“The health emergency is not yet over, and the economic emergency has only just begun.” With a global pandemic for a backdrop, Chancellor Rishi Sunak has announced a short-term spending review for the year 2021. With a freeze on public sector pay, an economy declining more than it has in 300 years and no mention of Brexit, experts from across the country share their reactions.
Drew Woodhouse, Senior Lecturer in Economics, Sheffield Hallam University
Rishi Sunak announced £280 billion in his spending review to be spread across several sectors, with little mention of Brexit or the climate crisis. This included £18 billion for COVID-19, £250 million for rough sleepers, £2 billion for transport and £3 billion to local councils.
This came in the context of the highest levels of borrowing “in peacetime”. What was most stark was that the government cut more channels to growth than it did create them. This spending review focused on short-term government spending policy “plasters”, with considerations of longer-term sustainability measures.
The most important question in the review was how bad economic forecasts are looking. Economic output is expected to contract by 11.3% this year – the worst result for 300 years. With no expectations to match our pre-crisis trend level until late 2022 and the “natural level of unemployment” not being met until 2024, this is indeed dire.
There was an undertone in the chancellor’s comments that, to improve the economy’s health, his response should target real growth through indirectly supporting the productive “supply” capacity of the economy – the amount businesses and workers can produce. There was also a formal acceptance that deeply ingrained structural issues, that have gripped the UK for years, should also be at the forefront of a “reform” effort.
Then there was contradiction on wages. He announced measures to protect wages of those who earn lower incomes, citing that this could fuel some “marginal” growth, whilst also accepting that this recession has been far worse for low-paid workers than anyone else. Yet by freezing public sector wages (except for NHS nurses and doctors), Sunak restricted a source of economic stimulus at the time we need it most.
Private sector wages decline quicker and do not pick up the demand slack, while public sector wages can act as an “automatic stabiliser” in a downturn because they typically grow more quickly during recessions. The freeze will also have a worse affect on regions with a higher proportion of public sector jobs, which are the same regions already worst affected by the crisis.
While effective economic support is vital, it must be part of a wider plan to get the economy going again, restarting growth and supporting job creation.
Ernestine Gheyoh Ndzi, Senior Lecturer, York Business School, York St John University
Early on in his speech, the chancellor stated that, despite the pandemic, the UK still has one of the lowest unemployment rates in Europe. But this statement is highly misleading as, in the UK, people in precarious and insecure work – such as those on zero-hours contracts – are considered employed. Indeed, these types of contracts can have a hugely devastating impact on people’s lives – yet a ban on them has been ignored by the government.
But the headline statement of the day was the pay freeze for all public sector workers – apart from nurses and doctors in the NHS. The chancellor talked of restraining public sector pay levels to retain consistency with the private sector. Yet compared to the private sector, public sector pay has fallen drastically in the past decades.
Employees in the public sector, especially frontline services, have worked incredibly hard throughout this pandemic. And a pay freeze would likely affect worker morale and performance.
The pay freeze will be interpreted as a lack of recognition and appreciation for the work public sector employees are doing. There is also the risk that this will affect frontline staff’s mental health – which has already been impacted during the pandemic.
The government needs well motivated workers to rebuild the economy that has been hit hard by COVID-19. But this will not be achieved by damaging the morale of workers.
There’s also the fact that the public sector has, for some years, been struggling to recruit and retain staff in areas like the NHS and teaching, and this pay freeze will most likely exacerbate difficulties with recruitment and retention of workers.
In this sense, it seems the government still hasn’t learnt its lesson from the impact of the two-year pay freeze imposed across the public sectors in 2010, that resulted in increased gender inequality and widened the gender pay gap. With the UK economy in its steepest decline for centuries, while a pay freeze may seem like a good solution, it’s likely to create more problems in the long run.
Personal finance and pensions
Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University
Income is the key driver of personal finances. The chancellor has announced an income freeze for all public sector workers apart from NHS doctors and nurses and a small flat-rate increase of £250 for those earning less than £24,000 a year.
The lowest earners who are on the national living wage or minimum wage will also see an increase in their hourly rate from April of 19p to £8.91 an hour. But this still trails behind the “real” living wage that people are estimated to need to meet their living costs of £9.50 an hour (£10.85 in London).
The income tax personal allowance and national insurance thresholds and bands are being increased from April in line with inflation (0.5%). This will give most benefit to people on modest earnings.
The government has also confirmed that changes to the retail prices index (RPI), a commonly used measure of inflation, will go ahead – though not until 2030. This will see the formula for calculating RPI brought into line with the more commonly used consumer price index (CPI) that typically records inflation rates around 1% a year lower than RPI. The retired, in particular, will be affected, if they have private pensions and annuities that are “increased” each year in line with the RPI.
On the spending side of household budgets, the spending review confirmed funding for the government’s ten point plan for green recovery recently announced by the prime minister. In addition to the big push towards electric vehicles, this includes encouraging homes – whose heating and cooking account for around a fifth of the UK’s carbon dioxide emissions – to give up their gas boilers in favour of ground and air-heat pumps. But it seems likely that, even with the current Green Homes Grant, most households will eventually find they need to invest heavily in “greening” their home heating system – though running costs thereafter may be lower.
Overall, personal finances are likely to come under pressure over the next few years as the government starts to bring its finances back to more sustainable levels. But at last it seems this government is taking the need to tackle climate change seriously, which is important as the green industrial revolution holds the promise of jobs and incomes to replace those lost in the pandemic.
Infrastructure and levelling up
Anupam Nanda, professor of urban economics and real estate, University of Manchester
Infrastructure is key for unlocking economic opportunities and supporting prosperity. Infrastructure investments tend to have very long-term implications for the economy and society. Today’s announcements have put emphasis on using infrastructure spending to support and accelerate economic recovery from the pandemic.
Sunak has tried to address concerns of funding inequality across and within regions with the creation of a £4 billion “Levelling Up Fund”. Local areas can bid directly for support for projects from this fund.
Using national and regional infrastructure investments to close the regional inequality gap is welcome, as areas such as the north of England continue to suffer heavily from the ongoing pandemic. However, whether this is enough remains to be seen and will depend on how the fund is administered.
The creation of a new infrastructure bank – to be headquartered in the north of England – is good news. This will replace the UK’s involvement with the European Investment Bank and, by encouraging private sector involvement in infrastructure projects, will lead to more streamlined investment.
The spending review also placed emphasis on green and digital infrastructure and renewable energy use. This is very much needed.
Much will depend on the choices and types of specific infrastructure projects, as well as the mixture of national, regional and local investment. The success of these projects will rely on skill development and cooperation across the government departments and agencies involved. It will also demand collaboration across all government levels, down to local authorities.
Alex de Ruyter, Professor of Economics and Director of the Centre for Brexit Studies, Birmingham City University
For this fiscal year, the government is still very obviously in “whatever it takes” mode. That remains partially true in certain areas for 2021-22, although in other respects the government is very much looking to scale back support.
Total support due to COVID-19 is estimated to be around £280 billion this financial year. The largest portion is job support – an estimated £53.7 billion on the furlough scheme and a further £19.6 billion on support for the self-employed. A total of £113 billion has been allocated to government departments, of which almost half is for health. A further substantial amount goes directly to the devolved administrations, who have the power to decide how it is spent.
However, this is misleading, since the vast majority is being spent on COVID-related procurement rather than frontline services. Test and trace, operated by the private sector, has been allocated £22 billion (a very large increase from the initial £12 billion). A further £15 billion is for personal protective equipment (PPE), which is eye-catching given the government’s poor record in getting value for money on this. Likewise £2.7 billion is being spent on developing and procuring vaccines.
Next year sees COVID-related support scaled back to a “mere” £55 billion, with nearly half set aside as contingency. The additional recovery money for the NHS seems miserly – that only £1 billion is being spent on addressing the backlog for elective treatments is particularly concerning.
Funding for councils – £5.4 billion in 2020-21 and £3 billion in 2021-22 – likewise seems tiny relative to increases in demand.
All of the money will be borrowed, although the spending review suggests this won’t be a problem, with government spending on debt interest actually expected to fall very substantially over the next few years.
Armed forces and foreign aid
Simon J. Smith, Associate Professor of Security and International Relations, Staffordshire University
The chancellor claimed the spending review “strengthens the United Kingdom’s place in the world”, and that the UK will remain “open and outward looking”. However, the financial resources required to make a convincing case for a global Britain were lacking.
Rishi Sunak said the foreign aid budget would be cut to 0.5% of national income (down from 0.7%) in 2021, as retaining the current budget would be “difficult to justify to the British people”. Some of these savings, however, will be allocated to defence. It was announced soon after that there would be £24 billion investment in defence over the next four years, “allowing us to provide security not just for our country but around the world”.
Although it is not stated as such, it would seem there has been a reduction to the foreign aid budget in order to provide savings to boost defence investment. Neither of these announcements came as a surprise, as the prime minister signalled “the biggest defence investment since the end of the cold war” on November 19, saying that “the defence of the realm must come first”.
There is no doubt that this is a serious escalation of investment and a demonstration that defence secretary Ben Wallace and chief of the defence staff General Sir Nick Carter have convinced the Prime Minister to confirm four-year funding for the military.
What will be prioritised for investment? Current suggestions are that the money is for a national cyber force, a space command and an artificial intelligence agency. An even larger question is for what grand strategic purpose these capabilities will be used.
In any case, tough decisions will need to be made in terms of pursuing savings elsewhere in the force. As Michael Clarke, former director general of the Royal United Services Institute thinktank put it, which older areas of the armed forces are going to “have to be cut to be able to afford the new bells and whistles”? Moreover, will the British people think these eye-watering costs are justified in the age of COVID and when the government is set to borrow £394 billion this year alone.
Listen to Recovery, a series from The Anthill Podcast, to hear more about how the world recovered from crises including the Lisbon earthquake, world wars, the collapse of the Soviet Union and the 2008 financial crisis. Start here with episode one on the recovery after the Black Death.
by : Alex de Ruyter, Professor of Economics and Director of the Centre for Brexit Studies, Birmingham City University