The impact of the Free School Meal Voucher Scheme on inter-temporal sustainability and sustainable deficit.

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by Justyna Lada

Introduction:
 
 
 
Fiscal concepts:

Intertemporal budget constraint requires for the present value of debt to be lower than discounted future revenues calculated at the NPV (Baglioni, Cherubini, 1993). It is a measure used to define the sustainability of debt. Not having enough revenue in the future to cover the present debt can lead to debt default (as per example of Greece back in 2015), resulting in loss of access to borrowing and inevitable shrinking of the economy as the government struggles to support the future growth.

The sustainable deficit looks at the relationship of debt as a percentage of GDP. Through adjusting the rate of growth (G) by deducting the interest rate (and inflation rate) (r) and multiplying by the proportion of debt (D) to GDP, we calculate the level of deficit that can occur before the level of debt would need to be increased to maintain the D/GDP proportion (Mear, 2020). This results in the below formulae:

(G-r) x (D/GDP)

 2013-2017 Debt and Deficit Sustainability

 The trends have been analysed based on the 5-year period between 2013-2017 (Appendix 1). Main findings of the analysis include:

  1. Economy and debt:
  • economy growth slowing down year-on-year (decreasing rate of growth)
  • increasing nominal debt year-on-year
  • debt sustainability – although debt/GDP level (85.2%) exceeds the Maastricht threshold of 60% and has a growing tendency which may suggest the unsustainable path (IMF, 2020), the Article IV (IMF, 2018) suggests that debt vulnerability profiles are low. The sustainability of debt will be highly affected if external shocks occur, thus impacting the rate of growth (GDP).
  1. Sustainability of deficit:
  • closing the gap between sustainable deficit % level and actual deficit % between 2013-2016
  • actual deficit became sustainable in 2017 mitigating the risk of debt default (Appendix 2).

Current Position

Latest Article IV Surveillance report (2018) indicates that the countries sustainable deficit level stands at 3% with a level of debt to GDP being 85.2% (Appendix 3). In current pandemic (external shock), both levels of debt and sustainable deficit have changed. With the shrinking of the market (negative 9.8% rate of growth) (IMF, 2020) a 10.11% surplus is required (Appendix 4) to maintain current levels of debt to GDP – 100.8% (gov.uk, 2020). All of governments income will be used to cover the current levels of debt.

 National Free School Meal Voucher Scheme and Covid Winter Grant Scheme

 

  1. Background

In response to Covid-19, on 31/03/2020, government introduced the Free School Meal Voucher (temporary) Scheme to ensure that children eligible for free school meals are receiving meals despite school closures, and where schools are not providing the meals for collection or delivery.

The school meal voucher value (£15) per child was exceeding the costs of meal subsidise provided to the schools (£11.50/child) (National Audit Office, 2020) to recognise the difference in cost of providing the meal when bulk buying versus provided at retail price by parents (Gov.uk, 2020). The scheme has been extended into school holidays to cover Easter and Summer Holidays 2020 following public demand (BBC, 2020) and has incurred a total estimated (adjusted) cost of £384m for voucher codes issued by supplier. The policy was replaced in November 2020 by Covid Winter Grant Scheme, which extends government support in providing meals to disadvantaged children, up to March 2021 at a cost of £170m. The funding will be provided to the local authorities to distribute as appropriate reverting back to schools providing meals for eligible children in term time only (Gov.uk,2020).

  1. Impact on inter-temporal sustainability and sustainable deficit.

Both policies have an unsignificant impact (below 1% each) on the total welfare spending forecasted by OBR (2020) at £246.2 billion in fiscal year 2020-21 (Appendix 4).

  • Intertemporal impact – the policy does not have an impact on future growth of the economy or levels of revenue as the Debt/GDP levels remain constant at 109.9% regardless of the policy change. The policies are a temporary measure in response to external shock, supporting the families on the lowest income levels, but being insignificant in terms of % of total welfare spend or total expenditure. The replacement of Free School Meal Voucher Scheme by Winter Grant Scheme improves the fiscal space through reducing the expenditure by £214m.
  • Deficit impact – the expenditure increases the welfare spend, therefore increasing the amount of surplus needed to sustain the levels of sustainable surplus considering increasing levels of Debt. The value of the spend is unsignificant on its own and thus does not affect the sustainable deficit %.

Table below provides an overview of spend as per OBR (2020) predictions, showing the impact of both policies as additional spend assuming constant nominal GDP, revenue, and interest.

 

 

OBR Forecast*

Free School Meal Voucher Scheme

Winter Grant Scheme

In billion unless otherwise stated

Policy Cost (p)

–

0.384

0.170

Nominal GDP

2069

2069

2069

Government Revenue (a)

771

771

771

Primary Expenditure with relevant Policy (b+p)

1164.6

1165

1164.7

Primary Deficit (a-(b+p))

-393.6

-394

-393.7

Interest (c)

-28.1

-28.1

-28.1

Total Deficit (a-b+p+c)

-421.7

-422.1

-421.8

Public Debt + Cost of Policy (p)

2274

2274.38

2274.17

Primary Deficit/GDP (%)

19

19

19

Debt/GDP (%)

109.9

109.9

109.9

 

*Note: OBR Forecast figures include the expenditure on Free School Meal Voucher Scheme and Winter Grant Scheme. The table is purely informative to highlight the impact of both policies on deficit and debt levels.

 

Cautionary Notes

  1. Main criticism of introduction of both Policies:
  • Responsibility of parents – there is an argument amongst MP’s that it should be parents’ responsibility to feed their children, not the governments (Catt, 2020; Elgot and Walker, 2020).
  1. Main criticism of withdrawal of both Policies:
  • Short-termism of the policies – the demand for government support to provide free school meals outside of term time is high following Mr Rashford’s successful campaign in June 2020 (Lawrie, 2020). An open critique of the lack of government support for the families living in poverty has been voiced again by public figures and organisations after the withdrawal of Free School Voucher Scheme (Siddique, 2020). Support for the continuity of meal provisions for children extends to wider organisations, i.e., Save the Children UK (2020) charity supports the Winter Grant Scheme and other provisions that have been put in place, but already voices concerns over the lack of future continuity of the support.
  • Increase in other welfare measures as a sufficient measure of support– in March 2020, an announcement has been made on the temporary increase in Universal Credit and Working Tax Credit by £20/week each at a total cost of £6.1m (OBR, 2020). This could be argued as a sufficient increase in the government support to allow for the withdrawal of the policies, the counterargument being that increase in this welfare spends are temporary and subject to being withdrawn in April (Sandhu, 2020).
  • Issue of hunger in UN Sustainable Development Goals context – the free school meals being aimed at financially disadvantaged children are fulfilling basic rights to a nutritious meal under SDG’s 2 (United Nations, 2020). It can be argued that discontinuation of the policy undermines the basic human rights of access to food.
  • Reduced funding – reduction of funding through movement from Free School Meal Voucher Scheme to Winter Grant Scheme is putting additional strain on the local governments responsible for distribution of the funds considering increasing demand for Free School Meals and means tested benefits (OBR, 2020).

 

Appendix

Appendix 1

 

 

2013

2014

2015

2016

2017

Source

IMF (2017)

IMF (2018)

Growth (%)

2.1

2.9

2.3

1.8

1.7

Interest Rates (%)

2.4

2.6

1.9

1.3

1.2

Inflation (%)

2.0

1.0

0.1

1.2

3.0

Debt/GDP(%)

78.2

80.2

82.6

82.3

85.2

Calculation

2.1-(2.4-2.0)x78.2

2.9-(2.6-1)x80.2

2.3-(1.9-0.1)x82.6

1.8-(1.3-1.2)x82.3

1.7-(1.2-3.0)x85.2

Sustainable deficit (%)

1.33

1.04

0.41

1.40

2.98

Source

OBR (2020)

Actual Deficit/GDP (%)

5.3

4.2

3.2

2.5

0.7

Source

Gov.uk (2020)

Debt Levels (£b)

1,424.20

1,520.90

1,602.60

1,650.90

1,719.60

 

Appendix 2

Free School Voucher Scheme as a % of total welfare spend:

384,000,000 / 246,200,000,000 = 0.16%

Covid Winter Grant Scheme as a % of total welfare spend:

170,000,000 / 246,200,000,000 = 0.07%

 

Appendix 3

(G-r) x (D/GDP)  

2017:

G=1.7%

R=(1.2%-3% inflation)=-1.8%

D/GDP = 85.3%

1.7- – 1.8×85.3 = 2.98%

(IMF, 2020)

 

Appendix 4

2020:

G= -9.8 (IMF,2020)

R= 0.2(Bloomberg, 2020) – 0.8 (IMF, 2020) = -0.6

D/GDP = 109.9% (OBR, 2020)

-9.8- – 0.6×109.9% = – 10.11%

 

References:

About Justyna Lada

My name is Justyna Lada. I am an Accounting and Finance Final Year Mature Student with one year placement experience and a mum of three. My journey to university was long and rocky. And so was my love for Finance. It all started with an Accounting for Dummies book picked up from the Library, through Bookkeeping course, to applying to the University. I do not come from an accounting background, and neither does anybody in my family full of teachers, environmentalist and admin workers. My passions lay with managing the public spending and business partnering as a means to better corporate finance.