Rishi Sunak accepted the public finances were not sustainable and warned of tough decisions to come © via REUTERS

Be the first to know about every new Coronavirus story

Rishi Sunak has warned that Britain faces a gruelling haul out of the Covid-19 crisis against a backdrop of soaring borrowing, rising unemployment and uncertainty over Brexit. “Our economic emergency has only just begun,” he said.

The chancellor revealed in his spending review that the coronavirus pandemic would raise government borrowing this year to a peacetime record of £394bn, while 2.6m people, or 7.5 per cent, could be out of work by the second quarter of 2021.

The government’s independent forecaster said the virus was responsible for an 11.3 per cent contraction in the UK economy, the steepest for more than 300 years. It added that output would take a further large hit if ministers fail to negotiate a free trade agreement with the EU before the end of the year.

With Brexit talks bogged down, the Office for Budget Responsibility predicted that reverting to World Trade Organisation terms for trade in the new year would reduce gross domestic product by a further 2 per cent at the start of 2021.

Sectors such as manufacturing and financial services, which trade extensively with Europe, would feel the most pain, the OBR said. Mr Sunak has tried to play down the damage that might be caused by a “no-deal” Brexit.

Although the economy is expected to recover from the pandemic over the next four years, a borrowing hole of about £30bn a year will remain by the time of the next election, the OBR said.

Mr Sunak accepted the public finances were not sustainable and warned of tough decisions to come. “This situation is clearly unsustainable over the medium term,” he said, adding that he had a responsibility to rectify the problem.

Making a start on the retrenchment, the chancellor cut the government’s spending plans from 2021-22 onward by more than £10bn a year, compared to plans he laid out in March before the pandemic hit.

But even with these cuts, Paul Johnson, director of the Institute for Fiscal Studies, warned that the chancellor would struggle to keep public spending down because he is under pressure on multiple fronts. “We are in for a pretty austere few years once again, or for some significant tax rises,” he said.

Part of the spending cuts imposed by Mr Sunak came from a freeze in public sector pay increases, which the chancellor said would be “paused” for one year. However, there would be rises for 2m state workers on below-average pay and for more than 1m NHS workers.

Mr Sunak confirmed plans to cut overseas aid spending by £4bn, breaking a manifesto commitment and a legal obligation for Britain to spend 0.7 per cent of its national income on overseas aid.

Liz Sugg, sustainable development minister, quit in protest at Mr Sunak’s “temporary” plan to cut aid spending to 0.5 per cent of GDP, which will be backed up by a new law. David Cameron, former prime minister, said it was “a very sad moment”.

Mr Cameron added: “We’re breaking a promise to the poorest people and the poorest countries in the world — a promise that we made and a promise that we don’t have to break.”

Amid the bad news in the forecasts, Mr Sunak vowed to invest in schools and hospitals and to continue supporting business through the pandemic. He said that departmental spending would have risen an average 3.8 per cent in real terms over the two years between 2019 and 2021, the fastest rate in 15 years.

Mr Sunak also announced a new levelling-up fund worth £4bn from which councils will be able to bid for grants. He confirmed, too, that the Treasury would launch a new national infrastructure fund, which will in part replace the UK’s membership of the European Investment Bank once the Brexit transition period comes to an end.

Anneliese Dodds, Labour’s shadow chancellor, said the cut in state wages for firefighters, police officers and teachers would damage the economy. “This takes a sledgehammer to consumer confidence,” she said. “[Workers’] spending power is going down, so they will spend less in our small businesses and on our high streets.”

Get alerts on UK spending review when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article