Spending Review

“The economic emergency has only just begun”, according to the Chancellor.
He was delivering his spending review earlier this afternoon.

Now, you will forgive me if I felt he was somewhat disingenuous. The OBR now estimates that the Treasury will borrow £394 bn this year, up from the August forecast of £372 bn. This is nearly 20% of GDP, a record for peacetime Britain.

He knew months ago that he was spending like a drunken sailor on shore leave. You don’t spend like that and not expect to have an “economic emergency” of sorts.

We hosted a webinar recently to talk about his U-turn on the Job Retention Scheme. At that point it seemed incongruous to me that we had just entered a lockdown, due to “automatically expire” on 2 December, whilst at the same time Furlough was being extended to 31 March 2021.

Of course, there was no incongruity. What is clear now is that the end of the lockdown isn’t really the end of the lockdown. We will be moving into a “tiered system”, aka clever political rebranding of lockdown.

So de facto lockdown, and Furlough, until 31 March 2021.

The relevance of next March is that this touches on the next fiscal year. For some employees that will mean a full 12 months in some sort of government (I mean taxpayer) subsidised wage scheme. The relevance of 12 months, a whole year, is that it’s difficult to see that through the lens of something that is “one off” or “transitional”. The Chancellor today didn’t make any huge announcements: a few tenths of a percent off foreign aid, certain public sector jobs having their pay frozen (frozen, note, not reduced). The explicit comment that changes to the tax system are not for discussion at this time.

All this continues to point to a situation where there is no clear exit plan. Coming back to that comment of the Chancellor, that the “economic emergency has only just begun”, points to a realisation that turning this around is going to be a long process. That we are going to see the impacts not just in this fiscal year, but in the next, and the next…

The argument is often put that, with such low interest rates, and a vaccine on the horizon, Keynesian deficit spending on large-scale infrastructure projects is the answer. But that is only the answer if those large-scale projects ultimately will pay back more than the respective debt costs. And all the signs are that the changes to our economy, social norms and behaviours wreaked by the government’s responses to Coronavirus, are structural and are long-term.

How hard has it been for employers to welcome back a member of staff, often remotely, after such a long period of Furlough leave? How many of us will go back to making our regular commutes? How many of us will buy things from the supermarkets or the High Street, rather than Amazon, in the future? Or go to restaurants instead of take out? Will we stick to the habits we’ve become accustomed to over the last seven or eight months? Will businesses, having necessarily been through painful changes and reorganisations, go back to how it was before?

I don’t think that they will.

I’m starting to think of Rishi Sunak as the “Long Grass Chancellor”. It’s always easy to be the one doling out the free drinks at the beginning of the party. Much harder to be the one taking the punch bowl away at the end of the evening.

It seems that many of the hard choices have again been “left to another day”. The timing, of 31 March, does point to next tax year doesn’t it?

Whilst a lot of us have stood in wonder as global markets have seemingly readily accepted the growing indebtedness of the UK as Her Majesty’s government prints fiat money like the clappers, we have come to realise that it may not be an economic crisis that brings matters to a head. Instead, with us all continuing to have fundamental freedoms restricted for a period long beyond what the Prime Minister announced on the 23rd of March this year, it may well be a political crisis that forces Rishi to eventually collect his ball from the long grass.

The grim headlines:

• Underlying debt will continue rising every year to 97.5% of GDP by 2025/26. Yet it won’t be enough to stop a tide of unemployment.
• Unemployment is set to rise to a peak of 7.5% or 2.6million people by the second quarter of 2021.
• Britain’s economy will have contracted this year by 11.3% – the largest fall in more than 300 years.
• It is expected to resume growing by 5.5% next year, 6.6% in 2022, then 2.3%, 1.7% and 1.8% in the following years. But it is not expected to return to pre-crisis levels until the end of 2022.