Here is what to expect from the chancellor’s mini-budget on Wednesday.
New forecasts from the government’s tax and spending watchdog, the Office for Budget Responsibility (OBR), are expected to show the UK’s economy is heading for the biggest decline in more than 300 years in 2020, with a drop in gross domestic product (GDP) of more than 10%.
The chancellor could draw some comfort because the forecasts probably won’t be as bad as the OBR expected earlier this year, when it pencilled in a 13% decline in GDP for 2020. But after a rapid summer rebound, the second wave and return to lockdown will result in a double-dip recession this winter.
Slightly better bad news is still bad news. Meanwhile, the watchdog is expected to forecast rising unemployment next year – despite the extension of furlough – and a degree of long-term scarring for the economy, with the UK taking several years to return to its pre-pandemic economic peak.
Providing a dramatic backdrop to the chancellor’s spending decisions, the latest figures from the OBR are expected to forecast a budget deficit – the gap between spending and tax income – of about £400bn this year, as spending on the Covid crisis balloons and tax receipts evaporate.
More than twice the size of the deficit incurred during the 2008 financial crisis, Sunak is expected to use these figures to argue “hard choices” must be made to balance the books – despite the International Monetary Fund calling for growth rather than austerity in response to Covid-19.
The chancellor could set out a longer-term vision for fixing the public finances, including through higher taxes. Changes are unlikely to be announced until the spring, but could include a hike in capital gains tax after a government review. Road pricing could also be used to plug the hole left by fuel taxes, after bringing forward the ban on the sale of petrol and diesel cars to 2030.
Public sector pay squeeze
The chancellor is expected to say savings are required to fund spending elsewhere. Top of the list is likely to be a renewed public sector pay squeeze – enraging unions and hitting workers on the frontline of the pandemic.
Echoing his predecessor, George Osborne, Sunak will argue this is fair because public sector pay has held up better than private sector wages. However, the return to pay restraint comes after a decade of austerity that has left public sector pay 1.5% lower after accounting for inflation, and at the lowest level relative to the private sector in decades.
The Institute for Fiscal Studies says public sector workers can expect no more than 1% next year. The Centre for Policy Studies, a free-market thinktank whose director helped write the 2019 Conservative manifesto, argues a three-year pay freeze would save a total £23bn.
Sunak could also put the brakes on the government plan to increase the national living wage, which would be another blow for low-income households. Ahead of the 2019 election the Conservatives had promised to end low pay by raising the legal wage floor to two-thirds of median earnings by 2024. However, the strategy has an “emergency brake” clause that can be applied during times of economic stress.
In an attempt to reset the government’s agenda and provide a vision for the UK economy beyond the Covid pandemic, billions of pounds for infrastructure projects are expected to be announced to meet the government’s “levelling-up” agenda.
Sunak will earmark £1.6bn for local roads aimed at fixing potholes, congestion pinch-points and other upgrades, drawn from a £600bn commitment made at the March budget. Plans to move civil servants to the north of England will also be confirmed.
The delayed national infrastructure strategy, which sets out the government’s priorities for major public works, will be published, and changes will be made to the Treasury green book, which guides spending decisions, to boost investment outside of London and the south-sast of England. Sunak will also set out the government’s plan to replace EU funding spent in struggling parts of the country.
An additional £151m will be provided for tackling homelessness. However, Sunak is under pressure to increase funding for local authority budgets, with councils across the country close to breaking point.
Covid and Brexit
The pandemic and end of the Brexit transition on 31 December will dominate the next few months – and both will involve costs. Expectations are on Sunak to find funds for the NHS, test and trace, protective equipment and the mass delivery of vaccines when they become available.
The chancellor had already committed to extending the furlough scheme until the end of March, in a spending commitment costing billions of pounds. However, businesses are calling for additional steps to be made to support the economy. Whitehall departments will also need money as they take on extra post-Brexit responsibilities.
Job creation and welfare support
As many as 9.6m jobs in total have been furloughed at a cost of more £40bn since the start of the flagship wage subsidy scheme in March, keeping millions of people in work who risked losing their jobs during lockdown. Aiming to prevent a return to the 1980s when unemployment hit a post-war high under the Thatcher government, the chancellor will use the spending review to plough more money into job creation.
Sunak will pump £2.9bn into a new three-year “restart” scheme to help more than 1 million unemployed people look for work. Those out of a job for more than 12 months will get help with regular, intensive support. A further £1.4bn will also be ploughed into the Job Centre network.
Attention will, however, also be focused on universal credit, with the chancellor under pressure to maintain the temporary £20 per week increase in the benefit system made earlier this year, which is due to be cut again from April. Sunak has also been lobbied to scrap the pensions-triple lock to save money.
Boris Johnson’s £16.5bn defence budget settlement, designed to strengthen UK power overseas, is set to be confirmed in the spending review. However, there is speculation that cuts to the overseas aid budget could be made to save money, in a development experts warn could damage the nation’s international standing.
The UK has a legal commitment to spend 0.7% of GDP on overseas development. But there is a get-out clause in times of exceptional economic circumstances, including when there is a substantial fall in national income.
The aid budget was set to shrink anyway by about £1.5bn as a result of the recession. Cutting it from 0.7% to 0.5% of GDP would probably save a further £3bn-4bn and delight the right of the Conservative party who have long campaigned for a cut.