U.K. Curtails Spending Review in Fresh Blow to Boris Johnson
U.K. Limits Spending Review to One Year in Setback to Johnson
(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak cut a planned spending review from three years to one due to “unprecedented uncertainty,” dealing a blow to Boris Johnson’s plans to map out his priorities for a post-pandemic world.
The prime minister had hoped to bolster his agenda of “leveling up” inequalities across the country after promising 100 billion pounds ($130 billion) of investment in infrastructure projects. Now Sunak will set the budgets of government departments for the 2021-22 fiscal year only as a resurgent coronavirus raises more doubts about the economic outlook.
The announcement came as public finance data showed the budget deficit climbed to a record 208.5 billion pounds in the first six months of the fiscal year, highlighting the cost of supporting the economy through the pandemic. Beleaguered businesses and workers are calling for further aid.
“In the current environment it’s essential that we provide certainty,” Sunak said in a statement on Wednesday. “So we’ll be doing that for departments and all of the nations of the United Kingdom by setting budgets for next year.”
The spending review will be published in late November. In order not to disrupt longer-term planning, multi-year plans for the National Health Service and schools will still be funded, as will priority infrastructure projects such as the HS2 high-speed rail project.
Sunak started the spending review in July with a warning that ministers faced “tough choices” in the wake of the pandemic. Departments were told to “identify opportunities to re-prioritize and deliver savings,” dialing back on the inflation-busting increases previously envisaged.
But the ongoing pandemic, with large parts of the country in partial lockdown again, make it hard for the government to predict the state of the economy and the spending power it’ll have in future years.
The areas facing the tightest restrictions are in the north of England, fueling grievances in places that propelled Johnson to power on the back of his promises to deliver Brexit and tackle economic inequality.
Sensible Move
Institute for Fiscal Studies Director Paul Johnson called the decision to shorten the review period a “sensible” one. “Usually makes sense to have a longer period, but far too much uncertainty now,” he said in a tweet.
It marks the second time a full spending review has been delayed. Last year, the then chancellor, Sajid Javid, drew up plans for 2020-21 only amid the confusion over Brexit. The prospect of a no-deal split from the European Union continues to stalk the economy after negotiations hit the rocks last week.
The review will focus on helping departments respond to Covid-19 and deliver the government’s plans to support jobs, as well as providing “enhanced support” for public services, the Treasury said.
Government borrowing in September alone was 36.1 billion pounds, compared with just 7.7 billion pounds a year earlier, the Office for National Statistics said Wednesday.
The deterioration will fuel the debate about how much economic aid the government can provide as the virus spreads again and new restrictions are imposed. Sunak has already scaled back his job support plan, leaving local leaders in areas hit by regional lockdowns such as Manchester calling for more financial help.
“Over time and as the economy recovers, the government will take the necessary steps to ensure the long-term health of the public finances,” Sunak said.
While the pandemic has wrought havoc with the public finances -- pushing debt above 2 trillion pounds for the first time on record -- Bank of England bond-buying has kept borrowing costs at record lows. That’s left economists, and Sunak’s own fiscal watchdog, suggesting he has plenty of time to balance the books through tax increases or spending cuts.
The latest figures showed debt climbing to 103.5% of GDP -- the highest ratio since the financial year ending 1960. The deficit was set to be approaching 400 billion pounds in the current fiscal year even before Sunak announced further measures to support jobs and wages in recent weeks.
The government will still be borrowing more than 190 billion pounds in the following fiscal year, according the average of new forecasts compiled by the Treasury this month. That’s well above the level at the height of the financial crisis.
In a report Wednesday, the Centre for Policy Studies suggested one solution to addressing the swelling deficit would be replacing the pensions triple lock -- a promise to raise the state payment every year by the highest of average earnings growth, inflation or 2.5% -- by a dual lock that strips out the 2.5% commitment.
That was part a series of ideas for savings or asset sales which it said would deliver 30 billion pounds a year to the Treasury without harming the coronavirus response.
©2020 Bloomberg L.P.