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Political Insider: Spending Review

Following the Chancellor of the Exchequer, Rishi Sunak, delivering the 2020 Spending Review alongside the details of the Office for Budget Responsibility’s latest economic and fiscal outlook in the House of Commons, MHP Public Affairs outline the key measures announced, alongside analysis from MHP  Adviser and former Vote Leave CEO Matthew Elliott.

Rishi Sunak began his statement by saying that the UK’s “health emergency is not yet over and our economic emergency has only just begun.” He added that the Government’s priority is to protect lives and livelihoods, through delivering stronger public services, new hospitals and better schools, as well as a once-in-a-generation investment in infrastructure.

The announcements made by the Chancellor were as follows:

COVID response: the Government is providing £280bn to support the country through the ongoing COVID-19 pandemic, with public services receiving £55bn

  • Next year £18bn will be spent on funding testing, PPE and vaccine programmes, while £3bn will be given to the NHS
  • Over £2bn is being provided to keep transport open, including through rail subsidies
  • Councils will be provided with over £3bn, and an additional £250m to end rough sleeping
  • Devolved administrations will be provided with £2.6bn

Office for Budget Responsibility economic forecasts: the economy will contract by 11.3% this year, the largest fall in output for more than 300 years

  • The economy is expected to grow by 5.5% next year, with a return to pre-crisis levels expected in the fourth quarter of 2022
  • The UK is forecast to borrow £394bn this year, equivalent to 19% of GDP
  • The UK’s underlying debt will be 91.9% of GDP this year, with this figure expected to reach 97.5% in 2025-2026
  • The OBR expects unemployment to peak in the second quarter of 2021, with 2.6m people expected to be unemployed. Sunak announced an additional £2.9bn would be made available next year through the Government’s Restart Scheme to support those who are unemployed
  • The OBR’s full economic and fiscal outlook can be found here

Public sector pay: with private sector wages falling by nearly 1% compared to last year while public sector wages rose by nearly 4%, Sunak stated that the Government would “target resources to those who need it the most” rather than at across the board pay rises

  • Over 1m nurses, doctors and others working in the NHS will receive a pay rise. However, there will be a pause in pay rises in the rest of the public sector next year
  • 2.1m public sector workers who earn less than the median wage of £24,000 will be guaranteed a pay rise of at least £250
  • The Government will accept a recommendation from the Low Pay Commission to increase the National Living Wage next year by 2.2%, to £8.91 an hour – extended to those aged 23 and over

Government departmental spending: in 2021 total departmental spending will be £540bn, and over this year and next departmental spending will rise in real terms by 3.8%

  • Through the Barnett formula, the Scottish Government will receive an additional £2.4bn in funding, the Welsh Government an additional £1.3bn and the Northern Ireland Executive an additional £900m
  • The Government pledges that total domestic UK-wide funding for the UK Shared Prosperity Fund will at least match EU receipts, on average reaching £1.5bn per year

Infrastructure investment: capital spending next year will total £100bn, £27bn more in real terms than last year

  • A new UK Infrastructure Bank will be headquartered in the north of England and will work with the private sector to finance major new investment projects across the UK, starting in Spring 2021
  • The full National Infrastructure Strategy can be found here

Levelling up: HM Treasury, the Department for Transport and the Ministry of Housing, Communities and Local Government will manage a new “levelling up” fund worth £4bn

  • Projects applying for the fund must be delivered within this Parliament and must command local support
  • The fund aims to fund “the infrastructure of everyday life”

Health: the core health budget will grow by £6.6bn, with capital investment increasing by £2.3bn to support long-term investment in the NHS

Education and skills: the schools budget will increase by £2.2bn in 2021-2022.

  • £291m will be made available to pay for more young people to go into further education
  • The Government has committed to rebuilding 500 schools over the next decade and will make £1.5bn available to rebuild colleges
  • The Government pledges £375m to deliver the Prime Minister’s Lifetime Skills Guarantee and extend traineeships, sector-based work academies and improve apprenticeships for business

Foreign aid: the Government will spend 0.5% of national income on aid, rather than 0.7% as promised in the Conservative manifesto. Sunak stated it was the Government’s intention to return to 0.7% when the fiscal situation allows

Defence: over the next four years defence spending will increase by £24bn

Housing: the Government will introduce a £7.1bn National Home Building Fund, in addition to the £12.2bn Affordable Homes Programme

Broadband: the Government has pledged to deliver faster broadband for over 5m premises across the UK, with better mobile connectivity with 4G coverage across 95% of the country by 2025

Matthew Elliott

Former CEO of Vote Leave Campaign and MHP Adviser

When I was running the TaxPayers’ Alliance in the 2000s, someone created a TPA Quote Generator website, that allowed people to plug in an item of expenditure which the TPA spokesperson would then decry as “an outrageous use of taxpayers’ money”.

I suspect I used the term “outrageous” when public sector net borrowing hit £100bn in 2008/09 when Gordon Brown was Prime Minister, so the figure in the Spending Review that jumped out at me was the revelation that PSNB is set to hit a record £394bn this year.

The blame for this cannot be ascribed to Rishi Sunak – the culprit is COVID-19 – but what is clear is that the argument about how and when to get the country’s finances under control is going to define the rest of this parliament.

The first political takeaway for me from the Spending Review was that Rishi Sunak has probably had a better 2020 than almost anybody else in the country. When he took over from Sajid Javid in February, the word was that he would be ‘Finance Director’ to an economically powerful No10 – hence the creation of the Joint Economic Unit. Over the course of the year, he has grown into the shoes of his hero, Margaret Thatcher’s heavyweight Chancellor Nigel Lawson, albeit thinner and wearing a hoodie.

The second takeaway was the performance of Shadow Chancellor Anneliese Dodds. Granted it was a stronger performance than she has managed previously – and responding instantaneously to any financial statement from the Chancellor is notoriously tricky – but it lacked weight. Against recent performances from Lisa Nandy, Jonathan Ashworth or even Ed Miliband, it lacked punch. I suspect she won’t be Shadow Chancellor going into the next election.

And finally, there were the two dogs that didn’t bark. Brexit barely got a mention – despite the nature of our departure at the end of the year still being unclear – and nor did the private sector. Being a review of government spending, this was perhaps understandable. But if the Chancellor is going to get the economy firing on all cylinders again, to help pay back the borrowing, then we will need to see some Boosterism (copyright B. Johnson) in the Budget.

Ultimately, it will be the private sector, not the public sector, which will enable the Chancellor to get the country’s finances back under control, so business leaders will be looking for some pro-growth, pro-enterprise stimulus measures in the Budget. No pressure, Chancellor.