By Chris Roberts, Non-Executive Director & Senior Political Counsel
After the budget last March, I queried whether the plans it contained could survive Covis-19. Having paid little attention to the virus in the budget, immediately before the first lockdown, it seemed a reasonable assumption that Rishi Sunak would have to correct his plans and forecasts.
The Spending Review announced late last month confirms that. In many respects the Statement was overdue, as it constitutes the first time that the Government has actually set out what it has been spending and borrowing to deal with Covid-19.
The Government has borrowed £280bn to finance Covid-19, raising overall borrowing to £400bn, the highest levels in our economic history outside the two World Wars. Indeed, it represents 14% of GDP and one-third of total Government spending.
The statement suggests that Covid-19 will result in a permanent negative hit to the UK economy of 3%, which will have ongoing effects on public spending. This presumes an EU trade deal is secured.
Government borrowing, projected at the time of the budget to be £50bn, is now projected to be double that figure. This will result in an assumed share of spending against national income of around 42%, a level not seen (outside the financial crisis) since the mid-1980s. Unless the Government is prepared to return to such levels on a permanent basis, then further cuts or tax increases seem inevitable beyond this Review. More about that below. Sunak has also made a number of assumptions which he may again be required to revisit.
Covid-19 related public spending has increased by £113bn this year and has been budgeted to be £55bn next year. Thereafter, there is no spending proposed. Sunak assumes that the UK will need no additional Covid-19 related spend (nothing for test and trace, vaccines, PPE etc) beyond March 2022. It is a bold assumption and one in which we all hope he is correct, but if he is not, his spending plans are easily knocked off course and all assumptions with it.
Allied to this, Sunak has proposed no increase in health spending beyond that announced pre-Covid-19. This also seems overly optimistic. It assumes that any backlog in operations or diagnoses of illness (which may now be detected at more advanced stages) can be absorbed within pre-Covid-19 spending profiles.
Protected vs Non-Protected Areas of Spend
While the Government has announced a 2% increase in public spending, this is heavily skewed. The Government’s ‘protected’ public spending areas, health, education, defence, overseas aid, plus Scotland, Wales and Northern Ireland will collectively increase by 2.8%.
Remaining areas will see a combined overall cut of 0.3%. Local Government, whose allocations fall within the non-protected sphere, have been advised that the Chancellor’s figures for their spend assume that each authority will increase Council Tax by 5%. Nothing like getting someone else to levy your stealth tax!
This overall cut to non-protected areas of spending follows 10 years of austerity, in which non-health spending was cut by 19%. Further, if one excludes lower cuts in education and defence spending, the cuts in local government spending are in excess of 30%, before Sunak’s latest proposed reductions.
An analysis of spending would not normally cover anything other than the headline figure when it comes to welfare.
This year is different because of the huge impact that this has on existing Covid-19 related spend and the impact it has for Sunak’s financial assumptions.
It is worth re-emphasising that around a quarter of households (around 6m) of working age have fallen into receipt of welfare benefits during Covid-19. Spending in this area is back to 2010 (financial crisis) levels, only it is hitting a much broader swathe of the population than it did at that time.
Within the welfare sphere, there are two significant decisions in the Review which could have much broader connotations, one of which is particularly relevant to the housing and development industry.
First, Sunak has made no provision for the uplift in Universal Credit to continue beyond 31 March next year. This will hit all of those six million households of working age, unless they find work in the interim, or the Chancellor decides to continue with the supplement in the March budget.
Second, the Chancellor has left a ticking time-bomb in place in relation to the private rented sector.
During Covid-19, the Government increased Housing Benefit levels to cover the 30% cheapest private rented properties in a recipient’s area. While this is to continue, the scheme will be frozen in cash terms.
This means as rents rise, the number of properties housing benefit claimants will be able to afford, will fall. The support available to housing benefit claimants will be capped at 2019 levels and not rise in line with the market levels of rent.
This may increase homelessness and create further planning pressure from local councils for higher proportions of socially rented homes in new developments.
The Spending Review has at least provided us with a picture of how much the Government has been borrowing and spending on the Covid-19 crisis. Overall, non-Covid-19 projected spending levels in March have been cut back by £10bn next year and by £13bn over the subsequent three years. With small increases in spending projected for health, education and defence, it means the real cuts across the board elsewhere, following on from ten years of austerity, may be brutal in some areas. It would not be a surprise to see more councils defaulting and declaring bankruptcy. More broadly, the Chancellor’s forecasts seem optimistic and are based on:
And for good measure, there are ongoing estimates as to things such as the cost of our ageing society. That is projected to be around £40bn over the next decade, regardless of everything else.
The Chancellor will prove to be extremely lucky should all the presumptions in the Spending Review fall his way.
They almost certainly will not, so higher taxes (beyond those he has all but dropped onto councils) seem extremely likely.