James Meadway assesses the political and economic pressures facing Chancellor Rishi Sunak ahead of tomorrow’s Spending Review

Chancellor Rishi Sunak will present the Spending Review on Wednesday in the midst of a second national lockdown and grave uncertainty about the economic future of the country.

This comes not so much from Brexit, with Sunak himself now pushing back against the prospect of a ‘no deal’, but from the ongoing impacts of the Coronavirus pandemic.

The official forecaster, the Office for Budget Responsibility (OBR), is likely to report a deficit for this year of around £500 billion – an amount without any precedent in peace time. Borrowing by government on this scale has provoked a predictable clamour from elements in the Conservative Party, while Sunak himself has spoken of his “sacred duty” to balance the books. Under previous circumstances, we might expect a Conservative Spending Review to be a foregone conclusion: cuts, cuts, and more cuts.

But the new normal doesn’t work quite like that. Even before COVID-19 hit, the Prime Minister declared his long-standing opposition to austerity – and, of course, we all believe him – with a manifesto pledging £100 billion of infrastructure spending, the ‘levelling up’ of those parts of the country that have spent four decades on the wrong side of the free market, and plentiful support for green spending.

Recent announcements, pre-empting the Spending Review, have been photocopied from Labour’s economic programme under former Shadow Chancellor John McDonnell: a National Infrastructure Bank, modelled on the Labour’s 2016 National Investment Bank; rewriting the rules of the Treasury to encourage investment in the north, first pledged by McDonnell in 2018; even moving parts of the Treasury to other areas of the country, as promised by McDonnell in 2019

There will be no tax changes announced – a full Budget having been again postponed until next year – but Sunak is reported to be considering equalising capital gains tax and income tax, and raising corporation tax to 24%. These are both smart moves that will address inequality and raise funds – both lifted from Labour’s manifesto last year.

It is a long way from the kind of Conservatism we’ve become used to in recent decades.

Hugging Huskies

For a start, Johnson’s ‘10-point plan’ for the environment, announced last week, seeded a new kind of green Conservatism, promising climate change investment, notably in low-carbon offshore wind, running up to the UK’s hosting of the postponed COP26 climate conference next year.

With the change in the US administration, and China tightening its own carbon targets, the prospect of COP being a PR victory is a lot more likely.

Britain as a world-leader in climate diplomacy, with promises of jobs for former ‘Red Wall’ seats, is an attractive package and the kind of broad coalition Johnson successfully constructed during his time as Mayor of London. It is possible to see in it the basis for a long period of Conservative rule. Never mind that it all falls a long way short of what is needed to address climate change.

This may not work quite according to plan, however. The increasingly noisy pro-market, pro-virus Conservative faction is also given to having conniptions about the size of government debt. This is economic illiteracy on a grand scale. The abject failure and huge human cost of the decade of austerity since 2010 has turned a broad consensus in the economics profession against spending cuts, with even the International Monetary Fund urging more, not less, spending.

With interest rates for government at world-historic lows – turning negative for the UK earlier this year – there is no pressure from markets to repay the debt any time soon. Better, as we did after World War Two, to recognise the borrowing as exceptional and allow the steady flow of taxes and moderate inflation (2% remains the official target) to wear down the debt over time. Cutting spending now would trash any recovery at exactly the point we need to be stoking up demand, creating jobs and getting the economy moving.

A belief that the economy is there to serve the public finances, rather than the other way round, is hardwired into Whitehall. If that means, say, supporting a near-decade of spending cuts, regardless of the damage to jobs, public services, and people’s lives, then too bad for those queuing at food banks.

This single-minded dedication to getting things wrong has recently started to get the political attention it deserves and press briefings ahead of the Spending Review have said that the Treasury’s internal rules – the ‘Green Book’ that guides investment decisions – will be rewritten to remove its demonstrable anti-north, anti-Midlands, anti-south-west bias, alongside publication of a new R&D and National Infrastructure Strategy.

Government spending this year has, of course, been exceptional, with departments allocated an additional £70 billon over the year, including £22 billion for the COVID-19 ‘test and trace’ system alone. In the first phase of the pandemic, with its extraordinary demands, this is to be expected.

But the graft and political favouritism that has accompanied this increase in spending is becoming notorious, with companies that have never produced so much as a single face mask awarded huge Government contracts, and the experience-light friend of a former Conservative prime minister suddenly overseeing complex health logistics. 

The Factionalism of Finance

Spending cuts have been very sharp over the past decade – beyond anything seen in this country since the 1930s.

Outside of the so-called ‘protected’ departments (primarily health and education), real-terms spending has fallen by 25% per person. This headline figure disguises huge variation: local government spending, for example, has fallen by 60% in real terms, but local governments are still expected to provide the backbone of day-to-day public services, as well as a range of wider social protection, like social care. 

Despite the name, the protected departments have also suffered. Rising demand for healthcare due to an ageing population was severely squeezing NHS provision, even ahead of the pandemic, whilst a growing younger population was putting pressure on schools funding, with real-terms per pupil funding falling between 2011 and 2019.

The visible decline of the NHS and our schools was becoming a major political headache for the Conservatives, contributing to Labour’s shock 2017 General Election gains, and it is little wonder that Johnson released more funds for both shortly after becoming Prime Minister last summer. Education funding is now set to increase up to 2023, bringing the real funding per head back to 2010 levels. Both are likely to receive additional funding in the Spending Review.

There are, of course, some obvious targets for cuts, were a Conservative chancellor looking to shore up his party support ahead of a leadership bid, for instance.

Overseas aid spending is particularly unpopular with the Conservative base. Since the 2019 Conservative Manifesto commitment was to spend 0.7% of the country’s Gross National Income on aid – and since the economy has shrunk so much this year, much reducing national income – the Government can cut spending and still meet its manifesto promise.

But the hard questions will be around those areas speculated upon in the Conservative-friendly press for the last week.

The Chancellor is apparently considering cutting public sector pay in real terms, following the advice from Margaret Thatcher’s favourite think tank, the Centre for Policy Studies, with a public sector pay freeze from next year. There is no real reason to do this – no pressure on Government borrowing that would warrant it – while there are some heavy political costs.

Indeed, those Red Wall seats Johnson keeps glancing at nervously are more likely to be dependent on public sector employment. Real-terms cuts in public sector pay, often held up as a way of ensuring ‘fairness’ with the private sector, in fact lower the wage floor for the whole economy – feeding back into lower private sector wages.

However, if Sunak wants to send a signal to his own backbenches and maintain the ‘flexible’ (read: cut-throat) labour market of the past decade, this cap for carers could be an appealing prospect.

Sunak might not go through with it – briefing big, nasty spending cuts before a fiscal event, and then not delivering, is a trick Sunak has used already. It is a convenient way to exaggerate the media impact of any decisions you do make.

But as we move out of the first phase of the pandemic, the intra-Conservative factional disputes around the direction of this Government are becoming sharper, and it is these concerns – not economic rationality or the wider public good – that are going to weigh heaviest on Sunak’s mind. 

James Meadway is a former advisor to the former Shadow Chancellor John McDonnell MP and former chief economist at the New Economics Foundation


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