Issue of the week: Sunak’s spending review
Last week, the Chancellor warned that Britain’s “economic emergency has only just begun”. Is he out of step with the times?
“Rishi Sunak is one of the most familiar figures in British politics,” said Bagehot in The Economist. But what really makes him tick? The young Chancellor appears to have two “warring identities”. The spending review delivered last week was designed by “Rishi-the-pragmatist, whose Keynsian mantra is ‘we’re prioritising jobs’ and who reeled off a mind-boggling list of spending commitments”. But there is another, “more ideological” Rishi with such “ingrained enthusiasm for balancing budgets and limiting expenditure” that he might be described as a “chip off the old Thatcherite block”. Which will dominate in the long term? Judging by the “flashes of steel” we saw as Sunak froze public-sector wages, reduced planned spending (excluding emergency expenditure on the virus) and slashed foreign aid, we can make a fair bet that, as the economy recovers, “the Thatcherite Rishi is likely to become more assertive”.
We’re safe for the moment, said Russell Lynch in The Daily Telegraph. With interest rates at rock bottom and the economy still flat on its back, Sunak won’t, in all likelihood, start turning the “fiscal screw” until 2022 – even though UK public borrowing is due to hit a peacetime record of £394bn this year. He remains “noticeably coy about saying anything about future fiscal policy”, said David Smith in The Sunday Times. But he certainly laid the groundwork for tough moves ahead by warning that Britain’s “economic emergency has only just begun” – a line almost guaranteed to “undermine confidence” and also, frankly, wrong. When monthly GDP reached its low point eight months ago in April, we were indeed in an emergency. But a 23% recovery by September, and a 15.5% rise in GDP in the third quarter, show that the recession is largely “in the past”. This month’s lockdown is a “hiccup”, but “there’s good reason to expect a strong recovery in the next two years”. If the economy returns to where it was in 2019 by the end of 2022, as the Office for Budget Responsibility now forecasts, it will be “in line with three of the past four recessions since the 1970s, and shorter than the five years it took after the financial crisis”. These are extraordinary times, but there is hope.
The Chancellor warned that public borrowing and debt were “clearly unsustainable”, as though preparing us for tax rises and “stealthy austerity” ahead, said Chris Giles in the FT. But what if it doesn’t happen? The pandemic has added to “pressure for a rethink on fiscal rules” around the world. We naturally assume that tax rises will be needed to pay for the pandemic, but “the way this debate is changing, don’t bet your house on it”.