A faster than expected economic recovery means Sunak has more leeway for spending
Tax and spend is back in fashion. The UK economy has recovered faster than was predicted at the time of Rishi Sunak’s March budget, largely due to a better-than-expected Covid-19 recovery and the ramping up of the vaccine rollout. This economic boost meant that the Chancellor had more room for spending during the Budget announced today.
The fast recovery will see GDP growth of 6.5 per cent this year, and 6 per cent in 2022. However, the high growth isn’t predicted to last. The UK is set for slower economic growth in the long term once the economy has bounced back from the pandemic.
The cost of living crisis remains an issue, and inflation is expected to rise even further, according to the Office for Budget Responsibility's latest projections. Goods bottlenecks, labour shortages in certain industries such as transport, logistics and food processing, and rising global demand for oil and gas mean that Consumer Price Inflation could reach a high of 4.4 per cent in the second quarter of next year – which will put pressure on living standards.
Sunak announced a range of short-term spending pledges in today’s Budget. However due to the extraordinary measures taken during the pandemic, spending is expected to fall from a peacetime high of 53.1 per cent of GDP to 42.1 per cent next year as pandemic support measures come to an end. From 2024-25 it is expected to stabilise at around 42 per cent of GDP, which the OBR says is the highest sustained level since the late 1970s.
Despite Sunak's claim that the increase in departmental spending outlined in this budget is the “largest increase this century”, analysis by the Institute for Fiscal Studies found that, in real terms, the increase is lower than many during the New Labour period, and the increases announced at the last two Conservative Spending Reviews.
Taxes are also projected to rise – to the highest level since the 1950s (as a proportion of GDP). The Chancellor said: "I don’t like it, but I cannot apologise for it – it’s the result of the unprecedented crisis we faced."
Although Sunak announced a host of new spending commitments, most of them do little to compensate for the dramatic cuts made since the Conservatives entered power over a decade ago. The Chancellor pledged £82m for new hubs for family support, but annual budgets for Sure Start centres were slashed by £760m between 2010 and 2017.
Sunak committed £560m to youth services, but analysis by the YMCA found that between 2010 and 2018, annual spending on youth services fell by £1bn.
Read More: How generous was Rishi Sunak’s 2021 Budget and Spending Review really?
The announcement of the end of the public sector pay freeze will have a huge impact on many, though the precise rise remains unknown and it's unlikely it will do much to counteract the past decade of declining wages. In real terms, public sector workers have seen their pay fall by an average of 8 per cent in the past 10 years, with teachers and police officers among the most affected.
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