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High interest costs continue squeezing UK public finances

Author: ICAEW Insights

Published: 23 May 2023

The provisional deficit of £26bn for April 2023 as revealed by the ONS is the second highest on record.

The monthly public sector finances for April 2023 were released by the Office for National Statistics (ONS) on Tuesday 23 May 2023. These reported a provisional deficit for the first month of the 2023/24 financial year of £26bn, which if confirmed will be the second highest deficit for April on record after the £49bn shortfall in the first month of the 2020/21 financial year, shortly after the arrival of the pandemic in the UK.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The first monthly release in a new financial year – which is what today’s numbers show – usually provides only limited insight into the UK’s fiscal position, even though at £26bn the reported deficit for April is the second highest since records began. Nevertheless, the Chancellor will be expecting the position to improve in subsequent months, giving him some room for manoeuvre ahead of what is likely to be a tax-cutting pre-election Budget either this autumn or next spring.

“Unfortunately, there are good reasons why taxes typically go up in the first Budget following a general election, irrespective of which party is in charge. Tax rises are even more likely this time around given low levels of economic growth, historically high levels of public debt, ongoing demographic change and the significant cost pressures facing many of our public services.”

Month of April 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of April 2023 was £26bn, £12bn more than the £14bn deficit reported for the first month of the previous financial year (April 2022). 

Tax and other receipts in the month of April were provisionally reported to amount to £77bn, up £1bn or just over 1% compared with the same month in 2022/23. This is much lower than might be expected given the rate of inflation and may be revised upwards later when better data is obtained. The abolition of the short-lived health and social care levy part-way through the last financial year was also a factor.

Total managed expenditure was £103bn in the month, 14% higher than the £90bn reported for April 2022. This can be analysed between current expenditure excluding interest in April of £84bn (up £5bn or 7% over the previous year), interest of £13bn (up £6bn or 76%), and net investment of £6bn (£2bn or 40% higher than last April).

Inflation is the main driver behind the year-on-year increase in current expenditure together with the extension in the household energy price guarantee for a further three months, while higher interest rates and the effect of the retail price index on inflation-linked gilts have caused debt interest to rise significantly. 

It is too early in the financial year to understand the trends in investment spending given that the timing of capital projects can have a significant effect on the reported numbers.

Year to March 2023

The ONS also made its first revision to the provisional numbers for the financial year ended 31 March 2023, reducing the reported deficit by £2bn from £139bn to £137bn, still one of the largest full-year deficits on record.

This was £16bn more than in 2021/22 primarily because of energy support packages put in place to help households and businesses through the cost-of-living crisis, but £176bn lower than in 2020/21 during the first year of the pandemic. The 2022/23 deficit was £76bn more than the £61bn reported for 2019/20 financial year, the most recent pre-pandemic pre-cost-of-living-crisis comparative period.

The numbers for the year ended 31 March 2023 will be continually revised over the next few months as year-end estimates are finalised, although the overall picture – of substantial red ink – is unlikely to change significantly.

Balance sheet metrics

Public sector net debt was £2,537bn at the end of April 2023, a net increase of £7bn since the end of March 2023. Debt was 99.2% of GDP, down from the 99.6% reported last month, principally as a consequence of higher inflation causing GDP estimates to be revised upwards.

The movement of £7bn in the month comprises the deficit of £26bn less £19bn in net cash inflows as loan repayments and positive working capital movements exceeded new lending to students, businesses and others during the month.

Public sector net debt has risen by £722bn or 40% 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 last month, was -£612bn at April 2023, a £6bn deterioration from the -£606bn reported for March 2023. This comprised £1,571bn in non-financial assets, £1,036bn in non-liquid financial assets and £309bn in liquid financial assets less public sector gross debt of £2,846bn and other liabilities of £682bn. 

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.

Public sector finance trends

   Apr 2019 (£bn)  Apr 2020 (£bn)  Apr 2021 (£bn)  Apr 2022 (£bn) Apr 2023 (£bn)
 Receipts  66  55  67  76  77
 Expenditure  (65)  (92)  (80)  (79)  (84)
 Interest  (7)  (5)  (5)  (7)  (13)
 Net investment  (5)  (7)  (6)  (4)  (6)
 Deficit  (11)  (49)  (24)  (14)  (26)
 Other borrowing  -  (54)  (15)  12  19
 Debt movement  (11)  (103)  (39)  (2)  (7)
 Net debt  1,788  1,918  2,192  2,384  2,537
 Net debt / GDP  80.5%  90.1%  98.1%  96.8%  99.2%
Source: ONS, ‘Public sector finances, April 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.

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

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