Earlier this week, Chancellor Rishi Sunak unveiled the government’s spending plans for the coming year.
The Spending Review sets out how the government plans to allocate money to each individual department. It covers a range of areas, such as health, policing, and education as well as public sector pay, and money for the devolved administrations of Scotland, Wales, and Northern Ireland.
Usually, a Spending Review will cover several financial years, enabling the government and specific departments to plan for the future. However, because of the economic uncertainty caused by the Covid-19 pandemic, Rishi Sunak set out spending plans for the 2021/2022 tax year only. This brings us to…
The economic impact of Covid-19
The Chancellor delivered November’s Spending Review against a backdrop of challenges. As a result of the significant financial support the government has provided in 2020, the Office for Budget Responsibility (OBR) predicts the government will borrow £394 billion in 2020/21, far higher than in previous years.
This figure represents around a fifth of UK GDP and means borrowing has reached its highest level in peacetime history. While the Chancellor committed to maintaining a range of Covid-19 support schemes, he did note that this level of borrowing is unsustainable in the medium term.
Economic forecasts from the OBR also paint a gloomy picture. The OBR forecast the economy to contract by 11.3% this year, the largest fall in output for 300 years. While the OBR then expects the economy to grow by 5.5% in 2021 and 6.6% in 2022, Rishi Sunak said the economic damage would be lasting. Output is not expected to return to pre-crisis levels until the fourth quarter of 2022.
Due to the economic challenges, the OBR predicts unemployment will reach a peak of 7.5% in the second quarter of 2021 – that’s an estimated 2.6 million people out of work.
Rishi Sunak described the economic emergency as ‘only just beginning’. He added the immediate priority was to protect people and livelihoods, but the Spending Review also delivers ‘stronger public services’ and a ‘once in a generation investment in infrastructure’.
Perhaps unsurprisingly, the cost of responding to the Covid-19 crisis was top of the agenda. The Chancellor announced that the government is providing £280 billion to get the country through Covid-19.
In 2021, Sunak has set aside an initial £18 billion to spend on testing, PPE, and vaccines.
Public sector pay
The Chancellor announced that one million nurses, doctors, and other NHS employees will receive a pay rise. Other public sector workers that earn below a median wage of £24,000 (around 2.1 million people) will also receive a guaranteed pay rise of at least £250.
Rishi Sunak also announced a pay freeze for 1.3 million public sector workers. The Chancellor told Sky News that salaries in that sector are “generally higher” than those in the private sector, adding: “What we’ve seen over the last six months is private sector wages have fallen by a percent and public sector wages have risen by around 4%.
“On top of that, people in the private sector are losing their jobs, their hours are being cut, they are being furloughed – none of that is happening in the public sector.
“So given the context, I couldn’t justify an across the board, universal pay increase for the public sector.”
National living wage
The Chancellor announced that around two million people will benefit from a 2.2% national living wage increase, taking this to £8.91 per hour.
While previously the national living wage was only available to those aged 25 and over, Sunak confirmed this increase will apply to all workers over the age of 23.
During his speech, the Chancellor argued that spending so much on international aid is difficult to justify while borrowing is so high. Consequently, he announced that the government would reduce the overseas aid spend, from 0.7% to 0.5% of GDP. This reduces the aid budget by around £4 billion.
“If you look at that as a percentage of GDP that’s 0.5%, which will still make us more generous than almost any other major economy and we’ll still be one of the most active countries globally,” Sunak said.
Despite the economic woes caused by Covid-19, total departmental spending will increase by 3.8% in real terms, the fastest growth rate in 15 years. Headline announcements for departmental spending include:
- An additional £3 billion for the NHS
- An extra £1 billion to tackle NHS treatment backlogs
- £300 million in extra grant funding
- An increase in annual defence spending over the next four years, designed to create 40,000 jobs
- An extra £2.2 billion for schools
- A new £4.6 billion package to help people get back to work
- £2 billion extra for public transport, including subsidies for the rail network
- More than £400 million to recruit 6,000 new police officers by the end of 2022
- £4 billion over four years to provide 18,000 new prison places.
Infrastructure and ‘levelling up’
The Chancellor also announced a ‘levelling up’ fund of £4 billion to pay for upgrading infrastructure across the UK. Local areas will be able to bid for the funding to support projects.
This fund will be supported by plans to launch a new infrastructure bank, which will be based in the north of England.
Get in touch for help
If you have any questions about what the Spending Review means for you, please get in touch. Email firstname.lastname@example.org or contact your adviser on 020 3828 8100.