Sajid Javid is due to deliver a spending round on September 4. It will be his first major speech as the UK’s chancellor of the exchequer – he’s just six weeks into the post – and it could possibly be his last. This major fiscal event has assumed even greater political importance because of the Johnson government’s decision to prorogue parliament and the prospect of an imminent general election.
The spending round will set departmental budgets for day-to-day spending for a single financial year, 2020-21. According to the Treasury, it has been fast-tracked to “give government the time and space to focus on delivering Brexit”.
But the spending round is likely to cast aside vital questions of long-term strategic planning. Its focus will be on political expediency – populist spending announcements that will foster an electoral “feel-good factor” of sufficient strength and momentum to enable the Johnson-led Conservative Party to win a majority at Westminster in the forthcoming general election.
Spending reviews were initiated in 1998 by the New Labour government of Tony Blair, with the ambition of abandoning the political expediency of short-term, annual public expenditure plans in favour of planning on a more strategic, three-year basis. Brexit seems to have done away with that. The last multi-year spending review was in November 2015. And the long-promised first full multi-year spending review since then has been postponed until an unspecified date in 2020.
Like so many other important decisions in contemporary British politics, this fiscal can has been kicked down the road until after the UK’s exit from the European Union. Barely six months ago, it was all meant to be so different. In his March 2019 spring statement, the previous chancellor, Philip Hammond had committed to launching “a full three-year spending review before the summer recess, to be concluded alongside an Autumn Budget”.
Assuming a smooth and orderly Brexit deal was concluded, Hammond said this spending review would deliver “an end to austerity”. But he later warned in his June speech to bankers at Mansion House that a damaging no-deal Brexit would disrupt this plan.
This is the reality that the Johnson government is now faced with. Thanks to the customary raft of leaks and announcements, we already know what the focus of spending will be: Brexit preparations, the National Health Service and schools in England, the police and defence.
Brexit preparations have been “turbo-charged” with £2.1 billion. The NHS in England has been promised a one-off £1.8 billion injection on top of the May government’s £20.5 billion – and a 3.4% real-terms increase in annual funding until 2023-24. Schools in England have been promised an additional £2.6 billion in 2020-21, £4.8 billion in 2021-22 and an extra £7.1 billion in 2022-23.
At a projected cost of £1.1 billion, a total of 20,000 police officers will be recruited over three years for England and Wales. Defence is also reported to be the beneficiary of a 0.5% real-terms increase in spending to signal the country’s commitment to a proactive post-Brexit foreign policy.
None of these announcements signify an end to austerity. They simply reverse the austerity cuts made since May 2010, while highlighting that austerity was always a political and ideological choice rather than an unavoidable economic imperative – albeit one that resulted in the addition of £790 billion to the national debt.
Despite these spending commitments, Javid has promised to honour the previous chancellor’s “fiscal mandate” that the structural deficit remain below 2% of GDP by 2020-21.
In its March 2019 forecast, the OBR (the Treasury’s watchdog) suggested the government would meet this fiscal mandate with £26.6 billion (1.2% of GDP) of headroom to spare. While changes in the accounting rules surrounding student loans will reduce this total by around £12 billion or 0.5% of GDP in 2020-21, there would remain around £14 billion of fiscal headroom for additional spending or tax cuts.
Javid’s ability to honour the fiscal mandate has been questioned by the Resolution Foundation think-tank. The Institute for Fiscal Studies has suggested that the spending round will constitute “a pause, rather than an end, to austerity”.
In truth, all of Javid’s pledges in the 2019 Spending Round for 2020-21 will be nothing more than pre-Brexit and pre-election promises. And it may be that none of them are honoured if there is a no-deal Brexit or change of government.
The disruption and heightened uncertainty of a no-deal Brexit could “push the economy into recession, with asset prices and the pound falling sharply” warns the Office for Budget Responsibility. Plus, it says, GDP could fall by 2% by the end of 2020 and borrowing could rise to around £30 billion more than previously forecast from 2020-21 onwards.
In such circumstances, whether there has been a general election or not, whoever is in charge at the Treasury will have to deliver an emergency budget to redress the ensuing economic, political and social chaos. And when the 2020 spending review is finally delivered, its plans for future public spending are likely to be very different from those in the 2019 review. Having endured one “lost decade” of falling living standards, a no-deal Brexit Britain may well have to prepare itself for another.