Amid the jaw-dropping economic contraction and partial public sector pay freeze, Rishi Sunak’s Spending Review provided no shortage of headlines.
What with foreign aid cuts and staggering borrowing totals, the Chancellor’s Commons statement contained plenty to analyse and discuss.
Here’s three areas, though, that are attracting less attention now than they will in the future. These are some of the smouldering issues buried in this Spending Review which could blow up in the Chancellor’s face.
The first is the government’s new “levelling up” fund, a £4bn pot to “invest in local infrastructure that has a visible impact on people and their communities”. This sounds like a good idea, and it is.
When the Chancellor stressed, though, that such schemes “must be delivered within this Parliament”, he may inadvertently have highlighted future problems.
The Government was heavily criticised earlier this year after the National Audit Office revealed some of England’s most deprived areas missed out on the £3.6bn Towns Fund after ministers chose other lower-priority areas not reflecting scoring criteria set out by officials.
The cross-party Public Accounts Committee of MPs said it “was not convinced by the rationale” behind some decisions, suggesting the Government was favouring “red wall” seats across the North and Midlands won from Labour in 2019, using public funds to shore up Tory support.
Reasons offered by ministers were “vague”, MPs concluded, with the allocation of grants giving “every appearance of having been politically motivated”, according to Labour’s Meg Hillier, who chairs the committee.
Expect lots more rows about “pork barrel” politics ahead of the next general election, due in May 2024.
The second, much bigger dog yet to bark is unemployment. In his statement, Sunak warned that, given this year’s 11.3pc fall in GDP, unemployment will surge to 2.6 million by mid-2021. That’s around 7.5pc of the workforce, up from 1.6 million now.
This is a serious understatement. The unemployment measure referred to by the Chancellor covers those “actively looking for work” – which many unemployed people aren’t, due to Covid-related restrictions and job centre closures.
The “claimant count” definition of unemployment, in contrast, is already around 2.7 million, having doubled since March – suggesting a current jobless rate around 8pc.
While the growth of “in work” benefits mean some of this “claimant count” total will have some work, we must also consider HMRC payroll data showing employee numbers down sharply, as well as the drop in self-employment – again, not covered by the Chancellor’s figures.
Back in July, little-noticed forecasts from the Office for Budget Responsibility suggested that even in an “upside” GDP growth scenario, unemployment would reach 9.7pc, with a “downside” estimate of 13.7pc.
Consider, also, that aside from the 1.6 million officially unemployed, there are millions more (precise figures are yet to be released) still on furlough.
With the best will in the world, when the extended scheme ends in March, even if there’s a strong post-Covid rebound, unemployment seems certain to hit three million. And, just as during the mid-1980s, widespread joblessness could convulse our politics.
The other looming issue, of course, is “quantitative easing”, a phrase which failed to appear in the Chancellor’s speech or in any of the Treasury’s Spending Review documents.
The reality is, though, that the only reason the Government can borrow at so much is that many of the gilts sold to investors are being bought back by the Bank of England, using newly-created money.
The numbers involved are quite astonishing.
Back in March, as lockdown was just starting, the OBR said the Government would borrow £301bn between 2020/21 and 2024/25.
That five-year estimate just ballooned to £863bn, including £394bn in this fiscal year alone – an annual budget deficit equal to 19pc of GDP, twice the previous peacetime record.
As such, this entire Spending Review hinges on a single, oblique reference in the Treasury’s technical document to “an additional £450bn of asset purchases”.
This is the huge expansion of the Bank of England’s balance sheet from £425bn to £875bn since March, with the UK unleashing more QE over the last six months than during the previous nine years.
QE was originally a one-off measure to prevent a banking collapse in the aftermath of the 2008 sub-prime crisis. This emergency medicine is now a lifestyle choice.
Bank of England largesse keeps share prices buoyant, making it popular among investors. And by hoovering up government bonds, QE keeps state borrowing costs down.
“In all scenarios, borrowing costs continue to be very low,” says the Treasury, explaining away any concerns about the astonishing rate at which the Government is now borrowing.
So confident are the mandarins, and our broader policy-making establishment, total debt service costs are forecast to fall over the coming five years, even as the stock of outstanding debt explodes to 110pc of GDP.
The market is only accepting such low rates, though, because investors know that, for now, the Bank of England will buy up gilts in the secondary market, while allowing them to make a “turn” or small profit.
Our government debt market is now rigged, given the massive influence of a central bank prepared to create and spend hundreds of billions of pounds.
Can this continue? Will it all end in tears? Nobody knows and, amid rows over foreign aid and public sector pay, no-one wants to think about it.
How does the Government's spending review affect you? What did and didn't you like about the Chancellor's statement? Get in touch by emailing [email protected]