Chancellor Rishi Sunak has unveiled the government’s spending plans for the coming year in his Spending Review given on Wednesday 25 November.
A Spending Review sets out how the government plans to spend money and what each department will receive. It covers a range of areas, like health, policing, and education. It also covers public sector pay and money for the devolved administrations of Scotland, Wales, and Northern Ireland.
Usually, a Spending Review will cover several financial years, allowing the government and departments to plan. However, Rishi Sunak set out spending plans for the 2021/2022 tax year only due to the economic uncertainty caused by the Covid-19 pandemic.
The Spending Review was delivered against a backdrop of challenges. The Office for Budget Responsibility (OBR) predicts the government will borrow £394 billion in 2020/21, far higher than in previous years as a result of the pandemic.
This figure represents around a fifth of UK GDP and means borrowing is at its highest levels in peacetime history. While the Chancellor committed to supporting Covid-19 support schemes, he notes that this level of borrowing is unsustainable in the medium term.
Economic forecasts from the OBR also paint a gloomy picture. The economy is forecast to contract by 11.3% this year, the largest fall in output for 300 years. While the economy is expected to grow by 5.5% next year and 6.6% in 2022, Rishi Sunak said the economic damage would be lasting. Output is not expected to return to pre-crisis levels until the fourth quarter of 2022.
Due to the economic challenges, the OBR predicts unemployment will reach a peak of 7.5% in the second quarter of 2021.
Rishi Sunak described the economic emergency as ‘only just beginning’. He added the immediate priority was to protect people and livelihoods, but the Spending Review also delivers ‘stronger public services’ and a ‘once in a generation investment in infrastructure’.
Unsurprisingly, the cost of responding to the Covid-19 crisis was top of the agenda. The government is providing £280 billion to get the country through Covid-19, the Chancellor said.
Next year, he has set aside an initial £18 billion to spend on testing, PPE, and vaccines.
Rishi Sunak argues that, compared to private sector workers, public sector employees have benefited from higher pay rises and more security during the crisis. As a result, he said he cannot justify across the board pay increases.
One million nurses, doctors, and other NHS employees will receive a pay rise. Other public sector workers that earn below a median wage of £24,000 (around 2.1 million people) will receive a guaranteed pay rise of at least £250. All other public sector employees will have pay rises paused next year.
Around two million people will benefit from a 2.2% national living wage increase, taking this to £8.91 per hour. The increase will apply to all workers over the age of 23, as previously the national living wage was only available to those aged 25 and over.
Sunak confirmed claims that the UK will abandon the 0.7% overseas aid target and spend 0.5% of national income on aid next year. This will amount to £10 billion.
The Chancellor argued that spending so much on international aid is difficult to justify while borrowing is so high. The government plans to return to the 0.7% target once borrowing is lower.
Total departmental spending will increase by 3.8% in real terms, the fastest growth rate in 15 years. Headline announcements for departmental spending include:
Investment in infrastructure will total £100 billion next year, with plans to deliver the highest sustained investment in four decades. This is supported by plans to launch a new infrastructure bank, which will be based in the north of England.
The Chancellor also announced a ‘levelling up’ fund of £4 billion. Local areas can bid for the funding to support local projects.
Please contact us if you have any questions about the Spending Review and what it means for you.