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Spending review presents challenges for Sunak

The Chancellor of the Exchequer is facing an uphill battle as he attempts to find funding both for the government's policy agenda as well as to repair the gaping hole left in the Treasury by the pandemic

WAKE - Sunak faces frosty reception at spending review
Chancellor of the Exchequer Rishi Sunak

Chancellor of the Exchequer Rishi Sunak is likely heading for a somewhat frosty reception when he delivers a spending review, also known as a ‘mini budget’, to the House of Commons on Wednesday, with the revelation that the Treasury is considering a public sector pay freeze having already caused outcry given many of the state’s employees have continued to work during the pandemic at high risk to their health.

It has been estimated that a pay freeze would save the Treasury around £23bn, according to a report from centre-right think tank the Centre for Policy Studies (CPS), or around £15.3bn if NHS workers are excluded from the freeze.

The government may also have inadvertently poured salt into the wound by announcing a £16bn military spending package the day before, leaving may questioning why buying more weapons is coming at the expense of what many consider to be a well-earned wage increase for state workers.

Aside from the public opinion fallout, the other area of most concern will be the size of the hole blown in the economy by the pandemic, with output expected to shrink by at least 10% from its pre-pandemic level. Sunak is expected to disclose the latest public finance and economic forecasts from the Office for Budget Responsibility (OBR), which should provide more clarity on how deep the hole is for Britain as 2021 begins.

Green industrial revolution

However, Sunak may be able to provide some bright spots in the review, notably any more details on the government’s green spending plans and boosting infrastructure expenditure.

“The government has promised big on investment and infrastructure. The Spending Review is likely to see more of this, with pre-existing investment plans tied into the economic recovery, ‘building back better’ and the ‘levelling up’ agenda. One thing to look out for is whether new funding is announced, or future funding brought forward”, said analysts at the Institute of Fiscal Studies (IFS).

The government’s green spending plans, unveiled by Boris Johnson last Tuesday, are aiming to create 250,000 jobs, with a particular focus on the north of England, the Midlands, Scotland and Wales, as well as ban the sale of petrol and diesel cars by 2030.

Other elements in the plan include a target quadruple offshore wind power to 40 gigawatts by 2030 as well as moves to boost hydrogen production and a £525mln investment in new nuclear power reactors.

Tax rises may cause backbench grumbles

But with the UK economy facing a gloomy outlook at it attempts to recover from the damage caused by the pandemic, Tory MPs are likely to be riled by any plans for tax increases, which are likely to focus on affluent Conservative heartlands in the South to ‘level up’ regions in the North and fill the gaping hole in the UK's coffers.

It has been suggested that the Treasury will need to find around £40bn per year in extra tax to plug the gap left by the crisis, although there is considerable debate about where the hammer will fall hardest.

One thing that is unlikely to make an appearance in the statement is any mention of spending cuts or austerity, a brand that has yet to shake off its toxicity after it was implemented by the Tory-Lib Dem coalition a decade ago.

Any implication of spending cuts is likely to draw swift condemnation from the opposition Labour Party, provided it can look away from its infighting for long enough.

However, the spectre of tax rises or spending cuts in spending could be ameliorated by an efficient vaccination programme, which is likely to help the UK economy rebound faster as restrictions are relaxed. While it may not eliminate the need for either measure entirely, the Chancellor may have some wiggle room to soften the blow to taxpayer wallets.

Watch out for Brexit

While the pandemic and policy to repair the damage left in its wake will likely dominate the conversation, the imminent prospect of Brexit is also looming large in the background as the UK and EU attempt to thrash out a deal before the transition period ends on December 31.

“Over the past five years, the government has spent around £8bn on Brexit preparations. Some departments – notably the Home Office, HM Revenue and Customs, and the Department for Environment, Food & Rural Affairs – are likely to require additional funding on a more permanent basis to reflect new post-Brexit responsibilities. HMRC, for instance, will almost certainly need to employ tens of thousands of new customs agents”, the IFS said.

“The Chancellor will also need to take numerous decisions over replacements for existing EU spending done in the UK or on the UK’s behalf. This includes things like agricultural subsidies, research grants to UK universities, and regional support funds”, they added.

--Adds economic and public borrowing information--

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