Public finance bulletin: September 2014

Today the Office for National Statistics and HM Treasury published Public Sector Finances, August 2014. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the first five months of financial year 2014–15.

Soumaya Keynes, a Research Economist at the IFS, said:

“Today’s figures are the first to include significant methodological changes, such as the incorporation of network rail into the public sector. However, these are essentially accounting changes and do not fundamentally affect the strength of the public finances. This month’s figures show a similar big picture to those last month, with borrowing so far this year being higher than it was over the same period last year. This largely reflects weakness in National Insurance contributions and income tax receipts. In part this may be the result of lower than expected earnings growth so far this year, but it is also due to temporary timing effects that are expected to unwind towards the end of this year.”

Introductory note

The figures published by the ONS today are the first that incorporate changes to the definition of some components of public revenues and spending, and borrowing and debt. Further details on the impact of these changes on measures of the public finances can be found in ONS’ statistical bulletin Public Sector Finances (http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/august-2014/index.html).

In this press release we focus on what the figures published today indicate about the strength of the public finances. All the outturn figures are presented on the basis of the new definitions. The Office for Budget Responsibility (OBR) will not produce forecasts on this basis until their December 2014 Economic and Fiscal Outlook (EFO). However, in their March 2014 EFO the OBR produced estimates of what they expected their forecasts for the headline measures of borrowing and debt would be under the new definitions. Where possible we therefore compare the published outturn data from the ONS with these illustrative projections.

Headline Comparisons

• The illustrative projection from the OBR at the time of the March 2014 EFO was that borrowing would fall by £11.6 billion (11.8%) from £98.2 billion in 2013–14 to £86.6 billion in 2014–15. The latest estimate of last year’s borrowing now stands at £99.3 billion, slightly higher than what the OBR thought in March
• In contrast to the OBR’s predicted fall in public sector net borrowing over the year as a whole, over five months April to August 2014 it has been 6.2% higher than over the same months in 2013 (£45.4 billion compared to £42.8 billion).
• Taken at face value, this suggests that borrowing will be higher over this financial year than last, not lower as the OBR’s projections suggest. However, we should be cautious of drawing this conclusion on the basis of data for only five months of the year, not least because there are a number of factors that are known to affect the timing of borrowing this year compared to last.
• The relatively high levels of borrowing so far this year have predominantly been driven by weak growth in National Insurance contributions and income tax receipts. NICs receipts over April to August 2014 were 0.2% lower than over the same months of 2013, compared to the OBR’s March forecast of 2.5% growth over the year as a whole, while Income tax receipts so far this year have fallen by 0.8% compared to a forecast of 5.8% for the year as a whole.
• Some of the low growth in NICs and income tax receipts so far this year is due to a timing effect that will unwind later in the financial year. The drop in the top rate of income tax from 50p to 45p in April 2013 induced some high income individuals to shift income (and thus their tax liabilities) from 2012–13 into 2013–14. This will have the effect of boosting tax receipts in the early months of last year (making a comparison between the early months of 2014–15 with the early months of 2013–14 look weak), but it is also expected to boost receipts later in this financial year through self-assessment tax payments in respect of income earned in 2013–14.
• However, there might still be some cause for concern as the OBR has also noted in their last two months’ press releases that earnings growth has been lower so far this year than was assumed in their March 2014 forecasts. This weaker earnings growth will tend to depress receipts of income tax and NICs relative to their March forecast, and could mean that not all the weakness in receipts will be reversed over the rest of this financial year.

Further information and contacts

For further information on today’s public finance release please contact: Rowena Crawford, Soumaya Keynes or Gemma Tetlow on 020 7291 4800, or email @email, @email or @email.

Next month’s public finances release is due to be published on Tuesday 21^st October.

Relevant links:

This, and previous editions of this press release, can be downloaded from http://www.ifs.org.uk/publications/pf

Office for National Statistics & HM Treasury, Public Sector Finances, August 2014: http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/august-2014/index.html

Office for Budget Responsibility analysis of monthly Public Sector Finances, August 2014: http://budgetresponsibility.independent.gov.uk/category/topics/monthly-public-finance-data/

Office for Budget Responsibility, Economic and Fiscal Outlook, March 2014: http://budgetresponsibility.org.uk/economic-fiscal-outlook-march-2014/

Notes to Editors:

 All figures are on a basis that excludes public sector banks.