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Revisions benefit Chancellor amid cost-of-living crisis

Author: ICAEW Insights

Published: 24 May 2022

A £7bn downward revision in the deficit for the year to March 2022 is seen as helpful to the government in the context of a likely windfall tax on energy companies.

The public sector finances for April 2022 released on Tuesday 24 May 2022 reported a provisional deficit for April of £18.6bn, an improvement from this time last year, but still £8bn higher than April 2019, the year before the pandemic – and rising inflation and interest rates provide a further note of caution.

The 2021/22 financial year deficit was revised down by £7bn from £152bn to £145bn.

Public sector net debt increased by £4bn from £2,344bn at the end of March 2022 to £2,348bn or 95.7% of GDP at the end of April. This is £555bn higher than in March 2020, reflecting the huge sums borrowed over the course of the pandemic.

The deficit reported for the month of April 2022 of £18.6bn was an improvement of £5.6bn from the deficit of £24.2bn reported for the month of April 2021, and £30.3bn better than the £48.9bn reported for April 2020. However, it was £8bn worse than the pre-pandemic deficit of £10.6bn in April 2019.

Tax and other receipts in the month amounted to £74.4bn, £7.2bn or 11% higher than a year previously. This included higher income tax receipts from wage increases and bonuses as well as the new higher rate of national insurance, as well as higher VAT receipts driven by higher retail prices.

Expenditure excluding interest and investment for the year of £79.4bn was £0.3bn lower than the same period last year, as reduced spending on the pandemic was offset by planned increases in spending announced in the Spending Review last year and by a £3bn or so council tax rebate to households to help with their energy bills.

Interest amounted to £5.1bn in April, slightly higher than the £5.0bn in April 2020. This is surprising given the much higher rate of inflation this year, which affects the interest on RPI-linked debt. This may be a timing issue in the way interest has been calculated, given the OBR is forecasting a record interest charge this year.

Net public sector investment in April 2022 was reported to be £8.5bn, which is £1.8bn or 27% higher than a year previously. This is principally because of higher planned capital expenditure, but also reflects subsidies to Bulb Energy, a failed energy supplier taken over by the government.

The increase in net debt of £3.8bn since the start of the financial year comprises the deficit for the month of £18.6bn less £14.8bn in net borrowing repayments. This reflects the recovery of loans to banks through the Bank of England’s Term Funding Scheme and of loans to businesses via the British Business Bank (including bounce-back and other coronavirus loans), offset by student loans and other government cash requirements.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Today’s numbers highlight that while the deficit is still high – the fourth highest on record for April – it’s a marked improvement on the past two years as the costs of dealing with the pandemic continue to subside.

“More notably, the £7.2bn downward revision to the deficit for the fiscal year to March, initially reported last month, will help the Chancellor build up his coffers to support struggling households, particularly when combined with a likely windfall tax.

“However, exposure to higher debt interest as inflation soars and anticipated further base rate increases by the Bank of England continue to overshadow the outlook for the country’s public finances.”

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 the prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the 12 months to March 2022 by £7.2bn from £151.8bn to £144.6bn and reducing the deficit for the year ended 31 March 2021 by £0.3bn from £317.6bn to £317.3bn.

Public sector finances: fiscal deficit comparisons

   Receipts (£bn)  Expenditure (£bn)  Interest (£bn)  Net investment (£bn) Deficit (£bn) 
Apr 2019   65.5  (64.5)  (6.7)  (4.9)  (10.6)
Apr 2020  55.5  (92.5)  (5.5)  (6.4)  (48.9)
Apr 2021  67.2  (79.7)  (5.0)  (6.7)  (24.2)
Apr 2022  74.4  (79.4)  (5.1)  (8.5)  (18.6)
 Source: ONS, ‘Public sector finances, April 2022’.

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

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