‘Sobering’ news on UK economy to come in spending review, Rishi Sunak warns

Official projections on the prospects for the UK’s economy will make “sobering” reading when they are released alongside the spending review today, chancellor Rishi Sunak has told the cabinet.

Figures compiled by the independent Office for Budget Responsibility (OBR) will lay bear the havoc unleashed on the UK’s finances by the coronavirus pandemic, which has pushed the national debt over £2 trillion.

But Mr Sunak is expected to take only relatively small steps to reining in borrowing when he sets out departmental budgets for 2021/22 today, with economists predicting that the pain in the shape of significant tax rises will come some years down the line.

First to feel the squeeze are likely to be public sector workers outside the NHS, slated for a pay freeze today despite union warnings that this amounts to “economic madness” at a time when consumer demand is needed to fuel recovery from Covid.

And the poorest workers could be facing a pay rise of just 18p an hour, instead of the expected 49p, after reports that the chancellor has agreed to a Low Pay Commission proposal to downgrade the annual hike in the minimum wage for over-25s in response to the crisis.

The aid budget also looks set to come under attack, with development charities concerned that a mooted cut from 0.7 to 0.5 per cent of national income may become permanent.

Nobel Prize winner Malala Yousafzai today joined five former prime ministers and the Archbishop of Canterbury in urging the chancellor to honour the Conservative manifesto commitment to maintain the 0.7 per cent figure.

OBR figures are expected to show government borrowing close to £400bn this year, with public spending above 50 per cent of GDP for the first time since the Second World War and the national debt at a 60-year high.

But all eyes will be on the projection for the speed of recovery after the deepest recession in three centuries took 10 per cent off GDP in 2020.

Mr Sunak’s comments will cast doubt on the prospect of a V-shaped recovery boosting the UK back to pre-pandemic prosperity as soon as restrictions on social and economic life are lifted. 

The Resolution Foundation think tank has suggested that the OBR’s central forecast could show a permanent reduction in GDP of 3 per cent, equivalent to £1,000 a head.

Meanwhile, the official forecasters will also set out the likely impact of the UK’s departure from the EU’s single market and customs union on 31 December this year, with or without a free trade deal.

The most recent Treasury forecasts in 2018 suggested that a no-deal Brexit could knock as much as 9 per cent off GDP over a 15-year period, with the kind of bare-bones agreement being sought by the prime minister resulting in a hit of up to 6 per cent.

Speaking to cabinet ahead of his 12.30 statement to the House of Commons, Mr Sunak said that his three priorities are: 

- To protect lives and livelihoods by providing the support the UK needs to get through Covid.

- To provide strong public services by investing in schools, hospitals and police. 

- To deliver the highest sustained levels of government investment in infrastructure for almost 50 years.

Prime minister Boris Johnson told cabinet colleagues the government would “work tirelessly on job creation, driving economic recovery and building back better”.

Shadow chancellor Anneliese Dodds, who will respond to Mr Sunak’s statement for Labour, said: “The Conservatives’ irresponsible choices have wasted and mismanaged billions, led to our country experiencing the worst downturn in the G7, and created a jobs crisis.

"They clapped for key workers – but now they’re freezing their pay, and looking to scrap planned minimum wage increases for the private sector. That will hit people’s pockets and pull spending out of our small businesses and High Streets when many are already on their knees.

“Instead, we need a relentless focus on jobs and growth to get the economy back on its feet. The government must act to recover jobs, retrain workers and rebuild business, as part of a longer-term plan to make our country the best place in the world to grow up in and to grow old in.”