IFS public finance bulletin: June 2015

Today the Office for National Statistics and HM Treasury published Public Sector Finances May 2015. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the first two months of financial year 2015–16 and revised outturns for the whole of financial year 2014–15.

Rowena Crawford, a Senior Research Economist at the Institute for Fiscal Studies (IFS), said:

“With only data from the first two months of the financial year, we cannot yet say much about the likely path of the public finances over the year as a whole. Receipts have so far performed well, but it is too early to tell whether this is a trend that will continue, and as ever the picture for central government spending is complicated by timing issues.

“Today’s figures also highlight the uncertainty of initial estimates. Outturns for borrowing over the last financial year have been revised again, and now lie roughly in line with the forecasts that the Office for Budget Responsibility made back in March.

“The Chancellor faces his first budget of the parliament next month with little change in the public finance position since his last Budget four months ago. The interest will therefore lie in what new policies the Chancellor announces to help him achieve his aspiration for an overall budget surplus by 2018–19, his desire to reduce spending more rapidly this year, and any detail he fills in on the £12 billion of welfare cuts that the Conservative party manifesto pledged but that have so far been largely unspecified.”

Headline Comparisons

• Public sector net borrowing in 2014–15 is now estimated to have been £89.2bn, higher than the £87.7bn published last month, but still lower than the £90.2bn forecast by the OBR in the March Budget. This change is due to a £0.6bn downward revision to central government current receipts, a £0.8bn net upwards revision to central government spending, and a £0.5bn upward revision to borrowing by public corporations. The OBR’s March 2015 forecast is for the public sector to borrow £75.3bn this financial year, although this does not take into account the additional in-year spending cuts announced by Mr Osborne two weeks ago. Borrowing over April and May 2015 was £16.4bn, which is £5.1bn lower than over the same months in 2014.
  
  
• Public sector net debt at the end of 2014–15 is now estimated to have been £1,486bn, or 80.5% of national income. The OBR’s March 2015 forecast is that this will fall to 80.2% by the end of this financial year.
  
  
• Central government current receipts were forecast to increase by 3.1% between 2014–15 and 2015–16 by the OBR in its March 2015 Economic and Fiscal Outlook, adjusting for the effects of the Asset Purchase Facility. Growth in receipts between April and May 2015 compared to the same two months last year was higher than this, at 4.1%. This higher than average expected growth was largely driven by strong growth in corporation tax in April and VAT in both April and May. With 10 months left of the financial year still to come, these data do not provide much indication as to whether the OBR’s forecast for the year will prove to be an under- or over-estimate.
  
  
• Central government current spending in May 2015 was 0.7% higher than in May 2014, while spending over the first two months of this financial year together has been 2.9% lower than over the same period last year. This is in contrast to the 1.0% increase forecast by the OBR for the year as a whole. The low growth of spending in April 2015 compared to April 2014 was largely driven by changes in the timing of grants paid to local government which should unwind as the year progresses.
  
  
• Public sector net investment in May was £0.8bn, £0.5bn less than was spent in May 2014. Over the year so far investment spending has been £1.5bn, £0.7bn less than over the same period last year. The OBR’s forecast at the time of the March 2015 Budget was that net investment over the whole of 2015–16 would be £29.5bn, which would be 4.4% below last year’s level.

Further Analysis

Little can be inferred or extrapolated about the public finances in 2015–16 from information about only the first two months of the financial year. Bearing this in mind, the figures for receipts and spending in May 2015 show:

Central government current receipts

Receipts from income tax, capital gains tax and National Insurance Contributions for May 2015 were 4.4% higher than in the same month last year, and taking April and May together, receipts were 3.8% higher this year than last. The OBR’s March 2015 forecast implies that receipts from these taxes will grow by 3.9% over the whole of 2015–16.

VAT receipts in May 2015 were 5.6% higher than the same month last year, and taking April and May together, receipts were 4.9% higher this year than last. This is a larger increase than expected in the OBR’s March 2015 forecast for the year as a whole, which implies that VAT receipts will grow by 2.8% over the whole of 2015–16.

Cash receipts of corporation tax in May 2015 were 2.8% lower than in the same month last year. However, a relatively small proportion of corporation tax is received in May, and receipts from CT performed strongly in April 2015, a month in which a substantial proportion of corporation tax payments are made. Taking April and May together, corporation tax receipts were 13.5% higher than over the same months in 2014. This is strong performance relative to the OBR’s March 2015 forecast for the year as a whole which implies CT revenue would be essentially unchanged from last year. According to the OBR, this strong performance was down to increases in profits of the financial and life assurance sectors, which was enough to offset the cut to the main rate of corporation tax from 21% to 20% that took effect in April 2015.

Central government current spending

Expenditure on net social benefits was essentially the same in May 2015 as in May 2014, and over April and May together compared with the same two months last year. The OBR’s latest forecast implies that central government net social benefit expenditure will grow by 0.6% over 2015–16.

Spending on debt interest was £4.1bn in May 2015, £0.2bn lower than was spent in May 2014. Over the first two months of this financial year £9.2bn has been spent on debt interest, 4.3% less than the £9.6bn that was spent over the same period in 2014–15. The OBR’s forecast from the time of the March 2015 Budget was that debt interest spending over the whole of 2015–16 would be £46.0bn, 1.3% higher than in 2014–15.

Other current spending by central government, including spending on the administration and delivery of public services, was 1.6% higher in May 2015 than in May 2014. Taking April and May together, spending has been 4.0% lower than over the same period last year. This is largely driven by a change in the timing of grants to local government, which reduced central government spending in April 2014 compared to April 2015; this will unwind over the rest of the year. The OBR’s March 2015 forecast implies that other central government spending will grow by 1.3% over the year as a whole, although this does not take into account the additional in-year spending cuts announced by Mr Osborne two weeks ago.

Further information and contacts

For further information on today’s public finance release please contact: Rowena Crawford or Gemma Tetlow on 020 7291 4800, or email @email or @email.The first budget of this parliament is scheduled for Wednesday 8th July. On the following day the IFS will hold a lunchtime briefing, where IFS researchers will present analysis of what the Chancellor says on the public finances, departmental spending, and the tax and benefit system. Further information and registration details are available at http://www.ifs.org.uk/events/1159

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

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, May 2015: http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/may-2015/index.html

Office for Budget Responsibility analysis of monthly Public Sector Finances, May 2015: http://budgetresponsibility.independent.gov.uk/category/topics/monthly-public-finance-data/

Office for Budget Responsibility, Economic and Fiscal Outlook, March 2015: http://budgetresponsibility.org.uk/economic-fiscal-outlook-march-2015/

HM Treasury Budget 2015: https://www.gov.uk/government/topical-events/budget-2015

ENDS

Notes to Editors:

1. All figures are on a basis that excludes the impact of the public sector banks.

2. Central government current spending includes depreciation.

3. Where possible we compare figures on an accruals basis with the Office for Budget Responsibility forecast.