In his November spending review, Chancellor Rishi Sunak has emphasised the UK currently faces an ‘economic emergency’, and revealed the economy is set to contract by 11.3%, the largest fall in over 300 years
Sunak said figures from the Office for Budget Responsibility (OBR) indicated that the economy is predicted to grow by 5.5% next year, but said economic output will not return to pre-crisis levels until Q4 2022.
The Chancellor also told MPs that the pandemic had resulted in a very significant increase in borrowing and debt. Total UK borrowing is set to reach £394bn this year, equivalent to 19% of GDP and the highest level in peacetime history.
Borrowing is forecast to be £164bn next year and to remain around £100bn annually for the remainder of this Parliament.
Sunak said the government had provided some £280bn to help get through the Covid crisis, noting that ‘as high as the cost are, the costs of inaction would have been fair higher’.
Next year the government will allocate an initial £18bn for PPE and vaccine purchases, along with £3bn for NHS recovery, £2bn for transport investment, £3bn for local councils and £250m for rough sleeping.
There is also £2.6bn earmarked for the devolved administrations.
Sunak described his priorities as, firstly, protecting people’s lives and livelihoods; secondly providing strong public services; and finally making what he called a ‘once in a generation’ investment in infrastructure.
To fulfil these aims, there is £3bn for the Department for Work and Pensions to launch a new three-year restart program to help 1m people who have been unemployed for over a year find new work.
However, Sunak said unemployment is still expected to peak in Q2 2021 at 7.5% or 2.6m people, before falling to 4.4% by the end of 2024.
In the circumstances, the Chancellor said he could not justify pay increases across the public sector, but will offer a pay rise to 1m NHS workers. Pay rises in the rest of the public sector are to be ‘paused’ next year, apart from those on lower incomes.
For those 2.1m public sector workers paid less than £24,000 there will be a guaranteed pay rise of at least £350. the Treasury has also committed to the full increase in the national living wage to £8.41 per hour and increase in the national minimum wage as well.
Total departmental spending will be £540bn next year, representing the fastest rise in 15 years and an additional £14.8bn.
However, given what he called the ‘domestic fiscal emergency’, Sunak said it was now difficulty to justify the government’s previous commitment to spend 0.7% on overseas aid, and this will be cut to 0.5% from next year, with the intention of reinstating the previous target ‘when the fiscal situation allows’.
Sunak said his final priority was the highest public investment for 40 years infrastructure. This includes £7.1bn for housebuilding; faster broadband to five million premises, and 4G for 95% of the country by 2025, as well as spending on new roads, upgrading railways and cycle lanes.
There is to be a new UK infrastructure bank headquartered in the North of England which will work with the private sector to finance new investment projects, starting next spring.
Sunak also announced a new ‘levelling up’ fund of £4bn which is designed to make it possible for any local area to bid directly to fund local projects. This will be managed jointly by the Treasury, Department for Transport, and the Department for Housing, Communities and Local Government. To qualify, projects must have real impact, be delivered during this Parliament and have local support.
Julia Rosenbloom, tax partner, Smith & Williamson, said: ‘The Chancellor is kicking the can down the road with today’s spending review.
‘At some point we will have to address the historic rates of government borrowing, which means two inevitables: tax rises and spending cuts.
‘While today isn’t the right time for tax rises, they are likely to be on the horizon for 2021 so individuals and businesses should reflect on their tax planning now before any changes are made.’
Rosenbloom said that one possible approach is for the government to seek to tax those looking to pass on wealth. It could abolish the ability to make a gift to someone of unlimited value and it be exempt from IHT if the donor lives for further seven years.
Passing property or other investments to children or grandchildren could also see a capital gains tax (CGT) hike to up to 45% if the government seeks to align CGT with the current income tax rates.
‘For companies, a tax hike relating to investments including property is possible. We could see the rate rise significantly from the current 19%.
‘The Chancellor may also consider changing the tax rules for companies so that property gains in companies are taxed on shareholders personally and subject to higher rates of personal CGT, rather than lower rates of corporation tax, possibly with an acceleration of when the tax has to be paid,’ Rosenbloom said.