Spending Review 2020: Covid-19, Brexit And Beyond

29th September 2020

The Chancellor, Rishi Sunak, has announced his intention to hold a Comprehensive Spending Review this year. The immense economic uncertainty associated with the COVID-19 pandemic, and the looming end of the Brexit transition period, makes this an extraordinarily difficult time to be formulating public spending plans.

In addition, the Spending Review will come on the back of the longest sustained squeeze in public spending on record, with pressure for austerity to be brought to a decisive end. Whether Mr Sunak makes the sensible decision to set only one year of spending plans, or embarks on a ‘comprehensive' multi-year review, the process will be fraught with difficulty and delicate trade-offs.

In this chapter, we outline the public spending framework and explain which components of spending are subject to the Spending Review process, and why. We then discuss four major challenges confronting the Chancellor: the economic fallout from the pandemic; uncertainty associated with Brexit; making decisions on the back of a decade of austerity; and the government's ambitious ‘levelling up' agenda. We then turn to a discussion of the options facing Mr Sunak. We set out a number of scenarios to illustrate the two major choices to be made - the initial baseline of public spending and its real-terms growth rate over the next three years - and consider the implications of each. Finally, we make the case for holding a one-year Spending Review.

Key findings

1 This year's Spending Review (SR) will take place in extremely

challenging circumstances. The immense economic uncertainty

associated with the COVID-19 pandemic, and the looming end of the Brexit transition period, makes this an extraordinarily difficult time to be formulating public spending plans.

2 The SR comes on the back of a decade of austerity. By 2019−20, total government spending was just 2.6% higher in real terms than a decade previously, and 4.4% lower in real per person terms. Day-to-day spending on public services was down 7% in real terms (13% per person). Outside of Health, real-terms public service spending was cut by 20% (25% per person) over the decade to 2019−20. This has been the longest sustained squeeze on public spending on record. Yet despite these cuts, on the eve of the pandemic, government spending as a share of the economy (i.e. the size of the

state) was the same as in the mid-2000s.

3 Following the September 2019 Spending Round which provided

across-the-board real-terms budget increases for 2020−21, the

plans published in March 2020 would have seen public service spending rising by 10.7% between 2019-20 and 2023-24. This would have been enough to reverse two thirds of the last decade's cuts to per-person public service spending.

4 But COVID-19 has rendered these plans obselete. Departments

have been allocated more than £70 billion this year as part of the response to the virus. The health budget alone has been topped up by £35 billion, or 25%. A crucial question for the Spending Review is the extent to which this COVID-19 spending needs to continue into future years.

5 If some of these spending programmes - such as expanded

procurement of personal protective equipment (PPE) or the running costs of NHS Test and Trace - need to persist, they could swallow up a huge chunk of the increase in funding pencilled in between now and 2023−24. Some areas of government would be left facing another bout of austerity unless more money in total is found.

6 For instance, if 25% of the spending announced in response to COVID-19 needs to be permanent, that would eat up almost half of the planned £40 billion increase in departments' non-COVID budgets between 2020−21 and 2023−24 (in today's prices). Given the government's commitments on the NHS, schools, the police and ‘levelling up', that would almost certainly require another bout of austerity for some public services. To meet those costs while keeping non-COVID spending growing at the rate planned in March would require the Chancellor to find an additional £20 billion by 2023−24, relative to his pre-pandemic plans.

7 Public spending was at 39.8% of national income in 2019−20, much the same as where it was in 2007−08, despite the cuts in public service spending documented above. It is now likely that the economy will be smaller than expected into the medium run, and there are additional pressures on public spending. As a result, even if no COVID-19 spending continues into future years, it is probable that total spending will settle at a significantly higher fraction of national income than it was pre-pandemic, and higher than it was after ten years of Labour government in 2007−08.

8 Given the huge amount of economic uncertainty, the Chancellor would be ill-advised to embark on a multi-year Spending Review. Instead, it would be sensible to limit this year's Spending Review to a single year (2021−22), and delay decisions on spending in future years until a point when some of the uncertainty over COVID-19, Brexit and the future of the economy has dissipated.

The full report from the Institute for fiscal Studies can be read and downloaded HERE Pdf - 57 pages. Published 29th September 2020.