As Chancellor Sunak gives a depressing view of the UK economy in his Spending Review, tax rises appear inevitable.
- The economy will be 11.3% smaller as a result of the coronavirus crisis
- The UK will end use of the controversial retail prices index in 2030, using CPI from 2030
- A no-deal Brexit could make a bad situation worse.
It was never going to be pretty, but Chancellor Sunak delivered a damning assessment of the state of Britain’s finances in his Spending Review. The economy will be 11.3% smaller as a result of the coronavirus crisis, only returning to its pre-pandemic size in 2022.
Borrowing will reach a peacetime record of £394bn this year – the majority of it spent fighting Covid-19 - and unemployment is likely to reach 2.6m next year. National debt will hit £2.2 trillion by the end of this financial year, over the magic level of 100% of GDP.
The Chancellor needed to find spending cuts. His first snip was to end the use of the controversial retail prices index in 2030, using CPI from 2030. CPI tends to be about 0.8% lower than RPI.
While this is good for commuters, who will see lower fare increases, and car owners, who will see lower Vehicle Excise Duty, it is bad news for some retirees. Around two-third of private sector defined benefit schemes link to RPI, as do some inflation-linked annuities. It is also bad news for holders of inflation-linked bonds linked to RPI, who will receive no compensation.
In a gruesome twist, it turns out that the Chancellor is already saving on some pension payments as a result of Covid. The state pension bill will be around £600m lower than forecast this year because of all those who have died.
Inevitably, the Government has had to pare back some of its more ambitious plans, notably around infrastructure investment. That said, the Chancellor has said he will establish a UK infrastructure bank, based in the North of England, which will work with the private sector to finance new projects.
At a time when UK finances are under review, it seemed odd that the potential for a no-deal Brexit didn’t merit a mention. Trading on World Trade Organisation rules would make the economic emergency even worse, according to the Office of National Statistics, pushing unemployment up to 8% rather than 7.5%.
Against this backdrop, tax rises look both inevitable and uncontroversial. Any return to austerity would risk damaging the economic recovery and there appears to be increasing public acceptance of higher taxes, even from those who would pay them.
Mr Sunak said: “Our health emergency is not yet over, and our economic emergency has only just begun.” The UK economy is in intensive case. It will need skilled care to revive it from here.