An ‘economic emergency’ caused by the global pandemic has only just begun in the UK according to chancellor Rishi Sunak, as he warned the Covid-19 would cause lasting damage to both jobs and growth. Yesterday he set out his spending review detailing how much would be spent, warning that the economy faces permanent scarring as he set a course to hit a peacetime borrowing record of nearly £400 billion. That’s equivalent to 19% of GDP, again the highest ever in peacetime. In the biggest fall in 300 years, the Office for Budget Responsibility said that the economy would be over 11% smaller as a result of the pandemic, and although it predicted strong growth over the next couple of years, the economy will still be 3% smaller in 2025. Output not expected to return to pre-crisis levels until 2022.
Sunak stated that the immediate priority was too ‘protect people’s lives and livelihoods’ and to this end he did not cut corners. Unemployment is on course to reach over 2.5 million by mid-2021, Sunak allocated GBP3bn to help the long-term jobless find work plus announced a GBP4bn ‘levelling-up fund’ for local projects in parts of the country with the greatest need. The NHS, schools, social care, the railways, defence, the prison service will all be given bigger budgets. Although the Chancellor said he ‘cannot justify a significant, across the board’ public sector pay rise, more than one million nurses, doctors and others working in the NHS will get a rise to reward them for their work throughout the pandemic. Another 2.1 million public sector workers earning less than £24,000 will receive at least £250 extra a year. In total departmental budgets will rise to GBP540bn with day-to-day spending climbing by nearly GBP15bn.
It did not stop there. He confirmed a new National Infrastructure Strategy that will invest GBP600bn over the next five years and GBP100bn next year, a GBP27bn year-on-year increase in real terms. There was over GBP7bn for a national homebuilding fund, 5 million premises will get faster broadband, the biggest ever investment in new roads was announced plus money for the Prime Minister's green agenda. To round off he announced a new National Infrastructure Bank. This will be based in the North of England and will support investment to aid the levelling up and net zero targets. It will work with the private sector from spring next year to finance new projects.
However, this all must be paid for. Part will be clawed back by a cut in the UK’s aid budget from 0.7% to 0.5% of national income, but that is just scratching the surface. The new head of the Office for Budget Responsibility (OBR), Richard Hughes, highlighted that Sunak must find tens of billions of pounds by the middle of the decade just to cover day-to-day spending without borrowing, let alone other costs such as investment. He said ‘While the Chancellor's spending review has made a GBP10bn down payment on that adjustment (by trimming future non-Covid spending), a further GBP20bn to GBP30bn will be needed to meet the loosest conventional definition of balancing the books, and arrest the rise in the underlying debt-to-GDP ratio by the end of the forecast horizon’.