Accounting changes add £17.8bn to government borrowing

The accounting treatment of student loans and a miscalculation in corporation tax revenue has led to a £17.8bn hike in government borrowing reveals analysis by the Office for Budget Responsibility (OBR)

The increase in borrowing is jeopardising government plans to reduce the deficit, warns the OBR. Revised figures from the Office for National Statistics (ONS), including changes to student loans, public sector pensions and corporation tax, increased borrowing in the year to March by 75% to £41.4bn.

The ONS has incorporated several methodology and data changes in its September release. The OBR says the improved accounting treatment of student loans adds £12.4bn to borrowing in 2018-19.

The change to student loans means outlays are no longer all treated as loans (since a significant proportion are expected to be written off rather than repaid). Instead, that portion is treated as spending rather than lending, and will add to borrowing as it happens. The spending portion will not accrue interest. The OBR says this removes the most problematic ‘fiscal illusions’ generated by the existing treatment.

 In March, the OBR estimated that the new accounting treatment would add £10.5bn to borrowing in 2018-19, widening to £13.6bn by 2023-24. The difference between the March estimate and the ONS out-turn in 2018-19 largely reflects the ONS treatment of sales of student loans at a discount to their value as recorded in the public finances, where spending equal to the discount adds to the deficit. The OBR was not able to anticipate this effect in March. Incorporating it in the next forecast will add further to borrowing in all years in which loan sales are assumed to take place (ie, 2019-20 to 2022-23).

The OBR highlights two changes to accounting for corporation tax. First, HMRC identified a problem with the algorithm that split corporation tax data between larger quarterly payers and smaller annual payers. Correcting this adds £4.7bn to payments from smaller payers in 2018-19 and lowers payments from larger instalment payers by the same amount.

The OBR says this has very little effect on cash receipts, but affects accrued corporation tax receipts as recorded in the public finances due to the different accruals methods used for quarterly and annual payers.

Corporation tax miscalculation

Secondly, HMRC identified double-counting of the directly payable tax credits’ element of corporation tax receipts. This lowers accrued receipts by £2.6bn in 2018-19. Both changes will affect the next OBR forecast and are likely to persist over the medium term.

The changes mean it is difficult for the OBR to make direct comparisons with previous months as the basis for some of its calculations has altered. However, it states that ‘clearly they leave measured public sector net borrowing (PSNB) and the current budget balance looking significantly worse and public sector net debt (PSND) a little better’.

The OBR calculates the effect on PSNB is likely of the order of at least £15bn a year (from the student loan accounting change and lower corporation tax) while the current budget could also be worse by around £15bn a year (from the higher depreciation, lower corporation tax and the lower accrued student loan interest income).

The OBR report says PSNB is already higher than its full year 2019-20 forecast, thanks to the student loans accounting treatment change being larger than anticipated in March, and to the other revisions – notably the correction to corporation tax data – that also raise borrowing. Following these revisions, it now seems likely that borrowing will exceed the OBR’s restated March forecast for 2019-20.

John Hawksworth, PwC chief economist, said: ‘We will have to wait for the Budget planned for later this year for revised OBR forecasts and a full set of government fiscal plans to add to the Spending Round announcements made by the Chancellor earlier this month.

‘But, based on the new and revised data published today, it does look quite likely that the budget deficit in 2020/21 could exceed the 2% of GDP target set by the previous Chancellor, even assuming a no-deal Brexit can be avoided.’

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