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Chief Economist’s note: Spending Review 2020

Chief Economist’s note: Spending Review 2020

Yael Selfin, Chief Economist in the UK, comments on the Spending Review announcement.

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Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK

Contact

Also on home.kpmg

Key points

  • The Chancellor announced further spending on government’s priority areas but left important parts of the new economy out
  • The winners include health and defence while international aid is set to lose out 
  • The state of public finances will require some consolidation in spending as well as tax rises once the economy regains its growth momentum   

While the Spending Review outlined yesterday by the Chancellor covered only one year, it told us something about the Chancellor’s priorities for the rest of this parliament. His spending plans were relatively constrained given the government’s ambition to ‘level up’ the UK economy. And overall, there is a growing recognition that the government will have to reduce the current debt burden, even if the cost of servicing the debt remains low over the medium term.

The state of public finances

The Office for Budget Responsibility (OBR) released its independent forecasts of public finances to coincide with the Chancellor’s statement. They offer sober reading: the deficit is projected to reach £394billion this fiscal year, or 19% of GDP, highest since 1944-45.

This will take debt to 105.2% of GDP by the end of this fiscal year in April 2021. While the cost of debt remains very low, thanks to the Bank of England’s record low interest rates and quantitative easing (QE) policy, the current course could see debt increasing every year until 2023-24, reaching 109.4% of GDP.

Public spending initiatives

The bulk of new spending relates to the NHS and schools, along with a big rise in defence spending announced earlier.

COVID-19 accounts for a further £55billion allocated to spending in the 2020-21 fiscal year, but the settlement also provides for a generous real increase in departmental day-to-day spending of 3.8% next fiscal year. Next year will see a large increase in day-to-day spending on health and defence, which will rise by £6.6billion and £4.8billion respectively. These increases came largely at the expense of international aid spending, which is set to fall from 0.7% to 0.5% of GDP next year.

On investment, the chancellor touted a figure of over £100 billion pencilled in for 2021-22, a £2.7billion increase on spending this year excluding the effects of COVID. With COVID added in, capital budgets are set to fall by nearly £6billion this year.

Multi-year plans show some missed opportunities. Despite the COVID-19 pandemic accelerating the already urgent need to improve digital infrastructure, only a small proportion of planned spending next year will go to areas such as new technologies and supporting infrastructure. Yet these are critical if the UK is to secure a more productive and prosperous future. Instead, the plans showed that capital spending is projected to continue to focus on traditional transport infrastructure.

As we move to a new normal, where people work more from home and shop online, bringing forward spending on programmes such as the Gigabit broadband would have cost relatively little, yet deliver a big impact. Similarly, spending on electrical vehicle charging may need to be brought forwards if the government is to meet its target for electric vehicles adoption. And of the £1bn set for carbon capture and storage over the next four years; 90% of spending takes place after March 2022 .

 

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