An uncertain background
Pre-election Spending Reviews always offer an insight into the upcoming General Election campaign, and today’s statement by the Chancellor is no exception. However, there has rarely been a more uncertain period in the UK economy. Sterling is trading at early 1980s levels against the dollar, and banks and funds are warning of chaos and price hikes if a no-deal Brexit takes place. Inflation is gradually rising (reaching 2.1% in July 2019), but the Bank of England is being forced to remain in wait-and-see mode until there is clarity on Brexit. The entire economy remains vulnerable and at-risk as the possibility of no-deal Brexit continues.
Meanwhile, under his government’s self-imposed rules, the Chancellor is bound to keep public debt falling as a % of GDP, and to ensure borrowing (adjusted for the state of the economy) is below 2% of GDP in 2020-21. In theory, he is also supposed to keep the previous Chancellor’s pledge to eliminate the deficit by the mid 2020s, which most economists believe to be almost impossible.
Adding to the backdrop of economic uncertainty, the UK now looks set to be heading into the political uncertainty of a General Election. In many respects, it is a terrible time to be making spending pledges – but election campaigns require them, and that is why today’s Spending Review will signal substantial increases in public spending despite political and economic upheavals. The last Review – traditionally used to give government departments the ability to plan several years ahead – was in 2015. Today’s Spending Review will only cover 2020-21 because of the massive uncertainty over the future health of the economy and public finances. However, this 12 month period will see the new PM attempt to follow through on recent pledges to increase spending on areas of public concern. Supporters of the PM have been arguing that it is time for a temporary freeze on deficit reduction, and necessary to give the economy a post-Brexit boost.
Likely spending announcements
Announcements we are likely to see today include:
- No-deal Brexit planning – the government has announced an extra £2bn for the UK Border Force, assistance for UK ports, and a possible replacement for the EU Galileo satellite navigation system. This brings the running total of no-deal costs to £8.3bn, comprising the original £4.2bn, an extra £2.1bn allocated in August for stockpiling medicines and hiring additional border officials, and the new £2bn;
- Health – the government plans to spend £1.8bn upgrading 20 hospitals in addition to continuing to put an extra £34bn into the NHS;
- Schools – the government will invest an extra £14bn in primary and secondary schools over 3 years (£2.6bn in 2020-21, £4.8bn in 21-22, £7.1bn in 22-23), bringing school budgets back to around 2009-2010 levels. It will also spend an additional £700m on children with special education needs and disabilities, and has allocated £100m for the introduction of T-levels, the new 2 year blended academic/vocational qualifications for 16-19 year olds;
- Policing and crime – the government will promise to hire 20,000 extra police officers (at a cost of around £500m next year, rising to £1.1bn by 2021-22), fund an extra 10,000 prison places by the mid 2020s, and allocate £2.5bn to improve prisons;
- Defence – the government hopes to increase the current 2.1% of GDP allocated to defence spending to 0.5% above inflation (in a diplomatic gesture towards US expectations for NATO members), and to give a further £90m to UK embassies and spend £60m on a campaign promoting trade with the UK;
- International development – the government has ruled out making cuts to overseas aid funding, which is set at 0.7% GDP each year;
- Infrastructure – there is speculation that announcements may include the scrapping of the HS2 high speed rail link (which the government has already announced is likely to be delayed until 2031 amid soaring costs of £88bn), and abolishing the proposed third runway for Heathrow;
- Social care – although the PM has vowed to fix the social care funding crisis, large scale spending on this is not thought to be likely, although local councils will get an extra £3.5bn next year with around £1bn of this earmarked for social care services;
- Student loans – student loan reforms are also not thought to feature this time, despite the Augar review proposals in May 2019 to cap tuition fees and cut interest payments on loans – however, substantial reforms are certainly coming soon, as the government looks to keep billions of pounds of debt off its balance sheet;
- Pension tax – another topic for the autumn Budget will be pension tax taper, with urgent measures needed to stop NHS doctors, in particular, from cutting their hours or retiring early – the Chancellor is unlikely to commit to government spending on this at this point, but it may well get a mention in the Spending Review to reaffirm that the government is taking the issue seriously;
- Older people – facing a likely General Election, the PM will also ensure that there is some good news for older people – one option might be to reaffirm the ‘triple lock’ (whereby the basic state pension will always rise by a minimum of either 2.5%, the rate of inflation, or average earnings growth – whichever is largest), but another would be to find some cash for a temporary funding fix to the cancellation of free TV licences for over 75s.
The PM has signalled a desire to raise the higher rate income tax threshold from £50,000 to £80,000 (costing £9bn), and to review the basic rate threshold of £12,500. He is also thought to be looking at raising the level above which people have to pay NI (£719 month / £8632 year). However decisions on these changes are likely to be left to the next Budget (due late November – early December), giving the Chancellor a little room for manoeuvre if the economic situation alters.
Responsible or reckless?
The Institute for Fiscal Studies has argued that the Chancellor is making major fiscal announcements without adequate financial forecasting, since there are no up to date forecasts available from the OBR. The Spring Statement from the OBR – on which the Chancellor is relying – gave the government £15bn of headroom against its target to keep borrowing below 2% of national income next year. However, economic forecasts are now deteriorating and the picture is likely to have altered significantly. The IFS believes that the recent economic slump will have wiped out any fiscal headroom, and that the government may well have to find an extra £5bn to pay for their pledges. If this is true, these announcements may well herald forthcoming tax increases before next year, with no indication where these might fall, unless the economy rallies and the uncertainty of Brexit reaches a final settlement.