As an accountant, I know better than anyone that your outgoings cannot exceed your income.
So I watched Rishi Sunak deliver his 2020 Spending Review in the House of Commons yesterday with interest.
After all, how on earth was he going to recover from the borrowing the country has done to get through the pandemic this year – and, more importantly, would recovering this money hit us all hard in the years ahead?
Well, it’s a mixed bag and in case you missed it - or if you think you may have mistaken one of Rishi’s billions for his trillions - here is a summary of this year’s Spending Review and how it might impact you.
Economic growth
The Chancellor stated that forecasts from the Office of Budget Responsibility (OBR) suggest that the economy will shrink by 11.3% this year.
Unsurprisingly, this would be the biggest decline in three centuries. Sunak also says that it will take until the end of 2022 for the UK economy to return to its pre-pandemic size.
Estimates suggest that GDP will grow by 5.5% next year, then 6.6% in 2022, 2.3% in 2023, 1.7% in 2024 and a further 1.8% in 2025.
In July, when some may have hoped a second lockdown would never arrive, the OBR foresaw a 12.4% drop in GDP this year. This compares to estimates from the beginning of November which suggested a fall of 11% in 2020.
What it means to you
Recession and a period of austerity is likely. The Chancellor mentioned that there would be ‘long-term scarring’ to the UK’s economy, with his review indicating its impacts could continue until as late as 2025. So, don’t expect to be rid of Rishi once you’ve had your vaccine.
Borrowing
As expected, Sunak says this year’s budget deficit will be the highest level in peacetime history, at £394bn, or 19% of GDP.
He says that borrowing will remain at £164bn in 2021 and around £100bn for the remainder of the financial forecast.
In July, the OBR estimated a budget deficit of £322bn for 2020-21. It had also previously estimated that the national debt across all budgets would be £2.2tn in 2020-21 – a whopping 104.1% of GDP.
What it means to you
It is bound to mean tax increases are looming. Rishi Sunak continued to stress that the current climate was ‘an economic emergency’ and that this level of borrowing was justified as it helped to prevent further damage. But we have to pay it back somehow.
Public sector pay
In one of the most highly-anticipated parts of his Spending Review, the Chancellor delivered news that was met with disappointment and dismay across the nation – pay rises for the public sector are going to be paused next year, with the exception of over one million NHS doctors and nurses.
For these 2.1million public sector workers - who earn below the national median wage of £24,000 - a pay rise of at least £250 a year. Not much, is it?
In an attempt to protect political balance, the Chancellor explained that he could not justify an across-the-board pay rise for public sector workers in order to ensure fairness between the public and private sectors.
What it means for you
Nothing unless you are a nurse earning below the national median wage of £24,000.
However, he also revealed that the national living wage would be increased to £8.91 per hour and extended to over-21s. This means you will need to review what you are paying your staff.
Spending
The Chancellor emphasised the point that day-to-day departmental spending will rise by 3.8% (around £14.8bn), the fastest rate of growth in 15 years.
He revealed that the UK government will match EU funding for regional development post-Brexit. Next year, funding for communities to pilot programmes will become available.
In order to help hire 50,000 new nurses, Sunak says that the core health budget will grow by £6.6bn. He also says that the budget for schools will increase by £2.2bn.
As he closed his Spending Review, the Chancellor also announced that next year’s investment in infrastructure will total £100bn. He plans to deliver the highest level of sustained investment in 40 years.
And finally, Sunak announced that a new £4bn fund will be available to local areas to allow them to bid for the funding of local projects.
Local councils will question whether £4bn will stretch far enough after years of underfunding devolved governments.
What it means for you
Figures often only go so far to reassuring the population – the proof will be in the pudding in the months and years ahead as to whether we are able to effectively recover from the impact of the pandemic.
How can we help you?
We will continue to support you or your business if you are affected by any of the Chancellor’s announcements.
As we head into the future with only worrying predictions to guide us, KBL are here to steer your finances into a more positive direction.