Sunak: Our economic emergency has only just begun

♦11.3pc: worst fall in output for 300 years ♦£ 394bn: highest borrowing in peacetime ♦2.6m: unemployment forecast next year ♦£ 550bn: cost of the Covid pandemic

BRITAIN’S economic emergency “has only just begun”, Rishi Sunak warned yesterday, as he put the country on notice of tax rises to pay for the £550 billion cost of coronavirus.

The financial devastation caused by the virus will see the economy shrink by 11.3 per cent this year – the biggest drop in 300 years – with borrowing reaching levels never before seen in peacetime.

But the Chancellor said he could only address the i mbalance “once the economy recovers” and used his autumn spending review to announce yet more borrowing so he can spend money protecting jobs and businesses.

Mr Sunak also confirmed that the Government will cut £4 billion from its foreign aid budget in a move which prompted the resignation of a minister and was described as “shameful and wrong” by the Archbishop of Canterbury.

Tory MPS, meanwhile, warned that tax rises would stifle enterprise at a time when the country needs wealth creators more than ever.

The one-year spending review – cut down from the planned three-year review because of the unpredictability of Covid – took place against a background of grim economic forecasts.

The Chancellor said the “long-term scarring” to the economy would mean that in 2025 it will still be around 3 per cent smaller than it would have been without Covid.

Independent analysts said Mr Sunak would have to find up to £46 billion through tax rises or spending cuts every year to balance the books.

Signalling that tough decisions will have to come, he said: “This situation is clearly unsustainable over the medium term. We could only act [over Covid] in the way we have because we came into this crisis with strong public finances.

“And we have a responsibility, once the economy recovers, to return to a sustainable fiscal position.”

The Office for Budget Responsibility (OBR), the spending watchdog, forecast 2.6 million unemployed by the middle of next year, or 7.5 per cent of the workforce, compared with 4.8 per cent now. It will be the highest percentage of people out of work since the financial crisis of 2008.

The OBR said the economy would not return to pre-crisis levels until the end of 2022, dampening hopes of a swift “V-shaped” recovery, with long-term economic growth downgraded for at least the next five years.

The Chancellor said: “Our health emergency is not yet over. And our economic emergency has only just begun.

“So our immediate priority i s to protect people’s lives and livelihoods.”

Mr Sunak, who has come under constant pressure from the Prime Minister to find money for major infrastructure projects, will take advantage of record low interest rates to fund “once-in-ageneration plans to deliver once-in-ageneration returns for our country”.

He announced a £14.8 billion increase in day-to-day departmental spending over the next year, and confirmed the Government would press ahead with £100 billion in infrastructure spending as part of a blueprint for recovery.

He also found money to finance a pay rise for most public sector workers, at a time when many in the private sector will be facing redundancy. By far the

most controversial announcement was the cut to overseas aid, which is likely to become a major battleground when the Government legislates in the new year to reduce spending from 0.7 to 0.5 per cent of national income.

Mr Sunak said sticking to 0.7 per cent was “difficult to justify to the British people, especially when we’re seeing the highest peacetime levels of borrowing on record”.

Baroness Sugg, the Foreign Office minister, resigned over the move, which was also condemned by David Cameron, who enshrined the 0.7 per cent level in law when he was prime minister. Mr Cameron said he “deeply regrets” the decision, while Andrew Mitchell, the former international development secretary, said it risked allowing 100,000 preventable deaths in poor countries.

The NHS, social care, schools and defence will all be given bigger budgets, with billions more set aside for getting a million people back to work.

And while Mr Sunak said coronavirus had “deepened the disparity between public and private sector wages”, with private sector wages falling by 1 per cent while public sector pay went up by 4 per cent, the majority of public sector workers will get a pay rise next year. The Chancellor said he “cannot justify a significant, across- the- board” pay increase. However, over a million nurses, doctors and others working in the NHS will get a rise to reward them for their work throughout the pandemic and 2.1 million workers earning less than £24,000 will receive at least £250 extra. A 2.2 per cent increase in

the National Living Wage will also benefit some public sector workers, meaning the majority will get a pay rise at a time when many in the private sector will be losing their jobs because of the end of the furlough scheme.

Britain is forecast to borrow £394 billion this year, the equivalent of 19 per cent of gross domestic product and the highest level in peacetime history.

Mr Sunak said he would set aside £55 billion to pay for the pandemic next year, but the full cost would be even higher because of reduced tax receipts. According to the OBR, borrowing through to 2024-25 will be £555.4 billion higher than had been forecast before the pandemic. Underlying debt is forecast to reach 97.5 per cent of GDP in 2025-26. Mr Sunak said: “High as these costs are, the costs of inaction would have been far higher.”

Paul Johnson of the Institute for Fiscal Studies said there would have to be “significant” tax rises or “a pretty austere few years once again”.

John Baron, the Tory MP, said: “I commend the Chancellor for many of these measures... When it comes to funding them, I encourage him not to stifle enterprise through increases in taxes as these are often counterproductive.”

The OBR forecasts show a recovery is expected over the coming years, with growth of 5.5 per cent forecast next year as restrictions are eased, then 6.6 per cent in 2022. It said that in a worst-case scenario the Chancellor would have to find £46 billion per year to plug an annual shortfall in public finances.

The Chancellor also announced a new £4 billion “levelling up” fund that will pay for new museums, galleries, roads and other improvements that local communities can bid for.