06 Sep It’s official: The end to austerity!
Given events in the House of Commons on Tuesday night, the Chancellor’s spending review on Wednesday was always likely to have the feel of ‘after the Lord Mayor’s show’ about it. MPs certainly thought so as members began filing out of the chamber as Sajid Javid took to the floor.
Regular readers of our budget newsletters will know that we usually break the budget announcement into three or four key categories and provide opinion or commentary on these. Because things are moving so fast in Westminster, it is easy to see a situation where Wednesday’s review becomes something of a ‘white elephant’. This being the case, and the fact that this was not a full budget, we have compiled a straight forward summary of the headline issues and we have restricted our views to just the essentials.
We will of course provide more incisive analysis and views once there is more clarity on the political front and there is a formal budget, whoever that might be delivered by!
- The Chancellor said the government was ‘turning the pages on austerity’ by announcing an increase in day-to-day public spending of £13.8bn. This equates to a 4.1% in real terms. Given the economy is growing at around 1.5%, these represents a significant hike. The question is whether the increased spend will meet the ‘fiscal rules’. The answer to this is they would possibly meet those based upon Spring forecasts but is very doubtful if it were based on current Office for Budget Responsibility (OBR) views.
- There was a commitment to £2bn for Brexit delivery, in addition to the £2.1bn already pledged for ‘no-deal’ preparations. Add in the £4bn previously committed by Teresa May and the total rises to more than £8bn.
- Mr Javid could not resist a swipe at Labour’s previous stewardship of the economy, saying ‘Labour left behind a bankrupt Britain and we fixed it’. He was referring to debt as a percentage of GDP falling to around 1.1%.
- There was a 6.3% real-terms increase in UK Home Office spending, with £750m earmarked for first year spend to recruit 20000 new police officers by 2022. Whilst eye-catching, since 2010, police numbers have fallen by 20500 so this merely represents ‘back-filling’ or more precisely a veiled admission that previous cuts had been too invasive. Spending on the police comes hand-in-hand with extra spending for other elements of the justice system such as the Crown Prosecution Service.
- The £1,5bn increased spend for social care exceeded the expectation of around £1bn, though again this needs to be seen in the context of an 80% reduction since 2010. An additional £6.3bn for the NHS also beat estimates.
- Another attention-grabber was a £7.1bn boost to school spending by 2022-23. This includes a widely predicted increase in the starting salary for school teachers of £30,000 and an allocation to each school equivalent to £5,000 per child. This appears to have been tentatively welcomed by the sector, though some argue the headline is misleading and is actually closer to £4bn.
- The Department for Environment, Food and Rural Affairs (Defra) to receive £420m for improving environmental standards once the UK leaves the European Union, plus £30m to address air quality and the same amount for bio-diversity, including widening the Blue Belt programme for the protection of marine life. There is a pledge of new funding to help achieve the UK’s zero-carbon economy by 2050, though no amount was disclosed, and this looks an extremely steep hill to climb, if the target is to be realised.
- Ministry of Defence spending up by £2.2bn (or 2.6%).
Whilst this spending review could turn out to be an exercise in futility, it might serve to pose a serious strategic question if the UK does go to the polls next month. The government has charted a steady course of debt reduction since the financial crisis but Wednesday’s announcement strongly suggests a greater commitment to borrowing, now the finances are in better order. This makes any campaign of spending backed by tax rises a whole lot less palatable.
Summary
Today’s review represents a huge spending commitment which may well test the fiscal rules, which Mr Javid said he would address in the Budget. What he is likely to mean by this is addressing the fiscal framework, or put another way, changing the parameters to give him more room to borrow. This does of course call into question the purpose of having fiscal rules in the first place!
The equity market barely reacted to the announcement but sterling rallied. Prior to Mr Javid’s speech the pound had dropped below the 1.20 mark against the US dollar, but bounced to 1.22 shortly afterwards. This is probably as much to do with currency markets seeing the possibility of a ‘no deal’ Brexit being diminished (for now) as what he had to say. Yields on government bonds spiked as aggressive spending will be seen as a) inflationary and b) has to be funded, possibly through more gilt issuance. This needs to be put into context. The yield on the UK 10 year benchmark Treasury rose 24% but still only yields 0.5%, at the start of the year it yielded over 1.2%.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue and Customs practice as at 6th September 2019. You are recommended to seek competent professional advice before taking any action.