21 Feb 2017

Public finances: Method changes cloud data but borrowing on track

Philip Shaw

Chief Economist

The public finances figures released today included sizeable changes to the methodology (accounting) for Corporation Tax receipts, the Bank Levy and also on the classification of Housing Associations.  

  • For the January 2017 numbers the key adjustment was to Corporation Tax and meant that the headline borrowing measure, the PSNBx came out in surplus to the tune of £9.4bn against a market consensus balance of -£14.0bn (i.e. surplus) and Investec forecast -£14.2bn. Under the old methodology January used to be a big month for Corporation Tax revenues, but the move away from cash accounting to the new accruals based numbers spread these revenues according to when the activity took place, dragging the January receipts numbers down by almost £6bn.

  • The methodological changes also had widespread implications for borrowing totals for previous years. The accounting change should be one of ‘smoothing’ revenues, however that smoothing can take place over several years and hence the impact of the Corporation Tax change has not been neutral for each fiscal year. It pushes up total revenues and pushes down on borrowing totals by £1.6bn in 2015/16, by £1.1bn in 2014/15 and £1.3bn in 2013/14. Note that the Bank levy change, which has also been modified to make it consistent with the Corporation Tax change, added £0.2bn to the 2015/2016 borrowing total. The change on Housing Association classifications, which relates to a reclassification from the private to the public corporation sector has an impact on the 2015/16 numbers, bigger than the Corporation Tax change, reducing the borrowing total by a further £2.3bn. Overall total 2015/16 PSNBx is now recorded at £71.7bn, some £3.8bn below its previous print.
    One word of warning for readers of historical data is that so far the accounting change on Corporation Tax has only been applied from the financial year ending March 2001 onwards and up until 2005 those figures are ‘estimated’ by the Office for National Statistics. As this methodology is carried forward and tested in practice, there could well be further revisions made.

  • Note that in terms of the current position of the public finances for the 2016/17 fiscal year, with just two month’s to go, today’s numbers point to the prospect of an undershoot of the Office for Budget Responsibility’s £68.2bn borrowing forecast. In general the receipts picture looks to have held up well and whilst the January figures are likely lifted by a good print on self-assessment tax receipts the underlying revenue picture looks pretty robust. Note that if the year to date performance of the public finances was to be repeated in the final two months of fiscal year data, the 2016/2017 full year borrowing print could come in close to £61bn. Note though, that in contrast to the data for previous fiscal years, so far the Corporation Tax accounting change looks to have been an unfavourable amendment for the fiscal year so far; on the old methodology in the year to January Corporation Tax revenues would have equalled £46.3bn, but the total is now recorded at £44.5bn.

  • With just over a couple of weeks to go until the 8 March Budget, the first of two Budgets this year, the Chancellor seems to have found himself a little bit of fiscal headroom for the current financial year. However whilst the story for the economy has been so far so good, as Brexit efforts progress, we view it as unlikely that the Chancellor uses this Budget to mark a notable fiscal loosening.