26 November 2020: Against a gloomy backdrop of the largest annual GDP fall in 300 years, the Chancellor announced unparalleled levels of spending and borrowing to meet the challenges of COVID-19 in 2021 and beyond.

Setting out the government’s spending plans for 2021-22, Chancellor Rishi Sunak told MPs that while the health emergency was not yet over, the economic emergency had only just begun.

The Spending Review contained a raft of investment announcements, including money for public services and infrastructure. However, it also contained a sting in the tail as the Chancellor announced a pay freeze for millions of public sector workers and a cut to the overseas aid budget.

The economic forecast from the Office for Budget Responsibility (OBR) was as bad as many had predicted, with the economy dropping by 11.3% in 2020 – the largest annual fall since the Great Frost of 1709. The report stated it will take until the end of 2022 to recover to pre-pandemic levels.

The OBR also forecast that unemployment will peak at 7.5% (or 2.6 million people) next year, before tapering down to 4.4% by the end of 2024.

Annual borrowing this year has been pushed to £394bn (19% of GDP, the highest since 1944). It was expected to be around £350bn but has been extended £20bn by the extension of the various furlough schemes, while £30bn is down to anticipated write-offs on lending schemes such as CBILS.

Borrow prudently to get back on track

Commenting on the figures Michael Izza, ICAEW Chief Executive, said: “While today’s debt figures are eye-watering, if the Chancellor borrows prudently while interest rates are low, then he should be able to get the economy back on track. Nevertheless, it’s clear from today’s forecasts that the fallout from COVID-19 will hang over the next few years, if not the whole decade.

“Businesses need help now, but will also require support for the future, so the announcements on infrastructure investment, innovation and jobs are welcome. However, the level of borrowing required to secure our post-pandemic recovery will take generations to repay, heaping more intergenerational debt on top of that still owed from the last financial crisis.

“The Chancellor’s announcement comes at a critical time, with less than 40 days until the end of the Brexit transition period. Politicians should be moving heaven and earth to secure the best possible trade deal to help stimulate and sustain our economic recovery.”

Sunak confirmed the anticipated pay freeze for public sector workers but excluded some NHS staff and those earning less than £24,000. From April, the National Living Wage will increase by 2.2% - or 19p - to £8.91 an hour, with the rate extended to those aged 23 and over.

Levelling up and infrastructure

The Chancellor also announced a “levelling up” fund of £4bn, where areas can bid to fund local projects with “real impact”. Further details on the fund will be released in due course, but Sunak told MPs that applications need to be backed by local MPs and projects must be delivered during this current parliament (ending on or before 2024).

Sunak also confirmed plans for a National Infrastructure Bank. Headquartered “somewhere in the north of England”, the bank will work with the private sector to finance new investment projects across the UK. It will in part replace funds previously obtained from the European Investment Bank, of which the UK will no longer be a member following the end of the Brexit transition period.

The long-awaited National Infrastructure Strategy and the government’s response to the National Infrastructure Assessment were also finally published yesterday.

The Spending Review also trailed £100bn worth of capital investment next year, a £27bn real terms increase on 2019-20 .

Brexit conspicuous by its absence

Given that the review outlined major plans to rebuild and reshape the UK economy, there was little that addressed the change Brexit will inevitably bring about once the transition period ends.

One consequence of Brexit was addressed in a roundabout way, however. The review reiterated that funding from the UK Shared Prosperity Fund (UKSPF) will increase so it will at least match receipts from EU structural funds. However, it lacked a clear timeline. If there are any delays to the funding, it could cause further divergence across regions already been hit hard by the pandemic that have previously relied on EU funding.

It is also unclear how the fund will be distributed, and how much say devolved powers will have in this. It will, however, be aligned with net-zero objectives. ICAEW will push for details to be published as soon as possible to provide more certainty for businesses, boost confidence and unlock private sector investment.

The Spending Review also outlined plans to deliver 10 freeports across the UK, with at least one in each nation. The implication is that these will be placed in areas in need of regeneration. This feeds into some of the government’s plans to regenerate communities, but is not without its complications.