london skyline

United Kingdom Fiscal November 2020

United Kingdom: Fiscal policy to stay fairly loose next year to support economy

On 25 November, Chancellor Rishi Sunak outlined the government’s spending plans for FY 2021–2022 (April 2021–March 2022). While overall spending will fall markedly from 2020–2021 as Covid-19-related funding ebbs, core day-to-day spending will rise slightly, and the budget deficit is seen remaining sizable. This reflects the need to continue supporting a fragile economy, and a reduced appetite for significant fiscal austerity.

Total spending is seen falling from GBP 1,165 billion to GBP 1,011 billion, largely due to reduced funding allocated to addressing the pandemic. However, core day-to-day spending by government departments is seen rising 4% to GBP 385 billion, while capital spending is seen declining slightly, but should remain elevated relative to pre-Covid-19 levels at GBP 119 billion. Meanwhile, revenue is expected to rise from GBP 771 billion to GBP 847 billion as the economy recovers. The OBR—the government’s official fiscal watchdog—expects the fiscal deficit in its central scenario to fall to 7.4% of GDP in 2021–2022 from an eye-watering 19.0% in 2020–2021. That said, there is huge uncertainty surrounding the projections: In the OBR’s downside scenario of an extended lockdown and ineffective vaccines, the budget shortfall is seen at 12.7%. Looking at specific areas, both the National Health Service and schools will see additional funding, while the overseas aid budget will be cut from 0.7% to 0.5% of GDP and pay for most public sector workers will be frozen.

The evolution of the pandemic will be the key factor in determining whether the figures announced in the spending review will be met. The OBR’s central scenario is for restrictions on activity to remain until the spring: A slower-than-expected vaccine rollout could easily throw this assumption off. Moreover, a free trade deal with the EU is also assumed, although such an agreement is still up in the air.

Regarding the fiscal concerns posed by the Covid-19 crisis, Kallum Pickering, senior economist at Berenberg, comments:

“The benefits of spending aggressively to finance job and income support as well as public investment programmes, at a time when economic output is more than 10% below normal, far outweigh any distant risks that could materialise from the ongoing rise in public debt. […] Judging by the tone of the ongoing UK fiscal debate, the bigger risk to worry about is not that the government overdoes the stimulus, but that it falls short of an adequate medium-term response because deficit hawks persuade it to pull back policy support prematurely.”

The OBR also outlined tax and spending forecasts up to 2025–2026, which show the fiscal shortfall remaining stubbornly high at close to 4% of GDP. On these longer-term projections, George Buckley, economist at Nomura, comments:

“What was perhaps more interesting from a macroeconomist’s perspective was: a) the fact that the deficit looks hard to budge in the final years of the forecast [and] b) that after a significant policy loosening this year the purse strings are not being tightened that much (certainly relative to the coalition government’s 2010 austerity announcements).”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest