The Spending Review: Sobering economic news and ‘tough choices’

By Gareth Jones 

Today, the Chancellor, Rishi Sunak, set out the government’s spending review amid some stark and sobering figures on the state of the economy and public finances from the Office of Budget Responsibility (OBR). Declaring that “Our health emergency is not yet over and our economic emergency has only just begun”, Sunak stated that his spending plans would be focused on protecting people’s lives and livelihoods for the immediate future, while also taking steps to return to a “sustainable financial position” in the longer term to ensure strong public finances. 

The headline figures from OBR certainly point towards some difficult times ahead. The UK economy will contract this year by 11.3%, the largest fall in output for more than 300 years. The economy is expected to recover, following the successful rollout of vaccines and the easing of restrictions, with growth forecast to be at 5.5% next year, 6.6% in 2022, then 2.3%, 1.7% and 1.8% in the following years. The Chancellor did stress that the economic damage is likely to be lasting – and that by 2025, the economy will be around 3% smaller than previously expected in the March Budget. 

This would have significant impacts on day-to-day life, notably on unemployment, which is expected to rise to 2.6 million people in the middle of next year. The impact will also be felt strongly on public finances, which have already reached record levels of borrowing in peacetime history – at nearly £400 billion this year. Much of this additional borrowing was required for the various measures to get the country through coronavirus (eg health spending, furlough, support for self-employed, tax cuts) many of which will continue into next year.  

While the Spending Review was not the full three-year ‘Comprehensive Spending Reviews’ of previous parliaments, the Chancellor did use his announcement to show where his – and the government’s -- priorities lay. In the short term, day-to-day spending would increase by 3.8%, the defence budget will increase, and more money has been reserved to fulfil manifesto promises on prisons, hospitals, schools and police. In addition, the Chancellor announced a new £4bn ‘Levelling Up Fund’ for local infrastructure projects.

Despite all this additional spending, the Chancellor did take the opportunity to demonstrate he was making the ‘tough choices’ that would be needed in the years ahead. The first area was on public sector pay freeze – and while this contained some caveats (NHS workers and those earning less than £24,000), Sunak stressed that across-the-board pay increases could not be justified while so many in the private sector are facing difficulties. The second area, was the Chancellor’s decision to cut foreign aid spending, dropping the commitment of 0.7% of national income to be spent on overseas aid to a lower figure of 0.5%. 

It should be noted that the fiscal impact of these savings are relatively small – and certainly do not do much to address the huge borrowing sums and the widening deficit. These measures appear to be more of a political statement that, emphasising where the current government’s priorities lie – rather than a serious plan to address public finances at this stage. Indeed, a particular issue which will have a far greater impact on the economy and public finances – the UK’s post Brexit future and the issue of a trade deal – was completely absent from the Chancellor’s speech. 

At first glance, these choices look far from ‘tough’ for a Conservative Chancellor to make. Public sector workers and overseas aid recipients are not typically priorities for Conservative grassroots or their target swing voters – and identifying these areas for savings may even be seen as the easy choice for the ambitious Chancellor looking to cement his popularity within the Party. However, both decisions have the potential to cause problems for the government. Public sector workers – including those in the police, the military and elsewhere – will surely let their discontent be known in the months ahead, while the decision on foreign aid has prompted the resignation of a Foreign Office Minister, Baroness Sugg, and enraged many backbench Conservative MPs (including former Cabinet Ministers) who feel that such a move severely undermines the message of ‘Global Britain’ at precisely the wrong time.

For Sunak, these developments could just be the start and an indication of the backlash he could receive when the real tough choices – including tax rises and substantial spending cuts – are made in coming years.