The anticipated but much-leaked spending review from Chancellor Rishi Sunak on 25 November highlighted the difficult bind the UK economy is currently in, with Sunak tacitly acknowledging that the “economic emergency has only just begun”. While the majority of government spending has already been pre-determined, such as welfare, pensions and the debt interest burden, the remaining third of Sunak’s dwindling cash balance was expounded upon. This spending review is different in one notable way – usually they are much more forward looking affairs covering the government’s spending plans for three years or more. Except this year, the pandemic has reduced their visible horizon to a much shorter timeline – departmental budget spending announced in the review will only be in effect for the next year.
Despite being stuck in an ever increasing and ballooning budget deficit, tax hikes were not on the agenda, and quite rightly as they shouldn’t be – this is a spending review not a budget announcement and how we are all expected to pay for the cost of the pandemic response is kicked further into the long grass. Instead we saw freezes on certain areas of public sector pay – an acknowledgment of sorts to the private sector that in this tough economic environment, it would be politically unpopular to allow for any inflation adjusted increases for all public workers when private sector pay has collapsed. Instead nurses, doctors and others working in the NHS will be the only ones getting a justified pay rise (along with any public sector workers earning under GBP 24,000) but all others on the public front line will see pay frozen and a return for them to austerity. Predictably, we saw overseas aid being cut to 0.5% of national income – this spending has to be balanced somewhere and Sunak saw this as an obvious area and said it would only return to previous levels when the situation allows, so do not expect that anytime soon.
On the spending front, we saw money thrown at infrastructure (roads, broadband, rail and cycle lanes) along with the hoped-for associated jobs boost, in line with Prime Minister Boris Johnson’s message of ‘building back better’ and attempting to deliver on their election promise of ‘levelling up’ prosperity across the country. Also we saw a much justified increase for the NHS, being at the centre of the pandemic crisis with a GBP 3 billion package to support the health service in recovering from the pandemic.
The Office for Budget Responsibility (OBR) included their update on the outlook for the UK economy and the state of the public finances. The fall in GDP for this year was slightly upgraded from the 13% decline they had earlier in the year to an 11.3% decline, but this still represents the largest drop in growth we have witnessed outside wartime conditions (and the worst drop since the Great Frost of 1709). The UK economy is still not expected to recover to where it was pre-pandemic until the fourth quarter of 2022. The budget deficit will rise to a record GBP 394 billion, an eye watering level almost three times that seen in the darkest days of the 2007-08 financial crisis and Treasury debt issuance will have to continue to flood the bond markets and why not when borrowing costs are at record lows? A record GBP 490 billion is planned to be sold by the Debt Management Office for next year.
With just over a month left of the Brexit transition period (and still no hard agreement found), one would have thought that Sunak needed to make tough Brexit related spending decisions on the assumption that he does know exactly what the end state will be, even if we still don’t yet. HMRC, the Home Office, the Departments of the Environment and Food & Rural Affairs are all going to need a permanent funding boost with countless new staff required, but there wasn’t any mention of this in his speech, which was curious.
Overall, the outlook still looks very dark for the UK and one which the gilt and currency markets have already factored in as the spending review has hardly made an impact to each.