Not since the second world war has a UK chancellor confronted parliament with a hit to public finances and growth on such a scale. Rishi Sunak’s spending review showed the extent to which coronavirus has pushed Britain on to a quasi-wartime footing, with large-scale state support for the economy in the face of a common threat. The result is wartime-sized debt. Now is not the time to start trying to stabilise borrowing. But it was worrying that Mr Sunak made little reference to how this might eventually be achieved.
Forecasts from the Office for Budget Responsibility made clear the economic damage. The predicted 11.3 per cent fall in national income is the steepest for three centuries. The estimated £280bn spending on fighting the pandemic will push total borrowing this year close to £400bn, or about 19 per cent of national income — just below rates last seen during the war.
Yet the statement was an implicit indictment, too, of the government’s handling of the pandemic. The scale of borrowing puts the UK among the countries that have spent most on coronavirus response. This spending has not delivered superior health or economic outcomes to those of European partners; only Spain’s economy is forecast to shrink by more than Britain’s this year.
The uncertainty over the outlook provides at least some grounds for hope. The OBR’s central assumption is that the economy will be 3 per cent smaller by 2025 than without coronavirus, but an optimistic scenario foresees no permanent scarring. The UK’s comparatively generous furlough scheme means the public, overall, have amassed sizeable savings during the crisis; these may fuel a sharper-than-expected recovery when restrictions are lifted. But the central forecast on scarring must be the basis for working out what is ultimately needed to repair public finances. And a no deal Brexit, not factored into the forecasts, would mean an even deeper fiscal hole.
The review had important positives. The focus on recovery and keeping unemployment down was the right one. Confirmation of an infrastructure bank to co-invest in projects to improve productivity and reduce carbon emissions was welcome. Getting the long-term unemployed back to work is a laudable aim, even if it may depend more on the general state of the economy than the £3bn assigned to the Restart Scheme.
The chancellor signalled no new support, however, for 3m self-employed and small business owners who are not covered by income protection schemes. Freezing pay for public-sector workers outside the NHS seems to conflict — given higher proportions of public employees in deprived areas — with the government’s “levelling up” agenda. A tokenistic £4bn community improvement fund is little consolation.
The cut to overseas aid is particularly regrettable. The recession would already reduce such spending, set as a percentage of national income; lowering the percentage amounts to a double-cut. Britain’s exit from the EU means it must make the most of its soft power resources, and aid is an area where it is among the best in class.
Mr Sunak also failed to prepare the public — and his party — for the long-term need for unpopular tax rises to repair public finances. The current unsustainable stance would need fixing, he warned, “once the economy has recovered”. This was, however, the sole recognition that, although debt servicing costs are low, there will remain around a £50bn hole in spending. Though the pandemic is not over, discussion should begin sooner rather than later of how that hole will finally be filled.
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