Working with Data on Government Finances

1. Introduction: Data Use include everything which is reported for accounting purposes about the size of What is the commercial demand for public sector expenditures and receipts. data on public finances? Governments across the world The term ‘general government’ refers to responded pro-actively to the dramatic local and central government. The economic slow-down of the late 2000s. `Public sector’ refers to general Their spending to support those government plus other organisations, responses will affect governmental including public corporations. budget figures for years to come. The Confederation of British Industry (CBI) Activities move between the private and represents big business in the UK. It has the public sector of the economy over expressed concerns about the time. For example, the global banking consequences for business of the problems of the late 2000s prompted excesses of government spending over transfer of all or part of some financial government income.1 organisations into public ownership. In contrast, numerous government This example shows that it is not only organisations, assets and activities were government which is actively interested formally transferred into private hands in data revealing the public finances. (`privatised’) during the 1980s/1990s. Private organisations, especially wealthy ones, monitor and use those data in Selecting government sources of their decision-making. They also use budget surplus and deficit data them in trying to persuade governments We choose here to focus on data about to act in their interests. the public sector budget balance. For example, has the UK public sector The size and structure of government typically run a budget deficit with budgets affect the wealth and wellbeing expenditures exceeding receipts? How of private individuals and organisations. unusual in recent history were the Managing the size of a budget surplus or increasing deficits of the late 2000s? deficit affects future levels of taxes and How large were they as a feature of the spending for everyone, although the whole economy? consequences will differ to some extent between us. Many data about the size of public sector expenditures and receipts are 2. Data Search and Selection available from government sources. The sources in each government jurisdiction Definitions and distinctions typically include departments with Different terms are used to describe particular responsibilities, such as for government expenditures and income in health or education. Private sector users similar data sets. These distinctions will of data are attracted to using affect any data search and selection government figures on government undertaken for particular purposes. The finances, because of their wide range broad term `public finances’ is used to and low cost of access.

1 The homepage for the Confederation of British HM Treasury is the government ministry Industry can accessed at http://www.cbi.org.uk responsible for the UK public finances. It

publishes a vast array of relevant 1 figures. The HM Treasury Budget Report Net borrowing 90.0 6.3 (issued in March or April in recent years) Public sector net cash 59.9 4.2 and the Pre-Budget Report (November) requirement both present extensive public Source: HM Treasury Budget Report, 22 April 2009 (Tables C2, C4, C5 and C12) expenditure and taxation data series.2 The public sector budget balance is We make use in this Case Study of the summarised in Table 1. It presents HM Treasury Public Finances Databank. key figures from the government annual Figures from the databank can be budget for financial year 2008/09. The downloaded from the ministry website. figures are taken from HM Treasury That source is especially helpful to users Budget Report, April 2009. We present in a practical sense because the data them by level (£billion) and also by one 3 are contained in Excel spreadsheets. relative measure of their size (% of Gross Domestic Product, GDP). The Office for National Statistics (ONS) publishes a large, similar but somewhat Components of the budget balance distinctive selection of data on behalf of Public sector `Current receipts’ (Table 1, the UK government. The figures from row 1) come predominantly from the ONS we use here are from the taxation. They also include the operating Public Sector Finances First Release. profits of public sector organisations. For This is one of many releases available at example, figures in Table 1 indicate that the ONS website. Data can be public sector current receipts in 2008/09 downloaded from it to an Excel totalled £530.7 billion, 36.9% as large spreadsheet.4 as GDP in that year.

All data used in this Case Study will be Current expenditures include payments nominal: data for each period are of welfare benefits. They also include presented in monetary terms at prices most of the purchases of inputs used in prevailing in that period (current prices). producing or providing goods and Some of our time series data will be for services by the public sector. The calendar years (January to December), figures incorporate the wages and while others will be for the UK financial salaries of all public sector staff. In year (April to March). 2008/09, estimated current expenditure totalled £564.5 billion (39.2% of GDP). Table 1: Estimated current and capital budget, 2008-09 `Depreciation’ (see Table 1, third row) £ % of is a value attributed to deterioration of billions GDP public sector capital stock (including Current receipts 530.7 36.9 machinery, buildings and Current expenditures 564.5 39.2 infrastructure). Depreciation in 2008/09 Depreciation 18.6 1.3 was estimated to involve a loss of value Surplus on current budget -52.3 -3.9 Net investment 37.7 2.6 of £18.6 billion (1.3% of GDP).

2 The Budget and Pre-Budget Reports can be accessed Subtracting current expenditures and from the HM Treasury website depreciation from current receipts gives http://www.hm-treasury.gov.uk/ a balance known as the ‘surplus on the current budget’. For 2008/09, this 3 The HM Treasury Public Finances Databank and other economic data and tools can be accessed at yielded a negative figure, indicating a http://www.hm-treasury.gov.uk/data_index.htm current budget deficit.

4 The various ONS releases from which data series can In other words, current expenditures be extracted can be accessed at http://www.statistics.gov.uk/statbase/tsdtimezone.asp plus the value attributed to depreciation exceeded the public sector’s current 2 receipts. The estimated deficit on the in see in Section 3, however, that current budget in 2008/09 was £52.3 absorbing monetary financial institutions billion (3.9% of GDP). into the public sector increases the accumulated stock of public sector debt. Some of the inputs purchased by the public sector are classified as capital Receipts by the public sector from its expenditure. They are those which financial transactions in 2008/09 were generate benefits across an extended estimated to exceed the amount it paid. period of time. Inputs classified as Therefore, the public sector net cash capital expenditure include those requirement (PSNCR) was less than the involved in public spending on roads, net borrowing figure. The estimated hospitals and schools. PSNCR for 2008/09 was £59.9 billion (4.2% of GDP). Some capital expenditures from public finances are payments or subsidies to The switch of UK financial institutions to firms and households. These payments the public sector in 2008 amounted to a redistribute or transfer to the private change in the structure of the economy. sector the means for engaging in capital Changes of that magnitude complicate spending. They do so as a way to time series comparisons of budget achieve government policy objectives. balances and debt levels. It is clearly important to acknowledge any changes Subtracting the depreciation figure from of that kind, if we are to make reliable the (gross) capital expenditure figure and meaningful comparisons. leaves an estimate of public sector net investment (see Table 1, row 5). The 3. Data Transformation and estimate for 2008/09 was £37.7 billion Interpretation (2.6% of GDP). Chart 1 below presents our two Net borrowing by the public sector measures of the gap between (Table 1, row 6) indicates the amount government income and government needed to finance its net investment expenditure: `net borrowing’ and the and any current budget deficit. Such a public sector net cash requirement deficit is indicated by a negative surplus (PSNCR). The figures used are readily figure in Table 1, row 4. available from the ONS Public Sector Finances First Release and are for A figure for public sector net borrowing calendar years from 1963. is obtained by subtracting net investment from the current budget Chart 1: Budget deficits, £ billions surplus. The estimate for 2008/09 was PSNCR Net borrowing 70

£90 billion (6.3% of GDP). 60

50 Finally, various public sector assets 40 30

might be traded. Data representing the s n 20 o i l l i b overall budget balance from year to year 10 £ include changes in public sector 0 property, shares or other holdings. -10 -20

-30 Financial assets and liabilities became -40 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 increasingly important in the UK during Source: Public Sector Finances First Release, National 2008. Several sizeable monetary Statistics financial institutions (MFIs) were transferred to the public sector. We shall 3 In preparing the figures for Chart 1, we The higher relative deficit figures among have ignored the negative signs in the those shown in Chart 2 indicate that data series for `net borrowing’. Those they amount to a larger percentage of signs are merely an accounting total economic activity. Chart 2 figures convention and would obscure a also indicate that the average annual comparison with our alternative deficit between 1963 and 2008 was measure of the income-expenditure gap. 2.71% as large as GDP.

Chart 1 indicates that public sector Chart 2 offers a different impression of deficits were common during the period public sector debt, if compared with 1963 to 2008. It also shows that our Chart 1. UK deficits that caused great two budget deficit measures broadly concern in the late 2000s seem little echo each other, although the gap different in magnitude to others that between them varies in size over time. were experienced up to 45 years earlier. Indeed, the PSNCR figure for 1975 was The largest deficit levels are found in as large as 9½% of GDP. figures for the early 1990s and for the late 2000s onwards. The largest surplus We do not observe a systematic upward figures are found for the late 1990s and trend in the portrayal of budget deficits into the new millennium. in Chart 2. Some of the considerable volatility we do observe echoes the Comparative measures of budget pattern of economic growth from period balance size to period known as the business cycle. The CBI and others are interested in the significance of the public finances within Public sector revenues and expenditures the overall economy. Accordingly, we are affected by broader trends in the compare the size of UK public sector economy. For example, weak or balances with total UK economic negative economic growth tends to expenditure in the same period. To do diminish revenue from taxation but so, we transform the two data series in increases expenditure on welfare Chart 1 by expressing each one as a payments. Data suggest that these percentage of GDP5. The GDP (current effects happened in the early 1980s, the price) series used is from the ONS early 1990s and the late 2000s. release Output, Income and Expenditure (series YBHA). These relative deficit Eliminating the cyclical element measures are presented in Chart 2. Sums within the budget balance which are not attributable to cyclical effects Chart 2: Budget deficits as a % of GDP are known as structural balances. For PSNCR Net borrowing example, a structural deficit might exist 10 if the prevailing tax system causes 8 public sector spending commitments to 6 exceed income throughout the business

P 4 cycle. It can be useful to estimate the D G

f o structural component of any overall % 2 budget balance. 0

-2 To do so here, we simply adopt data -4 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 which has been suitably transformed by Sources: Public Sector Finances First Release and UK specialists at HM Treasury. They indicate Output, Income and Expenditure, National Statistics what budget levels would be if output of the economy (GDP) reached its potential 5 For how to find and use GDP data, please see the level. `Potential output’ is defined as the companion Case Study, `Working with Data on level consistent with normal utilisation Economic Growth’. 4 of productive capacity. The outcome of but removing the cyclical element from that artificial transformation of observed the data reveals a structural deficit. figures is called a cyclical adjustment. During the 2000s, both the overall and Chart 3 includes HM Treasury estimates the cyclically-adjusted public sector of cyclically-adjusted net borrowing for balance figures showed annual deficits. financial years since 1973/74. Each For the late 2000s, cyclical adjustment figure is presented as a percentage of of the estimated figures still leaves large GDP. These series are available from HM relative budget deficits by historical Treasury’s Public Finances Databank. standards. They are up to three times the average across the period from The figures for 2008/09 to 2013/14 are 1973/74. Furthermore, in 2009, large HM Treasury forecasts. They were structural deficits were expected to announced by the UK Chancellor of the continue throughout the forecast period. Exchequer in the April 2009 budget and appeared in the accompanying HM Managing a public sector deficit involves Treasury Budget Report. finding an effective way to finance it. One way to do so is by `issuing debt’ Chart 3: Cyclically-adjusted net and this might involve selling treasury borrowing as % of GDP bills. These bills represent short-term Net borrowing, cyclically-adjusted Net borrowing 14 loans to the government. They are sold

12 below their face value but redeemed at

10 full face value, thereby offering the

8 investor a rate of return. A deficit might P D G

instead be financed by selling gilts

% 4 (longer-term loans). Gilts require regular payment of interest by the 2 government to the purchaser. 0

-2 1973-74 1978-79 1983-84 1988-89 1993-94 1998-99 2003-04 2008-09 2013-14 Data on stocks of accumulated debt Source: HM Treasury Public Finances Databank Budget balances are determined by flows of payments and receipts. We Average net borrowing over the period have seen that the UK public sector has is estimated to be 3.9% of GDP. managed many annual budget deficits. Cyclically-adjusted, it falls to 3.2% but It borrowed to finance them all, so indicates the strength of the structural accumulated a stock of debt to be repaid component within the full budget deficit. over time. In addition to its outstanding financial liabilities, the public sector can Data for the 1980s show starkly what also accumulate liquid financial assets. the effect of cyclically-adjusting net These might include bank deposits and borrowing figures can be. Chart 3 foreign exchange reserves. Net public indicates the extent to which the sector debt is its gross debt less its business cycle reinforced peaks and liquid financial assets. troughs of annual net borrowing. Chart 4 presents data on the UK public The cyclically-adjusted budget balance sector net debt. The figures are directly figures for the early 1980s were in from the HM Treasury Public Finances surplus. Cyclically low total economic Databank. They are presented by activity levels, however, yielded an financial year, not calendar year. overall budget deficit. Surplus figures appeared during the late 1980s boom We begin by looking at figures for the level of debt (£ billions) and observe 5 that it has grown over time. The For the period until 2000, they indicate estimated net debt stock in 1974/75 a downward trend in public debt as a was £52.1 billion. It is expected to grow percentage of GDP. A clear exception over 40 years to be almost 26 times as was an increase in the early 1990s. large: £1.37 trillion in 2013/14. During that time, recession propelled public sector debt upwards. Chart 4: Level and growth of public sector net debt Chart 5: Public sector net debt as a % Annual growth Net Debt, £b of GDP 1,400 35

80 30 1,200

25 70 1,000 20 e g n

s 800 60 15 a n h o c i

l l i % P b

r 10 D £

600 Y / G

f 50 Y o

5 % 400 0 40

200 -5 30 0 -10 1974-75 1979-80 1984-85 1989-90 1994-95 1999-00 2004-05 2009-10 20 Source: HM Treasury Public Finances Databank 1974-75 1979-80 1984-85 1989-90 1994-95 1999-00 2004-05 2009-10 Source: HM Treasury Public Finances Databank The steepest section of the Net Debt line in Chart 4 represents forecasts The HM Treasury forecast in April 2009 made during 2009 for several years indicated that the stock of net public ahead. The gradient of that section sector debt in 2013/14 will be indicates an increased growth rate of equivalent to more than 76% of GDP. the stock of debt. The trend is seen By the time you read this Case Study, more readily in Chart 4 by looking at the new data will be available to verify that line representing Annual Growth. forecast.

2009/10 was expected to see an 4. Review Questions increase of about 30% in the public sector’s stock of net debt. A further 1. What reasons might wealthy increase of almost 25% was envisaged corporations have to monitor and for 2010/11. use government data on the state of the public finances? The closest recent parallel shows 2. Distinguish between the terms increases of 22% for 1992/93 and 24% deficit and debt. for 1993/94. It is unusual in the UK, 3. How could you estimate a structural however, for large increases in public budget deficit? sector debt to be as persistent as is 4. Why do figures for PSNCR and forecast for the period beyond 2008/09. public sector net borrowing differ? 5. What is indicated by figures for Relative size of public sector debt public sector deficit and debt levels, Chart 5 offers one more perspective on as a proportion of GDP? the scale of UK public sector debt. It shows the stock of net debt, expressed This Case Study was designed and authored by: as a percentage of GDP. The data are Dean GARRATT and Stephen HEASELL, of taken from the HM Treasury Public Nottingham Business School, Nottingham Trent Finances Databank and are for financial University with acknowledgment of funding from The Economics Network of the UK Higher years from 1974/75. Education Academy.

May 2009