UK chancellor of the exchequer Rishi Sunak. Picture: REUTERS/JOHN SIBLEY
UK chancellor of the exchequer Rishi Sunak. Picture: REUTERS/JOHN SIBLEY

London — UK chancellor of the exchequer Rishi Sunak has cut a planned spending review from three years to one due to “unprecedented uncertainty” caused by the coronavirus pandemic.

The shorter review — which the UK treasury had kept open as an option because of the resurgent virus — is a setback for Prime Minister Boris Johnson’s attempt to map out his priorities for a post-pandemic world. He’s pledged billions of pounds of investment in infrastructure projects as he pursues his agenda to “level up” inequalities across the country.

The announcement came as public finance data showed the budget deficit climbed to a record £208.5bn in the first six months of the fiscal year, highlighting the cost of supporting the economy through the pandemic. Beleaguered businesses and workers are calling for further aid.

“In the current environment it’s essential that we provide certainty,” Sunak said in a statement on Wednesday. “So we’ll be doing that for departments and all of the nations of the UK by setting budgets for next year.”

The spending review will end in late November and will now set the budgets of government departments for fiscal 2021/2022 only. So as not to disrupt longer term planning, the treasury said that multi-year plans for the National Health Service and schools will still be funded, as will priority infrastructure projects such as the HS2 high-speed rail project.

Sunak started the spending review in July with a warning that ministers faced “tough choices” due to the pandemic. Departments were told to “identify opportunities to reprioritise and deliver savings”, dialing back on the inflation-busting increases previously envisaged.

But the ongoing pandemic, with large parts of the country in partial lockdown again, make it hard for the government to predict the state of the economy and the spending power it’ll have in future years.

It marks the second time a full spending review has been delayed. In 2019, then chancellor Sajid Javid drew up plans for 2020/2021 only amid the confusion over Brexit. The prospect of a no-deal split from the EU continues to stalk the economy after negotiations hit the rocks last week.

The review will focus on helping departments respond to Covid-19 and deliver the government’s plans to support jobs, as well as providing “enhanced support” for public services, the treasury said.

Government borrowing in September alone was £36.1bn, compared with just £7.7bn a year earlier, the Office for National Statistics said on Wednesday.

Regional lockdowns

The deterioration will fuel the debate about how much economic aid the government can provide as the virus spreads and new restrictions are imposed. Sunak has already scaled back his job support plan, leaving local leaders in areas hit by regional lockdowns, such as Manchester, calling for more financial help.

“Over time and as the economy recovers, the government will take the necessary steps to ensure the long-term health of the public finances,” Sunak said.

While the pandemic has wrought havoc with the public finances — pushing debt above £2-trillion for the first time on record — Bank of England bond-buying has kept borrowing costs at record lows. That’s left economists, and Sunak’s own fiscal watchdog, suggesting he has plenty of time to balance the books through tax increases or spending cuts.

The latest figures show debt climbing to 103.5% of GDP — the highest ratio since the financial year to end-1960. The deficit was set to approach £400bn in the current fiscal year even before Sunak announced further measures to support jobs and wages in recent weeks.

The government will still be borrowing more than £190bn in the following fiscal year, according to the average of new forecasts compiled by the treasury this month. That’s well above the level at the height of the financial crisis.

In a report on Wednesday, the Centre for Policy Studies suggested one solution to addressing the swelling deficit would be replacing the pensions triple lock — a promise to raise the state payment every year by the highest of average earnings growth, inflation or 2.5% — by a dual lock that strips out the 2.5% commitment.

That was part a series of ideas for savings or asset sales which it said would deliver £30bn a year to the treasury without harming the Covid-19 response.

Bloomberg

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