Spending big was unavoidable, but we'll soon have to tighten our belts

·3-min read
Sunak - EPA
Sunak - EPA

The Chancellor certainly gave a stark warning when he stated that our health emergency has not yet ended but our economic emergency has only just begun.

He did not duck the grim statistics from the Office for Budget Responsibility, indicating there would be no quick, V-shaped recovery and the economy would contract by more than 11 per cent this year.

The biggest for over 300 years. As if that were not enough, national debt and annual borrowing are set to rise to levels not seen outside the two world wars.

So, the Chancellor deserves credit for spelling out the cold reality of where we are economically.

Unfortunately, there was a contradiction between this frank exposition and the rest of his speech. One sympathises with the Chancellor.

When you have a national emergency like this, there will be large, unavoidable increases in spending, whether it be on boosting the health service or supporting industry through the furlough scheme.

But these financial hits should be one-off and should not morph into general, permanent increases in spending.

Many of the across-the-board increases announced on Wedensday, however, will be a permanent additional cost.

The increase in departmental spending to £540 billion amounted this year and next to a rise of 3.8 per cent in real terms – the fastest in 15 years. Business will benefit from the huge increases in infrastructure spending.

But infrastructure also adds to debt.

It is correct that at a time of unprecedentedly low interest rates there is opportunity to invest in projects that could increase Britain’s competitiveness.

But this depends, firstly, on interest rates remaining low, which they may not do indefinitely, and also that the projects deliver measurable benefits and are completed on time.

That has not always been the case.

Economic Intelligence newsletter SUBSCRIBER (article)
Economic Intelligence newsletter SUBSCRIBER (article)

The Chancellor bravely decided to freeze much public sector pay while skilfully protecting the lower paid and increasing the living wage.

Labour opposition was predictable but it would surely be bizarre for the taxpayer to fund some people’s wage increases when the economy is shrinking and many people in the private sector are losing jobs or facing wage cuts.

The decision to cut the aid budget temporarily to 0.5 per cent of gross national income will face opposition from both sides of the House.

I have no objection to spending 0.7 per cent but it makes no sense to have a target that has to be met every year regardless of what is happening to the economy more generally.

It is understandable that the Chancellor, who has handled himself with great skill throughout the pandemic, wanted to emphasise the positives at this gloomy time.

No one would expect him to start tackling the deficit or the level of debt today.

But it might have been sensible to have reminded the country that there will have to be restraint in spending in the future if we are to avoid crippling tax increases.

At some point, too, the Chancellor will have to come forward with a new set of fiscal rules, indicating how our financial situation can be made sustainable.

Our present situation carries considerable risks. The Prime Minister has repeatedly said that there will be no return to “austerity”, that dreaded word.

It is perhaps unfortunate that Conservative politicians ever used that word instead of simply observing we will always have to live within our means.

Conservative MPs follow where they are led and seem ever more keen to spend money that is not there. But at times it sounded in the Chancellor’s speech as though golden boxes were descending from above.

Next year’s speech may have to be very different.