Wages and aid squeezed in economic emergency

● Chancellor accused of ‘threatening recovery’ as borrowing hits new high

The devastation caused by coronavirus will see the economy shrink by its largest amount for 300 years and Government borrowing reach levels previously unseen in peacetime, Rishi Sunak warned yesterday as he unveiled his spending review.

The Chancellor said there would be lasting damage with the economy shrinking by 11.3 per cent in 2020 and not recovering to pre-crisis levels until the end of 2022.

Unemployment is forecast to hit 2.6 million by the middle of 2021 and the “long-term scarring” from the crisis means that in 2025 the economy will still be around 3 per cent smaller than had been expected in March this year, Mr Sunak told MPS.

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

The dire state of the public finances means an estimated 1.3 million public sector workers will see their pay frozen while the overseas aid budget is being slashed by billions of pounds - prompting the resignation of Foreign Office minister Baroness Sugg.

The OBR forecasts show a recovery is expected over the coming years, with growth of 5.5 per cent forecast next year as coronavirus restrictions are eased, then 6.6 per cent in 2022, 2.3 per cent in 2023, 1.7 per cent in 2024 and 1.8 per cent in 2025.

The Government will borrow an eye-watering £394 billion this year, equivalent to 19 p er cent of Gross Domestic Product (GDP), a measure of the size of the economy - which is the highest ever recorded in peace - time.

Although borrowing will subsequently fall, the national debt is

forecast to reach 97.5 per cent of GDP in 2025-26.

"T h i s s i t u a t i o n i s c l e a r l y unsustainable over the medium term," Mr Sunak admitted.

The Chancellor said he "cannot justify a significant, acrossthe-board" pay increase for all public sector workers given the difficulties faced in the private sector. Instead, he announced a pay rise to more than a million nurses, doctors and others working in the NHS. He also promised a pay rise of at least £250 for the 2.1 million public sector workers who earn below the median wage of £24,000.

There was also a hike to the National Living Wage, rising to £8.91 an hour for two million people and the Chancellor also unveiled a three-year programme called the Restart Scheme, aimed at helping more than a million long-term unemployed.

Wi t h d a y - t o - d a y - d e p a r t - mental budgets i n c r e a s i n g by £14.8bn, Scotland was also handed a financial boost. Mr Sunak also unveiled ‘City and Grow th Deals’ i n S cotland, aimed at helping Tay Cities, Borderlands, Moray and the Scottish islands to create jobs.

But the SNP accused him of “threatening Scotland’s recovery” with the measures.

SNP shadow chancellor Alison Thewliss claimed the package showed the Government was “failing Scotland”.

She said: "The Tory government is threatening Scotland's recover y by slashing pay for millions of workers, and falling a long way short of the £98bn package of support for the economy and public services needed to secure a fair and full recovery from the pandemic.

“This failure will make the growing Tory unemployment crisis even worse, squeeze living standards even further, and risk a protracted downturn by starving the economy of funds.

“It shows, yet again, that Westminster cannot be trusted to act in Scotland's interests.

"By blocking the devolution of financial powers and withholding investment, the Tories are hindering Scotland's ability to respond to this crisis.

"The fact that the Tories are wasting millions on a Brexit festival while slashing public sector pay, and cutting support for the world's poorest, tells you everything you need to know about this government's twisted priorities.”

Scottish Conser vative leader Douglas Ross claimed the investment meant Mr Sunak had “gone further than any government in peacetime history to protect jobs and support public services”.

He said: “These unparalleled spending promises show that the deep pockets of the UK Government are best placed to support Scottish jobs, schools and hospitals.

“The Scottish Conservatives argued for accelerated City and Growth deals to invest more quickly in Scottish communities, and we’re delighted to see that has been delivered alongside a bumper £2.4bn boost in Barnett Consequentials.

“There’s huge positives for rural communities across Scotland with a substantial investment to improve broadband, and welcome news that Scottish farmers and fisheries will benefit from even more financial backing.

"As the Fraser of Allander Institute made clear yesterday, the SNP’S Barnett Consequential funding disputes have no substance. They’re just another nationalist grievance.”

Scotland’s Finance Secretary Kate Forbes accused Mr Sunak of cutting the Scottish Government's capital budget.

She said: “Behind the Chancellor’s headline 27 per increase in UK capital expenditure, Treasury docs show a cut to the Scot Government’s capital budget by 5 per cent in cash terms.”

In a sombre address in the House of Commons, Mr Sunak claimed unemployment could hit 2.6 million people next year.

He said: “Our health emergency is not yet over. And our economic emergency has only just begun. So our immediate priority is to protect people’s lives and livelihoods. Even with growth returning, our economic output is not expected to return to pre-crisis levels until the fourth quarter of 2022. And the economic damage is likely to be lasting. Long-term scarring means, in 2025, the economy will be around 3 per cent smaller than expected in the March Budget.”

T h e C h a n c e l l o r h a d a l s o announced a cut in the foreign aid budget, slashing it from 0.7 per cent to 0.5 per cent. Keeping it at 0.7 per cent was in the Tory manifesto, the Prime Minister’s leadership pitch and is also enshrined in law.

Mr Sunak explained: “This countr y has always and will always be open and outwardlooking, leading in solving the world’s toughest problems. But during a domestic fiscal emergency, when we need to prioritise our limited resources on jobs and public services, sticking rigidly to spending 0.7 per cent of our national income on overseas aid is difficult to justify to the British people.”

The move sparked a furious response, including on the Conservative benches. Minister for Sustainable Development Baroness Sugg resigned, labelling the decision "fundamentally wrong", while Tory MP Andrew Mitchell claimed it would lead to "a hundred thousand" preventable deaths, mainly of children.

Liberal Democrats leader Ed Davey claimed the Chancellor had failed to ensure “no-one is left behind”.

He said: “The Chancellor has also made some unforgivable political choices today. He has chosen to continue to ignore p eople excluded from sup - port and chosen to reject calls to properly extend furlough, leaving too many people facing unemployment.”

Shadow chancellor Anne - liese Dodds condemned the pay freeze for public sector workers and claimed the Spending Review "takes a sledgehammer to consumer confidence".

CBI chief economist R ain Newton-smith said the Spending Review "lays the foundations for a brighter economic future" but "ambition must be matched by action on the ground".