Spending review: Sunak navigates choppy waters
Chancellor Rishi Sunak presented a government spending review designed to reverse the UK's biggest economic decline for more than 300 years.
With the nation anxious about coronavirus and Brexit-related finances, the House of Commons was in a sombre mood as the Chancellor of the Exchequer read out the Office for Budget Responsibility (OBR) assessment of Covid-19’s impact on the country’s economy: an 11.3% contraction in GDP this year that will leave us 3% poorer in 2025 than expected.
The slump is likely to be accompanied by a rise in unemployment to 2.6m people over the same period.
Yet the downbeat forecast did not appear to inhibit Sunak’s menu for public spending, which included a £2.9bn Restart programme to help Britons who have been out of work for 12 months find jobs. Another £1.4bn was promised for the Jobcentre Plus network, which reversed Tory spending on employment exchanges over the past five years.
Sunak also promised increased departmental spending, with increases of £14.8bn spread across day-to-day on education, the NHS and policing.
To hark back to last year’s election promise to level up the north and south, the Chancellor invoked “once in a generation plans to deliver a once in a generation return for our country” in the shape of £100bn national infrastructure strategy that includes pledges for housing, green initiatives, broadband, 4G and the “biggest ever investment in new roads”.
No mention of tax
Spending reviews aren’t intended to tackle how the government is going to cover its spending commitments, but this Chancellor has surprised us several times already on that score. This time, however, Sunak kept any changes to fiscal policy close to its chest. Any major changes to tax policies or rates will be set aside until his the Budget scheduled for next spring.
Sunak skimmed over how he would fund his spending plans, apart from confirming that the UK’s borrowing will remain high at £394bn this year and easing down to around £100bn after 2023.
Several of his proposals confirmed what had already been leaked to the press during the past week. Some £5bn will be recouped by slashing the UK’s foreign aid budget from 0.7% of GDP to 0.5%, prompting condemnation from former Prime Ministers Tony Blair, Teresa May and John Majory, who called the decision “morally wrong”.
Meanwhile, the government will freeze pay rises for those working in the public sector (excluding NHS staff), basing the controversial decision on how public sector wages rose by nearly 4% this year, while private sector wages fell by 1%.
Shadow Chancellor Anneliese Dodds responded that the freeze “takes a sledgehammer to consumer confidence” as public service workers will know they have less money they have to spend on the high street.
Nimesh Shah, CEO at leading tax and advisory firm Blick Rothenberg, was thankful there was no mention of changes to taxes. “Businesses will breathe a huge sigh of relief that there was not even a suggestion from the Chancellor that tax increases are imminent after recent heightened speculation,” he said.
But for his colleague, Blick Rothenberg partner Richard Churchill, by not going ahead with an Autumn Budget to outline his plans more clearly the Chancellor “lost the opportunity to amend fiscal policy to encourage entrepreneurship and research and development”.
Anyone for Brexit?
The OBR, concluded in its summary of UK finances that “a ‘no deal’ Brexit could reduce real GDP by a further 2%, due to various temporary disruptions to cross-border trade and the knock-on impacts”.
Yet neither “Europe” nor “Brexit” were mentioned during the Chancellor’s spending review speech, even though the 12-month transition period could end without a trade deal between the UK and EU.
The omission was picked up by Dodds, who asked during her response to the spending review: “Does the Chancellor truly believe that his government is prepared and that he’s done enough to help those businesses that will be heavily affected?”