Press release

25 Nov 2020 London, GB

The Chancellor’s Spending Review focuses on providing further support to the economy and jobs in 2020/21 – EY ITEM Club comments

The Spending Review focused on providing further support to the economy and jobs in 2020/21.

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Related topics COVID-19 Growth
  • The Spending Review focused on providing further support to the economy and jobs in 2020/21.
  • The new OBR forecasts that the economy will not return to its pre-COVID-19 size until Q4 2022 and sees the economy 3% smaller in 2025 than it did at the time of the March Budget.
  • The OBR forecasts highlight the pandemic’s significant impact on the public finances, with the budget deficit seen at £393.5 billion (19.0% of GDP) in 2020/21 and still as high as £101.8 billion (3.9% of GDP) in 2025/26.
  • The Chancellor did not indicate what corrective action will be needed to rein in the public finances once the economy is on a surer footing.
  • Limiting measures on the public finances were restricted to reducing the overseas aid budget as a proportion of national income and measures on public sector pay.

Howard Archer, chief economic advisor to the EY ITEM Club, says:

“The scale of the challenge facing the Chancellor to restore the public finances to a sustainable position over the medium term has been highlighted by the Office for Budget Responsibility (OBR) forecasts.

“These forecasts look broadly defensible: the EY ITEM Club suspects that the OBR’s growth forecast for 2022 is on the high side, but the EY ITEM Club believes that the expansion in 2021 could be a bit more than the OBR expects, on the assumption that there is a widespread rolling out of the COVID-19 vaccine in the first half of the year. Similar to the OBR, the EY ITEM Club assumes that the UK and EU will conclude a Free Trade Agreement by 31 December.  

“In its central forecast, the OBR has lifted its estimate of public sector net borrowing in 2020/21 to £393.5 bn or 19.0% of GDP. This is up from the £372.2bn it anticipated in August. Borrowing is then seen falling back to £164.2bn in 2021/22, £104.6bn in 2022/23 and £100.4bn in 2023/24. It is then seen stabilising around £100bn in 2024/25 and 2025/26, when it will be 3.9% of GDP.

“The OBR expects GDP to contract 11.3% in 2020 then grow 5.5% in 2021 and 6.6% in 2022. Growth is then seen at 2.3% in 2022, 1.7% in 2023 and 1.8% in 2024. This means that the economy does not regain its pre-COVID size in fourth quarter of 2019 until the fourth quarter of 2022. It also means that the economy is expected to be around 3% smaller in 2025 than it was at the time of the March Budget.

“The unemployment rate – 4.8% in the three months to September – is seen reaching 7.5%, or 2.6 million people, in the second quarter of 2021 and then falling back to 4.4% by the end of 2024.

“The EY ITEM Club has recently updated its forecast and sees GDP contracting 11.6% in 2020, then growing 6.2% in 2021, 4.3% in 2022 and 1.9% in 2024. The EY ITEM Club expects GDP will contract around 4% in the fourth quarter due to the lockdown in England being followed by the introduction of restrictive conditions from early December. Consequently, GDP is seen contracting 11.5% over 2020. The EY ITEM Club sees the economy returning to growth in the first quarter of 2021 and then the recovery becoming more firmly established, helped by restrictions being eased and a vaccine becoming widely available during the first half of the year.

“The EY ITEM Club believes the peak in unemployment may be a little less than the OBR forecasts, partly reflecting our higher GDP forecast for 2021. The EY ITEM Club expects the peak in the unemployment rate to be around 7%, rather than the OBR’s 7.5%, in the second quarter of 2021. The EY ITEM Club expects the unemployment rate to be around 4% at the end of 2024.

“Consequently, the EY ITEM Club believes that the budget deficit could be modestly less than the OBR forecasts in the near term, although the shortfalls still look high. The EY ITEM Club anticipates a budget deficit around £375bn in 2020/21, equivalent to 18% of GDP, but also suspects it will still be around £100 billion in 2024/25.”

The Chancellor’s key announcements

Howard Archer continues: “As expected, the Chancellor has focused on near-term measures on supporting the economy and creating jobs.

“In particular, there is much focus on the labour market, with the latest measures primarily aimed at getting people into work, rather than keeping them there as has been the case with the furlough scheme. His latest measures include a £4.6bn package for the labour market, with £2.6bn for a Restart jobs scheme to help those who have been out of work for more than a year. There is also £1.6bn for the Kickstart scheme to subsidise jobs for young workers.

“As part of the plans to support the economy, there are also supportive measures for investment, including a £4bn “levelling up fund” from which councils will be able to bid for grants. A National Infrastructure Bank is to be set up while the Chancellor indicated that capital spending will amount to £100 billion in 2021/22, up £27 billion in real terms on 2021/22.

“Total departmental spending is planned to rise 3.8% in real terms in 2021/22, which is the largest increase for 15 years.

“While the focus was on the near-term, there are some measures aimed at limiting the budget deficit. The overseas aid budget is being cut to 0.5% of GDP from 0.7% of GDP. Additionally, pay is frozen for many public sector workers, although there are increases for doctors, nurses and other NHS workers, and also a rise of at least £250 for the lowest paid public sector workers.”