Spending Review & OBR Economic Outlook

Today, the Chancellor announced the Government’s spending plans for the coming year. The Spending Review made for sober listening, and included details on the extent of the economic damage done by the coronavirus pandemic and details on public sector pay, NHS funding and infrastructure.

The Office for Budget Responsibility also published its Economic and Fiscal Outlook, with references to the Tax-Free shopping decision. Please see key points below:

Office for Budget Responsibility Forecasts:

The Office for Budget Responsibility (OBR) has forecast that this year, the economy will contract by 11.3%; the largest fall in output in over 300 years. As restrictions lift, it is forecast that growth will return by 5.5% in 2021 however the UK’s economic output will not return to pre-crisis levels until Q4 2022.

The OBR expects unemployment to rise to a peak of 7.5% (2.6 million people) in the second quarter of next year. Unemployment is then forecast to fall in every year, reaching 4.4% by the end of 2024.

ASSESSMENT OF TAX-FREE SHOPPING

Submissions made by the Association of International Retail and others to the OBR are reflected in its independent assessment of the cost/benefit of the Treasury’s decision to end tax-free shopping. The OBR states that the Treasury has:

  • Overestimated potential savings to the Exchequer
  • Based its costings on highly uncertain estimates of consumer behaviour
  • Not taken account of knock-on costs of ending tax-free shopping

In response to this, Sir Geoffrey Clifton-Brown MP said, “The independent Office of Budget Responsibility has today confirmed that scrapping tax-free shopping will save the Exchequer an average of just £360m a year over the next five years rather than the £500m the Treasury has claimed.

“The OBR  has also said that Government’s costings are based on a “highly uncertain estimate” of how international visitors will react to this change and highlights that “there will also be costs as the UK becomes less attractive for affected tourists relative to alternative EU destinations such as Paris or Milan”.

“Based on this independent assessment by the OBR, and the concerns by business about the loss of up to 40,000 jobs as a direct result ending tax-free shopping, it is clearly time to re-assess the full impact of this policy.”

Chancellor’s Economic Announcements:

  • The Chancellor began by stating that his priority was to protect lives and livelihoods
  • The UK is forecast to borrow a total of £394 billion this year, equivalent to 19% of GDP.
  • Total departmental spending across Whitehall will be £540 billion in 2021 with day-to-day departmental spending rising by 3.8%. Devolved nations will receive increases of funding also:
    • Scotland: £2.4 billion
    • Wales: £1.3 billion
    • Northern Ireland £900,000
  • The whole of the UK will benefit from the “UK Shared Prosperity Fund” to match EU funding ending next year.

Funding to tackle Coronavirus:

The Government has so far spent £280 billion on Covid-19. Public service funding will total £55 billion next year to tackle Covid-19. this includes:

  • £18 billion on testing, PPE & vaccines
  • £3 billion to support NHS recovery
  • £2 billion for transport
  • £3 billion to local councils (with £250 million to help end rough sleeping)
  • £2.6 billion to devolved nations

On Jobs:

  • The Chancellor announced £3 billion to deliver 3 year restart programme to help unemployed people to find new work
  • He announced a partial pay freeze on public sector jobs;
    • Workers on low incomes will be guaranteed a payrise of at least £250 
    • He announced a pay rise for NHS workers
  • The chancellor has increased national minimum living wage by 2.2% to £8.91 per hour

Departmental Spending:

HEALTH: The health budget will rise by £6.6 billion next year, allowing the Government to deliver 50,000 more nurses and 50 million more GP appointments. There will also be a £2.3 billion increase in capital investments to replace old equipment and fund a promised hospital building programme

EDUCATION: The schools budget will increase by £2.2 billion next year with a £291 million boost for further education, £1.5 billion to rebuild colleges and £375 million to deliver the Prime Minister’s lifetime skills guarantee

SECURITY: £400 million will be spent to recruit 6,000 new police officers and £4 billion wlll be spent over four years for 18,000 new prison places

OVERSEAS AID: This will be cut from 0.7% to 0.2% of national income being spent on overseas aid. This is intended to return to 0.7% when the fiscal situation allows

LOCAL AUTHORITIES: Local authorities will be given extra flexibility to raise council tax alongside an extra £300 million grant to give them an extra £1 billion to spend on social care

INFRASTRUCTURE: Capital spending next year will total £100 billion. This will include:

  • A £7.1 billion national home building fund.
  • A new national infrastructure bank, headquartered in the north of England, will work with the private sector to finance major new investment projects across the UK
  • A Levelling up fund worth £4 billion to pay for local projects such as bypasses, railway station upgrades, traffic reduction, libraries, museums and galleries as well as high street and town centre improvements

For more information, please email covid@newwestend.com and a member of the team will get in touch.

Wed 25 November 2020