What is Rishi Sunak expected to announce in the government’s spending review this week?

The chancellor is preparing to make his latest update on the government's spending plans on Wednesday and has promised he will not usher in a new era of austerity.

Rishi Sunak has made more big announcements in eight months than some chancellors do in several years. Unlike his previous visits to the despatch box, this one will not focus on emergency coronavirus support measures. Instead, he will detail day-to-day budgets for Whitehall departments in 2021-22.

So what can we expect?

Bad economic news

Official forecasts for the economy are not expected to provide reasons for early festive cheer, with output likely to shrink more than 10 per cent this year and recover slowly. The Office for Budget Responsibility will give its latest assessment of the damage to the economy and the public finances. Borrowing is expected to hit £350bn this year.

Public-sector pay freeze

The chancellor has strongly hinted that he will freeze pay for 4 million public-sector workers including teachers, police and the armed forces. When questioned on Sunday, he said it would be “entirely reasonable” to look at pay levels in the context of the wider economic situation.

It would certainly cause controversy. Public-sector wages fell compared with those in the private sector for most of the past decade although they have held up better since the pandemic started. The government appears to be preparing to argue that it is only fair that the pain is shared evenly.

However, freezing wages is a pay cut in real terms. Cutting pay across the board, including for workers on lower incomes, would reduce spending in an economy that’s trying to recover.

The potential for savings for the government is large. Pay accounts for £200bn of public spending each year, making it an attractive area for a government that pledged in its manifesto not to raise VAT, income tax or national insurance – its three main sources of revenue. The decision will have to be weighed up against the risk of a backlash and even strikes.

Overall spending

Budgets for departments including health and education have already been agreed for the next few years, but Mr Sunak has promised he will announce “quite a significant” increase in spending on public services for 2020-21.

The chancellor will also need to pencil in spending totals up to 2025-26, says Ben Zaranko, research economist at the Institute for Fiscal Studies (IFS).  

“These could provide some indication over the extent to which he is planning a fresh squeeze on public spending after the current crisis, or whether he might instead opt for substantial tax rises at some future budget, or allow higher levels of borrowing to persist.”

The government announced £16.5bn of extra spending on defence last week, shortly after its much-heralded “green industrial revolution”, which is to be funded with just £3bn of new money.

There will be another £151m to help rough sleepers and £29m for a “festival of Brexit Britain”. Aid spending is likely to be cut from 0.7 per cent of GDP to 0.5 per cent, saving more than £4bn.

NHS

Day-to-day NHS funding is already laid out until 2023-24 but the chancellor is set to announce £3bn more.  

That includes £1.5bn to help with “existing pressures” and £1bn to clear a backlog of scans, operations and checks that has built up because of the pandemic.

Jobs

Almost £3bn is to be made available to tackle unemployment which is rising and is expected to go much higher next year.  Mr Sunak will set out the details of a three year “Restart” programme to help people who have been out of work for long periods. 

He will also pledge an additional £1.4bn of funding to increase capacity at Job Centres.

Investment

Mr Sunak will set out a plan for long-term infrastructure investment.  

To support its plan to level up regions of the UK, the government will change Treasury rules used to allocate funding to different projects. The value-for-money criteria have often favoured schemes in already affluent areas.

A UK Shared Prosperity Fund, which replaces EU regional funding, is planned to help “left behind” areas including towns, coastal communities and former industrial heartlands. Next year it will have £220m to allocate.

There will also be £1.6bn for roads to cover pothole repairs and upgrades.

Benefits increases

The government may make permanent the temporary £20-a-week increase in Universal Credit that was introduced in March.

Decisions on benefits are not normally announced in spending reviews but given the significance of this measure for low-income households, now could be an opportune moment.

Without it, the incomes of 4 million households will fall by £1,040 a year in April. The chancellor is under pressure to extend the increase to people on so-called legacy benefits, which are being phased out and replaced by Universal Credit.  

Brexit

A further £220m is to be allocated for borders and immigration to help with extra work as the transition period ends.