In today’s Spending Review, chancellor Rishi Sunak announced a public sector pay freeze, but pledged investment in areas like infrastructure as he outlined how borrowing will reach £394bn this year, equivalent to 19 per cent of GDP.
He also announced that more than a million nurses, doctors and others in the NHS will receive a pay rise, despite other public sector workers not getting a raise at all.
The announcements in the review have been welcomed by some across the advice, investment and pensions space, but have been criticised by many others.
Specialist adviser Wesleyan has come out against Sunak’s public sector pay freeze, arguing it ignored the value of many professions.
Wesleyan head of teachers division Simon Rake said: “Public sector workers have been at the coalface of the Covid-19 crisis, helping to keep the country on its feet throughout the pandemic. The chancellor’s announcement of a pay-freeze is a huge setback and isn’t the reward they deserve for their ongoing efforts.
“Over recent years, the public sector has been subject to limited pay rises and wage cuts following a decade of austerity. While frontline NHS staff have been excluded from the chancellor’s latest pay-freeze, millions of public sector workers including teachers have been dealt a blow to their personal finances and long-term savings plans.”
However, JP Morgan Asset Management chief market strategist Karen Ward said the chancellor had a “very fine line to tread today” between spending and the need to balance the books.
She said: “Further fiscal support is clearly required to sustain the economy through what is set to be a very difficult winter. But he also had to acknowledge the fact that borrowing this year is already near £400bn. It is a near impossible balance to strike, made even harder by the uncertainty surrounding how quickly vaccine roll out can pave the way towards much stronger levels of economic activity in 2021.
“The time will come when more weight is given to fiscal sustainability, but it is right that the chancellor has placed greater emphasis today on how to support the economy.
“Indeed, the need for further spending is reinforced by the eye-watering new growth and employment forecasts from the Office for Budget Responsibility. The longer-term challenge for the chancellor will be to demonstrate that the increase in the UK’s deficit is cyclical rather than structural, but that will be a debate for another day.”
Still in the dark about tax
But not everyone was as understanding about the chancellor’s announcements, with many calling for tax reform and more detail on how borrowing would be paid for.
Quilter tax and financial planning expert Rachael Griffin said Sunak’s opening of the purse strings came as no surprise. “We’ve become accustomed to the chancellor delivering wave after wave of historic spending commitments to stabilise the economy and protect jobs and today was no exception.”
The OBR forecast that output will contract by a total of 11.3 per cent this year, the largest fall in output for 300 years. Borrowing will top £394bn this year, 616 per cent higher than predicted at the March budget and will remain above £100bn until at least 2025/26.
Griffin said: “The OBR’s forecast makes it clear that this will be the chancellor’s final happy hour and the Treasury will now seek to raid the piggy bank to pay for the historic borrowing over this parliament.
“While we now know just how big the fiscal hole is likely to be, we are still in the dark as to how the chancellor plans to fill it as there were no decisions on tax policy today. This will have to wait until next year and the government will now consider their options carefully.
“Despite his popularity, Rishi Sunak will need all the political capital he can get. Flashy graphics with a personal signature won’t look quite so good when announcing tax hikes.”
Aegon pensions director Steven Cameron agreed as he said the chancellor now faces “the unenviable task” of how to begin balancing the books, and the pandemic payback is now on the horizon.
“While today’s statement steered clear of specific tax raising measures, the scale of the current funding gap means it’s not a question of whether, but of how, from whom and when Rishi plans to arrange that payback.”
Cameron argued that while there is no “easy remedy” it may include a reform of capital gains tax or a reform of pension tax relief, benefitting basic rate taxpayers but reducing uplifts for higher rate taxpayers.
“Such is the size of the budget black hole that future increases to income tax or national insurance can’t be ruled out,” he added. “The tax system can have a big impact on long term saving and investment behaviour and can go a long way to nudging individuals into actions the government wants to encourage.”
In 2017/18, the government received only £8.3bn in CGT income from 265,000 people. Griffin argued it is therefore “a likely target for reform”.
Scarring to the economy
Premier Miton Investors chief investment officer Neil Birrell said some of the numbers outlined by the chancellor are “frightening”. After the forecast bounce next year and in 2022, growth will fall back again to just over 2 per cent, than back below 2 per cent for the next two years.
“This illustrates that the scars are long lasting; the scale of debt and unemployment are fundamental to the problem,” Birrell says. “The support for jobs and business are significant and need to be, the spending on infrastructure is also positive, but that takes time to plan and apply; spending is needed now.”
Quilter Investors portfolio manager Hinesh Patel added that Brexit may also have a serious long-term economic impact, just like Covid-19, so spending will remain the order of the day for some time in order to support jobs.
“Sunak is going down the right track, and looking into the long-term the future does look prosperous, particularly if many of these spending commitments can address the challenges that were holding back the economy pre-Covid-19; for example, the regional divide, aging infrastructure and skills shortages.
“But this is a question of timing. All of these spending commitments will take years to show up in the data, so it is the here and now that will matter to most. In the short-term we are relying on the rollout of a vaccine, along with a resolution to the Brexit negotiations, to help unlock economic growth and kickstart the path to recovery. The government will be desperately hoping the consumer can help restart the economy.”
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