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Our views 26 November 2020

UK: Austerity postponed

5 min read

The one-year Spending Review and updated Office for Budget Responsibility (OBR) public finances figures highlight – as expected – that austerity is not a priority for now.

There was a real terms increase in departmental spending for next year, relative to the Budget in March. However, that is more than fully accounted for by spending on the Covid response. Core day-to-day spending is £10bn less than indicated in March. The worst of the announcements, in terms of spending restraint, was the well-trailed public sector pay freeze. While tax rises aren’t a focus for the Spending Review, the threshold for increases in Council Tax will be 2% (before needing a referendum), but the social care precept 3%, i.e. 5% total.

Beyond 2020-21, for now, the Chancellor has pencilled in a 2.1% real terms increase in core day-to-day spending every year.

Chancellor Sunak listed the Spending Review priorities as getting the country through coronavirus, stronger public services and delivering on infrastructure plans. Tackling the long-term sustainability of public sector finances did not make the list, though Sunak did make clear that he felt there was a “responsibility, once the economy recovers, to return to a sustainable fiscal position” (my italics).

The OBR note that “even on the loosest conventional definition of balancing the books, a fiscal adjustment of £27 billion (1 per cent of GDP) would be required to match day-to-day spending to receipts by the end of the five-year forecast period”. More bluntly: “Under our central forecast, the pandemic leaves the public finances in a weaker position in the medium term and significantly adrift from any definition of balance contained in previous fiscal frameworks.”

Note that the fiscal impulse will, nevertheless, reduce sharply next year. On the OBR forecasts, the deficit falls from £394bn to 164bn next year, or a whopping 19% GDP to (a still high) 7.4% GDP, partly as schemes roll off or are no longer needed (e.g. the furlough extension ends in March). The OBR’s economic forecasts, built into the projections, are close to consensus: an 11.3% contraction in GDP this year and 5.5% GDP growth next year.

Other announcements worth noting include the further 2.2% increase in the minimum, which, when combined with the earlier announced loss of the job retention bonus, might be a challenge for small businesses in particular – given the economic strain many will be under.

The views expressed are the author’s own and do not constitute investment advice.