Britain’s economy will contract 11.3 per cent in 2020 – the most in more than 300 years – as Finance Minister Rishi Sunak unveiled a 12-month spending review for the Covid-battered country and pledged to spend £280bn to get it through the pandemic.
The extent of Covid damage on Britain’s economy was laid bare on Wednesday as Mr Sunak said Britain's government will borrow £394bn in the 2020-21 fiscal year, the equivalent of 19 per cent of gross domestic product (GDP).
Mr Sunak, who has already pledged more than £280bn to fight Covid-19 since the crisis started, unveiled further investment to ease a backlog in the health system, tackle a surge in unemployment and build new infrastructure in the comprehensive review.
However, the finance chief said cuts to public sector pay, as well as to the UK’s foreign aid budget, had to be made to help finance what he called an “economic emergency”.
"Our health emergency is not yet over. And our economic emergency has only just begun. So, our immediate priority is to protect people’s lives and livelihoods. But today’s spending review also delivers stronger public services. Paying for more hospitals, better schools and safer streets. And it delivers a once-in-a-generation investment in infrastructure,” Mr Sunak said.
Here are the top eye-watering numbers that featured in Mr Sunak’s spending review:
Economy set to contract 11.3 per cent in 2020
Britain's economy is set to shrink 11.3 per cent this year, suffering the greatest annual slump in more than three centuries because of the economic effects of Covid-19.
The economy is expected to rebound 5.5 per cent next year and 6.6 per cent in 2022, according to data from the Office for Budget Responsibility (OBR, which sees further growth of 2.3 per cent in 2023, 1.7 per cent in 2024 and1.8 per cent in 2025.
UK will borrow £394bn this year, equivalent to 19% of GDP
Mr Sunak said the impact of coronavirus, and the action the UK has taken to tackle it, means “there has been a significant but necessary increase in our borrowing and debt”.
The UK is expected to borrow a total of £394bn this year, equivalent to 19 per cent of GDP, which is the highest recorded level of borrowing in the country’s peacetime history.
Borrowing is expected to fall to £164bn next year, £105bn in 2022-23, and then remain at about £100bn or 4 per cent of GDP, said Mr Sunak.
“Underlying debt – after removing the temporary effect of the Bank of England’s asset purchases – is forecast to be 91.9 per cent of GDP this year,” he said.
"Underlying debt is forecast to continue rising in every year, reaching 97.5 per cent of GDP in 2025-26. High as these costs are, the costs of inaction would have been far higher."
Economy set to be 3% smaller in 2025 than expected in March budget
Mr Sunak said the economic damage of the crisis will be “lasting” with economic output not expected to return to pre-crisis levels until end of 2022.
“Long-term scarring means, in 2025, the economy will be around 3 per cent smaller than expected in the March Budget,” he said.
Covid has cost £280bn so far, with figure set to rise £55bn
The government has spent £280bn so far to tackle the effects of the crisis, with a further £55bn, or 2.4 per cent of GDP, pledged in Covid-related spending for the 2020-21 fiscal year.
“The Chancellor’s spending spree looks set to continue for some time yet,” said Ruth Gregory, senior UK Economist at Capital Economics.
“And ‘normal’ day-to-day spending is set to increase by 3.8 per cent in 2021/22 in real terms, the fastest growth rate in 15 years.”
Foreign aid budget slashed to 0.5 per cent
The government reduced its commitment to foreign aid, pledging to spend 0.5 per cent of national income in 2021 as opposed to the normal 0.7 per cent figure.
Mr Sunak said at a time of unprecedented crisis "government must make tough choices".
"During a domestic fiscal emergency, when we need to prioritise our limited resources on jobs and public services, sticking rigidly to spending 0.7 per cent of our national income on overseas aid is difficult to justify to the British people, especially when we are seeing the highest peacetime levels of borrowing on record," he said.
The 0.7 per cent target was originally unveiled by Tony Blair in 2005 when he was prime minister, and was a commitment made by the ruling Conservative Party in the run-up to last year's election.
"We will continue to protect the world's poorest, spending the equivalent of 0.5 per cent of our national income on overseas aid in 2021, allocating £10bn at this spending review, and our intention is to return to 0.7 per cent when the fiscal situation allows," said Mr Sunak.
Earlier this week, former prime ministers Blair and David Cameron urged the government to retain the 0.7 per cent target, saying to cut it would damage Britain's influence on the world stage.
Unemployment to soar to 7.5 per cent in the second quarter of 2021
Measures to slow the spread of the virus have shuttered businesses and caused a spike in unemployment in the UK with the jobless rate hitting 4.8 per cent in September – the highest level in four years.
However, Mr Sunak warned this figure is expected to surge to 7.5 per cent in the second quarter of next year, the equivalent of 2.6 million people.
“Unemployment is then forecast to fall in every year, reaching 4.4 per cent by the end of 2024,” Mr Sunak said.
The OBR said the already-dire economic situation would be exacerbated if the Brexit negotiations end without a deal. In that scenario, unemployment would peak at 8.3 per cent, while the economy wouldn’t return to its pre-virus size until well into 2023.
Employment spending to surge by more than £4.3bn
To counter the effects of these worrying unemployment expectations, Mr Sunak pledged more than £4.3bn of additional funding, which includes a three-year £2.9bn programme to help more than 1 million unemployed people find work. It also includes a £1.4bn injection to increase the capacity of job centres.
Public sector pay rises of 0% except for NHS and low-income workers
Pay rises for public sector workers will be paused except those in the health service and on lower incomes.
Mr Sunak said he had to address the "disparity" between public and private sector wages in a move opposition parties said penalised the very people who have been on the frontline of Britain's fight against Covid.
"In such a difficult context for the private sector – especially for people working in sectors like retail, hospitality, or leisure – I cannot justify a significant, across-the-board pay increase for all public sector workers," Mr Sunak said.
"Instead, we are targeting our resources at those who need it most ... What this means ... is that while the government is making the difficult decision to control public sector pay, the majority of public sector workers will see their pay increase next year. And we want to do more for the lowest paid."
Furlough scheme cost £43bn and supported 8.9 million jobs at its peak
The country’s Job Retention Scheme cost £43bn up to November 15 and supported 8.9 million jobs at its peak.
The furlough scheme was the most expensive single programme of the government’s Covid-19 agenda. Preliminary tax data released on Wednesday showed that 2.4 million jobs were still fully or partly furloughed on September 30, which the government estimated would rise to 2.7 million once all returns had been received.
Earlier this month, Mr Sunak extended the job support scheme until the end of March 2021 due to a second wave of Covid-19 cases that thwarted his plan to rein in spending on the measure.
Eat Out to Help out cost £849m – twice as much as expected
Britain's government spent almost twice as much as expected on encouraging people to eat in restaurants, cafes and pubs during the temporary lull in Covid-19 cases in August.
The Eat Out to Help Out scheme cost £849m, much more than an initial government estimate of £500m.