A missed opportunity to embrace reform
Rishi Sunak had braced his Cabinet colleagues for some sobering news in his spending statement yesterday and his warnings were more than realised. While grim fiscal and economic projections from the Office for Budget Responsibility had been long anticipated, to hear them spelt out in detail was startling. The biggest fall in growth since the Great Frost of 1709; borrowing at levels not seen since the Second World War; debt higher than the country’s annual output; and the economy still 3 per cent smaller by 2025 than predicted in his March Budget.
Yet this gloomy set of forecasts was not matched by the retrenchment that might once have been expected in the form of spending cuts or tax rises. The latter may yet come in next year’s Budget; but far from trimming the nation’s cloth, the Chancellor rattled off a succession of substantial spending commitments that belied the Government’s parlous financial circumstances.
Apart from foreign aid and a freeze on pay for senior government workers outside the NHS, the public sector emerged almost unscathed. This was the contradiction at the heart of Mr Sunak’s statement. The fiscal position is unsustainable, as the Chancellor acknowledged, and yet the opportunity offered by the pandemic crisis to rethink how the state functions has been ducked.
Once again, the private sector is expected to shoulder the burden.
Hundreds of thousands of perfectly viable businesses have been wrecked by the response to the virus, yet they will have to pay the increase in the minimum wage announced by the Chancellor and help fund the generous public sector pensions that remain untouched while their own are hit.
Mr Sunak is a free marketeer and his own frustration could be sensed, even if it was not articulated. The rhetoric did not quite match the reality. In the two areas where he had made cuts in the teeth of objections, including from Tory MPS, he made the perfectly valid point that circumstances justified the decisions.
Given the fact that jobs in the public sector have been protected, the freeze on pay only for the better-rewarded was generous. It means a lower-paid public servant keeps his or her job and gets a pay rise while someone in the private sector on the same income is left facing unemployment or a pay cut.
The reduction in the foreign aid budget was also justified and the argument that this will somehow “damage the UK’S place in the world” is disingenuous. As the Chancellor pointed out, the UK will still be the second largest aid donor in the world and, in any case, contributes yet more through the global projection of military help, shared R&D and generous private humanitarian largesse. The country will simply not understand those MPS who cannot see this is necessary in the circumstances.
The money saved will help support retraining and apprenticeship initiatives that will be needed as unemployment rises to levels not seen for 20 years. The Chancellor’s spending statement foreshadowed significant increases in infrastructure investment in the years to come, with the publication of a new strategy and the creation of a Northern-based bank to raise the funds. New roads, railways, hospitals and schools are all promised, with the emphasis on helping areas that have hitherto lost out, as part of the so-called “levelling-up agenda”. A £4 billion pot of cash to fund purely local projects is specifically designed to help in this endeavour.
Investment in full-fibre broadband and scientific research is welcome, as is the emphasis on the UK as a whole in an effort to confound the separatists who would dismantle the world’s most successful union.
The background to this statement could hardly be forgotten, however. As the Chancellor said, the health emergency is not yet over, but the economic emergency has hardly begun. Nor was there a mention of the other elephant in the room, Brexit. Without a trade deal, a short-term economic hit is inevitable. Indeed, most of Mr Sunak’s departmental settlements apart from defence were for the next year only, while stock is taken of the impact of the pandemic and Brexit.
The new Covid restrictions to be imposed today on the English regions will arguably have a far greater impact on the economy than anything outlined yesterday. If London is placed in Tier 2 or even Tier 3, further damaging the nation’s premier economic powerhouse, even the most pessimistic calculations of the Chancellor and the Office for Budget Responsibility may look positively rosy by next Easter.
In just 10 months, Mr Sunak has emerged from relative obscurity to become an effective and persuasive occupant of the Treasury. He eschews the nitpicking micromanagement beloved of predecessors like Gordon Brown, and his instinctive liberalism occasionally shines through the quasi-socialist, big-state strategy that he is obliged to follow at the moment. But once a vaccine has made normal life possible again, he and Mr Johnson need to plot a way out of this political and economic cul-de-sac.
Mr Sunak is a free marketeer and his own frustration could be sensed, even if it was not articulated