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PUBLIC SECTOR FINANCES JANUARY 2006

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Provisional estimates of the public finances show that in January the public sector had:...
Provisional estimates of the public finances show that in January the public sector had:

- a current budget surplus of£15.3 billion;

- net borrowing of -£12.6 billion and at the end of January:

- net debt was£442.7 billion, equivalent to 35.6 per cent of gross domestic product.

Main Statistics

The main statistics released show, that in January 2006:

- the public sector current budget was in surplus by£15.3 billion; this is a£3.0 billion higher surplus than in January 2005, when there was a surplus of£12.3 billion; public sector net borrowing was -£12.6 billion (i.e. net lending); this is£3.7 billion higher net lending than in January 2005, when net lending was£8.8 billion;

- the public sector net cash requirement (see table PSF4) was -£21.1 billion (i.e. a repayment), a£4.3 billion higher repayment than in January 2005, when there was a net cash requirement of -£16.8 billion. 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 January 2006 public sector net debt was£442.7 billion (equivalent to 35.6 per cent of GDP). This compares to£406.8 billion (34.1 per cent) as at the end of January 2005.

Financial year to date (April 2005 - January 2006):

Monthly data may be volatile, so it can be misleading to read too much into one month's data. The following paragraphs give information on the financial year to date and comparisons with the corresponding period of the previous financial year.

In financial year 2005/06 to date:

- the public sector current budget was in deficit by£7.8 billion; this is a£7.2 billion lower deficit than in the same period of 2004/05, when there was a deficit of£15.0 billion;

- public sector net borrowing was£29.8 billion. This was£0.2 billion lower net borrowing than in the same period of 2004/05, when there was net borrowing of£30.0 billion;

- the public sector net cash requirement (see table PSF7) was£23.0 billion;£1.5 billion lower net cash requirement when compared with the same period of 2004/05 when there was a net cash requirement of

£24.5 billion.

Revisions

There have been revisions to Public sector current budget and Public sector net borrowing from 1998/9.

These mainly arise from today's announcement on the reclassification of London & Continental Railways and the reclassifications of public sector broadcasting announced on 20 January. Related to this latter reclassification, we have also included new information on a broadcasting subsidiary that had previously been excluded. In addition, updated HMRC data on central government receipts have been included from 2004/5 and in 2005/6 there are revisions to central government current expenditure data.

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

Data Quality

The system used by central government departments to report expenditure data is being improved. Departments started migrating to the new system in September and the migration is expected to be complete by March 2006. During the transitional period it is possible that the quality of latest months' data will be affected, which may lead to larger revisions.

Excessive Deficit Procedure reporting

On 12 December 2005 the Council of the European Union adopted a regulation amending the dates of the Excessive Deficit Procedure deadlines. The biannual reports will now take place one month later than previously. This means that the Government Deficit and Debt under the Maastricht Treaty First Release will in future be published on the last working days of March and September.

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 revised judgement is that the current economic cycle began in 1997/98 (Evidence on the UK economic cycle, published by HM Treasury on 19 July 2005) and is forecast to end in 2008/09 (Pre-Budget Report, published by HM Treasury on 5 December 2005). The forecasts for Public sector current budget as a percentage of GDP in the remaining years of the economic cycle are 2006/07 (-0.3%);

2007/08 (0.0%) and 2008/09 (+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 revaluations of the foreign exchange reserves due to currency exchange rate movements, and discounts/premia on the nominal price of debt issued. The ONS is working towards producing robust estimates of the stock of imputed finance lease loans for inclusion in public sector finances data.

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 current price 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 31st August 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 prepayments 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. The National Accounts methodology for the 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 . These tax credits (Working Tax Credit and Child Tax Credit) 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 is 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 current budget and public sector net borrowing, is neutral because the effect on receipts and expenditure nets out.

10. 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.

11. The Pre-Budget Report, (published by HM Treasury 5 December 2005) gave the following forecasts for the financial year 2005/06:-

- public sector current budget: a deficit of£10.6 billion

- public sector net borrowing:£37.0 billion

- public sector net debt: 36.5 per cent of GDP at end March 2006.

Table B29 in the Pre-Budget Report 2005 gives a forecast of the components of net borrowing and the current budget, using the same concepts and definitions as in this First Release.

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