Rishi Sunak’s spending review is less than envisaged: the UK Chancellor’s statement to Parliament contained few major changes to the budgetary path the country was already on, beyond additional short-term spending for the pandemic. Even so, outside of the UK, the event was enlightening as it approached the dilemmas Covid-19 has placed on every government.
As my colleague Chris Giles points out, the economic outlook is dire and the economy has been in deep recession for 300 years. As far as the eye can see, there is red ink: public borrowing is expected to reach £ 394 billion. The UK is among the worst in Europe for both growth and public finances, but the challenges in other countries are similar. Governments everywhere have to spend a lot of money on immediate health and economic emergencies. In addition, politicians and decision-makers are faced with three big questions.
The UK spending review shows how the government is responding.
The first is whether to worry about public finances. The instinct to do this is understandable: the deficit this year will be larger than it has ever been since World War II, and the debt ratio is now projected to be 30 percent of GDP higher than expected before the pandemic. However, this is not a good measure of whether public finances are sound. Instead, look at the most interesting table from the Independent Bureau of Budgetary Responsibility (see below) of government spending on debt interest as a percentage of revenue.
Even with the highest debt ratio in decades, the government’s cost to service that debt is the lowest since the war and is falling. So what does it take to make “tough decisions” to put public finances on a solid footing? None – provided that today’s low interest rates are locked in and debt doesn’t go up forever. The first caveat concerns debt management (the UK government can borrow at 0.9 percent interest for 30 years), not budgeting. The second requires that the deficit not be too large when the economy is back on its long-term path – but only then. Any signals of austerity today are likely to delay the recovery by undermining confidence in its strength.
For most of his testimony, the Chancellor has done reasonably well in this regard. His comments on the sustainability of public finances were short and superficial: “As high as these costs are, the costs of inaction would have been far higher. However, this situation is clearly unsustainable in the medium term. . . And we have a responsibility to return to sustainable fiscal positions once the economy has recovered. “Then he went on – but unfortunately came back to the wrong cause of a” fiscal emergency “which required the” tough choice “of cutting UK aid by nearly a third. This was a morally ugly act made worse by intellectual dishonesty.
While there is no tax emergency, there is clearly an economic emergency. The second big question is how to deal with this given the enormous uncertainty in the economy. As the independent forecasts of the UK economy have shown, everything depends on the future course of the pandemic. The most important thing we don’t know is how much permanent damage economic activity will do, how much “scars” it will leave. The OBR scenarios range from a long-term GDP deficit of zero to 6 percent compared to what was expected before the coronavirus.
However, government action can help improve or worsen this uncertainty, as the extent of scarring will depend in part on how deep and persistent the temporary slump is. That can influence politics. This is why, as I pointed out a few weeks ago, Sunak wrongly dropped a full, multi-year spending review because of the uncertain outlook. More detailed, longer-term spending commitments are one way to provide security for the private sector and to encourage the spending and investment on which a rapid recovery – and therefore better public finances – depends. From a government that voluntarily creates the additional uncertainty of a possible no-deal Brexit (see chart below), this is the least one could ask for.
But it’s not all bad. At least in some areas – especially some capital investments – the Chancellor has committed to five-year spending programs. These amount to just over £ 40 billion a year – around half of that for transport infrastructure – or around 40 percent of the total investment. This is undoubtedly helpful; This type of predictability could usefully have been extended to other expenses.
The third question is how to do what each country is now claiming to “rebuild better”. The UK government is sticking to its vision of “leveling up” which is undeniably worthwhile: UK territorial inequalities are a serious economic and political disease. The best that can be said for this spending review is that it doesn’t deviate from the spending pledges the government made in the March budget, especially on investments. But there’s not much more to it (the government actually cut the previously planned total spending a little bit from 2023).
Some new funding has been made available for local projects in difficult areas – albeit with a centralized bid structure that smells terribly of feudal almsgiving and risks becoming overly politicized. There is also a risk of being undermined by the indirect effects of other decisions. A wage freeze on some public sector workers could hit lower-income regions with a higher proportion of such jobs, and the silence on whether a temporary increase in universal credit will expire threatens incomes in the “red wall” areas that Conservatives believe in Labor won disproportionately in December.
All in all, it’s a puzzling situation. The Chancellor has presented a budget update that fully addresses the coronavirus emergency itself, but does not see the pandemic as either a reason or an opportunity to change the medium-term budget strategy. On the other hand, this lack of new ambition runs counter to a pre-pandemic economic plan that has been the most ambitious of any British government for decades. But if major disruptions like this year don’t make you rethink your strategy, what would that do? The verdict must surely be: “Could do better”.
Other readable elements
Norway’s trillion dollar man has lunch with the FT: I interviewed Yngve Slyngstad, who recently resigned after running the Norwegian sovereign wealth fund for 13 years.
In my column this week, I argue that European countries should withstand Hungary and Poland’s veto of the EU budget.
When introducing our report on the Future of Cities, I found that many city guides felt that the correct response to the pandemic was to reinforce what they had already tried. Check out the entire report.
The technological step that the pandemic is imposing on our economies is creating new jobs – albeit disproportionately for men, which increases gender inequality. My colleague Valentina Romei looks at the numbers.
Investors continue to ring in the new EU bonds. On the third issue of bonds for the EU’s SURE program for joint borrowing to finance short-term work programs in the member states, the European Commission has loans of EUR 8.5 billion at an annual interest rate of minus 0.1 percent for 15 years or only a quarter of recorded one percentage point more than in Germany.