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Public finances disappoint as interest rates rise

Author: ICAEW Insights

Published: 26 Apr 2022

Public sector finances for the year ended 31 March 2022 saw a provisional deficit of £152bn, less than half last year’s deficit, but more than two and a half times that seen in 2019/20.

The public sector finances for March 2022 released on Tuesday 26 April 2022 reported a provisional deficit for the 2021/22 financial year of £152bn, £24bn more than the OBR’s Spring Statement forecast. This was £166bn lower than the peacetime record of £318bn reported for last year but was £97bn higher than the £55bn deficit in 2019/20.

The provisional numbers reported by the Office for National Statistics (ONS) included a deficit that was £24bn higher than £128bn estimated by the Office for Budget Responsibility (OBR) in the Spring Statement. The provisional outturn will be revised over the next few months as the ONS obtains better data, and the ONS suggest the difference with the OBR forecast is likely to narrow as estimates for tax receipts in particular are updated.

Public sector net debt increased by £17bn from £2,327bn at the end of February to £2,344bn or 96.2% of GDP at the end of March. The provisional debt number is just under £210bn higher than the £2,134bn at the start of the financial year and £551bn higher than the £1,793bn in March 2020, highlighting just how much a hit the public finances have experienced as a consequence of the coronavirus pandemic. 

The deficit reported for the month of March 2022 was £18bn, which was an improvement of £9bn from the deficit of £27bn reported for the month of March 2021 but £12bn worse than the £6bn deficit in March 2020. 

Tax and other receipts in the 2021/22 financial year amounted to £908bn, £113bn or 14% higher than a year previously and £78bn or 9% above the level seen in 2019/20. Tax receipts have benefited from a relatively strong recovery from the pandemic, with the ONS expecting to revise its estimates upwards as it refines the numbers over the next few months.

Expenditure excluding interest and investment for the year of £924bn was £74bn or 7% lower than the same period last year, while £135bn or 17% higher than two years ago. This includes pandemic-related spending including support programmes such as the furlough schemes in the first half of the financial year. 

Interest amounted to £73bn for the 12 months, which was £31bn or 74% higher than in 2020/21 and £20bn or 38% more than in the year ended 31 March 2020. The increases are principally because of the effect of higher inflation on index-linked gilts, as well as the effect of the higher Bank of England base rate over the last few months.

Net public sector investment in the year to March 2022 was provisionally reported to be £62bn, although there are some suggestions this may be scaled back when the numbers are finalised. This was £9bn or 13% below the £72bn reported for last year, which included around £17bn of COVID-19 related lending that the government does not expect to recover. Net investment is £20bn or 48% more than two years ago, principally reflecting greater capital expenditures, including on HS2.

The increase in net debt of £210bn since the start of the financial year comprises the provisional deficit of £152bn and an estimated £58bn in other borrowing. The latter has been used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses via the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the recovery of taxes deferred last year and loan repayments.

Martin Wheatcroft FCA, external advisor on public finances to ICAEW, said: “Today’s numbers highlight how accelerating inflation is affecting the public finances as higher interest costs offset higher tax revenues. As expected, the deficit for the financial year is the third biggest ever in peacetime in cash terms, although government spending has declined following two years of pandemic borrowing.

“The cost-of-living crisis and further increases in interest rates – which are already seeing households make cuts to their spending – are likely to put further pressure on the Chancellor to increase support to hard-hit families. With the potential that these circumstances could trigger a recession, the Chancellor has a great deal to think about as we move into the new financial year.”

Public sector finances 2021/22: First provisional outturn

  12 months to
Mar 2022
Variance vs
prior year
Variance vs
two years ago
   £bn  £bn  %  £bn  %
 Receipts  907.7  113.4  +14%  78.4  +9%
 Expenditure  (924.3)  74.1  -7%  (135.0)  +17%
 Interest  (72.9)  (31.1)  +74%  (20.0)  +38%
 Net investment  (62.3)  9.4  -13%  (20.3)  +48%
 Deficit  (151.8)  165.8  -52%  (96.9)  +177%
 Other borrowing  (57.6)  (33.9)  +143%  (74.0)  -451%
 (Increase) in net debt  (209.4)  131.9  -39%  (170.9)  +444%
 Public sector net debt  2,343.8  209.4  +10%  550.7  +31%
 Public sector net debt / GDP  96.2%  2.3%  +2%  13.4%  +16%
Source: ONS, ‘Public sector finances, March 2022’.

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 ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the 11 months to February 2022 by £4.7bn from £138.4bn to £133.7bn and reducing the deficit for the year ended 31 March 2021 by £0.2bn from £317.8bn to £317.6bn.

Public sector finances 2021/22: fiscal deficit by month

Net investment
Apr 2021   67.2  (79.8)  (5.0)  (6.7)  (24.3)
 May 2021  67.6  (78.9)  (4.6)  (2.1)  (18.0)
 Jun 2021  69.9  (76.5)  (9.3)  (2.8)  (18.7)
 Jul 2021  77.6  (76.6)  (3.7)  (2.7)  (5.4)
 Aug 2021  71.0  (76.4)  (6.7)  (2.9)  (15.0)
 Sep 2021  71.4  (77.5)  (5.1)  (7.1)  (18.3)
 Oct 2021  72.8  (74.4)  (6.0)  (2.5)  (10.1)
 Nov 2021  72.7  (74.4)  (4.9)  (3.2)  (9.8)
 Dec 2021  77.2  (76.4)  (8.7)  (4.4)  (12.3)
 Jan 2022  100.4  (76.5)  (6.6)  (8.5)  8.8
 Feb 2022  79.0  (75.2)  (8.6)  (5.8)  (10.6)
 Mar 2022  80.9  (81.7)  (3.7)  (13.6)  (18.1)
 Cumulative  907.7  (924.3)  (72.9)  (62.3)  (151.8)
Source: ONS, ‘Public sector finances, March 2022’.

For further information, read the public sector finances release for March 2022.

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