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UK first-half deficit in line, but expected to soar over winter

Author: ICAEW Insights

Published: 21 Oct 2022

The energy price guarantee, a national insurance cut and rising interest charges are expected to result in double the budgeted deficit for 2022/23.

The monthly public-sector finances for September 2022 released on Friday 21 October reported a provisional deficit for the month of £20bn, bringing the total for the first six months to £73bn. This was in line with the Office for Budget Responsibility’s (OBR) March budget forecast for the deficit for the first half of the year, with higher receipts, the energy profits levy and lower capital investment than budgeted offsetting debt interest that is much higher than forecast.

Unfortunately, the costs of the energy price guarantee for households and businesses from October to March, the national insurance cut from November and even higher interest charges over the second half are expected to result in the deficit being close to double the budgeted deficit of £99bn for the full financial year ending 31 March 2023.

Public sector net debt was £2,450bn, or 98.0% of GDP, at the end of September, up £77bn from £2,373bn at the end of March 2022. This is £630bn higher than net debt of £1,820bn on 31 March 2020, reflecting the huge sums borrowed over the course of the pandemic.

The deficit for the month of £20bn was reported to be the second highest September deficit on record and compared with £9bn in August and £18bn for the same month last year.

The cumulative deficit for the first six months of the 2022/23 financial year of £73bn was £24bn lower than this time last year and £134bn lower than the previous year during the first stages of the pandemic, but £36bn more than the deficit of £37bn for first six months of 2019/20, the most recent pre-pandemic comparative period.

Tax and other receipts in the half-year to 30 September amounted to £475bn, £52bn or 12% higher than a year previously. Higher-income tax and national insurance receipts were driven by rising wages and the national insurance hike, while VAT receipts benefited from inflation in retail prices. Receipts included £3bn in accrued revenue for the energy profits levy ‘windfall tax’.

Expenditure excluding interest and investment for the six months of £463bn was similar to the first half of 2021/22, with spending increases announced in last year’s Spending Review together with previously announced support to households to help with their energy bills offsetting most of the reduced spending on the pandemic (including furlough programmes) that was incurred in the same period last year.

Interest charges of £63bn were recorded for the half-year to September, £28bn or 81% higher than the £35bn reported for the equivalent period in 2021, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt.

Cumulative net public-sector investment was £22bn. This is the same as a year previously, suggesting there has been a slowdown in capital programmes given that the Spending Review 2021 had pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £77bn since the start of the financial year comprises the deficit for the five months of £73bn less £4bn in net cash inflows, as repayments of taxes owed and loans made to businesses during the pandemic exceeded outflows to fund student loans, other lending and working capital movements.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The Chancellor will be relieved that the fiscal situation is not worse as he works to regain market credibility in the wake of his predecessor’s disastrous mini-Budget and the Prime Minister’s resignation.

“The deficit for the first half of the 2022/23 financial year of £73bn was in line with the Office for Budget Responsibility’s spring forecast, as higher receipts, the energy profits levy and lower capital investment offset the effect on debt interest of both rising interest rates and inflation.

“Unfortunately, the energy price guarantee scheme for households and businesses, the cut in national insurance from November and even higher interest rates since the mini-Budget mean the deficit for the full year is expected to be close to double the £99bn budgeted back in March.

“All eyes will now be on the Autumn Statement and the practical difficulties of finding sufficient spending cuts in the medium-term fiscal plan to bring the public finances under control over the next five years. The prospect of tax rises should not be discounted.”

Public sector finances: trends

   Apr-Sep 2019 (£bn)  Apr-Sep 2020 (£bn) Apr-Sep 2021 (£bn)   Apr-Sep 2022 (£bn)
 Receipts   402  360  423  475
 Expenditure  (390)  (506)  (463)  (463)
 Interest  (31)  (23)  (35)  (63)
 Net Investment  (18)  (38)  (22)  (22)
 Deficit  (37)  (207)  (97)  (73)
 Other Borrowing  10  (45)  22  (5)
 Debt Movement  (27)  (252)  (75)  (78)
 Net Debt  1,807  2,071  2,237  2,450
 Net Debt/GDP  80.3%  99.3%  95.5%  98.0%
Source: ONS, 'Public Sector Finances, September 2022'.

Caution is needed with respect to the numbers published by the Office for National Statistics (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 and the inclusion of the energy profits levy for the first time. These had the effect of reducing the reported fiscal deficit for the five months ended 31 August 2022 from £58bn to £53bn and the reported fiscal deficit for the 12 months to March 2022 from £134bn to £133bn.

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

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