Jam tomorrow but no jam today. As devotees of Lewis Carroll know, that was the credo of the White Queen in Alice Through the Looking-Glass. Plenty of chancellors of the exchequer have adopted the frugal White Queen approach but so far Rishi Sunak has not been one of them. He has spent an extra £280bn since the Covid-19 crisis began and is on course to preside over a budget deficit of £394bn this year – comfortably a peacetime record. Indeed, at 19% of national output, the deficit for 2020-21 will not be all that shy of the levels it reached during the two world wars – 27% in 1941-42 and 28% in 1916-17. During the course of the current financial year, the government will have been responsible for 56p of every pound spent in the economy. While spooning out large dollops of jam today, Sunak has talked a lot about how there will be no jam tomorrow but has never quite got round to it.
The chancellor’s spending statement to the Commons was, therefore a first. The jam pot has been taken away from the public sector workers who will face a pay squeeze and from poor people in the developing world as a consequence of a cut in the UK aid budgets. Non-Covid departmental spending next year will be £10bn lower than previously planned. But in truth, the money saved will be small change when set against the colossal spending deemed necessary to combat the economic emergency. The Office for Budget Responsibility (OBR) noted the chancellor had averaged £20bn of extra spending in each of the 14 fiscal events since the start of the crisis. “Each of these would have constituted a substantial budget package in normal times.” Assuming the economy does not take further hits from fresh waves of the pandemic, spending will increase by less in the coming years and borrowing will come down. Yet even by the middle of the decade, the gap between what the state takes in taxes and what it spends will be running at £100bn a year. Paul Johnson, the director of the Institute for Fiscal Studies thinktank, says spending is likely to be higher than planned. He doubts whether £10bn will be cut from non-Covid spending next year, points out that there is no pandemic pencilled in after 2021-22, and notes the growing pressure on the chancellor to continue with the £20-a-week increase in universal credit which is due to expire in the spring. Sunak did not mention Brexit in his speech, but the possibility of the UK and the EU going their separate ways without a trade deal did not escape the OBR. It said such an outcome would reduce output by 2%, putting further upward pressure on borrowing.
Even with a deal, there will be no miracle cure. The OBR’s best guess is that it will take until the end of 2022 for the economy to return to its pre-crisis level and that by the middle of the decade the economy will be 3% smaller than it would otherwise have been. Yet Sunak would say the £280bn is money well spent. Yes, the budget deficit is at the top end of financial market expectations. But the government is having no trouble financing its borrowing, and the money has been spent on emergency funding for the NHS and to prevent even worse scarring. In the early 1980s, when the economy contracted by much less than it will this year, unemployment soared to double-digit percentage levels. This time, it is expected to peak at 7.5%. Still bad, but not nearly as bad as it might have been.