from £2,110bn to £2,104bn; and GDP for 2021 has been revised up by £14bn from £2,270bn to £2,284bn. These seem relatively small changes when looking at trillions of pounds of economic activity.
Where the change really has an impact is in looking at the trends, especially after adjusting for inflation. On a nominal basis, a 5.7% nominal decrease in 2020 followed by a 7.6% increase in 2021 has changed to a 5.8% decrease and an 8.5% increase, but in real terms the previously reported economic contraction of 11.0% in 2020 followed by a 7.6% recovery has changed to a smaller contraction of 10.4% followed by a stronger recovery of 8.7%.
Of course, the devil is in the detail and some of the revisions at an industry level have been much more dramatic, with wholesalers and retailers now believed to have grown more strongly than previously believed, while the iron and steel industry changed from growth to contraction.
Many economic commentators have focused on the change in quarterly GDP (not shown in the chart) where the arithmetical changes have been more pronounced. The movement from the fourth quarter of 2019 (previously £568bn, now £566bn) and the fourth quarter for 2021 (previously £593bn, now £597bn) has gone from a 4.4% increase over two years to a 5.5% increase; in real terms from a 1.2% contraction in the economy to growth of 0.7%. Still anaemic, but at least in positive territory.
Despite this small improvement in the economic story portrayed by the GDP statistics, we should not get too carried away. Economic growth remains well below the pre-financial crisis levels and the public finances are in a significantly worse state than they were back in 2008.
In the meantime, the Office for Statistics Regulation has commenced a review into how these small revisions with big implications for our understanding of the economy were not identified at the time.
Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.
The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.
Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.
“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”
Month of July 2023
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.
This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.
Four months to July 2023
The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.
Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.
Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).
The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.
The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose.
The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn.
Public sector finance trends: July 2023
Four months to
Jul 2019 (£bn)
Jul 2020 (£bn)
Jul 2021 (£bn)
Jul 2022 (£bn)
Jul 2023 (£bn)
Receipts
270
234
282
320
343
Expenditure
(259)
(348)
(310)
(308)
(334)
Interest
(24)
(15)
(23)
(44)
(51)
Net investment
(10)
(26)
(13)
(11)
(15)
Deficit
(23)
(155)
(64)
(43)
(57)
Other borrowing
4
(66)
(22)
5
10
Debt movement
(19)
(221)
(86)
(38)
(47)
Net debt
1,796
2,036
2,239
2,420
2,579
Net debt / GDP
80.1%
96.9%
97.7%
96.6%
98.5%
Source: ONS, ‘Public sector finances, July 2023’.
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 three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.
Balance sheet metrics
Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.
The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.
Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.
Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.
This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.
![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%](https://martinwheatcroft.com/wp-content/uploads/2023/11/2023-10-Trends.jpg)
