Sunday, July 26, 2020
Austerity's off limits, but Sunak will try to squeeze spending
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There have been many tricky public spending reviews over the years. Some even informally revived the historic star chamber to resolve bitter disputes between Whitehall departments and the Treasury. This year’s review, announced by Rishi Sunak a few days ago, is perhaps the trickiest yet, however.

The chancellor’s task in providing support to an economy hit hard by Covid-19 is not yet over. During the crisis he has been handing out money hand over fist. Never before has the Treasury played Lady Bountiful to the extent it has in recent months. Her Majesty’s Revenue and Customs (HMRC), which is normally good at extracting money from firms and individuals, has proved surprisingly adept at handing it out. In the right circumstances, it seems, even tax officials have a soft spot.

Now, however, Sunak has to begin to pivot to a more traditional Treasury position, that of restraining and in some cases reducing public spending. The taps, he is already arguing, cannot be left on forever.

In launching the review, he said there would be “tough choices” and that departments have been asked to identify savings and ways of reprioritising their spending. Though he announced pay rises of up to 3.1% for 900,000 key workers, including doctors, teachers and police officers, he also warned of future pay restraint for the public sector.

This year, with public sector workers not having been furloughed, their pay has risen even as pay for most in the private sector has fallen. Sunak said it was important for the future that there was parity between the public and private sectors.

There are some who would say that the chancellor should carry on regardless with whatever spending the economy and public services need, now and in the future, regardless of a budget deficit which, according to a new EY Item Club forecast, will hit £335bn or 17% of gross domestic product this year, with a risk it could be higher.

This is not just conventional economists who believe that a repeat of post-2010 austerity would be disastrous. I have received many reader requests to write about modern monetary theory (MMT), which I promise to do. One of its most prominent advocates, Stephanie Kelton, has written a book called The Deficit Myth, which provides an indication of where MMT enthusiasts are coming from. More on this soon.

The Treasury does not quite see it like that, and does not regard the deficit as a myth, which will not surprise you. As a bit of background, there is a lot of unfinished business in this year’s spending review.

It was supposed to happen last year but was postponed because of uncertainty over Brexit. Some would say it is brave to hold it his year amid the uncertainty over Covid-19 and Brexit but that is what the government has decided to do.
It will cover everyday spending, current spending, from 2021-22, next year, to 2023-24, three years in total, and capital spending, infrastructure, for one further year, to 2024-25. The unfinished business is mainly on current spending, infrastructure having been a prominent feature of the March budget.

On the face of it, there will be no return to austerity. Sunak has promised that departmental spending, boh capital and current, will rise in real terms over the review period. This sounds more generous than it is.

Torsten Bell, chief executive of the Resolution Foundation think tank, points out that the chancellor has “given himself more flexibility to reduce the size of public spending increases over the coming years, rowing back on significant increases announced as recently as March”.

“The planned 2.8% real terms growth a year has now become a far vaguer promise of some growth in real terms. This could mean very tough times for some public services in the years ahead,” he added.

Indeed, public spending did not fall in real terms during the austerity years from 2010 to 2018, though even holding it constant while giving the National Health Service and some other aspects of spending real increases meant savage cuts elsewhere.

The government will want to avoid that, particularly when Boris Johnson has promised no return to austerity and the government has ambitious targets for the recruitment of nurses and police officers - the numbers of which were cut during the austerity years - as well as a big infrastructure programme.

Projections from the Office for Budget Responsibility (OBR) show how a combination of this year’s emergency spending and weaker future growth in the economy will mean that public spending, which is on course to hit roughly 55% of gross domestic product this year, almost wartime levels, will remain higher than previously expected relative to GDP in future years.

This year’s spending review was meant to be the time when other government departments caught up with some of the generosity shown to the NHS, which received its 70th birthday present from Theresa May’s government in 2018. That now looks harder to deliver, and some departments will continue to feel squeezed.

As it is, following this crisis, the NHS is likely to get more money and, while it no doubt deserves it, will look even more like a cuckoo in the nest. From taking 10% of spending on public services in the mid-1950s, the NHS was up to 26% by 2018-19, and is on course for 40% in coming years. That looks very lopsided but may be hard to avoid.

So this is a hard one. It is one thing for a chancellor to be parsimonious when he already has a reputation for being Scrooge-like. But Sunak, in his short period as chancellor, has only known generosity, on a scale that none of his predecessors could have imagined.

Not only that, but the government has to show a commitment to its new supporters in the North and Midlands in a way that was hard to do along austerity and which will not be achieved simply by its announcements on infrastructure projects. At the same time, the prospect of a surge in unemployment later this year will require additional government spending, some of which has already been announced.

Engraved on every finance minister’s heart is Jean-Baptiste Colbert’s famous quote that “the art of taxation consists of plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing”.

For this spending review, for the Treasury the art will be to achieve the maximum amount of restraint, to start to repair the public finances, with the minimum number of headlines about a return to austerity.