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Public sector finances: first half year sees £82bn deficit

Author: ICAEW Insights

Published: 20 Oct 2023

Public sector net debt increased to just under £2.6trn on 30 September 2023, as the fiscal deficit continues to trend below the Office for Budget Responsibility’s official forecast from March 2023.

The monthly public sector finances for September 2023 were released by the Office for National Statistics (ONS) on Friday 20 October 2023. These reported a provisional deficit for the month of £14bn, bringing the cumulative deficit for the first half of the year to £82bn, £16bn more than in the first six months of the previous financial year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, says: “This concludes a mixed set of results for the first half of the 2023/24 financial year. The cumulative deficit of £82bn continues to trend below the Office for Budget Responsibility’s forecast from March as higher inflation benefits tax receipts, but it remains on track to be well above where it was expected to be only a couple of years’ ago.

“The cancellation of northern HS2 routes is likely to result in a relatively small reduction in spending in the second half of the financial year, with the government continuing to search for other savings to offset higher than anticipated spending on debt interest and inflationary pressures on costs.

“Next month’s Autumn Statement should provide some insight into how well the Prime Minister and the Chancellor are reshaping the expenditure lines in the forecast spreadsheet, as well as key decisions on pensions and welfare benefits. Although tax cuts have been ruled out for now, the Chancellor’s focus remains on creating sufficient headroom in the medium term to be able to announce tax cuts in March 2024.”

Month of September 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of September 2023 was £14bn, made up of tax and other receipts of £85bn less total managed expenditure of £99bn, up 5% and 2% respectively compared with September 2022. 

The monthly result benefited from a £3bn credit to interest on time-lagged index-linked debt because of a 0.6% reduction in the retail price index (RPI) in July 2023, an £8bn swing from the £5bn charge recorded in the same month a year ago.

This was the sixth-highest September deficit on record since monthly records began in 1993, following deficits of £28bn, £18bn and £16bn in September 2020, 2021 and 2022 respectively during the pandemic, and £16bn in each of September 2009 and 2010 during the financial crisis.

Six months to September 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the six months to September 2023 was £82bn, £16bn more than the £66bn deficit reported for the first half of 2022/23. This reflected a widening gap between tax and other receipts for the six months of £514bn and total managed expenditure of £596bn, up 6% and 9% respectively compared with April to September 2022.

Inflation benefited tax receipts for the first six months compared with the first half of the previous year, with income tax up 12% to £122bn and VAT up 9% to £99bn. Corporation tax receipts were up 19% to £48bn, reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 3% to £86bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 29% to £7bn and the total for all other taxes was up just 2% to £98bn as economic activity slowed. Non-tax receipts were up 11% to £54bn, primarily driven by higher investment income.

Total managed expenditure of £596bn in the first half of the financial year can be analysed between current expenditure excluding interest of £505bn, up £39bn or 8% over the same period in the previous year, interest of £65bn, up £1bn, and net investment of £26bn, up £8bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £16bn increase in pension and other welfare payments, £11bn in higher central government pay, £6bn in additional central government procurement spending and £4bn in higher energy support scheme costs, plus £2bn in net other changes.

The rise in interest costs of £1bn to £65bn comprises a £16bn increase to £41bn for interest not linked to inflation as the Bank of England base rate rose, offset by an £15bn fall to £24bn for interest accrued on index-linked debt as the rate of inflation was lower than last year.

The £8bn increase in net investment spending to £26bn in the first six months of the current year reflects high construction cost inflation among other factors that saw a £10bn or 22% increase in gross investment to £56bn, less a £2bn increase in depreciation to £30bn.

Public sector finance trends: September 2023

 Six months to Sep 2019 (£bn)  Sep 2020 (£bn)
Sep 2021 (£bn)  Sep 2022 (£bn)  Sep 2023 (£bn) 
 Receipts  402  360  426  482  514
 Expenditure  (390)  (505)  (463)  (466)  (505)
 Interest  (31)  (24)  (35)  (64)  (65)
 Net investment  (18)  (38)  (25)  (18)  (26)
 Deficit  (37)  (207)  (97)  (66)  (82)
 Other borrowing  10  (48)  13  7  21
 Debt movement  (27)  (255)  (84)  (59)  (61)
 Net debt  1,804  2,070  2,237  2,441  2,599
 Net debt / GDP  80.4%  99.3%  94.7%  95.7%  97.8%

The deficit for the first half of £82bn is £19bn lower than the Office for Budget Responsibility’s official forecast for 2023/24 compiled in March 2023, which if this trend continues would see the deficit come in significantly below the £132bn forecast for the full year. However, it is still on track to be more than double the £50bn full year projection for 2023/24 year set out in the March 2022 official forecast. 

Balance sheet metrics

Public sector net debt was £2,599bn at the end of August 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £61bn, comprising borrowing to fund the deficit for the six months of £82bn less £21bn in net cash inflows from loan repayments and positive working capital movements exceeding cash outflows on lending to students, businesses and others.

Public sector net debt is £784bn or 43% higher than the net amount outstanding of £1,815bn on 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 ONS this year, was -£667bn on 30 September 2023, comprising £1,566bn in non-financial assets, £1,032bn in non-liquid financial assets, £2,599bn of net debt (£329bn in liquid financial assets less public sector gross debt of £2,928bn) and other liabilities of £666bn. This is a £60bn deterioration from the -£557bn reported for 31 March 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 the five months to August 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, while net debt at the end of August 2023 was reduced by £1bn. The latter, together with updates to estimates of GDP, resulted in the net debt to GDP ratio reported last month of 98.8% being revised down to 97.9%. 

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