Rishi Sunak has said the government will borrow a peacetime record of almost £400bn this year as it seeks to combat the worst recession in more than 300 years.
The chancellor said the UK faced an “economic emergency” warranting a cut in international aid and a public sector pay freeze for millions, with an exemption for NHS staff and workers earning less than £24,000 per year. However, he insisted there would be no turning back from the government’s levelling-up agenda, announcing a £4bn new fund to pay for local projects such as bypasses, libraries and station improvements.
Setting out the government’s spending plans for 2021-22 as the second wave of the Covid-19 pandemic threatens to push Britain’s economy into a double-dip recession, the chancellor said the one-year spending review would “deliver stronger public services and a once-in-a-generation investment in infrastructure”.
Forecasts from the government’s tax and spending watchdog, the Office for Budget Responsibility (OBR), updated to take account of the second lockdown in England and tougher restrictions in Scotland, Wales and Northern Ireland, show the economy will drop by 11.3% this year and take until the end of 2022 to recover to pre-pandemic levels.
Unemployment will rise to 7.5% next year – less than originally feared because of the Treasury’s furlough scheme and support for the self-employed – before falling to 4.4% in 2024. Nonetheless, it will mean 2.6 million people unemployed, as furlough comes to an end and companies struggle to stay afloat or retain some staff.
Setting out the government’s plans to find some savings while increasing public spending overall next year by 3.8% – the fastest rate in 15 years – Sunak said he could not justify maintaining the international aid budget at its current levels “at a time of unprecedented crisis”. He said a significant cut from 0.7% of GDP to 0.5% would be deployed to save £4bn next year. Spending would then return to the internationally agreed level “when the fiscal situation allows”.
He said the freeze on public sector pay would not apply to millions of workers, including NHS staff and public servants earning less than £24,000, who will get a pay rise of £250.
Anneliese Dodds, the shadow chancellor, said cuts to public sector pay would hit the economy and flew in the face of public support. “Earlier this year the chancellor stood on his doorstep and clapped for key workers. Today, his government institutes a pay freeze for many of them.
“This takes a sledgehammer to consumer confidence. Firefighters, police officers and teachers will know their spending power is going down, so they will spend less in our small businesses and on our high streets. They will spend less in our private sector,.”
Trades union leaders warned the chancellor was delivering a kick in the teeth to workers on the frontline of the government’s pandemic response. However, Sunak said the renewed pay freeze – reminiscent of the austerity drive imposed by George Osborne after the 2008 financial crisis – was vital to ensure fairness between the public and private sectors.
The chancellor said private sector wages had fallen in the six months to September by 1% compared with a year ago, while public sector pay had risen by almost 4%, and that public servants’ jobs were under less threat during the crisis.