6 things we learned from Rishi Sunak’s spending review

LONDON — U.K. Chancellor Rishi Sunak dished out more borrowed cash with one hand — but began the economic claw back with the other.

With a dire economic forecast and a need to support jobs and the state through the remainder of the coronavirus crisis, Sunak’s one-year departmental spending review Wednesday put off much, but not all, of the pain that will have to come as Britain recovers from the pandemic.

Meanwhile, he hinted at what his fiscal ideology might look like in future and managed to dodge the Brexit issue — although fiscal watchdogs did not.

Here are the six things you need to know:

1. Coronavirus is still king

A plan to set departmental budgets for the next year was always going to be dominated by the COVID crisis, following the biggest hit to the economy since the Second World War and with England still in a national lockdown.

Sunak announced a raft of spending to help the U.K. grapple with the virus in the coming year, amounting to £55 billion in total.

It included £18 billion for testing, personal protective equipment and vaccines; £3 billion to help the National Health Service cope with added pressures; more than £2 billion to keep transport routes running; more than £3 billion for local councils; and £250 million to help end rough sleeping. All in all, the U.K. will have spent around £300 billion grappling with COVID-19.

Sunak set the tone at the very start of his speech: “Our health emergency is not yet over. And our economic emergency has only just begun.”

2. The economic outlook is bad … like, really bad

The headline news from the spending review was the eye-watering economic forecasts Treasury watchdog the Office for Budget Responsibility published alongside Sunak’s announcements.

Gross Domestic Product (GDP) will contract to the tune of 11.3 percent in the wake of the pandemic, an off-the-scale hit which was worse than many had feared. The U.K. is on course to borrow £394 billion over the year, amounting to 19 percent of GDP — the highest level in peacetime.

Debt will rise each year of the forecast and hit almost 100 percent of GDP in 2025/26. Unemployment is forecast to rise to 7.5 percent next year, with 2.6 million more people out of work. Sunak announced a package worth more than £4 billion to help people find jobs over the coming years.

The chancellor pointed to his existing business and job support plans and said the costs of the pandemic were high but “the costs of inaction would have been far higher.” It is hard to imagine a much worse scenario however, with the U.K. taking the second worst GDP hit in Europe.

The opposition Labour Party pointed out that the U.K. was relatively slow to lock down in the first place then refused to implement a short circuit breaker lockdown to head off the second wave, meaning a longer lockdown later for a bigger economic hit.

The big question is what happens next. “This situation is clearly unsustainable over the medium term,” Sunak said. “We have a responsibility, once the economy recovers, to return to a sustainable fiscal position.”

3. The claw back begins

Sunak unveiled the first elements of a plan to repair the public finances. He froze public sector wages — except for people working in frontline health services and those who are paid less than the average annual wage of £24,000.

It means around 190,000 junior police officers, 50,000 fire service officers, 13,000 prison officers and around 700,000 teachers will see their pay frozen next year, according to Labour.

The other big saving was a cut to the overseas aid spending target, from 0.7 percent of GDP to 0.5 percent. Sunak said the cut would be temporary, but it is unclear when it might be reviewed.

The decision, which breaks a Conservative manifesto promise, has led to howls of outrage from senior Conservative figures, including former PM David Cameron, and will split opinion in the party. Some have long argued that the cash would be better spent on domestic priorities, while others take pride in the 0.7 percent target and are horrified by the change.

One Foreign Office minister, Liz Sugg, resigned in protest immediately, while the government came under fire from prominent public figures including the Archbishop of Canterbury Justin Welby. The move was, however, cheered by Nigel Farage.

Sunak also imposed a quiet trick of pushing tax rises onto local councils. “Local authorities will have extra flexibility for council tax,” he told the Commons, with the small print revealing local authority receipts are expected to rise by £1 billion a year.

“The chancellor’s response contains a one-billion-pound council tax bombshell buried in the small print that will hit families up and down the country,” said Shadow Chief Secretary to the Treasury Bridget Phillipson.

4. Sunak is still splashing the cash

There was still a hell of a lot of public spending in the U.K. chancellor’s announcement. Sunak said extra cash promised for health, schools and the police would be honored, while a week ago Boris Johnson announced a big boost in defense funding.

But the big spending plans might not be quite what they seem. “We actually see quite big cuts to public spending over the next few years relative to what was planned back in March,” Institute for Fiscal Studies boss Paul Johnson told the BBC.

Meanwhile, Boris Johnson’s love of building things continues to blossom, with £100 billion earmarked for capital spending next year, up from £27 billion in real terms the previous year. The plans include spending on housing, broadband, roads, mobile internet and more. However, one big proposal — a train line for London known as Crossrail 2 — has been halted, the government announced.

Sunak also pulled an infrastructure rabbit out of the hat: A new “leveling-up” fund that could have been drawn up by former Chancellor George Osborne, a politician who loved a feel-good proposal delivered with a hefty dose of political spin.

The fund is a £4 billion pot that local areas can bid for a chunk of in order to pay for local projects. It’s a dollop of Johnsonian optimism, despite the looming clouds of economic suffering to come. But Labour warned the cash could be diverted to Conservative constituencies to please local voters, something the government denies.

5. A hint at Rishinomics

Sunak made clear that, despite the economic pain to come, he expects the spending review to be his final big intervention while the nation remains in the throes of the pandemic. He pointed to hopes that Britain is “finally entering the final stages of our fight against coronavirus.”

It means Treasury-watchers will now turn their attention to the next big fiscal event — the budget in March 2021 — and begin speculating about what Sunak in “normal times” looks like. Some will even look for signs of a future prime minister’s priorities.

Sunak offered a glimpse of his ideological bent in a sweeping section at the end of his Commons address. He said spending announcements alone “will ring hollow” because wads of cash cannot “create a better nation.”

“We in government can set the direction: better schools, more homes, stronger defense, safer streets, green energy, technological development, improved rail, enhanced roads — all investments that will create jobs and give every person in this country the chance to meet their potential,” he said. “But it is the individual, the family, and the community that must become stronger, healthier and happier as a result. This is the true measure of our success.”

He added: “The spending announced today is secondary to the courage, wisdom, kindness and creativity it unleashes. These are the incalculable but essential parts of our future, and they cannot be mandated or distributed by government.”

The comments point to a small-state, Thatcherite vision of individuals taking charge of their own lives while the government does its best to get out of the way — meat and drink to the Conservative MPs and members Sunak’s future leadership prospects hang on.

6. Brexit, what Brexit?

Brexit was notable only by its absence in Sunak’s statement, despite being the other issue coming down the road that could have a massive impact on the U.K. economy.

The pro-Brexit chancellor is said to think the forecasts are too uncertain to make a prediction about how Britain’s departure from the EU could impact the fiscal outlook. Even when the opposition Labour Party pulled him up on his Brexit silence, he failed to address the point.

But it was no small oversight, as the Office for Budget Responsibility made clear. The independent watchdog said a trade deal with the EU would mean a long-run hit to GDP of 4 percent compared with remaining in the bloc. If there is no deal, Britain’s economy will take a 2 percent hit at first, requiring £10 billion extra in borrowing, and 1.5 percent in 2025. The Brexit pain will, the OBR said, largely hit different parts of the economy compared with the pandemic and in the long run be roughly equivalent to the coronavirus hit.

The current state of the public finances, of course, makes the OBR’s Brexit sums seem like a rounding error. Sunak’s refusal to even mention Brexit, however, suggests the government wants to keep the spotlight well away from ongoing trade negotiations with the EU.

There were pockets of Brexit cash tucked into the small print, however. There is a £60 million fund to “strengthen diplomatic relations” with the bloc, cash for the new immigration system and millions to replace EU structural funds, as well as a new domestic investment bank to replace the EU version.

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