Subrahmaniam Krishnan-Harihara, Head of Research at Greater Manchester Chamber of Commerce, looks at the Spending Review.
The lead up to any important fiscal event is marked by leaks, private press briefings and media speculation about the measures included in and excluded from the anticipated announcement. Over the last fortnight, there has been a lot of reporting around what the Chancellor might lay out in his spending review, which was announced today.
Expectations were high and criticism severe about specific measures. There were some good ideas, a last minute ‘rabbit out of the hat’ and some spin. Yet, coming as it did on the back of the extension to furlough, the Prime Minister’s 10 point Green Industrial Revolution and promises about delivering the levelling-up agenda, there was the potential for the government to provide clarity on the mechanics of big ticket announcements and – to use technical parlance – unveil a product design for the novel concept that levelling-up is. Instead, the Chancellor’s speech was somewhat of a let-down. It left many questions unanswered and, in my own assessment, indicates a postponement of some very tough decisions that will have to be made. And in what could be classed as an omni-omission, the Chancellor did not mention Brexit!
Public Sector Pay
It was widely reported that the Chancellor would put some restrictions on public sector pay. In reality, the actual “squeeze” is not as severe as was reported. Doctors and nurses will receive a pay increase next year. There will be a pause on pay rises for the rest of the public sector next year, although those who earn below the median wage of £24,000, will be guaranteed a pay rise of at least £250. The key issue here is that of messaging: at a time when consumer confidence is low and businesses are in fear of weak festive trading, signalling restrictions on pay could prompt lower consumer spending and in turn affect the economic recovery.
Increase in NMW and NLW
The Chancellor also announced an increase to the National Minimum Wage and National Living Wage by choosing to implement in full the recommendations of the Low Pay Commission. While the positive impact of these increases to lower paid workers cannot be disputed, employers, especially those in the sectors worst affected by COVID-19, may not welcome this news as it adds to their costs while they will be struggling to recover their trade, pay deferred tax liabilities and start loan repayments. What the Chancellor could have offered is an incentive to employers by perhaps cutting employers’ NI contributions to reduce the overall cost of employment. Nonetheless, if the increase in income leads to an increase in consumer spending, it does contribute to the economic recovery.
The Conservative party rode to power in the December 2019 general election with a clear promise to level up the regions of the UK that have suffered historic under-investment and perceive themselves to have been left behind in relation to regions in London and the South East.
From the very start of this pronouncement, there was an utter lack of clarity about what levelling up meant in practice. It was understood to involve a combination of infrastructure spending, upgrades to transport systems and an enhanced focus on placemaking. The Chancellor announced two schemes for this: the UK Infrastructure Bank, which will be head quartered in the North of England and a Levelling Up Fund, with a corpus of what will be seen as a meagre sum of £4 billion. The administration of this fund will also make for some disappointment – local areas have to bid for projects and those projects must be completed during the term of this Parliament.
The transformative projects that can level up regions such as Castlefield Corridor or the extension of Metrolink to Stockport, take much longer and require dedicated funding. Although the requirement for wide local support including from MPs appears to signal a consensual approach, in reality it reinforces a centrally controlled top-down administration of levelling up. The spending review was an opportunity for the Chancellor to give wings to levelling up and make an unequivocal commitment to correcting regional imbalances and inequality. Disappointingly, despite previously expressed ambition and the importance of the levelling up agenda to regions in the North of England (and the Conservative party!), the government has not lived up to its levelling up promise.
There is no doubt that COVID-19 has had a severe impact on the economy, employment and the business landscape. The Business Monitor and Recovery Tracker surveys we have conducted at Greater Manchester Chamber of Commerce paint a harsh picture of the loss of demand and revenue for businesses, the current liquidity pressures for businesses and the dent to business confidence. That local picture mirrors what is happening nationally and are confirmed by the OBR’s economic forecasts.
The UK economy is expected to shrink by 11.3% this year but is expected to grow from that low base, if and when restrictions are eased, by 5.5% next year and by 6.6% in 2022. Public sector finances are weak: the UK will borrow £394 billion this year. A lot of readjustment will be needed. The restrictions placed on public sector pay will not by themselves be enough to repair public finances. Will there be future tax rises? Or a further squeeze in public funding? Today’s spending review is for a 12-month period and hasn’t answered these questions but will trigger anxiety amongst businesses and the general public about what demands may be placed on them in the medium term.
Other investment announced by the Chancellor on infrastructure, housing, R&D and broadband are all to be welcomed. He ended his speech with a plea that his announcements should be assessed on the impact it may have on individuals, families and local areas. Yet, the small amount of money attached to levelling up and the continued lack of clarity will mean that in the Northern areas, the Chancellor’s announcement may indeed ring hollow.