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Public sector debt exceeds annual forecast in eight months

Author: ICAEW Insights

Published: 23 Dec 2022

Higher interest costs and energy support packages push public finances further into the red as the £105bn deficit heads towards revised forecast for the year of £177bn.

The Office for National Statistics (ONS) has released the monthly public sector finances for November 2022, revealing a provisional deficit for the month of £22­­bn. This brings the total reported deficit for the first eight months of the year to £105bn – a figure that exceeds the forecasted £99bn for the entire financial year.

The figure was forecast by the Office for Budget Responsibility (OBR) at the time of the Spring Statement. The increase is principally a consequence of much higher interest costs, the effect of higher inflation on index-linked debt and the cost of the energy price guarantee for households and businesses over the winter.

The OBR revised its forecast last month with the Autumn Statement and now estimates that the deficit will reach £177bn for 2022/23.

Public sector net debt was £2,478bn – or 98.7% of gross domestic product (GDP) – at the end of November, up £105bn from £2,373bn at the start of the financial year. This is £658bn higher than net debt of £1,820bn on 31 March 2020, reflecting the huge sums borrowed over the course of the pandemic. The OBR’s latest forecast is for net debt to reach £2,571bn by March 2023 and to approach £3tn by March 2028.

The month’s £22bn deficit was £14bn higher than the £8bn deficit reported for November last year and was £8bn more than the previous month (October 2022).

The cumulative deficit for the first eight months of the 2022/23 financial year of £105bn was £8bn lower than this time last year and £141bn lower than the previous year during the first stages of the pandemic. It was, though, £50bn more than the deficit of £55bn for the first eight months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.

Tax and other receipts in the period to 30 November 2022 amounted to £635bn, £65bn or 11% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance, while VAT receipts benefited from inflation in retail prices. Receipts included £4.2bn in accrued revenue for the energy profits levy ‘windfall tax’.

Expenditure, excluding interest and investment, for the eight months of £632bn was £22bn or 4% higher than the same period in 2021/22, with Spending Review planned increases in spending, higher interest costs and the initial payments for the energy price guarantee more than offsetting the furlough programmes and other pandemic spending in the comparative period that were not repeated this year.

Interest charges of £80bn were recorded for the period to October, £34bn or 74% higher than the £46bn reported for the equivalent period in 2021, through a combination of higher interest rates and higher inflation driving up the cost of retail price index-linked debt.

Cumulative net public sector investment to November was £28bn. This is £1bn more than the previous year – much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £105bn since the start of the financial year was equal to the deficit for the five months of £105bn as cash outflows to cover funding for student loans, lending to business and other loans and working capital requirements were broadly matched by cash inflows from repayments of deferred taxes and loans made to businesses during the pandemic.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, says: “Chancellor Jeremy Hunt will be relieved that the deficit for the year-to-date only exceeded £100bn by £5bn, on track to stay within the Office for Budget Responsibility’s latest forecast of £177bn for the full year. The continued slow-down in public capital investment is concerning given its importance to economic growth prospects and future tax revenues, compounded by continued disruption from industrial action.

“We’re pleased that the Chancellor has announced a Spring Budget and accompanying independent fiscal forecast on 15 March 2023, as this will be the first official budget for 18 months. However, it is important that HM Treasury sets out the terms of the energy bill relief scheme extension from April 2023 as soon as possible, as waiting until March could be too late for many businesses trying to work out whether they can be viable in 2023.”

Public sector finances: trends

  Apr-Nov 2019 (£bn) Apr-Nov 2020 (£bn)  Apr-Nov 2021 (£bn)  Apr-Nov 2022 (£bn)
Receipts  530  490  570  635
Expenditure  (521)  (661)  (610)  (632)
Interest  (41)  (30)  (46)  (80)
Net investment  (23)  (46)  (27)  (28)
Deficit  (55)  (247)  (113)  (105)
Other borrowing  12  (59)  (77)  -
Debt movement  (43)  (306)  (190)  (105)
Net debt  1,822  2,126  2,352  2,478
Net debt / GDP  82.9%  99.1%  99.0%  97.8%

Source: ONS, ‘Public sector finances, November 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 several revisions to prior period fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for the seven months ended 31 October 2022 by £1bn to £83bn and reducing the reported fiscal deficit for the year to 31 March 2022 by £7bn to £125bn.

The revisions in the current year were principally because of updated estimates for local government capital expenditure, while the prior year numbers were updated to reflect departmental audited financial statements that have been published recently. The latter benefited from a £6bn smaller loss on government loan guarantee schemes than originally estimated.

In addition, the deficit for the year ended 31 March 2020 was revised down by £3bn to £61bn to correct an error in the calculation of student loan write-offs.

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

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