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PUBLIC SECTOR FINANCES - APRIL 2005

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Provisional estimates of the public finances show that in April...
Provisional estimates of the public finances show that in April

the public sector had:

- a current budget deficit of£0.2bn

- net borrowing of£1.3bn

and at the end of April:

- net debt was£413.4bn, equivalent to 34.2 per cent of gross

domestic product

Main Statistics

The main statistics released show, that in April 2005:

* the public sector current budget was in deficit by£0.2 billion;

this is a£2.1 billion lower deficit than in April 2004, when there

was a deficit of£2.3 billion;

* public sector net borrowing was£1.3 billion; this is£1.5 billion

lower net borrowing than in April 2004, when net borrowing was£2.8

billion;

* the public sector net cash requirement (see table PSF4) was -£1.6

billion (i.e. a repayment), a£0.6 billion higher net cash

requirement than in April 2004, when there was a net cash requirement

of -£2.2 billion (i.e. a repayment). N.B. rather than looking at the

cash measure, which can be misleading due to timing factors, it is

better to look at the other, accruals-based, statistics

* at the end of April 2005 public sector net debt was£413.4 billion

(equivalent to 34.2 per cent of GDP). This compares to£373.8 billion

(32.5%) as at the end of April 2004.

Revisions since last data release

(Please refer to National Statistics website for all tables mentioned

in this release)

Public Sector Current Budget and Public Sector Net Borrowing have

been revised from April 2004. There have been some minor revisions to

Public Sector Net Cash Requirement from September 2002. Table PSF8R

presents revisions to key aggregates.

It is usual for estimates to be revised in the months after they are

first released, as estimated and provisional data are replaced with

firmer information. This is the case in this dataset, where Central

Government receipts and expenditure estimates for February and March

2005 have been revised. 2004/05 receipts data have also been

reprofiled in earlier months.

There are possible further revisions to local government data in

2003/04, although at this stage the indication is that they will lead

to offsetting changes between receipts and expenditure components

rather then a change to the main fiscal aggregates.

The next tranche of regular revisions covering a longer time span

will be in July. This will include the data used in the annual

National Accounts publication, the Blue Book.

Details of the public sector statistics revisions policy, covering

this and the other public sector first releases, is available at

http:www.statistics.gov.uk/about/Methodology_by_theme/Public_sector_accounts/default.asp

BACKGROUND NOTES

1. A guide to monthly public sector finance statistics is available

from

http:www.statistics.gov.uk/downloads/theme_other/GSSMethodology_No_12_v2.pdf

It explains the concepts and measurement of the monthly data, plus

those previously published, and gives some long runs of historical

data. It is also available as a paper publication, number 12 in the

GSS methodological guide series, ISBN 1 85774 296 6, (price£5).

These background notes explain the monthly data.

2. The current budget is derived, as net saving plus receipts of

capital taxes, from national accounts under the European System of

Accounts 1995 (ESA95). It is the key measure for assessing progress

against the golden rule, one of the Government's two main fiscal

rules. This states that, on average over the economic cycle, the

Government should borrow only to invest and not to fund current

expenditure. HM Treasury has stated that progress against the golden

rule will be measured by averaging the surplus on current budget,

when expressed as a percentage of GDP, over each year of the economic

cycle. So to accord with the rule, this average should be positive.

HM Treasury's provisional judgement is that the current economic

cycle began in 1999/2000 and is forecast to end in 2005/06. This was

set out in Budget 2005 (published by HM Treasury on 16 March 2005)

which gave the following forecasts of Public sector current budget

as a percentage of GDP: 2004/05 -1.4% and 2005/06 -0.5%.

3. Procedures for calculating net borrowing are discussed in the

methodological guide. The current budget is obtained by subtracting

net borrowing from an estimate of net investment. For central

government this is checked against some monthly data for some current

and capital transactions.

4. Net investment is defined as investment less depreciation.

Investment is capital formation (acquisition of fixed assets, stocks

and valuables net of any sales) plus net payments of capital grants.

Data sources are: Capital expenditure: for central government new

procedures have been established to collect capital expenditure

monthly from departments within a timetable needed for publication in

this First Release. For local government, monthly capital expenditure

data are not available, so estimates are made based on local

government's view of its expected capital expenditure for the year,

updated by actual quarterly outturn data, and monthly information on

asset sales. For public corporations there is a mixture of reported

monthly capital expenditure figures and estimates. Depreciation is

derived from a model that uses assumptions about asset lives and a

rolling estimate of the public sector's stock of capital assets

derived from capital expenditure data. The figures are reasonably

stable through time so adequate monthly figures can be estimated that

are consistent with the model's expected quarterly outputs.

5. Public sector net debt is built up by first calculating the public

sector's financial liabilities that are related to the financing

items of the public sector net cash requirement (PSNCR). These are

scored at face value. Liquid assets, mainly foreign exchange reserves

and bank deposits, are then subtracted to reach net debt. Net debt in

this First Release is calculated from the latest available

measurement of the stock of public sector financing liabilities and

liquid assets, and adding the change since then implied by PSNCR.

This method is refined by taking account of some other adjustments,

such as revaluation's of the foreign exchange reserves due to

currency exchange rate movements, and discounts/premia on the nominal

price of debt issued.

6. Public sector net debt is the key measure for assessing progress

against the Government's other main fiscal rule, the sustainable

investment rule. The Economic and Fiscal Strategy Report (1998)

states (page 5) that to meet this rule, 'Net public debt as a

proportion of GDP will be held over the economic cycle at a stable

and prudent level.' It also states (page 22) that 'The Government

believes that, other things equal, it is desirable that net public

debt be reduced to below 40 per cent of GDP over the economic cycle.'

>From Budget 2002 HM Treasury has also published a version of public

sector net debt excluding the effect of cyclical fluctuations, this

is referred to as 'core debt'. The GDP figure used to calculate the

net debt ratio is that for the 12 months centred on when the debt is

measured. Hence, this requires an estimate of GDP to be available

covering the period from six months before to six months after. An

entirely mechanical procedure is used to derive GDP figures for the

periods where National Accounts outturn GDP data are not available,

and to produce monthly GDP figures. The procedure computes the

quarterly growth rate implied by HM Treasury's last published

forecast of financial year money GDP, and applies those growth rates

to the latest quarterly GDP figure published by National Statistics.

Monthly figures are derived by dividing the quarters by three.

7. Net borrowing is consistent with the definitions in ESA95. Public

sector net borrowing is the Government's preferred measure of the

short term impact of fiscal policy on the economy.

8. General government net borrowing reported in this release forms

the basis of the reports of Government Deficit under the Maastricht

Treaty. The most recent release of government debt & deficit data was

on 28 February 2005. The definition of general government net

borrowing to be reported for the Excessive Deficits Procedure under

the Maastricht Treaty is different to that used for National

Accounts. A regulation requires that payments on Swaps are treated as

interest payments; for all other purposes, including the national

accounts and the Public Sector Finances First Release, such payments

are shown as financing items, consistent with ESA95. The Government

Debt and Deficit under the Maastricht Treaty First Release now

includes three versions of the deficit. It starts with the deficit

consistent with the definition of net borrowing used in this release,

then shows the effect of the alternative treatment of swaps and

finally shows an alternative treatment of the government's receipts

for allowing the use of spectrum by third generation mobile phone

companies. UK interpretation of ESA95 is that these receipts should

be treated as rents, which is the treatment used in the preparation

of the Public Sector Finances First Release. Eurostat requires that

for the Excessive Deficits Procedure, they be reported as being for

the sale of assets; cash receipts of£22.5 billion were paid to

government by the mobile phone companies during the second and third

quarters of 2000. These are treated in Public Sector Finances as

pre-payments of rent at the rate of£1 billion per annum over the

life of the licences. For more detail please refer to the PSA

homepage under Articles www.statistics.gov.uk/psa/

9. As detailed in: the 20 July 2004 Public Sector Finances First

Release, a new revisions policy was introduced for the the Public

Sector Finances that allows all periods to be open for comprehensive

revision. As a result of this the quarterly Public Sector Accounts

First Release, which was published with national accounts about 12

weeks after the end of the latest quarter reported was no longer

necessary and was discontinued.

An electronic dataset is made available three working days after

publication of the Public Sector Finances First Release. This

contains quarterly data previously published in the Public Sector

Accounts First Release and provides quarterly data, consistent with

the latest Public Sector Finances First Release, analysed by economic

category and sub-sector.

The new dataset is available at

http:www.statistics.gov.uk/STATBASE/Product.asp?vlnk=13583

10. The national accounts methodology for the new tax credits

introduced in April 2004, was announced in April 2003. It is

described in NACC decisions - Classification of Tax Credits available

at www.statistics.gov.uk. From their introduction, the new tax

credits (Working Tax Credit and Child Tax Credit) will count either

as negative tax (e.g. a deduction from income tax) for amounts within

the tax liability of the recipient or as a benefit (current

expenditure) for amounts that exceed the recipient 's tax liability.

Hitherto, tax credits (then the Working Families' Tax Credit and

Disabled Person's Tax Credit) were treated entirely as benefits and

this treatment is unchanged in the main National Accounts based

fiscal measures. The main effect of this change will be a reduction

in both current expenditure (net social benefits)and current receipts

(accrued income tax) by the amount of the tax deduction. The effect

on fiscal aggregates, such as the public sector surplus on current

budget and public sector net borrowing, is neutral because the effect

on receipts and expenditure nets out.

11. The monthly estimates of the split of receipts between Compulsory

social contributions and Income and capital gains tax are

provisional. Estimates are used for apportioning certain PAYE

payments during the fiscal year between income tax and national

insurance contributions. When employers' end-of-year tax returns are

received and processed, compensating adjustments can be made'.

12. Following the establishment of HM Revenue and Customs inApril

2005, table PSF6 will no longer be able to show separate payover

figures for the former two departments (columns 1 and 5). These have

been combined for the whole period covered by the table.

13. The Budget Report, (published by HM Treasury 16 March 2005) gave

the following forecasts for the financial year 2005/06:

- public sector surplus on current budget: minus£5.7 billion

- public sector net borrowing:£31.9 billion

- public sector net debt: 35.5 per cent of GDP at end March 2006

Table C23 in the Budget Report 2005 gives a forecast of the

components of net borrowing and the current budget, using the same

ESA95 concepts and definitions as in this First Release.

14. Data underlying the graphs in the First Release are available on

request.

15. One indication of the reliability of the key indicators in this

release can be obtained by monitoring the size of revisions. The

table below is designed to show the size and pattern of revisions

from first publication to one year later. The ONS standard

presentation is to show the average of five years worth of revisions

(e.g. sixty monthly observations). However, as there are less than

five years worth of observations for one of these key series, the

analysis for current budget is based from when the monthly time

series began. The latest observations in this table (p.9 )are for the

March 2004 first estimates, the revision to the April 2004 first

estimate is excluded from the table. Please note that these

indicators only report summary measures for revisions, the revised

data may still be subject to measurement error.

A statistical test has been applied to find out if there is bias in

the estimates. An asterisk (*) indicates where statistically

significant bias was found. Net debt is rarely substantially revised,

so the bias in this series is from the GDP estimates and forecasts

used in the calculations.

The table covers sixty monthly estimates of Public Sector Net

Borrowing and Public Sector Net Debt as a percentage of GDP and fifty

four estimates of Public Sector Current Budget.

A spreadsheet giving these estimates and the calculations behind the

averages in the tables is available on the National Statistics

website at http:www.statistics.gov.uk/StatBase/Product.asp?vlnk=805

Table PSF8R presents the latest revisions to key aggregates. The

largest revisions normally occur in the month following first

release, when estimated and provisional data are replaced with firmer

information.

More information about the revisions material in this Release can be

found on the National Statistics website:

http:www.statistics.gov.uk/cci/article.asp?ID=793

16. The estimate for 2004/5 Public Sector Current Budget as a

percentage of GDP, given in the table on page 2, uses outturn GDP

data for the first three quarters of the 2004/5 financial year plus

an ONS projection for the remaining quarter. This projection is

calculated by taking the annualised seasonally adjusted GDP growth

rate from the first three quarters of the financial year and applying

it to the first quarter outturn for 2004. This projection will be

replaced by outturn GDP data in the 20 June 2005 Public Sector

Finances First Release.

17. On 24 September 2004 ONS announced that British Energy was being

classified as part of the public sector. This classification took

effect from September 2002. This release includes the

reclassification.

18. The United Nations Statistics Commission has approved the

comprehensive and parallel updating of the National Accounts and

related manuals, in order to ensure their consistency and achieve

greater harmonisation. These manuals are the: System of National

Accounts, 1993 (SNA93); Balance of Payments Manual, 5th edition

(BPM5); and the Government Finance Statistics, 2001 (GFSM2001). The

ONS has developed the following webpage to inform users of progress

and to invite their input :

www.statistics.gov.uk/about/Consultations/NA/default.asp

19. Complete runs of series in this Release are available to download

free of charge at http:www.statistics.gov.uk/timeseries.

Alternatively, for low-cost tailored data call Online Services on 020

7533 5675 or email tailored@statistics.gov.uk

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