The OBR’s July 2023 fiscal risks and sustainability report indicates that, without higher taxes, public sector net debt as a share of GDP could triple or more over the next 50 years.
The Office for Budget Responsibility (OBR) published its latest fiscal risks and sustainability report on 13 July 2023, providing its analysis of the key risks confronting the UK public finances and long-term fiscal projections for the next 50 years.
This is a sobering report, suggesting that public sector net debt as a share of economic activity as measured by GDP could more than triple between March 2023 and March 2073 – and perhaps go even higher in certain circumstances. The OBR concludes that the public finances are on an unsustainable path.
As illustrated by this week’s chart, the OBR’s baseline projection suggests that the ratio of public sector net debt to GDP could rise from 101% of GDP in 2022/23 to 310% of GDP in 2072/73. The OBR also presented three alternate scenarios: the first is based on higher levels of spending, which could result in the ratio reaching 385% of GDP; one involves higher interest rates, where the ratio might reach 376% of GDP; and a further scenario assuming additional economic shocks, where the ratio might hit 435% of GDP.
The projections are based on the government’s current medium-term fiscal plans as set out in the March 2023 Spring Budget, extrapolated into the future based on existing trends. The starting point is the already high level of public debt that has built up over the past 15 years, together with the current government’s plan to cut spending on public services over the next five years.
The OBR has then overlayed its view of economic growth over the next half century and expected changes in patterns of public spending. This reflects a substantial rise in spending on pensions, health and social care as the proportion of the population in retirement rises, among other drivers that include the financial costs and benefits of delivering net zero. Other key assumptions relate to productivity, demographics (births, deaths and net migration), interest rates and inflation.
The one thing the OBR hasn’t been able to do is to include probable but not enacted tax changes in its projections, with increases in public spending assumed to be financed by higher levels of borrowing instead of the tax rises that future governments are in reality going to opt for.
The projections therefore reflect borrowing that compounds over time to result in some very large headline debt numbers in March 2073, rather than the 1.5% of GDP rise in the tax burden each decade that would, according to the OBR, maintain the debt to GDP ratio at close to its current level.
The fiscal projections calculated by the OBR highlight just how difficult a position the UK’s public finances are in and the major fiscal challenges that will face the incoming government – whoever that may be – after the next general election.
Public spending is expected to approach £1.2trn this year, an extremely large and incomprehensible number to most of us. Our chart this week attempts to make that number more digestible.
Public spending in the current financial year is budgeted to amount to £1,189bn or just under £1.2trn. But what does such a large number really mean?
It can be difficult to comprehend the sheer scale of public spending that a major economy such as the UK incurs each year. The 2023/24 budget of £1,189,000,000,000 is just a huge amount of money to think about.
One way to understand the number is to break it down a little; knowing that the UK public spending is expected to be an average of £99bn a month or £23bn a week during the current financial year helps a little. However, smaller but still exceptionally large amounts can be equally difficult to understand.
The traditional way to look at the public finances, not shown in the chart, is to relate it to the size of the UK economy. GDP is projected to amount to £2,573,000,000,000 in 2023/24, meaning that public spending should be equal to around 46% of the overall economy. However, while this is helpful in putting public spending into context, it is still just a ratio between two incredibly large numbers that very few of us really comprehend. Surely there must be a better way of getting to grips with the public finances.
Our chart this week attempts to do so. By dividing the total for public spending by the number of households in the UK (expected to reach around 28.6m in September, the middle of the financial year) and by the size of the UK population (anticipated to be approximately 68.2m) as well as by month and by week, we can hopefully get a better a feeling for what is going on.
As our chart this week illustrates, average public spending in 2023/24 is equivalent to £41,600 per household, which breaks down to £3,470 per household per month or £800 per household per week, and it may be helpful to think about public spending. Whether you prefer to think in annual, monthly or weekly time periods, they are pretty big numbers in the context of most people’s household budgets.
Alternatively, you may find it easier to identify with how public spending in 2023/24 is equivalent to an average of £17,400 per person living in the UK, breaking down to £1,450 per person per month or £335 per person per week. Again, a very large number, particularly when you realise the average covers children as well as the adult population.
In some ways these much smaller versions of a big number – such as public spending of £3,470 per household per month – feel a lot larger when brought into a more relatable context. The figure of £1.2trn is baffling, but when you know the UK public sector plans to spend £800 per week for each of its 28.6m households, you get a better sense of just how much the UK state spends.
Of course, in working out averages it is important to be clear that they are just that – averages. Many people will benefit more, or less, from public spending than others, while conversely different groups will pay more or less in the taxes needed to fund that spending. Pensioners and children generally pay much less in taxes than those of working age, while benefiting from a much greater proportion of public spending. Similarly, poorer households will receive more in benefits and other forms of support, while richer households pay more in taxes.
Despite that, per household and per person averages give us an opportunity to compare public spending with reference points we can relate to, such as our own salary or household budget.
One of the reasons the numbers are so high, whichever way you look at them, is that the state does an awful lot. Average spending planned of £1,450 per person per month can be broken down further to approximately £420 on pensions and welfare, £350 on health and social care, £160 on education, £140 on defence, security, policing and justice, £140 on debt interest, £75 on transport, and £165 per person per month on everything else. Each of these in turn are made up of hundreds if not thousands of different central and local government programmes, many costing mere fractions of a penny per person per month, but that together add up to a lot of money.
No matter how you break it down, public spending will always be a huge number.
Our chart illustrates how ‘core inflation’, energy price rises, and food, alcohol and tobacco price inflation contributed to a lower than expected fall in the overall rate of inflation in April 2023.
The annual rate of consumer price inflation (CPI) fell from 10.1% in March 2023 to 8.7% in April 2023, but this fall was not considered very good news by economists, policymakers or the financial markets.
The response to April’s inflation statistics has been dramatic, with financial markets now predicting that the Bank of England could increase its base interest rate to as much as 5.5%, instead of sticking at the 4.5% rate announced in May that many commentators had previously suggested might be the peak needed to bring inflation under control.
The reasons why there are these concerns can be illustrated by our chart this week, which analyses CPI into three component sub-indices: energy price inflation, food, alcohol and tobacco, and core inflation. Our chart highlights how core inflation and the annual rate of food, alcohol and tobacco price rises both unexpectedly increased in April 2023, partially offsetting the anticipated slowdown in energy price inflation as the huge rises in domestic energy costs that took effect in April 2022 fell out of the year-on-year comparison.
Energy price inflation, comprising both domestic energy and fuels such as petrol and diesel, currently represent just 8% of the overall consumer price inflation index, but the rises over the past 15 months have been so large they have contributed significantly to the overall headline CPI rate. Annual energy price inflation in January 2022 was already high at 23.2% as the constrained energy supply drove prices high while the global economy started to recover from the pandemic. This was followed by 22.7% in February 2022 and 27.2% in the year to March 2022, before jumping to 52.1% in April 2022. The annual rate of increase in energy prices remained high over the following months rising to 52.8%, 57.3% then 57.8% in July, 52.0%, 49.6% to a peak of 59.0% in October. The rate of increase decelerated to 55.6%, 52.8% and then 51.2% in January, to 49.0% and 40.5% in February and March 2023, before dropping to 10.8% in April 2023 when compared with the higher base of April 2022.
Food, alcohol and tobacco prices represent about 16% of the CPI index and were 4.0% higher than a year previously in January 2022. Since then the annual rate of increase has gradually increased each month, to 4.6%, 5.6% and then 6.0% in April 2022, to 7.5%, 8.2% and 10.4% in July 2022, and then to 10.8%, 11.8% and 13.2% in October 2022. The annual rate of increase moderated to 12.7% and 12.9% in November and December, before returning to 13.2% in January 2023. The annual rate of price increases accelerated to 14.3% in February, 15.0% in March and to 16.0% in April.
Not shown in the chart is the sub-subindex of food and non-alcoholic beverages, which was running at 19.1% in the year to March 2023 and 19.0% in the year to April 2023, with the jump in April coming from alcohol and tobacco prices, which rose from 5.3% in March to 9.1% in April.
Perhaps more worrying than the jump in alcohol and tobacco prices is what is happening to ‘core inflation’, which is defined as CPI excluding energy, food, alcohol and tobacco. Representing just over three quarters (76%) of consumer spending, annual core inflation was running at 4.4% in January last year, rising to 5.2%, 5.7% and then 6.2% in April 2022, 5.9%, 5.8% then 6.2% in July, 6.3%, 6.5% then 6.5% in October, 6.3%, 6.4% then 5.8% in January, 6.2%, 6.2% and then 6.8% in April 2023.
By excluding more volatile components of the CPI index, core inflation is generally more stable than overall CPI. By hovering within the 5.7% to 6.5% range for the past year, the hope was that core inflation was – while pretty high – at least not out of control. The unexpected rise to 6.8% in April is worrying for the Bank of England, which is concerned that inflation could become embedded into the UK economy at a rate much higher than its 1%-3% mandated target range.
The good news is that planned cuts to domestic energy prices in July, together with other price rises last summer falling out of the year-on-year comparison, should feed through to a much lower headline rate of inflation over the next few months, reducing the pressure on wage settlements and other input costs that are currently driving up prices across the whole economy.
Despite that, the markets believe that further interest rate rises may still be necessary on top of the actions already taken by the Bank of England, potentially risking overtightening that could worsen the cost-of-living crisis and the squeeze on businesses.
As the ONS reports that just over 600,000 more people came to live in the UK in 2022 than left to live elsewhere, this week’s chart looks at the numbers behind the comings and goings.
Net inward migration of 606,000 in the year ended 31 December 2022 was boosted by a quarter of a million Ukrainians, Hong Kongers and asylum seekers according to ONS experimental statistics on international migration to and from the UK.
The Office for National Statistics (ONS) released provisional numbers for international migration on 25 May 2023, providing its estimate of long-term arrivals and departures from the UK for the 2022 calendar year, with 1,163,000 immigrants arriving in the UK and 557,000 emigrants, a net migration number of 606,000.
These numbers exclude tourists and other travellers planning to stay for less than a year, as well as UK residents going abroad on holiday or likewise planning to be away for less than a year. However, the numbers include students and others coming for more than a year who don’t plan to stay in the UK after they finish their courses or their work visas expire.
Traditionally these statistics have been prepared using arrival and departure surveys completed by a sample of travellers when they arrive or depart from UK airports and ports, but these have been found to be inaccurate in recent years. The ONS has started to address this by using other administrative sources to improve the quality of their analysis, in the meantime slapping this dataset with ‘experimental’ and ‘provisional’ labels to emphasise how less than definitive it is.
As our chart of the week illustrates, 248,000 immigrants arrived through settlement schemes or to claim asylum, 316,000 came for work reasons, 404,000 for study, 64,000 to join family, and 131,000 for other reasons.
All of the 248,000 immigrants who arrived through settlement schemes or to claim asylum came from outside the EU. They comprised 114,000 Ukrainian refugees, 52,000 British Overseas Nationals from Hong Kong, 6,000 through other resettlement schemes (principally Afghanistan), and 76,000 asylum seekers. Some 3,000 asylum seekers were believed to have left the country in 2022, but the ONS does not have sufficient data to identify the number of Ukrainian refugees or other settlers who may have returned or moved elsewhere.
Of the 316,000 who came for work reasons, 235,000 were from outside the EU (of which 127,000 came to work and 108,000 were dependents), 62,000 came from EU countries, and 19,000 were UK citizens. Unfortunately, the ONS has not been able to analyse the number of EU or UK citizens who left for work reasons (either to start a new job elsewhere or because their UK-based job came to an end), but they have estimated that 56,000 non-EU non-UK workers and dependents left the UK in 2022 (29,000 workers and 27,000 dependents).
Study was the biggest immigration category in 2022, as the higher education sector continued to recruit international students as part of a big export drive. 404,000 people arriving during 2022. This comprised 361,000 from outside the EU (of which 276,000 came to study and 85,000 were dependents), 39,000 students from the EU and 4,000 being UK citizens who lived elsewhere before coming to the UK to study. The ONS reports that 153,000 non-EU citizens left the UK in 2022 after courses were completed (136,000 students and 17,000 dependents), but doesn’t report equivalent numbers for EU and UK citizens.
The number of non-EU students and dependents arriving has risen quite significantly over the last couple of years (from 121,000 in 2019 and 113,000 in 2020 to 301,000 in 2021) and so the net impact should reduce significantly in 2024 and thereafter as courses complete. The net number could turn negative if the recently announced restrictions on masters students bringing dependents (masters courses often being the first step towards PhD study) causes incoming numbers to fall below the level of departures.
The majority of the 64,000 arriving to join family came from outside the EU, with 51,000 arriving from non-EU countries, 8,000 from the EU, and 5,000 being UK citizens. Again, the ONS does not have data on EU and UK citizens leaving to join family or returning after a long-term stay with family, but it does report 42,000 non-EU citizens in this category left the UK in 2022.
‘Other’ arrivals comprise a combination of genuine other reasons for people choosing to settle in the UK as well as data collection issues, with the ONS finding it difficult to identify the reasons why many EU and UK citizens arrive or leave the UK. Of the 131,000 immigrants classified as other, 29,000 came from outside the EU, 42,000 came from EU countries and around 60,000 were returning UK nationals.
While the headlines about the migration numbers have not necessarily been that favourable to the government, the Chancellor may be more cheerful than many of his colleagues given the recent improvement in the IMF’s short-term economic outlook for the UK, partly as a consequence of migrants arriving to fill domestic labour shortages, as well as the contribution to the economy of a growing number of fee-paying students.
The mystery of just why so many businesses sit just below the VAT registration threshold will be a big topic of debate at ICAEW’s VAT at 50 conference on Monday 22 May.
Our chart this week celebrates the 50th anniversary of the introduction in the UK of Value Added Tax (VAT), the indirect tax on commercial transactions that now generates around 20% of tax receipts.
One of the big mysteries in the tax system is why so many small businesses and sole traders cluster just below the VAT threshold of £85,000.
As illustrated by our chart, the number of businesses below the threshold gradually falls from almost 31,000 in the turnover band between £50,000 and £50,999 to just under 17,000 in the turnover band between £77,000 and £77,999, before diverging above the trendline to increase up to just over 20,000 in the £84,000 to £84,999 turnover band – immediately below the threshold for registering for VAT. This is almost twice as many as the just over 10,000 traders in the £85,000 to £85,999 turnover band, the first band legally required to register for VAT.
One explanation may be that there is some gaming (or possibly even misreporting) going on, with business owners approaching the threshold for VAT deciding to spread their business activities across multiple legal entities or keeping ‘cash-in-hand’ transactions off the books to avoid, or evade, adding VAT of 20% in most cases onto their prices.
However, perhaps a more worrying concern is if these businesses are not getting around the rules, but instead deliberately choosing to keep their businesses small given the competitive disadvantage that goes with adding VAT to prices charged to consumers, and the hassles and hazards involved with becoming a tax collector on behalf of the government.
This is a big issue for a UK economy experiencing weak economic growth. Not only is government income at stake, but also the wider benefits of more prosperous small businesses to the overall economy and what that means for the national economy.
Of course, many businesses do register despite being below the threshold, with around 1.1m traders in 2018/19 with turnover less than £85,000 signed up to VAT.
Other countries take a different approach, with much lower registration thresholds across most of Europe. Domestic thresholds range from nil in Spain, Italy and Greece, NOK40,000 (approximately £3,000) in Norway, €22,000 (£19,000) in Germany and €37,500 (£33,000) in Ireland, up to €50,000 (£43,000) in Slovenia. Switzerland is an exception with a higher registration threshold than the UK at CHF100,000 (£89,000).
In general, this means that a much greater proportion of actively trading businesses across Europe are registered for VAT compared with the UK, where there are estimated to be more than 3m or so traders with annual revenue of between £10,000 and £84,999 who have not registered for VAT – more than £100bn in total revenue.
Some believe that raising the threshold would provide a boost to the economy, given that many businesses would be more willing to grow (or declare) more of their revenue, while others believe the better option would be to reduce the threshold to capture many more businesses. The former would likely result in lower tax receipts overall, by allowing businesses just above the existing threshold to stop collecting VAT. The latter should in theory generate much more in tax receipts, perhaps as much as £20bn a year, in addition to removing one of the distortions that the tax system creates in this part of the economy.
The irony is that a relatively high VAT threshold in the UK designed to encourage and support small businesses may be one of the factors holding back economic growth. And with an unchanged threshold combined with inflation of more than 10% over the past year, this may be an even bigger drag on the economy/incentive to cheat than it has been in the past.
Click here to find out more about VAT at 50, ICAEW’s celebration (if that is the right word) of the 50th anniversary of VAT, and what the future holds for our most beloved of indirect taxes.
An inflation rate of 10.1% in the year to March 2023 conceals a huge variation in individual price rises, as illustrated by this week’s chart on food prices.
One of the problems in measuring inflation is that a weighted average of thousands of different prices is very different from our individual experience of inflation. Not only are we unique in terms of the basket of goods and services that we buy, but we also tend to notice some price changes more than others – making our personal experience very different from everyone else’s.
Nowhere is this more pronounced than in our regular trips to the shops to buy groceries, where we can see higher prices both on the shelves and when we come to pay at the till. This can be much more visible to us than bills paid by direct debit, for example, where money just disappears from our bank account and we need to make an effort to work out what is going on.
The Office for National Statistics has recently launched a shopping prices comparison tool that allows you to choose a basket of goods and see how retail prices have increased across different types of purchases: food and drink, clothing and footwear, restaurants and bars, health, household items, recreation and culture, services, and transport. Even there, the prices they quote are averages from many different retail outlets, specific products, and brands – and so won’t exactly match what is happening to your individual basket.
For our chart this week, we have chosen to look at food prices, choosing a basket that in total has increased by 17% over the past year, rising from £422.40 if you had bought everything on the list in March 2022 to £495.43 in March 2023. We have allocated these into six different categories to give a bit more flavour (pun intended) to what is going on.
There is a huge amount of variation between different foodstuffs, with our chart illustrating how in the snacks and sweets category the average price of 200-300g of plain biscuits has increased by 26% (from 98p to £1.24), while in meat and fish, pork loin chops have gone up by 28% (from £6.35 per kg to £8.12 per kg). In the frozen category, chicken nuggets are up 35% (from £1.79 to £2.41), while in deli and dairy, hard cheese has gone up the most on average, by 44% (from £6.92 per kg to £9.98 per kg). Olive oil tops our store cupboard classification, up 49% (from £3.87 to £5.78 on average between 500ml and 1 litre), but the king of food price inflation is the humble cucumber, up a massive 52% over a one year period from 55p to 84p each.
Not highlighted in the chart are the smallest price rises in each category, with peanuts up 5% (from £1.23 to £1.29 for 150-300g), lamb loin chop/steaks up 4% (from £15.49 to £16.13 per kg), frozen vegetable burgers up 11% (£1.99 to £2.21), sliced ham up 9% (£2.41 to £2.64 for 100-200g), low-sugar/non-chocolate breakfast up 6% (£2.08 to £2.20), and sweet potato up a mere 2% (from £1.17 to £1.19 per kg).
The Bank of England continues to tighten the screws on inflation, raising its base rate to 4.5% on 11 May 2023, and the projections are that inflation overall should start to reduce quite rapidly over the next few months.
However, as ICAEW Economies Director Suren Thiru recently said in a TV interview on BBC Breakfast, inflation is now becoming embedded into the everyday things that we buy. This makes the challenge for the Bank of England to bring inflation back down to its target range of 1% to 3% that much harder.
The public finances continue to be battered by economic shocks as this week’s chart on the past five years of red ink illustrates.
The monthly public sector finances for March 2023 released on Tuesday 25 April contained the first cut of the government’s financial result for 2022/23, with our chart this week illustrating trends over the past five years in receipts, expenditure and the deficit.
As our chart highlights, tax and other receipts increased from £813bn in 2018/19 to £827bn in 2019/20, before falling to £793bn during the first year of the pandemic. They recovered to £920bn in 2021/22 before rising with inflation to a provisional estimate of £1,016bn for the year ended 31 March 2023.
Total managed expenditure (TME) increased from £857bn in 2018/19 to £888bn in 2019/20, before exceeding £1trn for the first time in 2020/21 as the pandemic caused expenditure to rise significantly. TME fell in 2021/22 to £1,041bn as pandemic-released spending was scaled back, before rising this year to £1,155bn as inflation, higher interest rates and energy support packages more than offset the pandemic related spending that was not repeated in 2022/23.
The deficit of £44bn in 2018/19 was the lowest it had been since the financial crisis, following an extended period of spending restraint over a decade. The purse strings were loosened a little in 2019/20 as previous government plans to eliminate the deficit were abandoned, with the deficit rising to £61bn. The huge cost of the pandemic saw the deficit rise to £313bn in 2020/21 as the borrowing rose to meet the huge costs of dealing with the pandemic, before falling back to £121bn in 2021/22.
There were hopes that the situation would improve further, with the government in October 2021 budgeting for a deficit of £83bn. Unfortunately, rampant inflation and the energy crisis following Russia’s invasion of Ukraine mean that the government does not currently expect to reduce the deficit to below £50bn until 2027/28 at the earliest. And that is with what some commentators believe are unrealistic assumptions about the government’s ability to reduce spending on public services beyond the cuts already delivered.
Provisional receipts in 2022/23 were 25% higher than the outturn for 2018/19, which in the absence of economic growth has principally been driven by inflation of around 15% over that period combined with an increase in the level of taxation and other receipts from around 37% to approaching 41% of the economy. Total managed expenditure is provisionally 35% higher than in 2018/19, although this includes substantial amounts of one-off expenditures on the energy support packages and index-linked debt interest that should moderate, at least assuming inflation reduces in the coming financial year.
Not shown in the chart is what these numbers mean for public sector net debt, which has increased by £753bn over the past five years from £1,757bn at 1 April 2018 to a provisional £2,530bn at 31 March 2023. This comprises £678bn in borrowing to fund the deficits shown in the chart, and £75bn to fund lending by government and working capital requirements.
Our chart this week may be well presented, but it is not a pretty picture.
Volumes have been the main driver of the increase in value of debit and credit card transactions since 2022, as average spend on debit cards fell and the average transaction on credit cards rose by less than inflation.
UK Finance, the industry body for the banking and finance industry, released its latest data on UK card transactions on 20 April 2023. This provides an insight into UK debit and credit card transactions between January 2022 and 2023, and our chart this week takes a look at the year-on-year change in transaction amounts.
The monthly total value of transactions on UK-issued debit and credit cards increased from £73.9m in January 2022 to £83.5bn in January 2023, putting card transactions on course to exceed £1trn over the course of 2023. This includes online and telephone purchases, as well as in-person retail transactions and spending overseas.
Our chart illustrates how the value of debit card transactions increased from £57.7bn in January 2022 to £64.7bn, analysed between £7.7bn from a 13.4% increase in the volume of transactions to 1,971m, less £0.7bn from a 1.1% fall in the average value of each debit card purchase to £32.82.
In the context of inflation in excess of 10%, a decline in the average value of debit transactions may seem counterintuitive. This is partly because of the continued displacement of cash as a method of payment, especially for low value purchases – contributing to growth in the volume of transactions, but a decline in average purchase amounts. Consumers scaling back their spending in response to the cost-of-living crisis is also likely to be a factor.
The value of credit card transactions rose from £16.2bn to £18.8bn, reflecting £1.6bn from a 9.9% increase in the number of transactions to 321m plus £1.0bn from a 6.0% increase in the average value of each transaction to £58.58.
The largest component of credit card transactions were purchases, which increased from £14.6bn to £17.1bn, up £1.4bn from a 9.9% increase in the volume of purchases to 319m, and £1.1bn from a 6.7% increase in the average value of each purchase to £53.60. Cash advances increased from £187m to £207m (from a 6.6% increase in the number of cash advances to 1.5m and a 3.6% increase in average advance to £135), while balance transfers increased from £1.4bn to £1.5bn (from a 4.0% increase in the number of balance transfers to 0.7m and a 4.9% increase in average transfer to £2,133).
Similar to debit cards, the decline in the average value of each credit card purchase after inflation is likely to be affected by the ongoing switch from cards to cash, as well as a scaling back of purchases by some consumers. There may also have been a shift in purchasing patterns for some households, from fewer larger purchases to more frequent smaller ones.
Not shown in the chart is the amount owed by credit card holders, which was 9.1% higher at £60bn at the end of January 2023 compared with £55bn a year previously. This is lower than the £61.3bn owed at the end of December 2022 as the £20.1bn repaid (just under a third of the total) exceeded the £18.8bn added. According to UK Finance, 51.3% of credit card balances attract interest, with the remainder primarily comprising those who pay their balances in full each month and those on interest-free balance transfers.
Debit and card usage is expected to continue to rise, with UK Finance previously forecasting that cash usage will fall from around 15% of all retail purchases in 2021 to around 6% by 2030. Others have suggested that physical cash could be eliminated altogether, saving the exchequer and businesses from the costs of creating, handling and disposing of cash.
For many, transitioning to a cashless society will be welcome – heralding the end of the need of jingling coins and purses and wallets bulging with banknotes. For others, including the million or so consumers who prefer or are reliant on cash for most of their day-to-day shopping, this may not be so positive.
I take a look at Africa this week and how its current population of 1.5bn, 18% of the world’s total, is distributed across the continent.
My chart this week illustrates how Africa’s population of 1,460m can be divided into five regions. These comprise Western Africa with 435m people, Northern Africa with 221m, Central Africa with 178m, Southern Africa with 198m, and Eastern Africa with 428m.
These regions are based on the African Union’s official regions for its 55 member states, which differ from the regions used by the United Nations. They include Réunion (1.0m) and Mayotte (0.3m), two French overseas territories in the Indian Ocean that are not members of the African Union, as well as St Helena (5,000), an overseas territory of the UK in the Atlantic. It also includes an estimated 5.8m people living in African Union applicant Somaliland that are included within the number for Somalia.
Excluded are 175,000 or so people living on the African continent in Ceuta and Melilla (Spain), around 2.2m and 250,000 respectively in the Atlantic Ocean on the Canary Islands (Spain) and Madeira (Portugal), and several hundred people in the Indian Ocean within France’s Southern Territories.
The table below breaks down the total by country within each region, highlighting how the four largest countries by population each have more than 100m people, led by Nigeria with 223.8m (15.3% of Africa’s total), Ethiopia with 126.5m (8.7%), Egypt with 112.7m (7.7%) and the Democratic Republic of the Congo with 102.3m (7.0%).
The next largest are Tanzania with 67.4m (4.6%), South Africa with 60.4m (4.1%), Kenya with 55.1m (3.8%), Uganda with 48.6m (3.3%), Sudan with 48.1m (3.3%), Algeria with 45.6m (3.1%), Morocco with 37.8m (2.6%), Angola with 36.7m (2.5%), Ghana with 34.1m (2.3%), Mozambique with 33.9m (2.3%), Madagascar with 30.3m (2.1%) and Côte d’Ivoire with 28.9m (2.0%).
The population of Africa is expected to grow significantly over the rest of the century, with the UN’s medium variant projecting a population of 1.7bn (20% of the projected global total) in 2030, 2.1bn in 2040 (23%), 2.5bn (26%) in 2050, 2.9bn (28%) in 2060, 3.2bn (31%) in 2070, 3.5bn (34%) in 2080, 3.7bn (36%) in 2090 and 3.9bn (38%) in 2100. This is despite a rapidly declining birth rate, with many more Africans living much longer lives than preceding generations.
Africa is currently relatively poor compared with advanced economies, with the total GDP for its 55 countries and 1.5bn people close in size to the UK’s single country GDP for 67.5m people of around £2.5trn a year at current exchange rates. This is around 3% of the global economy in each case.
The UK’s share of the global economy is likely to decline over the rest of the century as Africa and other developing economies grow at a much faster pace. For Africa the combination of a rapidly growing population and economic development should see it become substantially more significant to the global economy than it is today.
Jeremy Hunt limits his tax and spending ambitions in the Spring Budget to stay within a very tight fiscal rule.
The Spring Budget 2023 for the government’s financial year of 1 April 2023 to 31 March 2024 was presented by the Chancellor of the Exchequer to Parliament on Wednesday 15 March 2023, accompanied by medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) covering the period up to 2027/28.
The fiscal numbers in the Budget are based on the National Accounts prepared in accordance with statistical standards. They differ in material respects from the financial performance and position that will eventually be reported in the Whole of Government Accounts prepared in accordance with International Financial Reporting Standards (IFRS).
A (slightly) lower fiscal deficit in 2023/24
Table 1 shows the Spring Budget estimate for the deficit in 2023/24 is £132bn, £8bn lower than the £140bn forecast in November 2022. Positive revisions to the forecast added £27bn to the bottom line, before £19bn from tax and spending decisions made by the Chancellor.
Forecast revisions in 2023/24 comprised £13bn in lower debt interest, £7bn less in energy support and £8bn in higher tax receipts, less £1bn other changes. The cost of tax and spending decisions in 2023/24 was estimated to be £8bn in lower corporation tax receipts from the full expensing of capital expenditure, £5bn from freezing fuel duties, £5bn from extending the energy price guarantee and other energy support measures, £2bn more for defence and security and £2bn from other decisions, less £3bn in indirect effects of those policy decisions on tax receipts and welfare spending.
Total receipts in 2023/24 are now expected to be £1,057bn (£2bn higher than previously forecast) and total managed expenditure is now anticipated to be £1,189bn (£10bn lower).
The forecast for the deficit in 2024/25 was up £1bn at £85bn and was unchanged in 2025/26 at £77bn, with upward revisions of £18bn and £19bn respectively offset by an estimated £19bn net cost of tax and spending decisions. The latter includes £3bn in 2024/25 and £4bn in 2025/26 for expanded childcare eligibility.
The final two years of the forecast were better by £17bn in 2026/27 (down to a fiscal deficit of £63bn) and by £20bn in 2027/28 (down to £49bn), although several commentators have pointed out this is on the basis of unrealistic spending assumptions that do not take account of significant pressures on public services.
In addition to forecasts for the next five years, the OBR also revised its estimate for the deficit in the current financial year ending 31 March 2023 to £152bn, £25bn lower than November’s estimate of £177bn. This is £53bn more than the OBR’s March 2022 estimate of £99bn and £69bn more than the November 2021 Budget estimate of £83m.
Table 2 provides a breakdown of the forecast changes by year, showing how lower debt interest and higher tax receipts flowing through the forecast period have provided the Chancellor with capacity to extend energy support, incentivise business investment, freeze fuel duty for yet another year (and extend the temporary 5p cut) and increase spending in specific areas.
Receipts and expenditure development
As illustrated by Table 3, receipts are expected to rise from £1,020bn in the current financial year to £1,231bn in 2027/28, while expenditure excluding energy support and interest is expected to rise from £968bn in 2022/23 to £1,121bn in 2027/28..
Interest costs are expected to fall from £115bn this year to £77bn in 2025/26 as interest rates and inflation moderate, before rising to £97bn in 2027/28 based on a growing level of debt.
Net investment is expected to increase in 2023/24 as an £8bn one-off credit from changes in student loan terms in 2022/23 reverses, before declining gradually as capital expenditure budgets flatline and depreciation grows. Public sector gross investment is planned to be £134bn, £134bn, £133bn, £132bn and £132bn over the five years to 2027/28, in effect a cut in real terms over the forecast period.
The government’s secondary fiscal target is to keep the fiscal deficit below 3% of GDP by the end of the forecast period. Based on the March 2023 forecasts, it has headroom of 1.3% of GDP, or £39bn, against this target.
Table 4 provides a summary of the year-on-year changes in receipts and spending, together with the forecast for the increase in the size of the economy, including inflation. This highlights how tax and other receipts are expected to increase faster than the overall rate of growth in the overall size of the economy, while the government plans to constrain the average rise in expenditure excluding energy support and interest to 3.0% including inflation.
The former is principally a result of ‘fiscal drag’ as tax allowances are frozen, bringing in proportionately more in tax as incomes rise with inflation. The latter reflects what is generally considered to be unrealistic plans to constrain public spending in the context of an expected 9% rise in the number of pensioners over the five-year period (that will add to pensions, welfare, health and social care spending), pressure on public sector pay and the deteriorating quality of public services.
Average nominal GDP growth over the five years of 3.3% combines average real-terms economic growth of 1.7% a year and inflation of 1.6%, the latter using the GDP deflator, a ‘whole economy’ measure of inflation. This is different to consumer price inflation, which is forecast to fall to 4.1% in 2023/24 and average 1.4% over the five years to 2027/28.
Public sector net debt
Lower deficits over the forecast period translate into lower borrowing requirements, reducing forecasts for public sector net debt from just under £3.0trn to £2.9trn. This is partly increased or offset by changes in the forecasts for financial and other transactions and working capital movements.
Table 5 shows how forecast public sector net debt is now expected to reach £2,909bn by March 2028, £54bn less than was forecast in November. Although an improvement, debt at the end of the forecast period is expected to be £1,089bn higher than £1,820bn reported for March 2020 before the pandemic, reflecting the large amounts borrowed during the pandemic, in addition to borrowing planned over the next five years.
The government’s primary fiscal target is based on ‘underlying debt’, a non-generally accepted statistical practice measure that excludes the Bank of England and hence quantitative easing balances. Underlying debt needs to be falling as a proportion of GDP between the fourth and fifth year of the forecast period.
The forecast gives the Chancellor just £6.5bn in headroom against this target, with underlying debt / GDP expected to fall from 94.8% to 94.6% between March 2027 and March 2028.
Fiscal rules limit ambitions for tax and spending
Following the disastrous ‘mini-Budget’ of his predecessor Kwasi Kwarteng, the Chancellor’s principal goal has been to stabilise the public finances to provide confidence to debt markets. To do this he has prioritised meeting his fiscal rules over incentivising business investment, cutting taxes and increasing defence spending. He has also adopted what are generally considered to be unrealistic assumptions about public spending in the later years of the forecast to keep within his self-imposed fiscal rules.
This has led to the Chancellor announcing ‘ambitions’ to extend the full expensing of capital expenditure beyond three years and to increase defence and security spending to 2.5% of GDP, as well as continuing to plan for increases in fuel duties each year despite the repeated practice of cancelling these rises.
Because these are ambitions and not plans, they are not incorporated into the forecasts enabling fiscal targets to be met. The OBR reports that continuing to cancel fuel duty rises each year would reduce the headroom to just £2.8bn, while converting the Chancellor’s ambitions to extend full expensing beyond three years and to increase defence spending to 2.5% of GDP into formal plans would cause him to breach his primary fiscal rule.
Conclusion
The overall fiscal position remains weak, with public finances vulnerable to potential economic shocks.
The Chancellor has followed the practice of many of his predecessors in increasing planned borrowing when fiscal forecasts worsen, as occurred in November 2022, only to then use upsides from improvements in subsequent forecasts to fund new tax and spending commitments. This ratchets up borrowing and debt as forecasts fluctuate and creates instability in both tax policy and public spending plans.
The consequence is a relatively unchanged fiscal position for the financial year commencing 1 April 2023 and the two subsequent financial years, as tax and spending decisions offset forecast upsides. And although there is an anticipated improvement in the projected fiscal position in the final two years of the OBR’s five-year forecast (after the next general election), the likelihood is that it will be offset in due course by the reality of pressures on public service and welfare budgets.
There is a reason why the first Budget following a general election typically sees taxes rise and the Spring Budget 2023 suggests that this pattern is likely to be repeated, irrespective of whichever party wins power.
