Public sector finances, UK: August 2022

Other commentary from the latest public sector finances data can be found on the following pages:

• Recent and upcoming changes to public sector finance statistics: August 2022

• Public sector finances borrowing by sub-sector dataset

• UK government debt and deficit: March 2022

• Public sector net borrowing excluding public sector banks (PSNB ex) was £11.8 billion in August 2022; £2.6 billion less than in August 2021 but £6.5 billion more than in pre-coronavirus (COVID-19) August 2019, when it was £5.3 billion.

• Central government current (or day-to-day) expenditure of £73.2 billion in August 2022 was largely unchanged compared with August 2021, with a £1.5 billion increase in debt interest payable, a £1.7 billion increase in payment for goods and services and a £1.1 billion increase in net social benefit payments being offset by reductions elsewhere, including a £3.4 billion reduction in subsidy payments.

• Central government debt interest payable was £8.2 billion in August 2022, £1.5 billion more than in August 2021 and the highest August figure since monthly records began in April 1997; the volatility in interest payable is largely because of the effect of Retail Prices Index (RPI) changes on index-linked gilts.

• Central government receipts were £69.6 billion in August 2022, which was £5.6 billion more than in August 2021; of this, tax receipts were £51.4 billion, which was an increase of £3.9 billion compared with August 2021.

• PSNB ex was £58.2 billion in the financial year to August 2022; this was £21.4 billion less than in the same period last year but £30.4 billion more than in the financial year to August 2019, pre-coronavirus pandemic.

• Central government net cash requirement (excluding UK Asset Resolution Ltd and Network Rail) was £4.9 billion in August 2022, which was £3.6 billion less than the £8.5 billion cash deficit in August 2021; this brought the total to £29.4 billion in the financial year to August 2022.

• Public sector net debt excluding public sector banks (PSND ex) was £2,427.5 billion at the end of August 2022, or around 96.6% of gross domestic product (GDP), which was an increase of £195.2 billion or 1.9 percentage points of GDP compared with August 2021.

• Public sector net debt excluding public sector banks and the Bank of England (PSND ex BoE) was £2,107.4 billion at the end of August 2022, or around 83.8% of GDP, which was an increase of £113.8 billion but a reduction of 0.8 percentage points of GDP compared with August 2021.

In August 2022, initial estimates show that the public sector spent more than it received in taxes and other income. This required it to borrow £11.8 billion, which was £5.8 billion more than the £6.0 billion forecast by the Office for Budget Responsibility (OBR).

Central government forms the largest part of the public sector and the relationship between its receipts and expenditure is the key determinant of public sector current budget deficit and borrowing.

Central government receipts

Central government receipts in August 2022 were estimated to have been £69.6 billion, which was £5.6 billion more than in August 2021. Of these receipts, tax revenue increased by £3.9 billion to £51.4 billion.

In the most recent months, tax receipts recorded on an accrued basis are subject to some uncertainty. This is because many taxes such as value added tax (VAT), corporation tax and Pay As You Earn (PAYE) income tax contain some forecast cash receipts data and are liable to revision when actual cash receipts data are received.

The forecasts underlying our current tax estimates reflect the expectations published in the Office for Budget Responsibility's (OBR) Economic and fiscal outlook – March 2022 and the subsequent monthly profiles published on 12 May 2022.

Central government expenditure

Central government bodies spent £73.2 billion on current (or day-to-day) expenditure in August 2022, which was £0.1 billion more than in August 2021.

Interest payable on central government debt

Since mid-2021, the cost of servicing central government debt has increased considerably. These rising costs do not principally reflect recent increases in the level of government debt, nor is the change in servicing costs driven by large increases in the interest – or coupon – payments by government. Instead the recent high levels of debt interest payable are largely a result of higher inflation, with the interest payable on index-linked gilts rising in line with the Retail Prices Index (RPI).

In August 2022, the interest payable on central government debt was £8.2 billion, of which £4.7 billion reflected the impact of the RPI.

The inflation-linked portion of interest payable on most index-linked gilts is calculated using a three-month lagged RPI. In August 2022, we reference the RPI movement between May and June 2022. RPI increases in the most recent months will be reflected in our interest estimates for future months.

While any RPI uplift will affect accrued expenditure (as used in the calculation of borrowing), it will not be wholly and immediately reflected in the central government net cash requirement. These movements are reflected in the government’s liabilities, which will be realised as the existing stock of index-linked gilts is redeemed.

On 18 July 2022, we published a methodology article explaining The calculation of interest payable on government gilts.

Public sector net borrowing excluding public sector banks (PSNB ex) was £58.2 billion in the financial year (FY) to August 2022, £21.4 billion less than in the same period last year.

Public sector current budget deficit

The public sector current budget deficit is the gap between current expenditure and current receipts on an accrued basis, having taken account of depreciation. The current budget deficit can be thought of as borrowing to fund day-to-day spending, as it excludes the capital expenditure (or net investment) present in the wider net borrowing measure.

Central government receipts

Central government receipts in the financial year (FY) to August 2022 were £359.7 billion, which was £40.6 billion more than a year earlier. Of these, tax receipts were £262.8 billion, which was £26.4 billion more than in the FY to August 2021.

Central government expenditure

Central government bodies spent £386.6 billion on current (or day-to-day) expenditure in the FY to August 2022, which was £4.6 billion more than in the same five-month period last year.

In April 2022, we recorded the Council Tax rebate in England as a payable tax credit from central government to households. This payment was recorded within the Other Expenditure category in Table 7, and the additional expenditure increased central government and subsequently public sector net borrowing by £3.0 billion in April 2022.

The public sector borrowed £133.7 billion in the financial year ending (FYE) March 2022. This was £5.9 billion more than the £127.8 billion forecast by the Office for Budget Responsibility (OBR) in its Economic and fiscal outlook -- March 2022. However, this was less than half of the £314.3 billion borrowed in the FYE March 2021.

The coronavirus (COVID-19) pandemic has had a substantial impact on the economy as well as public sector borrowing. Expressed as a ratio of UK gross domestic product (GDP), borrowing in the FYE March 2021 was 14.7%, which was the highest for 75 years. Latest estimates indicate that this ratio fell by 9.1 percentage points to 5.6% over the 12 months to March 2022.

The central government net cash requirement (CGNCR), excluding UK Asset Resolution Ltd and Network Rail, is the amount of cash needed immediately for the UK government to meet its obligations. To obtain cash, the UK government sells financial instruments, gilts or Treasury Bills.

The amount of cash required will be affected by changes in the timing of payments to and from central government, but it does not depend on forecast tax receipts in the same way as our accrued (or national accounts-based) measures of borrowing.

The CGNCR consequently contains the timeliest information and is less susceptible to revision than other statistics in this release.

However, as for any cash measure, the CGNCR does not reflect the overall amount for which the government is liable or the point at which any liability is incurred – it only reflects when cash is received and spent.

Public sector net debt excluding public sector banks (PSND ex) was £2,427.5 billion at the end of August 2022, which was an increase of £195.2 billion compared with August last year.

The extra funding required by government over the course of the coronavirus (COVID-19) pandemic, combined with reduced cash receipts and a fall in gross domestic product (GDP), have all helped to push public sector net debt at the end of August 2022 to 96.6% of GDP.

Debt is largely made up of gilts (or bonds) issued to investors by central government. Of the £2,062.9 billion gilts in circulation at the end of August 2022:

• £1,519.4 billion are conventional gilts that pay a fixed interest rate

• £543.5 billion are index-linked gilts that pay an interest rate pegged to the Retail Prices Index (RPI) and are recorded at their redemption value

These gilts are auctioned by the Debt Management Office (DMO) in accordance with its financing remit, on behalf of central government.

The Bank of England's contribution to debt

The Bank of England's (BoE) contribution to public sector net debt is largely a result of its quantitative easing activities. These include both the gilt-purchasing activities and corporate bond holdings of the Asset Purchase Facility Fund (APF) and loans made under Term Funding Schemes (TFS).

In February 2022, the BoE announced that it will no longer be replenishing the gilt stock of the APF. Following a £3.2 billion gilt redemption in July 2022, the APF's gilt holdings currently stand at £731.7 billion (at redemption value).

It is important to understand that this £731.7 billion (conventional) gilt holding is not recorded directly as a component of public sector net debt. Instead, in August 2022, we record the £112.1 billion difference between the £843.8 billion of reserves created to purchase gilts (at market value) and the £731.7 billion redemption value of the gilts purchased.

Table PSA9A in our Public sector finances tables 1 to 10: Appendix A presents the impact of both APF and TFS as a part of the BoE's contribution to public sector net debt.

Our public sector net debt excluding the public sector banks and the Bank of England (PSND ex BoE) measure removes the debt impact of these schemes along with the other transactions relating to the normal operations of the BoE. Standing at £2,107.4 billion at the end of August 2022 (or around 83.8% of GDP), PSND ex BoE was £320.2 billion (or 12.8 percentage points of GDP) less than PSND ex.

Public sector net financial liabilities

Public sector net financial liabilities excluding public sector banks (PSNFL ex) provides a more comprehensive measure of the public sector balance sheet. It captures a wider range of financial assets and liabilities than recorded in PSND ex, such as the assets held under the TFS, which fall outside the boundary of PSND ex.

PSNFL ex was £2,084.0 billion at the end of August 2022 (or around 82.9% of GDP), which was £343.6 billion (or 13.7 percentage points of GDP) less than PSND ex.

Table PSNFL 3, published as a part of our Public sector finances tables 1 to 10: Appendix A, provides a reconciliation between the latest measures of PSND ex and PSNFL ex.

The data for the latest months of every release contain a degree of forecasts. Subsequently, these are replaced by improved forecasts, as further data are made available, and finally by outturn data.

Annual data updates

Our regular annual updates of data for Network Rail, Pool Re, public sector funded pensions, student loans and capital consumption also take effect this month.

Of these, the updates for public sector funded pensions estimates have the most noticeable impact. Although the pensions figures have been revised from April 2020 to date, the impact on the financial year ending March 2022 is the most material, reducing public sector borrowing by £8.0 billion and increasing net debt at the end of March 2022 by £5.0 billion.

Revisions to net borrowing (PSNB ex) in the financial year-to-July 2022

Since our last public sector finances publication on 19 August 2022, we have reduced our estimate of borrowing in the financial year-to-July 2022 by £8.6 billion.

Central government accounts for the largest part of this revision and has been revised down by £3.9 billion over this period, driven by stronger than previously estimated receipts and by lower than previously estimated spending. Notable changes include:

• an upwards revision to business rates of £1.3 billion, resulting from our review of their recording in the public sector finances introduced this month

• a reduction in central government net investment of £1.1 billion, largely arising from our annual update of student loans data

• an upwards revision to central government interest payable of £1.0 billion, in part arising from our new treatment of leases, as described in our Looking ahead -- developments in public sector finance statistics: 2022 article

Other, smaller updates account for the remaining impact on central government borrowing.

Local government borrowing accounts for around £2.7 billion of the fall in public sector net borrowing (PSNB ex) over this period. Previously, our local government data were based on the latest official forecasts published by the Office for Budget Responsibility (OBR) in their Economic and fiscal outlook -- March 2022. This month, we have included local authority budget data for England, Scotland and Wales that we have used to improve our initial estimates.

This month, we have also reduced the borrowing of the public sector (funded) pensions sub-sector by £1.6 billion, having revised our forecasts for the financial year-to-July based on our annual data update for the financial years ending March 2021 and March 2022.

Revisions to net borrowing (PSNB ex) in the financial year ending (FYE) March 2022

Since our last public sector finances publication on 19 August 2022, we have reduced our estimate of public sector borrowing in the FYE March 2022 by £10.4 billion.

This month, we have reduced central government borrowing by £2.8 billion.

We have increased our previous estimates of central government interest payable by £2.6 billion, of which £1.1 billion was because of our annual update of Network Rail data and £1.6 billion was because of our new treatment of central government leases introduced for the first time this month.

As well as increasing debt interest payable, the change to our recording of leases reduced our previous estimate of expenditure on goods and services by £1.9 billion over the same twelve-month period.

We have reduced our previous estimate of central government net investment by £3.1 billion, largely because of our annual update of student loans data.

This month, we have also reduced the borrowing of the public sector (funded) pensions sub-sector by £8.0 billion. Substantial revisions to our pensions data are not uncommon as we replace our initial estimates annually.

Tables 12 and 13 show the revisions to central government receipts and expenditure in the financial year-to-July 2022 and FYE March 2022 since our last publication.

Revisions to earlier periods are a result of our annual updates introduced this month, as explained in Section 9, and their impacts on public sector net borrowing (excluding public sector banks) are summarised in Table 14.

Revisions to public sector net debt excluding public sector banks (PSND ex)

This month, we have increased our previous estimate of the level of public sector net debt excluding public sector banks at the end of July 2022 by £28.7 billion from that published on 19 August 2022. This increase was largely the result of the new treatment of central government leases introduced for the first time this month, which added £20.7 billion to government gross debt.

The remaining £8.0 billion increase is a combination of improvements to our recording of public corporations' data, as described in Recent and upcoming changes to public sector finance statistics: August 2022,and our annual update to public sector pensions data.

Table 15 summarises the impact on public sector net debt (excluding public sector banks) of both the leases and public corporations changes introduced this month.

In accordance with our transparency strategy and to provide predictability to users, where possible, we aim to package together methodological changes at a single point in the year.

This section presents information on the changes outlined in our Looking ahead – developments in public sector finance statistics: 2022 article, which were implemented this month. These include improvements in the recording of:

• public corporations' data

• central government leases

• national non-domestic rates

Our article, Recent and upcoming changes to public sector finance statistics: August 2022,explains these changes in some detail.

These methodology changes were accompanied by our regular annual data updates, including improvements to our previously published capital consumption, public sector pensions, Pool Re and student loans data.

Estimates of how our developments have affected the fiscal aggregates are presented in Tables 14 and 15, for financial years. Changes to public sector finance statistics: Appendix L provides a more detailed assessment of these impacts.

Public sector

In the UK, the public sector consists of six sub-sectors: central government, local government, public non-financial corporations, public sector pensions, the Bank of England (BoE) and public financial corporations (or public sector banks).

Public sector banks

Unless otherwise stated, the figures quoted in this bulletin exclude public sector banks, currently only the NatWest Group (formerly the Royal Bank of Scotland (RBS) Group).

Public sector current budget deficit

Public sector current budget deficit is the gap between current expenditure and current receipts on an accrued basis, having taken account of depreciation.

The current budget is in surplus when receipts are greater than expenditure.

Public sector current expenditure

Current expenditure measures reflect the cost of the public sector’s day-to-day activities. For example, central government’s provision of services and grants, payment of social benefits and the payment of the interest on its outstanding debt.

Public sector debt interest to revenue ratio

The debt interest to revenue ratio (DIR) represents the proportion of net interest paid (gross interest paid less interest received) by the public sector (excluding public sector banks), compared with the non-interest receipts it receives in a given period.

Public sector net borrowing

Public sector net borrowing excluding public sector banks (PSNB ex) measures the gap between revenue raised (current receipts) and total spending (current expenditure plus net investment (capital spending minus capital receipts)). PSNB is often referred to by commentators as “the deficit”.

Public sector net cash requirement

The public sector net cash requirement (PSNCR) represents the cash needed to be raised from the financial markets over a period of time to finance its activities.

The amount of cash required will be affected by changes in the timing of payments to and from the public sector rather than when these liabilities were incurred. However, it does not depend on forecast tax receipts in the same way as our accrued (or national accounts) based measures of borrowing.

PSNCR may be similar to borrowing for the same period and close, but not identical, to the changes in the level of net debt between two points in time.

Public sector net debt

Public sector net debt excluding public sector banks (PSND ex) represents the amount of money the public sector owes to private sector organisations (including overseas institutions) and is often referred to by commentators as “the national debt”.

Public sector net investment

Public sector net investment is the sum of all capital spending, mainly net acquisitions of capital assets and capital grants, less the depreciation of the stock of capital assets.

Public sector net financial liabilities

Public sector net financial liabilities excluding public sector banks (PSNFL ex) is a comprehensive measure of the public sector balance sheet, capturing a wider range of financial assets and liabilities than recorded in PSND ex.

Total managed expenditure

Total managed expenditure (TME) covers all current and capital spending carried out by the public sector, including depreciation. This is equal to public sector current expenditure, plus public sector net investment, plus deprecation.

Comparing our data with official forecasts

The independent Office for Budget Responsibility (OBR) is responsible for the production of official forecasts for the government. These forecasts are usually produced twice a year, in spring and autumn.

Energy Bills Support Scheme

The Energy Bills Support Scheme (EBSS) is a government scheme giving households in Great Britain (with a domestic electricity contract) £400 towards the cost of their energy bills.

On 31 August 2022, the Office for National Statistics (ONS) announced that the EBSS has been classified as a current transfer payment from government to households.

This additional central government expenditure will increase public sector net borrowing over a six-month period between October 2022 and March 2023.

Energy Price Guarantee scheme

On 8 September 2022, the UK government announced a number of new plans to help manage the cost of energy prices for households and businesses across the UK. This includes an Energy Price Guarantee scheme, which will include the temporary removal of green levies on energy bills and cap household energy bills at an average £2,500 for the next two years.

We will review and classify these support measures in due course.

Energy profits levy

On 26 May 2022, the UK government announced a new levy on the profits of oil and gas companies in the UK and the UK Continental Shelf, intended to help fund cost-of-living support.

We have classified this levy as a tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf. The first payment received will be accrued back to be reported as close as possible to the commencement date of 26 May 2022.

We will implement this classification as soon as is practical.

Coronavirus (COVID-19) loan guarantee schemes

In its Economic and fiscal outlook – March 2022, the OBR estimated that a reduction on calls on the government's coronavirus loan guarantee schemes would reduce net borrowing by £4.4 billion in the financial year ending (FYE) March 2022. We will include any impact arising from a change in expected calls when sufficiently reliable data become available.

To supplement this release, we publish an accompanying public sector methodological guide and Public sector finances Quality and Methodology Information outlining the strengths, limitations, and appropriate uses of the public sector finances dataset.

Local government and public corporations

In recent years, planned local government expenditure initially reported in local authority budgets has been systematically lower than final outturn current expenditure reported in the audited accounts and higher than that reported in final outturn capital expenditure. We therefore include adjustments to increase or decrease the amounts reported at the budget stage.

For the financial year ending (FYE) 2022, we include:

• a £0.4 billion downward adjustment to Wales’s capital expenditure
• a £3.5 billion upward adjustment to England’s current expenditure on goods and services

We apply a further £2.0 billion downward adjustment to budget forecast current expenditure on benefits in the FYE 2022, to reflect the most recently available data for housing benefits.

For the FYE 2023, we include:

• a £0.8 billion downward adjustment to Scotland’s capital expenditure
• a £0.4 billion downward adjustment to Wales’s capital expenditure
• a £4.0 billion upward adjustment to England’s current expenditure on goods and services

We apply a further £1.8 billion downward adjustment to budget forecast current expenditure on benefits in the FYE 2023, to reflect the most recently available data for housing benefits.

Public corporations' data in the most recent periods are initial estimates, largely based on the Office for Budget Responsibility (OBR)'s Economic and fiscal outlook – March 2022, with adjustments being applied as needed.

Office for National Statistics (ONS), released 21 September 2022, ONS website, statistical bulletin, Public sector finances, UK: August 2022