Good for, bad for: Reform's Spending Review 2020 breakdown
Today’s one-year Spending Review held few surprises. We knew the finances were exceptionally bad, and the latest OBR data confirms that: the ‘central’ scenario has the economy contracting by 11.3% this year, unemployment peaking at 7.5% and long-term GDP scarring at 3%. Of course, as the Bank of England’s Chief Economist, Andy Haldane, pointed out in a recent Reform webinar: talking about a central path with so much uncertainty is rather ‘fanciful’. The OBR themselves say “the value of a single ‘central’ forecast is limited”, and it is worth noting that all three of the OBR’s scenarios assume a “smooth transition to a free-trade agreement with the EU”. (Check out “Annex B - Brexit scenarios” for the really scary numbers.)
So the Chancellor was right to tell us that “our economic emergency has only just begun”. £280 billion will be spent on Covid-related measures this year, and a further £55 billion earmarked for next year.
That comes on top of the huge spending pledges made by the Prime Minister pre-pandemic, and the additional billions announced for defence and green initiatives in the past week or so. These budgets were confirmed today, with the Chancellor celebrating delivering the “highest sustained level of public investment in more than 40 years”.
Yet at the same time, the Chancellor told us that borrowing at our current level is “unsustainable over the medium term” – the deficit will still be around £100 billion by the end of the Parliament. And he had very little to say on the measures that might need to be taken to fix the finances. The well trailed reduction in overseas aid to 0.5% (dropping us to the second most generous nation in the G7) and the partial public sector pay freeze help explain why the “core day-to-day departmental spending is £10 billion less than the indicative spending envelope in Budget 2020”.
On the public sector pay point the Chancellor’s rationale is reasonable – private sector workers have born the brunt of the economic devastation, they’re unlikely to be seeing a pay rise any time soon, and it wasn’t just public sector workers on the pandemic frontline – but it would be helpful to see whether the economic benefits of additional spending as a result of pay rises are indeed outweighed by the benefits of a lower pay bill. A point the Shadow Chancellor made.
As almost everyone has said, taking drastic action now, either to cut costs or to raise taxes, would risk further economic harm. On this the Government has been sound, and hopefully the investment committed will indeed create much needed jobs. But we do need a plan for getting back to black, and it’s hard to see how the Chancellor achieves this without backtracking on some manifesto commitments (nb. the majority of revenue comes from income tax, NI and VAT). And given the uncertainty, it’s also hard to see how the Chancellor isn’t back with another update in the New Year.
Local infrastructure funding
The £4 billion Levelling Up Fund announced by the Chancellor today is a welcome step in the Government's plans to tackle regional inequalities. Our annual State of the State national survey in partnership with Deloitte found that poor local transport is a problem for 1 in 5 people, the second biggest cause of dissatisfaction. There is also significant variation in what the different regions of England want ‘levelled up’. The Chancellor's new Fund seeks to put local people in charge of deciding what they need. However, with Whitehall processing the bids, this does raise questions about the Government’s commitment to real devolution.
Supporting people back to work
Today’s announcement of a £2.9 billion back-to-work programme is hugely welcome. To date, the Government has focused its attentions on young people, launching the Kickstart programme in September. But while the under 25s are the age group hardest hit by the jobs crisis, the majority of those on out of work benefits are aged over 25. The well timed release of a Work Programme impact assessment shows how effective these schemes can be (there was a “net positive for participant, the Exchequer and society”). The Chancellor told us that Restart will be for the long-term unemployed, those out of work for 12 months or more. We would encourage him to include time furloughed in this calculation, which, by March could be 12 months for some people.
Another major fiscal event passes without a plan to deliver a long-term solution to fund social care. The measures announced today will provide some financial relief to local authorities, who can now raise the Social Care council tax precept to 3%. But this is a sticking plaster. Failing to find a sustainable solution is increasing costs for the NHS, leaving vulnerable individuals without the care they need, passing the burden of care on to families, and exacerbating the workforce shortages due to low pay.
The NHS backlog
The Government announced £1 billion of extra funding to begin tackling the elective procedure backlog, as well as other issues such as mental health waiting times. However, pre-COVID the estimated cost of eliminating just the existing backlog whilst keeping up with demand was £1.3 billion annually over 4 years. This estimate placed the cost per case to eliminate the backlog at £2800. So, for instance, if 1.716 million patients were now waiting more than the NHS target of 18 weeks in September 2020, the total cost after lockdown paused operations would now be over £4.8 billion. If the NHS is serious about climbing this mountain funding alone won’t help, they will need to get smart about triaging patients more effectively and maximising use of resources, such as through collaborating with the private sector.
Table 1.1 in the Spending Review document appears to confirm that the temporary UC uplift will indeed be temporary – no spending is allocated to this beyond the current financial year. Scrapping it entirely would be a mistake. The four-year benefit freeze introduced in the 2015 Budget has meant that year-on-year some of the poorest families in the country have become poorer. With poverty rates rising, the Chancellor should think again – making permanent at least some of the uplift would not only benefit those individuals in receipt of UC, but also help the economy more broadly by boosting spending.
Given the OBR's dire forecasts, and the Chancellor’s own admission that borrowing is not sustainable over the medium-term, the huge Departmental spending increases through to 2025-26 look a little contradictory. Keep an eye out for those tax rises…