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Public sector net debt tops £2.5trn for the first time

Author: ICAEW Insights

Published: 24 Jan 2023

The highest December deficit on record has been driven by higher debt interest costs and the cost of energy support schemes.

The monthly public sector finances for December 2022, released on Tuesday 24 January 2023, reported a provisional deficit for the month of £27bn, the highest December deficit since records began in 1993. This was despite a mild December helping to mitigate some of the cost of energy support schemes.

The deficit for the month of £27bn was £12bn higher than the equivalent month in the previous financial year (December 2021) and £8bn more than the previous month (November 2022).

This brought the cumulative deficit for the first three quarters of the financial year to £128bn, which is £3bn below the Office for Budget Responsibility (OBR)’s revised forecast made at the time of the Autumn Statement last November. This substantially exceeds the budget of £99bn for the entire financial year to March 2023 forecast by the OBR at the time of the Spring Statement as 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 all add to public spending.

Public sector net debt was £2,504bn or 99.5% of GDP at the end of December 2022, up £131bn from £2,373bn at the end of March 2022. This is £684bn higher than net debt of £1,820bn on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic. 

The OBR’s latest forecast is for net debt to reach £2,571bn by March 2023 and to approach £3trn by March 2028, although energy prices falling faster than expected may help improve the outlook somewhat.

The cumulative deficit for the first three quarters of the financial year of £128bn was £5bn lower than this time last year and £143bn lower than in 2020/21 during the first stages of the pandemic. However, it was £67bn more than the deficit of £61bn reported for the first nine months of 2019/20, the most recent pre-pandemic pre-cost-of-living-crisis comparative period. 

Tax and other receipts in the three quarters to 31 December 2022 amounted to £721bn, £73bn 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. Year-to-date receipts included £3.7bn accrued for the energy profits levy ‘windfall tax’.

Expenditure excluding interest and investment for the nine months of £716bn was £30bn or 4% higher than the same period in 2021/22, with Spending Review planned increases in spending, high inflation and the cost of energy support schemes more than offsetting the furlough programmes and other pandemic spending in the comparative period not repeated this year.

Interest charges of £100bn for the three quarters were £46bn or 85% higher than the £54bn reported for the equivalent period in 2021/22, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt. 

Cumulative net public sector investment to December was £33bn. This is £2bn more than a year previously, 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 £131bn since the start of the financial year comprised borrowing to fund the deficit for the nine months of £128bn together with a further £3bn to fund student loans, lending to businesses and others, and working capital requirements, net of 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, said: “A mild December was not enough to prevent public debt from reaching £2.5tn for the first time, in a disappointing set of numbers for December 2022. However, the Chancellor will take comfort that cumulative borrowing for the first three quarters of the financial year was less than feared when the budget for 2022/23 was updated back in November. Energy prices coming down much faster than expected should also improve the outlook for the final quarter as well as the new financial year.

“The deficit is still on track to be one of the highest ever recorded in peacetime and stabilising the fiscal position is the best that Jeremy Hunt can hope for in the short term. Amid a sea of red ink, sustainable public finances remain a distant prospect for now.”

Public sector finances: trends

   Apr-Dec 2019 (£bn) Apr-Dec 2020 (£bn) Apr-Dec 2021 (£bn) Apr-Dec 2022 (£bn)
Receipts   597  559  648  721
Expenditure  (588)  (746)  (686)  (716)
Interest  (44)  (33)  (54)  (100)
Net investment  (26)  (51)  (31)  (33)
Deficit  (61)  (271)  (123)  (128)
Other borrowing  9  (68)  (86)  (3)
Debt movement  (52)  (339)  (209)  (131)
Net debt  1,832  2,159  2,371  2,504
Net debt / GDP  84.3%  99.4%  99.3%  99.5%

Source: ONS, ‘Public sector finances, December 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 eight months ended 30 November 2022 by £5bn to £101bn and reducing the reported fiscal deficit for the year to 31 March 2022 by £2bn to £123bn.

The revisions in the current year principally relate to an increase of £4bn in the estimate for accrued corporation tax receipts at 30 November 2022, while the prior year numbers were updated to reflect a £0.7bn correction to reported VAT cash receipts during 2021/22 and a £1bn increase in the estimate for accrued corporation tax receipts at 31 March 2022.

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

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