Challenges in Public Sector Finance: Income and Spending Gap

Understanding the Income and Spending Gap in Public Sector Finance

While December 2023 data showed a large deficit in public sector finance, January 2024’s figures are quite different. In this month, data revealed a surplus of £16.7bn. However, with tax receipts always higher in January than in other months, this snapshot does not represent a true picture of the public sector income and spending gap.

What is important is to look at where public sector funds are being spent to understand where the large spending gap visible during the rest of the year is coming from.

Causes of the Growing Financial Gap in the Public Sector

In June 2023, UK government debt overtook GDP after reaching £20bn in May: the first time this has happened since 1961. There are a number of reasons why borrowing is so high.

While tax receipts have increased on the whole, National Insurance and stamp duty receipts have fallen. This overall higher income, however, is not enough to support huge levels of Government spending – and the only solution is to borrow funds.

The central government’s total spend was £1.6bn higher in January 2024 than in January 2023. Compared with the previous year, net social benefit payments were £3.4bn higher, while spending on goods and services was £2.5bn higher

There are various reasons behind these increases – including inflation, as well as cost-of-living payments. 

Meanwhile, borrowing in the financial year to January 2024 was £3.1bn less than the same period the previous year – but still stood at an estimated £96.6bn. The forecast is for this figure to reach £123.9bn by the end of the financial year.

But what does this income and spending gap mean for public services – and the economy as a whole?

Impact on Public Services and the Economy

During the pandemic, the public sector finance deficit increased by the largest amount ever seen in peacetime. While plenty of public sector funding still exists, services like schools, the NHS, public health, the police force and local government are still operating under significant pressure. 

For our society to run properly we rely on these public services. Underinvestment could well increase things like deprivation and crime. However, increasing investment in these areas would further increase the income and spending gap, with negative consequences for the economy as a whole.

So, how can this financial gap be reduced?

Strategies for Managing Financial Challenges

There are various approaches that the government could take to address and reduce the gap in public sector finances.

In the past, the government has reduced the number of public sector staff and withheld pay rises in a bid to close the gap. Now, though – with staff shortages already problematic and strike action across various sectors, this simply isn’t a viable option.

Cutting funding levels for certain services – or even cutting some services altogether – would certainly reduce the finance gap. However, it could be counterproductive, increasing the pressure on other services as a result.

Other solutions, like investing in new software, equipment or technology, could well make a difference, but would require more money to be spent upfront – and it could be a while until any real difference is seen.

While there may be no current answer to how the government itself can reduce the public sector income and spending gap, there are things accountants can do to help. 

The Role of Accountants in Mitigating Financial Gaps

While it may seem like a struggle to do anything with so much government red tape involved in public sector finances, there are certainly ways in which accountants can help in managing public sector finances.

Using accounting software can help reduce manual data input – not only saving time and resources, but also reducing the risk of human error. Software can also make it easier to spot trends – whether seasonal or otherwise – to help with forward budget planning.

Accountants may also be able to use their understanding of an organisation’s finances to suggest and help implement new revenue sources. On the other side of things, a good accountant will also look at every aspect of an organisation’s spending to establish whether there are any economies that can be made, and whether there are any areas where spending can be reduced without impacting on performance or quality.

Public sector accountants have a big challenge on their hands. The good news is that they don’t need to go it alone.

Why Join QAccounting: Support for Public Sector Accountants

Wouldn’t it be handy if public sector accountants could find all the support, software and advice they needed, all included in one low-cost monthly subscription?

The good news? You can.

QAccounting offers a comprehensive online accounting solution, tailored to meet the needs of everyone from one-man bands to large public sector organisations. QAccounting clients benefit from their own dedicated Client Manager and support whenever they need it, as well as software subscriptions, payroll management and more.

With over 20 years of experience – and clients across all sectors – we’re passionate about helping organisations of all types to transform their finances. While much of the task of reducing the public sector income and spending gap is down to the government, there’s still plenty that accountants in this sector can do to play their part.

Get in touch to find out how we can help.