Rishi Sunak has unveiled his comprehensive spending review amid what he called the economic “emergency” of the coronavirus pandemic. Here is what the chancellor has revealed. 

Covid has devastated the UK economy 

The UK has seen the largest fall in output in 300 years, according to the Office for Budget Responsibility (OBR), underlining the sheer scale of the damage Covid-19 has visited on the economy. 

Sunak said the OBR is forecasting the economy will contract by 11.3% this year, and that the country’s finances will not recover to pre-pandemic levels until the last quarter of 2022. 

The “economic damage is likely to be lasting” and there will be “long-term scarring”, Sunak said. 

“As the restrictions are eased, they [the OBR] expect the economy to start recovering – growing by 5.5% next year, 6.6% in 2022, then 2.3%, 1.7% and 1.8% in the following years,” he said. 

“Even with growth returning, our economic output is not expected to return to pre-crisis levels until the fourth quarter of 2022 – and the economic damage is likely to be lasting.” 

Debt and joblessness 

Sunak also said the UK is forecast to borrow £394bn this year, equivalent to 19% of GDP, as the Treasury committed to the furlough scheme and numerous other spending pledges to help the UK weather the storm. 

He told MPs the figure was the “highest recorded level of borrowing in our peacetime history”.

It is expected to fall to £164bn next year, £105bn in 2022/23, then remain at around £100bn (4% of GDP). 

This leaves the UK in a staggering amount debt and the government facing tough choices in the months and years ahead. 

Sunak said: “Underlying debt— after removing the temporary effect of the Bank of England’s asset purchases — is forecast to be 91.9% of GDP this year.”

The OBR also expects unemployment to peak at 7.5% in the second quarter of 2021 to some 2.6 million people, Sunak said.

Pay rises … and pay freezes 

Sunak was accused of a U-turn after the minimum wage will increase by just 2.2% to £8.91 an hour.

The hourly legal minimum wage was due to rise from £8.72 to £9.21 in April, and the TUC said key workers, such as shop staff, had been let down. 

The 2.1 million public sector workers who earn below the median wage of £24,000, will be guaranteed a pay rise of at least £250 next year, Sunak. 

NHS doctors and nurses will also get a rise, but wages in the rest of the public sector will be “paused” next year.

It was believed the pay freeze would directly affect 1.3m out of 5.5m public sector workers, less than 25% of total.

It later emerged, however, that even some of those could in fact see their pay shrink in real terms, as the rise for lower-paid workers may be “fixed” at a £250 cash rise.

Sunak refused to guarantee wage rises for those on the lowest wages would be pegged to inflation, saying only they would get “at least” £250 extra. 

“It would depend on the exact salary that they make,” he said, “but it is a fixed increase of £250.” 

Kate Green, shadow education secretary, said the pay freeze was a “kick in the teeth for dedicated early years workers, teachers, teaching assistants and support staff who’ve been working flat out to educate children during Covid”.

Shadow chancellor Anneliese Dodds, meanwhile, said the public sector pay freeze will deliver a “sledgehammer” blow to consumer confidence. 

International aid budget slashed

One of the most controversial and widely-trailed elements of the spending review was Sunak’s cut to the international aid budget to 0.5% of GDP. 

It breaks the Conservative manifesto pledge of 0.7% and Sunak was very keen to stress the government’s “intention” was to return to 0.7% when the economy picks up. 

He told MPs: “During a domestic fiscal emergency, when we need to prioritise our limited resources on jobs and public services, sticking rigidly to spending 0.7% of our national income on overseas aid is difficult to justify to the British people – especially when we’re seeing the highest peacetime levels of borrowing on record.

“I have listened with great respect to those who have argued passionately to retain this target. But at a time of unprecedented crisis, government must make tough choices.”

The move is proving to be highly controversial among Tory backbenchers, who say it diminishes the UK on the world stage. 

Former Tory prime ministers David Cameron, who said he “deeply regrets” the cut, and Theresa May are reported to have lobbied the Treasury. 

NHS spending will rise 

Sunak said the government was providing £280bn this year to get the country through the coronavirus crisis.

There will be £3bn more to support the NHS, including £1bn to address treatment backlogs built up while attention was focused on Covid-19 patients

It comes after data released this month revealed the scale of the NHS backlog.

Across England, 139,545 people had waited more than 52 weeks to start treatment as of September this year – the highest number for any calendar month since September 2008.

The data from NHS England also showed 1.72m people had waited more than 18 weeks to start treatment in September.

Local authorities will also have access to an extra £1bn to help them fund social care and address coronavirus pressures next year.  

Meanwhile, £15bn will be made available in 2021/22 for the test and trace programme to support “enhanced testing capacity”, which will include regular testing of NHS staff and social care workers.

Another £2.1bn will pay to replenish stocks of personal protective equipment (PPE), though the government is under increasing pressure to explain cash wasted on deals for effectively-useless PPE. 

Pledges to ‘level up’ the north 

Sunak said a £4bn “levelling up fund” would be targeted at left-behind communities so they could bid for new roads funding, railway station upgrades and other job-creating infrastructure projects. 

The chancellor was clear that local buy-in is a core component of ensuring projects are effective and delivered on time. That local support can come from a wide variety of sources including local authorities, mayoral authorities or MPs.

The chancellor said: “Projects must have real impact, they must be delivered within this Parliament, and they must command local support, including from their member of parliament.”

The measure is likely to face claims it risks becoming a “re-election fund” for Tory MPs, however, after the government’s Towns Fund, was branded “not impartial” by the public accounts committee this month. 

Others have also pointed out that the £4bn announced for the new fund matched the cut to international aid. 

A new “UK infrastructure bank” – based in the north of England – to finance major new projects will also be established, Sunak said.

The government will publish a national infrastructure strategy, Sunak said: “To help finance our plans, I can announce we will establish a new UK infrastructure bank.

“Headquartered in the north of England, the bank will work with the private sector to finance major new investment projects across the UK – starting this spring.”

Brexit will be costly

The risk of a no-deal Brexit also continues to loom large, with negotiators still having not struck a deal and the transition period due to end in December. 

The OBR said even with a free trade deal with the European Union, there would be a “4% long-run loss of output”.

Shifting on to World Trade Organisation terms would slash GDP by around a further 2% in 2021, the OBR also said.

“The short-term impact is due to various temporary disruptions to cross-border trade,” it said in its analysis. 

“These effects abate over the course of the year as the government and businesses become more familiar with the new rules and procedures and find ways to operationalise them.

“However, the longer-term hit to productivity builds slowly to leave output around 1.5% lower than our central forecast after five years.

“This would continue to build beyond the forecast horizon to reach 2% in steady state.”