You may have missed it today, but today was new Chancellor of the Exchequer, the Right Honourable Sajid Javid MP, made his first spending round. This was, as traditional, after Prime Minister’s Questions. However by 8pm Prime Minister Boris Johnson was calling for a General Election. If that happens and if a new Government comes into power, then this could be the shortest-lived Spending Round ever to happen. Which makes you wonder what was the point.

Then you see what was promised – lots of new spending pledges – and you would be forgiven for thinking that maybe, if you were cynical, that the point of Mr Javid’s speech was the opening shot of that election.

There’s certainly lots of exciting-sounding giveaways. Education spending increase of £7.1bn by 2022-23 (as compared to the current fiscal year), £750m for 20,000 police officers, an extra £1.5 billion for social care. Usually you only hear of huge extra spending the Budget before a General Election.

So it certainly seems something is in the air. Sajid Javid is quoted as saying that the UK has “turned the page on austerity”. But in the context of the previous quarter showing negative growth and preliminary figures indicating we may be on the verge of a recession, this viewpoint seems a little optimistic at best, and pure political grandstanding at worst.

Now don’t get me wrong. I’ve been banging the drum to say that when in the economic dungeons, as the UK economy was after the Banking Crisis of 2008, extra government spending can actually help boost an economy, especially if the borrowing rate for a government is at historic lows. A government plowing extra money in spending can, if done correctly, trigger more cash flowing around the country which comes back through increased tax revenues and can build a country out of recession. So is this the case here?

Can we afford to spend more?

Let’s assume that these spending plans come to pass, either because there’s no General Election or that there is one and the existing plans are retained. The Government are boasting that “This is the fastest planned increase in day-to-day departmental spending in 15 years” and that “There is £13.8 billion more for public services” (https://www.gov.uk/government/news/spending-round-2019-what-you-need-to-know).  Now if this was a Budget, you would have published in the Budget Report not just what extra spending there’s going to be but what extra income there’s going to be too (e.g. tax increases, borrowing figures etc.) In this case, since it’s a Spending Round, there isn’t any corresponding announcements of income. So we need to assume there’s no changes to projected income at the moment.

If we leave aside the question of in we are in a recession or not (and because this isn’t a Budget, the Office for Fiscal Responsibility don’t have to provide revised projections on the health of the economy), the question is how will Mr Javid fund this extra commitments? The thought process seems to be extra borrowing. The Chancellor can borrow £26.6 billion (1.2 per cent of GDP) against his fiscal mandate, which requires the structural budget deficit to lie below 2 per cent of GDP in 2020-21. Mr Javid’s predecessor in post was Philip Hammond, who along with 20 other Conservative rebels, had the party whip removed from him last night. Mr Hammond had been cautious about pledging to use the borrowing headroom until the type of Brexit had been determined. With a No Deal Brexit looming, it seems like Messrs Javid & Johnson do not share that cautiousness when it comes to spending.

A matter of timing

Despite promising £13.8Bn, only £2.1Bn will be spent this year, with the rest in the 2020-21 fiscal year (page 5). That’s an awful lot of commitment that hangs in the balance and could easily be cancelled out by an emergency Budget between now and April 2020 if Brexit forces Mr Javid’s hands. And as certain costs are typically front-loaded – such as the costs for extra coaches, equipment, lockers etc. before you can train 20,000 new police officers – this seems especially cynical bearing in mind we still have 6 months between now and the next fiscal year.

Where is the money going?

At a glance, some key points include:

  • Over £700 million extra funding to support children and young people with special educational needs compared to 2019-20 funding levels.
  • £2.2Bn for the Armed Forces, so they can continue to “modernise”.
  • Over £200 million will be spent to “transform bus services”.
  • £2 billion in 2020-21 will help the UK to establish a new relationship with the EU, and capitalise on the opportunities created by Brexit.

(ibid)

As an unashamed fan of the Secret Barrister, let’s pick apart the commitment to spend extra money tackling crime as an example. The Prime Minister has made much noise about wanting to deal with crime, and pledging to spend more on hiring 20,000 extra police officers. The Spending Review pledges “£55 million for the Ministry of Justice and £80 million for the Crown Prosecution Service” (Paragraph 1.11). Against a budget of £531 million (from the 2017-8 CPS Annual Review (page 11)) this sounds promising. However it doesn’t even restore the CPS to where it was in 2010, where it had a budget of £614 million (page 5). And with crime only getting more complex, it doesn’t seem to be the investment the Crown Prosecution Service needs.

So…is this a good move?

As mentioned previously, the total extra revenue commitment is £13.8Bn. With the total headroom available, keeping within the Chancellor’s fiscal rules, of £26.6Bn if nothing has changed, this is using half of the Chancellor’s available headroom to invest in services. It could be a sensible move, if the investment is sustained. A lot will depend on the multi-year Spending Review promised in 2020.

However, it depends completely on the state of the economy as a whole. As a Spending Review the Chancellor didn’t need to comment on this too deeply, but signs suggest we may be heading towards if not a full-blown recession, skirting the edge of it like an awkward Dad at an ice-skating rink. This may well be behind the decision to only commit just north of £2 billion between now and March 2020.

We live in uncertain political times. And while Budgets, Spending Reviews and the Chancellor’s speeches of course reflect the political mood of the day, this one feels like more of a political declaration rather than a financial policy.

As always, just my opinion.

Michael Hardy
4 September 2019

 

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