Sunak continues the spending spree but warns of difficult decisions to come

“Our health emergency is not yet over, and our economic emergency has only just begun,” said Chancellor Rishi Sunak as he began his Spending Review today. It set the tone for what was a sobering statement to the country.

First came the grim economic and debt forecasts by the Office for Budget Responsibility. The economy is expected to contract in this financial year by 11.3 per cent, the largest fall in output for more than 300 years, followed by a multi-year recovery as restrictions ease, according to the OBR. Growth is forecast to be 5.5 per cent in 2021, 6.6 per cent in 2022, then 2.3, 1.7 and 1.8 per cent respectively in the following years.

“Even with growth returning, our economic output is not expected to return to pre-crisis levels until the fourth quarter of 2022,” Sunak added. “And the economic damage is likely to be lasting. Long term scarring means that in 2025, the economy will be around 3 per cent smaller than expected in the March budget.”

The debt forecasts didn’t provide any more comfort either, with the UK expected to borrow a total of £394bn this year – amounting to around 19 per cent of GDP – making it the highest level of recorded borrowing in Britain’s peacetime history. Borrowing is then forecast to fall to £164bn in 2021, £105bn in 2022-23, then will remain at the elevated level of around £100bn –or four per cent of GDP – for the remainder of the forecast (up to 2025-26).

Underlying debt is expected to be 91.9 per cent of GDP this year and, due to elevated borrowing levels and a persistent budget deficit, it is forecast to continue to rise every year. In 2025-26, it is expected to reach 97.5 per cent of GDP.

“This situation is clearly unsustainable over the medium term,” Sunak said. “We could only act in the way we have because we came into this crisis with strong public finances, and we have a responsibility, once the economy recovers, to return to a sustainable fiscal position.”

Amid this difficult debt situation, OBR also expects unemployment to rise to a peak of 7.5 per cent – meaning around 2.6 million people – in the second quarter of 2021. It is then forecast to fall every year, reaching 4.4 per cent by the end of 2024.

Despite this dismal economic outlook, however, there will still be billions more spent on the coronavirus response in the immediate future, as Sunak made clear that he is not prepared to deflate the Covid lifeboat. Sunak announced £55bn in extra funds for Test and Trace and the NHS, subsidies for rail networks, support to local councils, and efforts to end rough sleeping as well as £3bn for the Department of Work and Pensions to help over a million unemployed people find new jobs.

There will also be an historic boost to government departments, with total departmental spending rising to £540bn next year. Day to day departmental spending will rise, in real terms, by 3.8 per cent, the fastest growth rate in 15 years. The extra money will go towards fulfilling the Prime Minister’s general election promises – 50,000 more nurses, 40 new hospitals, rebuilding 500 schools, and so on.

The “levelling-up agenda” will also be attended to. A new National Infrastructure Bank, headquartered in the North of England, will work with the private sector to finance major investment projects across the UK from spring 2021, with the expectation that it will produce more than £100bn in extra capital investment.

Additionally, local areas will be able to bid directly for support from a new £4bn Levelling Up Fund to finance local projects to be delivered within the next four years – the delivery deadline coinciding conveniently with the next general election.

On the areas where government savings can be made, Sunak highlighted public sector pay, which, he announced, will be frozen next year. Justifying the move, Sunak noted that “in the six months to September, private sector wages fell by nearly 1 per cent compared to last year,” adding: “Over the same period, public sector wages rose by nearly 4 per cent, and unlike workers in the private sector, who have lost jobs, been furloughed, seen wages cut and hours reduced, the public sector has not.”

There will be some respite, however, for NHS workers and those in the public sector who earn below the median wage of £24,000. Both groups will receive a pay rise. The planned increase to the National Living Wage will also go ahead, increasing to £8.91 an hour. “Compared to 2016, when the policy was first introduced, that’s a pay rise of over £4,000,” Sunak said.

Overseas aid is the second area targeted for savings. The commitment to spend 0.7 per cent of GDP on aiding other countries “is difficult to justify to the British people, especially when we’re seeing the highest peacetime levels of borrowing on record,” Sunak said. “I have listened with great respect to those who have argued passionately to retain this target, but at a time of unprecedented crisis, government must make tough choices.”

Next year, the government will spend 0.5 per cent of GDP on international aid, a £4bn reduction from the original 0.7 per cent commitment. Sunak emphasised that his intention is to return to 0.7 per cent “when the fiscal situation allows”, but no specific time-frame was given. Many are sceptical, given polls showing public support for reducing overseas aid, that the budget will ever return to its former scale.

Despite the reduction in the budget, the UK will remain the second highest aid donor in the G7 and Sunak emphasised the government’s increased spending on the UK’s diplomatic network.

The bigger picture is this: the Chancellor, an avowed fiscal conservative who once said that public spending should not exceed 37 per cent of GDP, now presides over an economy in which government spending has nearly doubled that threshold. Today, he has had to continue pumping billions into Covid efforts in the immediate term and billions more to meet the Prime Minister’s election spending promises, but soon his only priority will be to bring borrowing under control – and that means more painful and likely unpopular decisions.

Sunak, who rose to political stardom on the back of the generous furlough scheme, may soon become synonymous with spending cuts. That will have consequences not only for the nature of this government, but also for the Chancellor’s personal ambitions.