The UK Public Finances are counting the cost of the energy crisis

This morning has brought us up to date on how much the UK borrowed in the last fiscal year ( until March).

PSNB ex in the financial year ending (FYE) March 2023 was initially estimated at £139.2 billion (or 5.5% of gross domestic product (GDP)), £18.1 billion more than in the FYE March 2022 and the fourth-highest FY borrowing since records began in 1946.

The main factor in play here was the energy crisis which led to waves of what has turned out to be expensive government subsidies.

the initally estimated £41.2 billion cost of the combined energy support schemes and other one-off costs.

As you can see the energy crisis gave the numbers a large shove higher and that is only the explicit costs. There will have been implicit ones on tax revenue as businesses were affected and also via the cost of living crisis. So we are discussing an impact of the order of £50 billion. If we stay with the energy crisis we do not seem to have learnt much at all as this from the Financial Times yesterday highlights.

Construction of the UK’s largest solar and battery storage plant has begun after the company developing it won the highest government subsidy yet for a sun-powered energy scheme.

Let me start with the good side of solar as I note we have recently generated 9.09 GW of electricity beating last year’s peak of around 8.6 GW. But even the simple quote above has a big problem.If it is as cheap as we keep being told ( and indeed supposedly getting cheaper). Why does a new project need the “highest government subsidy yet”? Also the description below is a nonsense as what will the 100,000 homes do at night?

Once operational, it is forecast to generate enough renewable power each year to meet the needs of about 100,000 UK homes.

Battery technology as it stands only allows us to smooth the power supply. So we will arrive a future winters very little better off as solar provide little then and of course when we need it least. So we have a cost to the public finances via a subsidy but provides little potential gain for the future winter risks.

Receipts and Taxes

These were boosted by the inflationary phase we have been experiencing.

Of these, tax receipts increased by £67.3 billion (10.7%) to £696.0 billion with growth strong in Value Added Tax (up £17.8 billion or 10.7%, being influenced by inflation and substitutionary affects during the energy crisis)

I would have thought the substitutionary effects would be negative as higher energy payments caused less spending elsewhere. But we see quite a few examples of inflation boosting receipts.

Income Taxes (up £26.0 billion or 10.8%, being boosted by record self-assessed taxes) and Corporation Tax (up £10.6 billion or 14.7%, being boosted by the Energy Profits Levy from June onwards).

Spending

At first this seems to show we are cutting back as the growth is less than inflation.

Central government current expenditure was £967.0 billion in the FYE 2023, an increase of £74.0 billion (8.3%) compared with FYE 2022, reflecting the impact of rising inflation and energy costs.

But I note they use central government and current expenditure to massage the numbers. As to breaking down to the detail I am sure readers will have been expecting something like this.

The interest payable on debt increased to £106.6 billion, £34.0 billion (46.9%) more compared with FYE 2022, as the rises in the Retail Prices Index have increased the interest payable on index-linked gilts.

There is another factor in play which will build up over time which is the cost of ordinary or conventional Gilts which these days cost a bit less than 4% rather than the 1% or so during the pandemic. This takes time to build up but is more expensive of course when we borrow a lot which we just have. In terms of future costs the borrowing over the last year will be more expensive than the pandemic borrowing for that reason. Also there is a link to yesterday’s topic which was QE.

Payments totalling £5.0 billion were made to the Bank of England Asset Purchase Facility Fund (as a part of the indemnity agreement)

We are a bit harsh on ourselves in international terms by counting this so if we compare ourselves internationally it should be ignored.

What about March?

There is a disappointing level of detail here.

Public sector receipts were £88.8 billion, £2.0 billion (2.3%) more than in March 2022, though this rise in income was insufficient to offset the £18.3 billion (19.9%) rise in total public sector spending, which reached £110.3 billion in March 2023.

I have taken a look at the tables and the March receipts are disappointing pretty much across the board. This seems rather odd as we have had plenty of other signals suggesting that the economy has been picking up. So as many of the numbers are estimates maybe they have been underestimated. So let us make a mental note and move on.

Student Loans

These have been a problem area for the public finances as no-one ever seems to really get a grip on them. There have been some government policy changes which have led to this.

This month, we have recorded a capital transfer of £10.0 billion from households to central government, accrued to December 2022, the month in which the changes to regulations were made. This reflects the increase in value of the loan stock for existing Plan 2 student loans as a result of these policy changes.

This adds to the changes in the previous fiscal year.

A reduction of the expected losses of the Covid loan guarantees scheme and the impact of student loan policy changes, totalling £7.2 billion were recorded in March 2022 adding to the year-on-year increase.

This leaves me with the impression that they have no real idea…

Public-Sector Net Worth

We have a new series which has been introduced with this release.

Public sector net worth, excluding public sector banks, was a deficit of £605.8 billion at the end of March 2023. This compares with a £531.1 billion deficit at the end of March 2022.

I suggest taking this number with not only a pinch of salt but the whole salt cellar. Just because you have a number does not mean it is accurate. Does anyone believe these numbers will be accurate?

Wider balance sheet aggregates such as PSNW require robust data on non-financial assets and financial instruments such as equity, derivatives and pension liabilities, which were not used to derive the fiscal measures historically.

We can take the pension numbers further.

 in relation to funded public sector pension schemes

What about unfunded pension schemes.then?

It is hard not to forget the Royal Mail pension scheme which was a sizeable liability for UK taxpayers but was recorded as an asset of around £20 billion.

Comment

There are a lot of strands to today’s report. If I start with the energy issue it remains a danger. Looking ahead to the summer and autumn things will be much netter than feared for the public finances and for the economy overall. But some still cold days next winter would shake that. Next up is one of my themes which is simply that we keep having crises that require fiscal support, but never really address as to why this is so? The first move in fixing anything is admitting you have a problem.

Next up is the Office for Budget Responsibility where my first rule ( that it is always wrong) has worked again.

PSNB ex in the FYE March 2023 was £13.2 billion less than forecast by the Office for Budget Responsibility (OBR);

Indeed their performance was much worse than that because if we go back to last November they predicted this.

Taking forecast and policy changes together,
the deficit rises from £133.3 billion (5.7 per cent of GDP) last year to £177.0 billion (7.1 per cent of GDP) this year.

Remember all the talk of a “fiscal black hole” which was based on this? Well it was a fantasy and this matters because policy was set on it. Our rather hapless Chancellor Jeremy Hunt did this as a response.

Hunt defended the decision to increase corporation tax to 25 per cent in the last Budget,  ( FT)

Now out tax raising Chancellor seems already to have lost the faith.

“The tax burden is too high, we would like to bring it down,” he said at the government’s Business Connect forum in London.

The media hardly helps if this is any guide. So missing a fantasy number means we can do this?

Jeremy Hunt gets £13bn tax cut boost ahead of general election ( Daily Telegraph )