Fiscal Spending Review – What is the impact on the economy

25 November 2020

In the Wednesday Spending Review, Rishi Sunak announced one of the largest fiscal spending plans in UK history. The chancellor plans for departmental spending across Whitehall to be approximately £540 billion in 2021, with £55 billion to directly tackle Coronavirus. Sunak reiterated that he most “immediate priority” will be to protect jobs, help businesses and support public services, especially the NHS.

The chancellor announced an extra £3 billion next year to support those who are unemployed and said that the Government would try to save jobs, but they “cannot protect every job”. He later announced that there will be pay rise for over a million nurses, doctors and others working in the NHS and will increase the National Living wage next year by 2.2%% for those aged 23 and over.

Public spending was focused predominantly on the NHS, and Sunak confirmed an extra £3 billion in 2021 to tackle the backlog in operations from the pandemic. The chancellor also set aside £2.3 billion for long-term investment into the NHS, specifically for new technology to improve medical infrastructure and improve patient experience.

This increased spending will have a significant effect on the fiscal deficit, and the underlying debt level is due to hit 97.5% of GDP in 2025-26, which Rishi Sunak quite rightly points out is “unsustainable over the medium term”. UK borrowing will also hit £394 billion in 2020, equivalent to a peacetime record of 19% of GDP.

There has been very little movement in equity and FX markets after the Spending Review, with both the FTSE 100 and Cable both trading unchanged in the hour after Rishi Sunak’s speech started at 12:45 p.m. This is most likely because these plans were expected, and most of the points were reported by The Telegraph last night.

It is worth noting that Sunak purposely missed out any taxation changes, focusing only on spending and cuts, and it is almost a certainty that taxes will have to increase in 2021 to address the large fiscal imbalance. With that being said, these spending plans will be music to the ears of business owners in the country. The plan to controversially cut foreign aid will benefit local businesses and long-term infrastructure spending, which will increase by £27 billion from last year in real terms, will provide a framework to help businesses prosper.

This could lead to an increase in the value of the pound, as foreign investors could look to take advantage of new British infrastructure, and will also please the Bank of England, who have been asking for the Treasury to help them carry the load of dealing with the fallout of the pandemic.