There is less than meets the eye to Rishi Sunak’s spending review: the UK chancellor’s statement to parliament offered few big changes to the budget trajectory the country was already on beyond additional short-term spending on the pandemic. Even so, the event was instructive — including outside the UK — for how it chose to approach the dilemmas Covid-19 has thrust upon every government.

As my colleague Chris Giles sets out, the economic outlook is gruesome, with the economy in the deepest recession for 300 years. There is red ink as far as the eye can see: public borrowing is set to hit £394bn. The UK is among the worst performers in Europe for both growth and the public finances, but the challenges are similar in other countries. Everywhere, governments are having to spend a lot of money on immediate health and economic emergency. But beyond this, politicians and policymakers face three big questions.

Here is what the UK spending review reveals about how its government answers them.

The first is whether to worry about the public finances. The instinct to do so is understandable: the deficit this year will be bigger than at any time since the second world war, and the debt-to-GDP ratio is now forecast to be about 30 per cent of GDP higher than expected before the pandemic. But this is not a good measure of whether public finances are sound. Look instead at the most interesting chart from the independent Office for Budget Responsibility (reproduced below), of government expenditure on debt interest as a share of revenues.

Even with the highest debt-to-GDP ratio in decades, the cost to the government of servicing that debt is the lowest since the war, and falling. So what need is there to make “tough choices” to put public finances on a sound footing? None — provided, at least, that today’s low interest rates are locked in and that debt does not keep rising forever. The first proviso is a matter of debt management (the UK government can borrow for 30 years at a 0.9 per cent rate), not budgeting. The second requires that when the economy is back at its long-term path — but not until then — the deficit is not too large. Today any signal of austerity is likely to delay the recovery by undermining confidence in its strength.

For most of his statement, the chancellor acquitted himself reasonably well on this account. His remarks on public finance sustainability were short and perfunctory: “High as these costs are, the costs of inaction would have been far higher. But this situation is clearly unsustainable over the medium term . . . And we have a responsibility, once the economy recovers, to return to a sustainable fiscal position.” He then moved on — but unfortunately came back to the false trope of a “fiscal emergency” requiring the “tough choice” of slashing British development aid by almost a third. This was a morally ugly act made worse by intellectual dishonesty.

While there is no fiscal emergency, there is clearly an economic emergency. The second big question is how to deal with it in the face of enormous uncertainty in the economy. As the independent forecasts of the UK economy showed, everything depends on the future path of the pandemic. The most important thing we do not know is how much permanent damage to economic activity it will cause, how much “scarring” it will leave behind. The OBR’s scenarios range from a zero to a 6 per cent long-term shortfall in GDP relative to what was expected before coronavirus.

But the government’s actions can act to make this uncertainty better or worse, because the amount of scarring depends in part on how deep and prolonged the temporary slump is. That is something policy can influence. That is why, as I argued a few weeks ago, Sunak was wrong to drop a full-fledged, multiyear spending review because of the uncertain outlook. More detailed, longer-term spending commitments are a way to provide certainty to the private sector and encourage the spending and investment on which a speedy recovery — and hence better public finances — rely. From a government that is voluntarily inflicting the additional uncertainty of a potential no-deal Brexit (see chart below), that is the least one could ask for.

Chart showing how a hard Brexit would add to UK economic woes

But it is not all bad. In some areas at least — importantly in some capital investment — the chancellor is committing to five-year spending programmes. These amount to slightly more than £40bn a year — about half of it for transport infrastructure — or about 40 per cent of total capital spending. This is no doubt helpful; this kind of predictability could usefully have been extended to other spending as well.

The third question is how to do what every country now claims it wants, to “build back better”. The UK government sticks to its vision of “levelling up”, which is indisputably a worthwhile one: Britain’s territorial inequalities are a serious economic and political disease. The best that can be said for this spending review is that it does not back away from the spending promises, especially on investment, that the government made in the March Budget. But there is not much more forthcoming (the government has actually shaved a little off previously planned spending totals from 2023 on).

Some new funding has been allocated to local projects in struggling areas — albeit with a centralised bidding structure that smacks awfully of feudal almsgiving and risks becoming far too politicised. It also risks being undermined by the indirect effects of other decisions. A pay freeze on some public sector employees may hit lower-income regions with a higher share of such jobs, and the silence on whether a temporary boost to universal credit will expire disproportionately threatens incomes in the “red wall” areas the Conservatives won from Labour in December.

All in all, it is a puzzling situation. The chancellor has delivered a budgetary update that spends without restraint on the coronavirus emergency itself but does not see the pandemic as either a reason or an opportunity to change the medium-term budgetary strategy. On the other hand, this absence of new ambitions comes against the base of a pre-pandemic economic plan that was already the most ambitious from a UK government in decades. But if disruptions as big as this year’s do not make you deeply rethink your strategy, what would? The verdict surely has to be “could do better”.

Other readables

  • Norway’s trillion-dollar man has lunch with the FT: I interviewed Yngve Slyngstad who recently stepped down after heading the Norwegian sovereign wealth fund for 13 years.

  • In my column this week, I argue that European countries should stand firm against Hungary and Poland’s veto of the EU budget.

  • For the introduction to our Future of Cities report, I discovered that many city leaders found that the right response to the pandemic had been to strengthen what they were already trying to do. Have a look at the whole report.

Numbers news

  • The technological step change the pandemic is imposing on our economies is creating new jobs — but disproportionately for men, thus increasing gender inequality. My colleague Valentina Romei looks at the numbers.

  • Investors keep lapping up the new EU bonds. In the third bond issuance for the EU’s SURE programme of common borrowing to finance short-term work schemes in member states, the European Commission borrowed €8.5bn for 15 years at an annual interest rate of minus 0.1 per cent, or just a quarter of a percentage point more than Germany.

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