Spending review: Rishi Sunak’s extra £55bn to fight Covid brings bill for the disease to £12,000 per household

Government spending on the Covid crisis has reached the equivalent of £12,000 for every household in the UK, as Rishi Sunak committed a further £55bn to fighting the disease in 2021.

And the scale of the economic emergency wrought by the pandemic was laid bare in official figures published alongside the chancellor’s spending review on Wednesday, showing that the UK economy shrank by 11.3 per cent in 2020 in the worst recession for 300 years.

Chilling forecasts set out by the Office for Budget Responsibility showed a permanent hit of 3 per cent to GDP – the equivalent of £1,400 for every adult in the country – as a result of the outbreak. And it warned that the recovery from the pandemic could be hit by a no-deal Brexit at the end of December, which would knock two percentage points off UK GDP growth in 2021.

Even a relatively swift emergence from the Covid-19 outbreak will see unemployment soar next year to 2.6m – 7.5 per cent of the workforce – with economic activity not returning to pre-pandemic levels until the end of 2022, said the official forecasters. If vaccines and testing prove ineffective, the jobless rate could hit 11 per cent and GDP remain below 2019 levels as late as the end of 2024.

Mr Sunak will need to impose tax rises or reductions in public spending totalling as much as £46bn by 2025/26 if he is to meet his own commitment to get borrowing and debt under control, the OBR said.

Meanwhile, coronavirus continues to impose a massive drain on public resources, with Mr Sunak committing an additional £55bn – more than the entire defence budget – to dealing with the disease next year, bringing the total bill for the pandemic to at least £335bn, putting government spending as a share of the economy at levels only previously seen in wartime.

In a sobering message to MPs, the chancellor admitted: “Our health emergency is not yet over. And our economic emergency has only just begun.”

He insisted the government would not be knocked off track on its plans for levels of capital expenditure not seen since the 1970s, with a £100bn investment in infrastructure in 2021/22 and a new £4bn “levelling-up fund” to allow areas to bid for money for local projects.

But tightening of purse-strings began with a pay freeze on 1.3 million public sector workers outside the NHS, alongside a reduced rise of just 19p an hour to the minimum wage and a £10bn cut in overall non-Covid spending by Whitehall departments next year and £13bn in 2022. There was no pledge to extend the £20-a-week welfare uplift for benefit claimants beyond its planned expiry date in April.

And Mr Sunak confirmed plans to renege on the Conservative manifesto commitment to spend 0.7 per cent of national income on international aid, reducing the figure to 0.5 per cent with no date set for its restoration.

The move drew howls of protest from Tory MPs, the Archbishop of Canterbury, former head of the army Lord Dannatt and Nobel Prize-winner Malala Yousafzai and triggered the resignation of Foreign Office minister Baroness Sugg, a close aide of David Cameron when he first enshrined the pledge in law.

Although the OBR expects a recovery over the coming years, with growth of 5.5 per cent forecast for 2021 and 6.6 per cent in 2022, the government is set to borrow an eye-watering £394bn this year, equivalent to 19 per cent of GDP – the highest ever recorded in peacetime.

Underlying debt is forecast to be 91.9 per cent of GDP this year and is predicted to reach 97.5 per cent by 2025/26.

Setting the scene for future consolidation, Mr Sunak told MPs: “This situation is clearly unsustainable over the medium term.”

The Resolution Foundation think tank said that economic scarring from the crisis will do permanent damage to the public finances, increasing borrowing by £57bn by the middle of the decade.

 “Despite reasons for optimism about the vaccine-driven economic bounceback in 2021, the economic damage from Covid will last,” warned Foundation chief executive Torsten Bell. “This will hit household and public finances hard.

“Faced with a grim economic outlook, and an ongoing public health crisis, the chancellor has rightly chosen to double down on Covid spending, which is set to total around £335bn over two years. The British state has never seen anything like this outside of the Second World War.

“It is certain that tax rises will end up playing a bigger part in any real plan to put the public finances on a sustainable footing once the recovery is secured.”

The director of the Institute for Fiscal Studies, Paul Johnson, pointed out that the bill for coronavirus could still rise further, with the chancellor having made no allowance for further spending beyond the end of next year.

Describing the sums devoted to tackling the disease so far as “truly astonishing”, Mr Johnson said: “It seems more likely than not that spending will end up significantly higher than set out today, and so borrowing in 2024/25 will be considerably more than the £100 bn forecast by the OBR. Either that or we are in for a pretty austere few years once again, or for some significant tax rises.”

Despite the dire national finances, total departmental spending will be £540bn in 2021/22, a £14.8bn rise in cash terms.

To help cope with rising unemployment, the Chancellor set out a near-£3bn Restart programme to help get people back into work.

And a new UK infrastructure bank will be based in northern England while the UK Shared Prosperity Fund – replacing European Union funding – will reach around £1.5bn a year.

Shadow chancellor Anneliese Dodds condemned the pay freeze for public sector workers and claimed the Spending Review “takes a sledgehammer to consumer confidence”.

And TUC secretary general Frances O’Grady said it would “level down Britain, hitting key workers’ pay and breaking the government’s promises to the lowest paid”.

But Confederation of British Industry chief economist Rain Newton-Smith said the package “lays the foundations for a brighter economic future” but “ambition must be matched by action on the ground”.