2.22pm: Analyst says UK economy faces “colossal challenge”
Reaction from the spending review has become to filter through, with Ayush Ansal, chief investment officer of hedge fund Crimson Black Capital, saying the OBR data indicated that the UK faces “a colossal challenge in the years ahead” despite vaccine news currently driving market sentiment.
“Paradoxically, it’s that point in the future when life returns to a relative normal based on widespread vaccination, and the adrenaline created by the pandemic has passed, that we could see sentiment go flat”, Ansal said, adding that without the “adrenaline of the pandemic pumping through them, markets will be looking at the grim economic fallout in the cold light of day”.
Meanwhile, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said “desperate times need desperate measures and sustained government spending is vital to help the economy climb out of the abyss”.
“The mountain of debt the UK has built up to prevent more jobs being washed away is towering but it’s not going to be chipped away at any time soon. Unpalatable decisions like personal tax rises have been pushed into the future, not just because voters will have little appetite for them, but because the Chancellor doesn’t think the economy will have the strength to digest them right now. However, the crisis has shone a spotlight on the need for better social care with so many people isolated at home. So council taxes will rise to meet these costs. A freeze on public sector pay has also been limited to those earning above the median wage, and a million NHS staff will get a pay rise”, Streeter said.
The analysts also highlighted the “real risk” presented by the potential lack of a Brexit deal before the end of the year, saying that a no-deal exit could “cause further economic pain next year”.
On the markets, the FTSE 100 seemed to have acknowledged the glum reality facing the UK economy heading into 2021, with the FTSE 100 index down 41 points at around 2.20pm.
The spending review, relatively short by most standards, was predictably light on a number of details, particularly relating to the possibility of tax increases, which the Chancellor may be holding back until the full budget in the spring. Also absent was anything regarding Brexit, which is bearing down on the country with the transition period set to end on December 31 and a deal with the EU yet to make an appearance.
However, the key announcements in the statement have unveiled a number of sobering economic statistics as well as a number of government policies;
- The OBR expects the UK economy to shrink 11.3% this year, the largest decline in over 300 years, returning to growth of 5.5% in 2021
- The government’s borrowing has also broken records, with the figure forecast to be GBP394bn this year, the highest peacetime figure in history
- Non-NHS public sector workers earning over GBP24,000 will see their pay frozen next year
- A GBP2.9bn Restart Scheme will be set up to help 1mln unemployed back into work
- The government will lower its foreign aid budget to 0.5% of national income from 0.7%
- A new national investment bank and a national housebuilding fund will be introduced to boost infrastructure investment, while a GBP4bn ‘levelling up fund’ will be set up through which local areas can bid to fund projects
1.13pm: Wrapping up
Sunak is now wrapping up the spending review statement, saying that alongside the unveiled proposals the government is also working to deliver a new immigration system, a new planning system as well as valuing free speech and jobs.
He adds that “encouraging the individual” and communities remains the cornerstone of a “thriving society”.
The statement is now over and the Labour Shadow Chancellor Anneliese Dodds is no0w responding to the review.
1.09pm: Foreign aid budget cut; national infrastructure bank unveiled
The Chancellor is addressing departmental spending, saying that day to day expenditure will rise 3.8%, the fastest rise in cash terms in 15 years. Schools will also receive an additional GBP2.2bn while the Treasury will shell out more cash for prison spaces.
While the review was unlikely to see much mention of cuts, one area in the crosshairs in the government’s foreign aid budget, which Sunak says will be lowered to 0.5% of the budget from its current level of 0.7%.
He says this reduction will still make the UK the second largest foreign aid spender in the G7 group of nations.
Looking to infrastructure, Sunak says capital spending will rise to GBP100bn next year and a national homebuilding fund will be introduced as well as more funding for broadband, roads, rail and buses.
He adds that the government will establish a new national investment bank to support infrastructure projects.
Meanwhile, the Chancellor has also unveiled a GBP4bn ‘levelling up fund’ through which local areas can bid to fund projects, provided they can secure local support.
1.00pm: NHS and living wage rises, but rest of public sector pay frozen
Sunak continues by announcing that the OBR expects unemployment to hit 7.5% in the second quarter of next year, around
He also says the pandemic has deepened disparity between wages in the public and private sector, with pay in the former rising while the later has declined.
As a result, he says he “cannot justify” a pay rise for state workers “at this time of crisis”, and says the treasury will provide a pay rise for NHS workers, but pay increases will be paused for the rest of the public sector. This public sector workers earnings under GBP24,000 will also see their pay increased by GBP250.
This means the majority of public sector workers will see a pay increase, Sunak says, adding the government will also increase the National Living Wage by 2.2% to GBP8.91 an hour.
Sunak has also announced a GBP2.9bn Restart Scheme to help 1mln unemployed Britons back into work.
12.52pm: Statement begins; economy set to shrink 11.3% in 2020
Sunak has begun delivering his statement on the spending review, saying that the review will deliver of the priorities of the British people and that an economic emergency is “just beginning” while the health emergency is ongoing.
He says the government is currently providing GBP280bn to alleviate the effects of COVID-19 and that in the next financial year the government will allocate another GBP55bn to protect public services.
Turning to the OBR forecasts, Sunak says the economy will contract 11.3% this year, the largest fall in over 300 years, while next year the economy is expected to grow 5.5% in 2021. But the economy will not return to pre-pandemic levels until 2022.
He adds that the UK is expected to borrow GBP394bn this year, the highest peacetime borrowing figure for the country.
12.32pm: Spending review to start soon
Sunak is expected to begin delivering his statement on the Treasury’s spending review shortly once Prime Minister’s Questions has concluded.
11.55am: Welcome to coverage of the spending review
Chancellor of the Exchequer Rishi Sunak is scheduled to deliver a spending review to the House of Commons later today, and is expected to outline both the government’s plans for the coming financial year as well as the latest public finance and economic forecasts from the Office for Budget Responsibility (OBR).
Sunak already faces a somewhat frosty reception following reports of a potential freeze on public sector wages, although others will be eyeing any detail on the government’s spending pledges as well as any signs of tax rises or other methods the Treasury may be considering to help repair the economy following the damage inflicted by COVID-19.
The Chancellor is expected to begin delivering his statement at around 12.30pm today, this report will track the key announcements and any potential impacts on different sectors of the economy…