Sunak Begins U.K. Spending Review Warning of ‘Tough Choices’

(Bloomberg) --

U.K. Chancellor of the Exchequer Rishi Sunak fired the starting gun on a comprehensive review of government spending for the coming years, warning of “tough choices” for some departments in the wake of the coronavirus pandemic.

The review, which had been planned before the outbreak hit, will be published in the fall, the Treasury said in a statement Tuesday. Overall, budgets will grow faster than inflation, but with that promise came a warning that some ministers will face difficult negotiations in coming weeks. Department were told to “identify opportunities to re-prioritize and deliver savings.”

“Given the large amounts already promised for priority areas like the National Health Service, schools, and police, and Rishi Sunak’s emphasis on the need for ‘tough choices,’ another round of budget cuts for other, lower priority departments is a very real possibility,” said Ben Zaranko, a research economist at the Institute for Fiscal Studies.

While Sunak has ruled out a return to the austerity measures imposed by his predecessor George Osborne, the chancellor’s comments underscore how the financial cost of the coronavirus pandemic will put pressure on public spending decisions for years to come -- and hamper the government’s effort to deliver on its promise to reduce regional inequality.

Before Britain went into lockdown, the budget deficit in the current fiscal year was forecast to be just 55 billion pounds ($70 billion). Now, according to the Office for Budget Responsibility, it’s course to exceed 370 billion pounds -- the highest as a share of the economy in peacetime -- and debt is set to surpass 100% of GDP.

Significantly, Sunak said he is no longer committed to the overall spending totals outlined at the time of the March budget, raising the possibility of a less generous settlement for many public services. The March spending envelope implied day-to-day spending rising by almost 3% a year in real terms. Now the government is promising merely that spending will rise faster than prices, given the uncertainties facing the economy.

Departments will receive cash allocations for the day-to-day spending for the three years starting April 2021, with capital budgets and block grants for the devolved administrations of Scotland, Wales and Northern Ireland being set for a further 12 months.

Despite the unprecedented pressures on the public finances, the government on Tuesday announced inflation-busting pay rises for hundreds of thousands of public-sector workers.

Pay Awards

They include 2.8% for National Health Service dentists and doctors, backdated to April; 2% for the armed forces; and 3.1% for teachers. The move comes in response to growing pressure to reward workers on the front line of the battle against the coronavirus.

“These past few months have been an incredibly challenging time for our NHS, and the resolve, professionalism and dedication of staff has been on show throughout,” Health Secretary Matt Hancock said in a statement.

Sunak, however, served notice on government workers not to expect such generous increases in coming years. “For reasons of fairness, we must exercise restraint in future” to ensure “public-sector pay levels retain parity with the private sector,” he said in a letter to ministers.

A cap on public-sector pay rises was lifted in 2018. Salaries for all but the lowest-paid workers were frozen between 2011 and 2013 and increases were then limited to 1% as part of efforts to bring down the budget deficit after the financial crisis.

©2020 Bloomberg L.P.