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Sunak funds schools and police in last hurrah before tax rises

Rishi Sunak will raise public spending significantly on schools and the police in this week’s spending review, the Treasury said late on Sunday, in what appears to be a last hurrah before the chancellor starts to address “the scale of the economic shock” caused by the Covid-19 crisis.

The Treasury said the government would stick to its plan to raise school spending by 4.6 per cent in cash terms in 2021-22 and stay on track to deliver 20,000 new police officers by 2023.

On health, plans to create posts for 50,000 new nurses and put the funding in place for 50m additional GP appointments also remain intact.

But the chancellor gave a foretaste of the grim state of the UK’s public finances that he said would need to be addressed later in the parliament, telling the BBC’s Andrew Marr: “I can tell you it’s a very difficult picture. The economy is experiencing significant stress.” He added: “There’s more stress to come.”

Mr Sunak has decided that it is not yet time to address the challenges of a budget deficit likely to exceed £350bn this financial year, but he made it clear that “sustainable public finances” were his aim. Forecasts produced by the independent Office for Budget Responsibility will show the government falling short.

Boris Johnson has ruled out a return to “austerity” and although Mr Sunak will this week announce a public sector pay freeze, he was broadly in accord with the prime minister on Sunday night.

“This has been a tough year for us all,” Mr Sunak said. “But we won’t let it get in the way of delivering on our promises — the British people deserve outstanding public services, and we remain committed to delivering their priorities as we put our public services at the heart of our economic renewal.”

With the focus on avoiding austerity, tax rises rather than spending cuts are expected to bear the burden of a fiscal consolidation. For now, the prime minister is insisting on higher spending in some areas.

Wednesday’s spending review will include spending commitments for “a green industrial revolution” and a £16.5bn boost for defence, along with an extra £3bn for the NHS to help it cope with the fallout from the pandemic.

Mr Sunak, referring to Mr Johnson, joked he would like to “take his credit card away”.

There will be some moves in the statement to rein in borrowing, such as the public sector pay freeze — excluding NHS workers — and an expected cut to the overseas aid budget, which could save £4bn a year.

Any reduction in foreign aid will face opposition from business groups who have written to the Financial Times saying a move away from spending 0.7 per cent of national income on overseas aid would damage the UK’s “global standing”.

A cut in the aid budget would also sit awkwardly next to Mr Johnson’s willingness at the weekend to sign up to the G20’s commitment to the poorest countries. “We remain determined to support all developing and least developed countries as they face the intertwined health, economic, and social effects of Covid-19,” the G20 communique said.

But with UK public borrowing setting peacetime records and public sector debt now over £2tn, Treasury officials admit there are soon to be the political and economic conditions for some “big” decisions on taxation ahead of a spring Budget.

Even before the pandemic, previous chancellors George Osborne and Sajid Javid looked at the system of pension tax relief, which mainly benefits richer people and costs almost £40bn a year in forgone income tax revenues.

The Conservative party’s election manifesto in 2019 pledged to remove “arbitrary tax advantages for the wealthiest in society”. It also promised not to increase rates of income tax, VAT and national insurance — a pledge Mr Johnson says he wants to keep — limiting Mr Sunak’s room for manoeuvre.

The chancellor, asked by Sky News’ Sophy Ridge about the so-called “tax triple lock” in the manifesto, left open the possibility that the promise might not be honoured: “I don’t comment on future fiscal events,” he said.

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