Message from the Director of Public Sector

Thank you for your membership in 2023, we value your continued engagement and trust you have found being a member worthwhile.

Last year was another challenging year for a plethora of reasons, in the UK, the cost-of-living crisis really took a hold and with interest rates at a 15-year high, there was and is continued pressure on businesses and households alike. Yet whilst in the UK we faced political and economic turmoil, internationally we have seen geopolitical unrest and 2023 is likely to go down as the hottest year ever recorded as extreme weather events continue to cause devastation around the globe.

There is some sense of economic optimism for 2024 as inflation is now reducing, relieving some of the pressures on households as salary increases start to outweigh inflation (a real rise). There is also an increased expectation that the Bank of England will reduce interest rates sooner which has already fed through to lower fixed rate mortgage loans. However, the increased interest rates will still be a shock to the 1.5m households whose fixed rate mortgage ends in 2024. Indeed, higher taxes and interest costs are likely to act as a handbrake as the economy attempts to find first gear after largely flatlining in 2023. There is also the matter of elections taking place globally, with key elections in the UK, US and India to name a few, marking 2024 as a major year of change (and uncertainty).

We are pleased to welcome you back as public sector community members in 2024 as we use our content to help you successfully navigate public sector financial reporting, fiscal and audit challenges. Below is a reminder of the key outcomes from 2023:

Last year this section started off by saying that local government financial reporting and audit environment looked unhealthy with only 12% of audited 2021-22 financial statements being published by the 30 November deadline. Forward one year and only 1% of local government bodies (five out of 467) had submitted their audit opinions for their 2022-23 by the required deadline. The current year backlog joins 456 outstanding opinions from previous years to form a grand total of 918 outstanding audited financial reports. Clearly something urgent should have and now needs to be done.

In 2023, ICAEW published a vision for local audit on how to bring confidence to the finances of local public bodies. Our vision makes the case for better financial reporting, high quality and more timely audits, stronger financial management and governance, and a thriving profession that is highly valued. But what are the solutions? Listen to our podcast on solutions to the current crisis with Meg Hillier MP, Chair of the Public Accounts Committee and Cllr Jamie Jamieson, previous Chair of the LGA.

We continue to work with a wide variety of stakeholders to find solutions including with Lee Rowley MP, former Minister for Local Government and Neil Harris, Director for Local Audit at the FRC. One of our successful outcomes was to encourage the House of Commons' Levelling up, Housing and Communities Committee to launch an inquiry into the purpose of local authority reporting and audit. The final report picked up many of the points we made in our vision and ICAEW followed up with a press release highlighting the importance of having audited financial statements for accountability, governance and effective financial management.

The utility of financial statements in central and local government was the key theme for the 2023 ICAEW Public Sector Conference, in particular how to make accounts more understandable and decision useful for the relevant stakeholders. For this year's conference we are considering exploring the role of AI in the public sector finance profession.

As our analysis of monthly inflation movements shows, 2023 continued the trend of upward inflation, only declining in the final quarter of the year.

Inflation is putting pressure on the public finances, with total managed expenditure continuing to be more than tax and other receipts resulting in a record deficit of £2.6trn in October 2023 or 97.8% of GDP. We reported on these figures in some detail comparing key financial metrics over the last five years. These show, for example, that interest costs have doubled from £26bn in October 2020 to £76bn in October 2023. Many of our stream of Insights this year has been on the state of the public finances and our regular charts of the week have covered a range of economic and fiscal topics across the year too.

The Autumn Statement was the Chancellor's attempt to inject some growth into the UK's economy which has been largely flat during 2023. One key announcement was that the super-deduction of 100% on capital allowances introduced in May 2021 will now be made permanent as part of a package of 110 measures to stimulate business growth and investment.

The public sector has a huge role to play in tackling climate change. Its primary role is to ensure that policies, regulation and legislation start to shift human behaviour to make climate and nature positive choices, both in business and private households.

In the UK, the Government is following the private sector in adopting the TCFD framework. You can watch this webinar from July 2023 when the Treasury introduced the model itself and the BBC outlined some of the challenges they experienced in adopting sustainability reporting.

Internationally, the IPSASB (International Public Sector Accounting Standards Board) is forging ahead with its sustainability agenda. We have been very supportive of the IPSASB combining GRI and ISSB guidance to ensure wider stakeholders are considered when formulating their climate reporting standard. IPSASB are near to issuing their natural resources financial reporting standard and it will be interesting to see the linkages to the non-financial reporting disclosures over the coming years.

The economic outlook is not looking very positive for 2024 and spending pressures, including the cost-of-living crisis will unfortunately persist as high inflation combines with frozen tax thresholds.

Public finances will remain under strain as inflation drives up the costs of providing services, and interest payments take an ever-increasing proportion of spend. According to the statistical figures in the latest WGA accounts, debt interest is in roughly the same magnitude as spend on defence or transport (WGA 2020-21, p.78). There is very little room for any tax cuts, but anything could happen in an election year. We have consistently been calling for sustainable public finances and any unfunded tax cuts could undermine confidence in UK fiscal policy and re-ignite the market volatility we saw in the brief Truss administration.

We will work with all key stakeholders to help make progress in local government financial reporting and auditing. We are also enthusiastic about encouraging greater use and understanding of public sector financial reports and will continue to get a better understanding of who the users are and what barriers are in place that prevent better use of financial data, be it for internal decision making or for external reporting purposes.

Another key topic for us is climate and sustainability reporting. We will be discussing this issue with HM Treasury and other key stakeholders and will share the latest updates with you throughout 2024. We will also take a look at the practical steps local governments can take in reporting on climate given the capacity constraints currently being experienced by their finance teams.

It leaves me now to say many thanks again for supporting our public sector community. We hope you will find our content helpful and supportive. If you have any topics you think we should cover, please contact us at: communities@icaew.com

With best wishes,

Alison Ring OBE FCA