Thanks to coronavirus and Brexit, 2020 is a hinge of history – where the years that follow promise to be nothing like those before. Rishi Sunak, the chancellor of the exchequer, had a chance, with his comprehensive spending review on Wednesday, to have made this year an economic turning point. He could have rejected the old ways of thinking and marked a big change of direction. It is a shame that he did not.
There may be a good reason that he swerved the challenges of the age. Mr Sunak may plausibly claim that he could not possibly know where the country was going. The future path of the virus, the public health restrictions required to keep it in check, and the prospects for the smooth rollout of an effective vaccine are unknown. But the economic crisis that the country confronts is staring him in the face.
Britain is in for a spell of high unemployment, low inflation and low growth. A double whammy of a lingering pandemic and a no-deal Brexit could see 4.2 million people out of work by 2022. Only the state can take up the slack if the private sector does not. This is politically inconvenient for Mr Sunak to admit. The Tories have won four elections in a row by claiming that Labour’s plans are unaffordable. They want to wear the mantle of fiscal rectitude in 2024. Hence Mr Sunak trades in economic illiteracy, claiming that it is “unsustainable” that UK government debt is almost as big as the economy.
This gives the chancellor cover to play politics with people’s lives. Cutting the aid budget, even temporarily, will hurt the world’s poorest, but it allows Mr Sunak to pander, simultaneously, to the worst instincts of reactionary voters and fiscal hawks on his backbenches.
There will be a price to pay at home for this ideological approach. Although the Office for Budget Responsibility forecasts a return to normal growth, it is unclear how this will come about without heroic assumptions about the investment and spending appetite of businesses and households in a Covid-scarred UK.
The government ought to step in and stimulate the economy rather than suck demand out of it. It is a mistake for Mr Sunak to institute real-terms pay cuts for millions of public sector workers. They would have been spending into an economy in need of a boost. Similarly, by not extending the £20-a-week uplift to universal credit, 6 million low-income households will lose more than £1,000 a year just when the OBR expects unemployment to reach its peak.
The chancellor did announce very significant increases in spending to combat the pandemic. But they will disappear with the virus. That is sensible, but it makes no sense to slash £10bn from planned normal public service spending next year, a cut that rises to £13bn in 2025. The billion pounds extra for social care, on the frontline in the fight against coronavirus, is an insult to families and key workers when compared to the £8bn in cuts that the sector has endured since 2010. Boris Johnson, the prime minister, makes a great play of disliking austerity, but he seems happy to endorse a version of it.
Fiscal deficits are necessary in a crisis. In the longer term, the government’s borrowing levels are determined by the desire of private individuals and companies to save, and what level of resources the government will leave idle. High unemployment represents a waste of resources so large that no one interested in efficiency can be complacent about it. Mr Sunak’s Restart scheme funds job searches for jobs that won’t be there. He should be more ambitious, ideally with a job guarantee scheme that creates work.
The chancellor is betting that a crisis can be averted and normal politics can be resumed. But if he is wrong, and the problems facing the government mount as trust dwindles, then the country will be in for a very rocky ride.