The monthly public sector finances for June 2023 were released by the Office for National Statistics (ONS) on Friday 21 July 2023. These reported a provisional deficit for the third month of the 2023/24 financial year of £18bn bringing the total deficit for the three months to £54bn, £12bn more than in the first quarter of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, says: “The bleak mood inside HM Treasury will not have been aided by the fiscal results for the first quarter of the 2023/24 financial year, following the confirmation last week by the Office for Budget Responsibility that the public finances are on an unsustainable path. The prospect is for significant tax rises over the next 50 years to keep public debt under control.

“The deficit of £54bn for the first three months is the third highest on record with tax and other receipts failing to keep pace with public spending. Higher benefit payments, energy support schemes, employee salaries and procurement costs were the main drivers of the £12bn increase in the deficit compared with the first quarter of the previous financial year, although the energy price guarantee coming to an end in June will benefit future quarters. 

“Even though interest on index-linked debt has started to moderate as inflation slows, it looks increasingly likely that any tax cuts announced before the next general election will need to be offset by even larger tax rises afterwards – a very difficult tightrope to walk if credibility in the UK’s public finances is to be maintained.”

Month of June 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of June 2023 was £18bn, being tax and other receipts of £85bn less total managed expenditure of £103bn, up 8% and 6% respectively compared with June 2022. The latter would have been a 12% increase if not for a £7bn fall in interest on index-linked debt compared with June 2022 as inflation moderated.

The deficit for June was £3bn lower than the £21bn forecast by the Office for Budget Responsibility at the time of the Spring Budget 2023, but higher interest rates on non-index linked debt could see this budget variance reverse in future months.

Three months to June 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the three months to June 2023 was £54bn, £12bn more than the £42bn deficit reported for the first quarter of the previous financial year (April to June 2022). This reflected a widening gap between tax and other receipts for the three months of £250bn and total managed expenditure of £304bn, up 8% and 11% respectively compared with April to June 2022.

The slower rate of rise in tax receipts is partly due to the abolition of the short-lived health and social care levy, but also reflects the weakness in the economy, which is concerning given the much higher pace of growth in public spending. 

Total managed expenditure of £304bn in the three months to June can be analysed between current expenditure excluding interest of £253bn (up £25bn or 11% over the same period in the previous year), interest of £40bn (up £3bn or 8%), and net investment of £11bn (up £3bn or 22%).

The increase in current expenditure excluding interest compared with the prior year has predominately been driven by £11bn from the uprating of benefit payments, £6bn in higher central government staff costs and £4bn in central government procurement, in addition to £5bn in energy support scheme costs.

The rise in interest costs of £3bn to £40bn reflects a fall in the interest payable on index-linked debt of £6bn from £26bn to £20bn as inflation has moderated compared with the same period last year, combined with an £9bn increase in debt increase on non-inflation linked debt from £11bn to £20bn.

The £2bn increase in net investment spending from £9bn in the first quarter of 2022/23 to £11bn in the first quarter this year is too early in the financial year to understand trends given that the timing of capital projects can have a significant effect on the reported numbers in individual months.

Public sector finance trends

Source: ONS, ‘Public sector finances, June 2023’.

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 latest release saw the ONS revise the reported deficit for April and May 2023 down by £7bn from £43bn to £36bn as estimates of tax receipts were updated for better data. The ONS also adjusted the reported deficit for the 2022/23 financial year by £2bn from £134bn to £132bn for similar reasons.

Balance sheet metrics

Public sector net debt was £2,596bn at the end of June 2023, equivalent to 100.8% of GDP – the highest level since the 1960s according to the ONS.

The debt movement since the start of the financial year was £64bn, comprising borrowing to fund the deficit for the three months of £54bn plus £10bn in net cash outflows to finance lending to students, business and others during the first quarter, partially offset by inflows from loan repayments and positive working capital movements.

Public sector net debt has risen by £781bn or 43% since 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£646bn at 30 June 2023, comprising £1,604bn in non-financial assets, £1,013bn in non-liquid financial assets and £322bn in liquid financial assets less public sector gross debt of £2,918bn and other liabilities of £667bn. This is a £69bn deterioration from the -£577bn reported for March 2023

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it still excludes unfunded employee pension liabilities that amounted to just over £2trn at 31 March 2020 according to the Whole of Government Accounts, although they are expected to be much lower at 31 March 2023 as discount rates have risen significantly since then.

For further information, read the public sector finances release for June 2023.