Home

Newsroom & speeches

Economic data & tools

Consultation & legislation

Independent reviews

Enterprise & productivity

Financial services

International issues

Public private partnerships

Public spending & reporting

Tax work & welfare

UK economy

Budget

Pre-Budget Report

Spending Review

About us

Careers

Other HMT sites

Terms & conditions

ANNEX B: PART 2 THE PUBLIC FINANCES

B41 Table B11 provides a more detailed breakdown of the projections of the tax-GDP ratio, which is derived from 'net taxes and social security contributions' (NTSSC). This is a measure of net cash payments made to UK government and differs in several respects from the accruals measures used in the National Accounts. The lower half of Table B11 sets out the adjustments needed to reconcile NTSSC with total current receipts, as defined in the National Accounts. Similar information is given, in £ billion, in Table B12. The main adjustments are:

• accruals adjustments, mainly on income tax, national insurance contributions and VAT, are added to change the basis of figures from cash to National Accounts accruals;
• some tax payments that are collected by the government, but then paid to the EC, are subtracted as they do not score as government receipts in the National Accounts;
• tax paid by public corporations is also subtracted, as it has no impact on overall public sector receipts;
• an adjustment is made for tax credits. In NTSSC, all tax credits are scored as negative tax to the extent that they are less than or equal to the tax liability of the household, and as public expenditure where they exceed the liability, in line with OECD Revenue Statistics guidelines. Although the Office for National Statistics will adopt this treatment in the National Accounts for the Working Tax Credit and Child Tax Credit, due to be introduced in April 2003, they have continued to treat the Working Families' Tax Credit (WFTC), the Disabled Person's Tax Credit (DPTC) and enhanced and payable company tax credits entirely as public expenditure in the National Accounts. Those parts of WFTC, DPTC and company tax credits that offset tax liability in NTSSC are added back into current receipts in Table B11; and
• interest and other non-tax receipts, which are excluded from NTSSC, are added. However, NTSSC includes payments of oil royalties, prior to their abolition from 1 January 2003, which are not scored as tax in the National Accounts.

back to top

Tax-by-tax analysis

B42 This section looks in detail at the projections for individual taxes and receipts. Table B12 contains updated projections for the main components of public sector receipts up to 2003-04, while Table B13 looks in more detail at changes in receipts between 2001-02 and 2002-03.

Income tax

B43 As shown in Table B13, total income tax receipts for April to October 2002 have increased very little relative to the same period in 2001-02. Receipts are expected to grow a little more strongly over the rest of the year, mainly because of self assessment receipts, which are due at the end of January, but income tax receipts in 2002-03 are now expected to be £114 billion, around £3¹/₂ billion lower than forecast in Budget 2002. This reflects a reduction in the Pay as You Earn (PAYE) projection of just under £4 billion, offset by a £¹/₂ billion increase in other types of income tax. As explained in Box 3.2 of the End of year fiscal report, PAYE is projected by applying appropriate tax rates to the changes in the tax base. Estimates of wages and salaries, the most important component of the tax base, are only slightly lower than in Budget 2002, and most of the fall in PAYE is due to a fall in the average tax rate. The falls in financial companies' profits this year also seem likely to impact on bonuses at the end of 2002-03, and the forecast prudently makes an allowance for this.

back to top

back to top

B44 After 2002-03, the projected growth in wages and salaries is marginally higher than assumed in Budget 2002. Slightly less of this growth is assumed to derive from employment growth and slightly more from growth in average earnings, mainly reflecting the results of the 2001 Census and new population projections. This increases the effective tax rate on wages and salaries, while the lower indexation factors used to uprate personal allowances and tax bands have a similar effect in 2004-05. The average tax rate is also assumed to recover slowly from the fall in 2002-03, as financial companies' profits recover from their current low levels. Mainly as a result of these effects, receipts at the end of the period are only about £³/₄ billion a year lower than in Budget 2002.

back to top

Non-North Sea corporation tax

B45 Non-North Sea corporation tax receipts in 2002-03 are expected to be £26 billion, almost £4 billion lower than projected in Budget 2002. This downward revision is largely based on instalment payments received in July and October - the first and second instalments paid in respect of 2002 for companies with calendar year accounting periods, together with the first instalments in respect of 2002-03 for companies with fiscal year accounting periods. Much of the observed shortfall relates to financial companies as their instalment payments suggest that the companies' own estimates of their profitability in 2002 are around 20 per cent lower than assumed in Budget 2002. Most financial companies have calendar year accounting periods and the impact of transitional provisions associated with the Budget 1998 reforms, coupled with falling profits, means that receipts were particularly low in October 2002, and much lower than in October 2001. Receipts over the remainder of 2002-03 are likely to be only slightly lower than in the corresponding period in 2001-02.

B46 After 2002-03, non-financial company profits are assumed to recover to a slightly higher level than assumed in Budget 2002. Coupled with lower than previously projected interest payments and investment levels, this would result in slightly higher projected receipts. However, these effects are broadly offset by other fiscal forecasting changes reflecting new data, notably on the stock of capital allowances available to companies. Financial companies' profits are also projected to be much lower in 2003-04 than expected at the time of the Budget, but to recover over the projection period to slightly lower levels than assumed earlier in the year. As discussed in paragraph B36, lower equity prices will have adverse effects on life insurers' profits which derive largely from capital gains. Receipts from life insurers are therefore projected to be between £1 and £1¹/₂ billion a year lower than expected in Budget 2002. In total, non-oil corporation tax receipts are expected to be lower than in Budget 2002, by around £5³/₄ billion in 2003-04, and by declining amounts in later years.

Tax credits

B47 The tables in this section show the amounts of tax credits classified as negative tax in line with OECD Revenue Statistics guidelines (see paragraph B41). The public expenditure amounts are included in Table B17. Since Budget 2002, the estimated split of total tax credits between that scored as tax and that scored as public expenditure has been revised, with the negative tax element now about £2 billion a year higher from 2003-04 onwards. These revisions are balanced by changes in the public expenditure element of tax credits. Similar changes, though smaller and acting in the opposite direction, have been made to earlier years to reflect revisions to the negative tax - public expenditure split of WFTC. This has no overall impact on the current balance or net borrowing.

back to top

North Sea revenues

B48 North Sea revenues in 2002-03 are expected to be just under £5 billion, around £¹/₂ billion lower than forecast in Budget 2002, of which around half is North Sea corporation tax. Much of this reflects lower than expected production. The very different growth rates shown for petroleum revenue tax in Table B13 reflect the interactions between oil price changes and the payment regime. Oil prices were much lower in the second half of 2001 than in the first half, but the pattern reversed in 2002.

B49 The production forecast underlying the projection in future years is around 5 per cent lower than that underpinning the Budget projections, largely reflecting outturns this year. This accounts for much of the downward revision in projected revenues after this year. While the projections are based on a starting oil price of $25.10 - almost 15 per cent higher than in Budget 2002 - the projections for sterling have strengthened against the dollar by almost as much, leaving the sterling oil price little changed. As a result, the impact of oil price changes on receipts has been small.

Capital taxes

B50 Receipts of capital taxes are expected to be £4¹/₂ billion in 2002-03, marginally higher than projected in Budget 2002. Capital gains tax receipts in 2002-03 are based on gains realised in 2001-02, and are therefore unaffected by recent movements in asset prices. The upward revision largely reflects new information on tax receipts and also the mix of assets upon which chargeable gains are realised. Inheritance tax receipts respond to asset prices with a lag, so that recent changes in asset prices have little effect on receipts in 2002-03.

B51 In later years, capital tax receipts are about £¹/₄ billion a year lower than in the Budget 2002 forecast. The impact of lower equity prices on inheritance tax is offset almost entirely by the effect of higher house prices, leaving projected receipts little changed since Budget 2002. However, the equity price changes have a bigger impact on capital gains tax than house price changes, because gains arising from the sale of main residences are exempt from tax. The full impact does not take effect until 2004-05, partly because the largest falls in share prices occurred part of the way through 2002-03, and partly because of the time lag before tax is paid.

Stamp duty

B52 Receipts of stamp duty are expected to be £8 billion in 2002-03, unchanged from Budget 2002. Around two-thirds of stamp duty receipts relate to land and property transactions; the remainder is derived from shares. The unchanged projection for 2002-03 partly reflects the offsetting nature of the changes in the assumptions for house prices and equity prices. The growth rate relative to 2001-02 is expected to increase in the latter part of 2002-03 because of the quarterly pattern of house price increases. Outturns for the year to date suggest that stamp duty on land has responded less strongly than would have been expected given the strength of house prices and transactions in the housing market. Commercial property accounts for about one third of the yield from land and property and prices in this sector have not risen nearly as fast as house prices. There is also some evidence that the prices of cheaper houses have risen more rapidly than more expensive ones, which, given the differing rates charged, has reduced the average tax rate. On the equity side, the volume of equity transactions observed so far in 2002-03 has been higher than expected, partly offsetting the effect of lower prices.

B53 Stamp duty receipts are also expected to be unchanged from Budget 2002 projections in 2003-04 and about £¹/₄ billion lower in 2004-05. The larger reduction relative to 2002-03 reflects the impact of a full year of lower equity prices, together with an assumption that housing and equity market transactions revert to more normal levels.

back to top

Social security contributions

B54 Receipts from social security contributions are expected to be just over £65 billion in 2002-03, around £¹/₂ billion higher than projected in Budget 2002. The bonus changes and other distributional effects described in paragraph B43 have less effect on national insurance contributions than on income tax collected under PAYE, and changes in the timing of personal pension repayments suggest that growth will be higher in the remaining months of 2002-03 than observed for April to October. In later years, the upward revision to the accrual in 2002-03 increases the projection slightly, as do the small increases in projected wages and salary growth compared with Budget 2002.

VAT receipts

B55 VAT receipts in 2002-03 are expected to be about £0.5 billion higher than projected in Budget 2002, largely reflecting stronger than expected receipts in the first half of the year. The forecast of VAT revenues from 2003-04 onwards continues to be governed by an NAO audited assumption, which stipulates that the ratio of VAT receipts to consumers' expenditure should decline gradually, by 0.05 percentage points a year, after the effects of VAT policy decisions are taken into account. This assumption, together with downward revisions to consumers' expenditure in 2003-04 and the upward revisions to receipts in 2002-03, has a broadly neutral effect on receipts in 2003-04 compared with Budget 2002. However, the combined effect increases VAT receipts in all other forecast years.

B56 The VAT forecast also takes into account additional VAT receipts resulting from the introduction of a new strategy for tackling VAT fraud and avoidance, which is expected to produce more than £2 billion a year in additional revenues by 2005-06. This is the Government's aim, but in line with the audited, cautious approach underlying the public finances, a lower figure of £1.4 billion a year by 2005-06 has been included in the public finance forecast. Scoring of any extra revenue in future forecasts will be subject to further evidence that the strategy is working. The strategy itself is described in Chapter 5, and in Protecting indirect tax revenues, published alongside this Pre-Budget Report.

Excise duties

B57 Excise duties in 2002-03 are expected to be around £0.3 billion lower than forecast in Budget 2002, and £0.9 billion lower than forecast in 2003-04. This is mainly due to a downward revision in the forecast for fuel duties of around £0.7 billion for 2002-03 and of about £0.9 billion for 2003-04. This partly reflects higher oil prices, lower GDP and lower forecasts for the RPI, which is used to uprate duty rates. Table B13 shows that although fuel duty receipts were only marginally higher in the first half of 2002-03 than in 2001-02, they are expected to be around 2 per cent higher for the year as a whole. This is because the current forecast for 2002-03 assumes that duty rates will be increased in line with inflation in March 2003, and that there will be corresponding forestalling by oil companies that will result in a surge in receipts in March 2003. There was no such behaviour in March 2002 because of the late Budget in 2002, and therefore receipts in the second half of 2002-03 are expected to be higher than in the second half of 2001-02.

B58 The impact of the revision to fuel duty receipts is partly offset by higher tobacco duties, which have been revised up in 2002-03 by around £0.4 billion, mainly on account of stronger than expected receipts in the first half of the year.

B59 The tobacco forecast is determined in part by an NAO audited assumption governing the proportion of additional revenue that should be included in the fiscal forecast resulting from HM Customs and Excise's tobacco anti-smuggling strategy. This assumption has been revised and now specifies that the forecast should take account of existing indirect effects, as well as direct effects. The revised assumption, combined with downward revisions to RPI figures and the impact of new indicative levels for bringing cigarettes and tobacco into the UK from the EU, results in projections that are close to Budget 2002 levels in 2003-04, and about £0.2 billion higher in later years. Alcohol duties are broadly as forecast in Budget 2002.

back to top

Other receipts

B60 Receipts from business rates in all years are expected to be around £0.5 billion lower than in Budget 2002, largely reflecting lower than expected net increases to rateable property values and lower indexation. The impact on total receipts is more than offset by higher than expected VAT refunds to central government and local authorities, although these refunds are balanced by offsetting changes in current expenditure.

PUBLIC EXPENDITURE

B61 Table B14 shows projections for public expenditure through to 2005-06, the last year covered by the 2002 Spending Review. The projections cover the whole of the public sector, using the National Accounts aggregate Total Managed Expenditure (TME). TME is split into Departmental Expenditure Limits (DEL) - firm three year limits for departments' programme spending - and Annually Managed Expenditure (AME) - spending that is not easily subject to firm multi-year limits.

B62 The 2002 Spending Review was the first to be conducted on a full resource basis. Resource accounting and budgeting (RAB) replaces the previous approach of planning and controlling public expenditure on a cash basis and applies the best financial and disclosure practices of commercial accounting to central government finances. Resource budgeting was introduced in two stages, and prior to the 2002 Spending Review budgets were set on a 'near cash' basis - a hybrid of resource budgeting and the previous cash management system. Table B14 tracks changes to DEL, AME and TME from Budget 2002 through the 2002 Spending Review to the projections set out in this Pre-Budget Report. As the table shows, the move to full resource budgeting does not affect TME, but does lead to changes within DEL and AME.

B63 The Pre-Budget Report is an interim report on the public finances. For this purpose, and in line with the usual convention, TME has been increased to accommodate the impact of policy decisions set out in Table B4 but otherwise remains unchanged.

B64 Departmental Expenditure Limits from 2003-04 to 2005-06 were set in the 2002 Spending Review. DEL for 2002-03 was set in the 2000 Spending Review. These plans have been adjusted to take account of changes to certain public sector pension schemes and other minor classification changes that have no impact on overall public spending. The only other changes to DEL are certain policy changes, as shown in Table B4, which are:

back to top

• the decision to reform the Landfill Tax Credit Scheme from April 2003;
• as in previous years, the underspend from 2001-02 has been carried forward and added to total DEL in 2002-03; and
• in 2002-03, the £1 billion special reserve addition.

B65 From 2003-04, departmental budgets will be controlled on a full resource budgeting basis, which means that the full economic cost of departmental activity will be recognised in budgets. Table B15 shows the Departmental Expenditure Limits for resource and capital budgets on this basis for the next three years, and restates budgets for 2001-02 and 2002-03 on the same basis. For 2001-02 and 2002-03, departmental expenditure is controlled on a near cash basis, and Table B16 shows outturn and plans on this basis. Both tables have been updated since the 2002 Spending Review to reflect transfers between departments and programmes.

B66 It is assumed in this Pre-Budget Report that the outturn for 2002-03 will equal total DEL plans. As in previous years it is assumed that, over the course of the year, underspends will offset the drawdown of end-year flexibility.

back to top

back to top

B67 Table B17 shows Total Managed Expenditure from 2001-02 to 2005-06 and new projections for individual AME programmes. Excluding additional spending on measures from 2003-04 onwards and reclassifications between DEL and AME, total AME is unchanged from the Spending Review. In line with the convention adopted in previous Pre-Budget Reports, changes to AME programmes have been offset in the AME margin.

back to top

B68 The main economic assumptions underpinning projections of AME are set out in Table B3. In particular, it is assumed that UK claimant unemployment will increase slightly from its recent level of 0.94 million (the average of the three months ending in October) to 0.99 million in 2005-06, in line with the average of independent forecasts.

B69 Table B18 shows changes to DEL and AME since the 2002 Spending Review. Of these changes, £3.0 billion, £3.3 billion and £3.5 billion in 2003-04 to 2005-06 respectively are accounted for by switches of expenditure from AME to DEL, which have no net effect on TME. The major part of this switch reflects a change in the way employers in the teachers and NHS pension schemes are charged superannuation contributions. In future these charges will be based on the full cost of pensions (including price indexation) not just the basic pension as in the past. DEL has been increased to cover these higher charges, though these are offset by higher pension scheme receipts in AME. The remaining changes to DEL and AME reflect increases to TME as a result of the measures set out in Table B4.

back to top

B70 In 2001-02, TME was £1.7 billion higher than expected at the time of the 2002 Spending Review, with DEL £0.2 billion lower, and AME £2.0 billion higher. The total underspend on DEL in 2001-02 was £0.4 billion, taking into account reclassifications between DEL and AME.

B71 Changes to AME programmes reflect a combination of factors discussed below. With the exception of 2003-04, forecasts for AME programmes are higher than those published in the 2002 Spending Review. As total AME - excluding DEL/AME reclassifications and policy decisions - is unchanged, this results in a lower margin in each year than at the 2002 Spending Review. In 2003-04 expenditure on AME programmes is lower, resulting in an AME margin £0.8 billion higher than at the 2002 Spending Review.

B72 The social security expenditure forecast is lower than in the 2002 Spending Review. This reflects lower forecasts for inflation, which affect the uprating of benefits in 2003-04 and, in particular 2004-05, than at the Budget. Falling numbers of lone parents on benefits also contributes to the reduced forecast. However, these factors are increasingly offset over the forecast period by higher expenditure on the Minimum Income Guarantee/Pension Credit and Disability Living Allowance.

B73 Revisions to the breakdown of tax credits between negative tax and public expenditure, described in paragraph B47, mean that projected tax credit expenditure in AME is approximately £2 billion a year lower from 2003-04 to 2005-06 than expected at the time of the 2002 Spending Review.

B74 Compared with the Spending Review, central government gross debt interest payments are lower in 2002-03 and 2003-04 but higher in 2004-05 and 2005-06. The reduced forecast this year and next is mainly the result of lower market interest rate expectations and, in 2003-04, the impact of a lower accrued uplift on index-linked gilts due to a lower forecast for inflation. In the latter two years, the effect of lower interest rate expectations is offset by the effect of higher borrowing than forecast in Budget 2002.

B75 Public corporations' own-financed capital expenditure is higher than forecast at the time of the 2002 Spending Review. This is primarily because the London Underground Public Private Partnership is now expected to be included on London Underground's balance sheet and hence that projected investment under this project will count towards public sector net investment. Forecasts for other departmental expenditure are also higher, from 2002-03 to 2004-05, than in the 2002 Spending Review, due to increased projections of payments to former British Coal miners under the coal health compensation scheme.

back to top

B76 Increases to the accounting adjustments are mainly the result of higher forecasts for VAT refunded on general government expenditure, due to higher than expected outturn data for last year and for the year to date. Increased VAT refunds are offset by equivalent changes in receipts. The main accounting adjustments, which comprise those items within TME but outside DEL and AME main programmes, are shown in Table B19.

B77 Chart B4 shows TME as a per cent of GDP from 1970-71 to 2005-06.

Supporting Docs & Media

• Chart B4: Total Managed Expenditure

back to top

Pre Budget report 2002 index