Labour's background briefing on the spending review

Bridget Phillipson, Shadow Chief Secretary to the Treasury, said:

“Today confirmed the UK economy has been hit harder than any other country in the G7.

“The Chancellor's response contains a one-billion-pound council tax bombshell buried in the small print that will hit families up and down the country.

“He froze pay for police officers, firefighters and other key workers that will pull spending out of our high streets and small businesses.

“And he ploughed ahead with a cut to Universal Credit that will hit those who can least afford it.

“This triple hammer blow to people’s pockets is totally irresponsible when the economy is so fragile.”

MAJOR ISSUES

1. 1. A hidden one-billion-pound council tax bombshell

Buried in the small print of today’s announcement is the news that the government is planning to put up council tax by over a billion pounds a year. They’re also going to make it easier for councils to hike taxes without first getting public support – by raising the threshold for large council tax rises having to be put to a local referendum.

The OBR says its forecast for council tax is up by £0.9 billion in 2020-21 and by £1.0 billion on average over the forecast period.

The OBR also references the Government’s decision to allow councils to increase council tax rates by up to 5 per cent in 2021-22, and assumes “that most councils take advantage of this flexibility”. Under current rules, councils must hold a referendum for any non-social care related council tax rise of more than 2%.

Spending Review (page 75, section 6.67): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938052/SR20_Web_Accessible.pdf

OBR Economic & Fiscal Outlook (page 98, section 3.57): http://cdn.obr.uk/CCS1020397650-001_OBR-November2020-EFO-v2-Web-accessible.pdf

1. 2. More pork barrel politics

The Chancellor announced a new £4 billion ‘Levelling Up’ fund. Far from being the strategic investment we need to make this country the best place to grow up and grow old in, this is yet another example of pork barrel politics – risking a repeat of the controversial Towns Fund.

The fund will be open to competition, with local areas having to submit bids in order to win funding. The Chancellor has said that bid must command the support “from their Member of Parliament”. This is exactly the same process that led to 60 of the 61 local areas picked by government for the Towns Fund being Conservative-held seats or targets with an average majority of 3,000 – including Robert Jenrick’s own constituency of Newark being given £25m even though it was 270^th on the list of the UK’s most deprived areas.

And only 15% (£600m) of the Levelling Up fund is available next year.

Chancellor’s speech: https://www.gov.uk/government/speeches/spending-review-2020-speech

Page 36 of Spending Review: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938052/SR20_Web_Accessible.pdf

1. 3. Confirmation of the government’s mishandling of the crisis

The OBR has confirmed that the UK was slow to get a grip on the health crisis and as a result our lockdown had to be stricter and longer-lasting, meaning a much bigger hit to our economy.

As the OBR says, the UK was “among those [countries in Europe] with the highest number of [hospital] admissions and the highest “overall number of deaths attributed to coronavirus”. But instead of moving quickly into lockdown to contain the spread of the virus, the UK was “among the last to move”.

Being slow into lockdown meant that restrictions in the UK had to be stricter and last longer. As the OBR puts it, “the level of stringency remained relatively high and for longer in the UK” than other countries.

This slowness has hit the UK economy particularly hard. The OBR reports a “sharp slowdown in activity” as a result and points out that the UK both “experienced one of the larger falls” and that activity was then “slower to recover in the UK”. Output in in the UK was still 8.5% below pre-virus levels in September, but had recovered completely in some other countries.

The government learned none of these lessons from the first wave of the crisis, and failed to listen to SAGE or to Labour when they argued for a 2-3 week circuit-breaker to coincide with half term. Instead we’ve had a longer national lockdown and another big hit to the economy – up to a £12bn hit to our economy compared to the circuit-breaker proposal. As a result, we’re mired in the worst economic crisis of all G7 countries.

OBR Economic & Fiscal Outlook (page 38, box 2.2): http://cdn.obr.uk/CCS1020397650-001_OBR-November2020-EFO-v2-Web-accessible.pdf

1. 4. A pay freeze for key workers

The Chancellor announced a pay freeze for millions of key workers. While 3.1m workers are not included in the freeze, either because they work in the NHS or earn less than £24,000, that leaves nearly 2.5 million who will face a pay freeze next year (according to the ONS, total public sector employment was 5.51m in the second quarter of 2020).

This pay freeze will hit:

• At least 90% of Police officers (sergeant and below) – that’s 189,000 junior police officers on the frontline
• At least 80% of Fire service officers (watch manager and below) – that’s 50,400 fire service officers
• At least 75% Prison service officers (below principal officer) – that’s 13,500 of them
• At least 80% of secondary teachers – 372,000
• At least 75% of primary teachers – 336,000

The Chancellor also didn’t reaffirm the Government’s manifesto commitment to ensure teachers’ starting salaries reach £30,000 by 2022. That commitment will be undermined and may prove impossible for the government to thanks to this key worker pay freeze.

This freeze puts targets for police recruitment in jeopardy. Pay review bodies including the School Teachers’ Review Body, and Police Renumeration Body have linked pay to the ability to recruit.

More than that, a pay freeze takes vital demand out of the economy, and will slow the economic recovery. The TUC have found that public sector pay increases could boost GDP significantly, with over half of the cost coming back in a stronger economy and higher tax take.

The Chancellor argued that public sector pay is high relative to the private sector, but according to the independent Institute for Fiscal Studies, public sector pay is currently at a 25 year low relative to the private sector. ONS figures show that pre-crisis, between 2010 and 2019 real average weekly earnings fell by 2% in the public sector (excluding banks taken over in the wake of the financial crisis), but rose by 2.5% in the private sector.

And according to the independent National Institute of Economic and Social Research, the fall in private sector pay seen this year is primarily the result of government policy decisions, such as paying furloughed workers 80%. Outside of the furlough, private sector earnings have largely recovered since the spring.

ONS: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/publicsectorpersonnel/bulletins/publicsectoremployment/june2020

ONS Annual Survey of Hours and Earnings: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2020

£30,000 teacher starting salary commitment: https://www.gov.uk/government/news/30000-starting-salaries-proposed-for-teachers

Police pay review body: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902426/CCS0520653454-001_PRRB_2020_00_Book_Web.pdf

TUC on pay growth and its impact on GDP: https://www.tuc.org.uk/news/unions-urge-chancellor-give-all-public-sector-workers-pay-rise

FT article including IFS comment on public versus private pay: https://www.ft.com/content/57e2f210-cdd8-4ef8-99a0-280cbda3dcda

ONS average earnings: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/november2020

NIESR: https://www.niesr.ac.uk/publications/prospects-uk-economy-38

1. Ploughing on with plans to cut Universal Credit

• Today's Spending Review also confirmed that the Government is pressing ahead with plans to cut Universal Credit for 6 million families across Britain, with zero extra spending allocated for Universal Credit beyond a nominal amount next year.
• The Government is expecting 2.6 million people to be unemployed next spring, yet their response is to cut Universal Credit, taking £20 a week, or £1000 a year, from Britain’s families at the peak of the unemployment crisis.
• The Government also confirmed this approach in a written ministerial statement released by DWP earlier today, which confirmed that working age benefits will increase by CPI (0.5%) and the Basic State Pension will rise by 2.5%. It stated that this statutory annual review was separate from the decision on the rate of Universal Credit, and that the government would "continue to assess how best to support low-income families, which is why [they] will look at the economic and health context in the new year." However, as stated above, no cost provision has been made for maintaining the current rate.
• In September 2020, analysis by the Joseph Rowntree Foundation (JRF) found that the cut risks bringing 700,000 more people, including 300,000 more children into poverty. It could also bring 500,000 more people into deep poverty (classified as being more than 50% below the poverty line). It will impact 16 million people overall, including 6 million children.
• JRF, along with more than 50 other charities and civil society organisations, has called on the Government to scrap the planned cut and match the increase in legacy benefits, which have remained at the same level (including JSA, ESA and Income Support.) as part of their Keep the Lifeline campaign.
• Labour is strongly opposing the cut while livelihoods are still so heavily affected by the pandemic and many families are struggling to make ends meet.

1. The scale of no-deal Brexit laid bare

With less than 40 days to go until we leave the EU, and still no deal in sight, the OBR has laid out in stark terms just how damaging it would be to our economy to leave without a deal.

The OBR shows that sectors such as manufacturing and financial services will be hit hard and that this hit won't be masked by the economic impact of the Covid-19 crisis. The OBR says that it is there “trade intensive sectors that are most exposed to the loss of unfettered access to the EU market”, meaning they would be impacted both by a no-deal Brexit and by a ‘thin deal’ under which market access is still severely restricted.

No deal will mean a smaller economy – it would reduce real GDP by a further 2% in 2021 and, in the words of the OBR, it would “have a longer-term impact on the productive potential of the UK economy”. After five years, output is 1.5% lower than the OBR central forecast in a no-deal scenario.

The OBR attributes this to both tariff and non-tariff barriers. While the former would disappear in a no-deal Brexit scenario, depending on the nature of any ‘thin deal’ Brexit the latter could still be a significant issue.

The money the UK government would raise from collecting tariffs in a no-deal scenario (£6 bn) would not cover even half of the shortfall arising from the £14bn loss in tax revenues as the result of the overall economy shrinking. Trade deals with other non-EU countries won’t compensate either (“gains from all third-country FTAs are together likely to be modest”).

On top of that, businesses have been less able to prepare for no deal due to the Covid-19 epidemic. The OBR notes that the Covid-19 response “is likely to have taken up personnel and resources at some businesses that would have otherwise been used to prepare for a no deal Brexit, while also running down cash reserves and inventories making them more vulnerable to shocks.”

OBR Economic & Fiscal Outlook (page 193): http://cdn.obr.uk/CCS1020397650-001_OBR-November2020-EFO-v2-Web-accessible.pdf

1. Broken promises to the world’s poorest

The Spending Review makes clear that the government will change its spending on international aid from 0.7% of gross national income to 0.5% in 2021. That means the total spend will be £10 billion, down from over £15bn. The government justifies this decision on the grounds that helping the poorest people in the world at a time of global emergency is “not an appropriate prioritisation of resources”.

Today’s decision by the Chancellor destroys the longstanding cross party support for spending 0.7% of GNI to help the world's poorest and most vulnerable, breaks a manifesto commitment and sends a clear signal to the world that Britain is in retreat.

Cutting the development budget will undermine the government's diplomatic strategy when we hold next year’s COP26 presidency. Financing developing countries to address and adapt to climate change will be an important aspect of striking a broader climate deal. Cutting ODA will reduce the UK's leverage and damage efforts to secure a breakthrough in Glasgow.

It is also not in the UK’s national interest to cut funding that is intended to stabilise the world’s poorest countries, help them develop and grow.

Spending Review (p.51, section 5.6): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938052/SR20_Web_Accessible.pdf