David Lane, Partner and Technical Director
We knew it was going to be bloody. The economic fall-out from the pandemic is unprecedented (a word we are going to hear a great deal more over the next weeks and months), and spelt out all too clearly in the 2020 Spending Review. All 116 pages of it.
The state of the economy
Firstly, some horrible numbers. According to The Office for National Statistics (ONS) "output fell 25 per cent between February and April as the economy entered the largest recession on record. The UK economy then grew rapidly from late spring onwards and by September GDP was around 8% below its pre-pandemic level. For 2020 taken as a whole, the UK economy is expected to shrink by 11.3% and not be back to anything like its pre-pandemic level until 2022. In short, the UK has suffered the worst economic decline in 300 years.
To support the economy, business, jobs and the public realm, total UK borrowing for 2020 will be not far short of £400 billion (£394 billion) whilst the total underlying debt of the UK government will amount to 91% of our Gross Domestic Product (GDP), which measures the total value of all the goods and services produced by UK PLC. These are levels not seen since the early 1960s. For some context, pre-pandemic levels of UK debt to GDP were circa 80%. The one saving grace, in all of this, is the cost of servicing this debt - because of very low interest rates, it has never been more affordable.
This dislocation of the economy has a clear and obvious human cost. Unemployment, according to the government's own independent forecaster, the Office of Budget Responsibility (OBR), will "surge" by the middle part of 2021 to 2.6 million people. A number not seen since the financial crisis of 2009 and echoes the high and brutal levels of unemployment of the early 1980s.
In terms of the measures announced by the Chancellor on Wednesday, there are some that do catch the eye:
What to make of all of this? The fact that this spending review was for 2021/22 only is unusual. Spending Reviews tend to look forward three years. This in itself shows how murky the picture is for accurate forecasting as the world (hopefully) emerges from the current "emergency". This spending review, with the associated announcements around increased spending on the UK defence budget, seem to show a government perhaps inevitably struggling to balance almost impossible choices. Spending here, but cutting there. Rishi Sunak, in an interview with the BBC, talked about "having to make tough choices". What is clear is that those choices are only going to get tougher in the future. He would not be drawn on tax rises, but did say that the current levels of borrowing are "unsustainable". I think we all know that taxes will rise, where and by how much remains unknown. A lot of conjecture out there. If in doubt, take professional advice.
Controversially, the axe has fallen on the overseas aid budget, cut from 0.7% of GDP to 0.5%, prompting a junior minister, Baroness Sugg, to resign from the Government, calling the decision "fundamentally wrong". We are back to balance. Sunak argues that during this period of economic emergency it is right and fair to make this decision, indicating that the cut will be temporary and that it will return to 0.7% of GDP as soon as public finances allow. Critics argue that the UK has been leading the world in terms of supporting developing nations, and that now is exactly the wrong time to turn off the taps. The UK has a global role to play. It is perhaps a strange outcome when one considers that we are leaving the European Union within weeks and therefore looking for new trading and economic partners around the world.
We live in strange and dangerous times. There are some amazing things happening out there, from "big science" to someone helping their neighbour with their shopping. What is clear from this review is although we may be at "the beginning of the end" of the pandemic, we are only now seeing in stark terms the economic cost of COVID-19 and its long-term impact on people's lives.
 ONS September 2020
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