Has Rishi Sunak really reintroduced austerity under our noses?

Before this week, chancellor Rishi Sunak had probably spent more public money both in cash terms and as a share of the overall economy than any of his predecessors, certainly in peacetime.

But in his spending review on Wednesday the chancellor seemed determined to show that he could take away as well as give.

He cut the foreign aid budget to be rolled out next year, breaking a Tory manifesto promise. Sunak also froze pay for millions of public sector worker in 2020-21, implying a real-terms pay cut.

But a host of other less well-publicised takeaways in the package have also since emerged, which has prompted some to wonder whether Sunak is seeking to reintroduce austerity by the back door.

The Trades Union Council, for one, has concluded the government’s “no more austerity” promise has been broken.

“Austerity” can mean many things of course. But there’s no question that, despite a huge increase in spending this year and next to cope with the virus, the chancellor cut some public spending plans further out relative to what he had pencilled in at the time of the March Budget.

Analysis by the Institute for Fiscal Studies (IFS) shows non-Covid related spending limits for departmental budgets have been reduced every year for the next for years, rising from a £10bn cut in 2021-22 to a £13bn cut in 2024-25.

The reduction in the aid budget next year accounts for around £3bn of cuts and the cash freeze for many public sector workers £1-£2bn.

And the austerity charge seems stronger when one considers the fact that some departments – notably, health, defence and education – have been, independently, promised quite large increases in their budgets over the coming years.

This implies all other departments – ranging from agriculture, to justice to communities and so on – will have less.

The IFS calculates that, factoring in the spending commitments made, unprotected departments are looking at an implied 0.3 per cent cut between 2021-22 and 2022-23.

That might not sound particularly austere, but it’s important to note that this comes after these departments have seen a 20 per cent cut in budgets over the past decade.

The chancellor didn’t mention it in his speech, but he also reduced central financial support for local authorities and in return allowed them to raise council tax by 5 per cent. “They’ll mostly probably need to,” says Paul Johnson of the IFS. 

That would raise an extra £700m in 2020-21 and put up council tax bills by an average of £70 a household.

Whether it can be classified as austerity or not, few economists believe it’s sensible to increase taxes, even by a small amount, before the economy has recovered.

Though all of the above assumes these plans will not change. 

The IFS points out that it’s quite possible Sunak will feel compelled to increase public spending relative to these plans, not least by extending the temporary increase in universal credit, which is due to end next April, around the time that joblessness is due to peak.

That would increase the implied hole in the public finances, from around 1 per cent of GDP (£20bn) to 2 per cent of GDP (£40bn). 

If spending is going to rise relative to these plans, that implies either borrowing will be higher or taxes will have to go up.

And what of capital spending? The chancellor recommitted on Wednesday to spend 3 per cent of GDP on public sector investment over the coming years, which has been presented as a key plank of the government’s regional levelling-up plans.  

Yet some analysts think this spending pledge too could come under pressure.

“After every recession in modern British history we have cut net investment capital spending. In the end you can either cut that or you have to do the more painful stuff of firing nurses or raising taxes. We’re trying to buck that trend,” says Torsten Bell of the Resolution Foundation.

“Our view is that is unlikely to stand the test of time once the government faces the trade-offs that come, even though that would be desirable.”

In the end it’s fair to say that Sunak has, so far, only opened the door to a potential return of austerity, rather than pushed us through the threshold.

Given how little, in the scheme of overall borrowing, the foreign aid cut saves it seems to be more driven by political positioning by the chancellor than concerns about the public finances – a demonstration that he can be “tough” on spending (and in an area where few Conservative party members favour spending). 

The spending review only covers one year, whereas it was originally intended to cover three. The chancellor seems, then, to be playing for time, hoping the economy recovers more strongly than the Office for Budget Responsibility’s central scenario (which has the level of UK GDP still 3 per cent lower than expected before the crisis in 2025). 

A stronger recovery would reduce the implied size of the hole in the public finances and, by extension, the pressure for tax rises and spending cuts.

As an economic strategy that’s more sensible than imposing major cuts now – which would be to repeat the now near-universally acknowledged mistake by George Osborne in 2010.

Yet many economists believe it would be better for the chancellor to increase borrowing to stimulate the economy now, making a strong recovery more likely.

Carsten Jung of the Institute for Public Policy Research think tank, which had proposed a £164bn stimulus next year, says the spending review’s timidity will end up weakening the public finances in the medium term. 

“It did not have to be this way,” he says. “Absent a stimulus of sufficient size, future tax receipts will be hit and our debt will be harder to repay.”