It was never going to be a joyous event.
The Chancellor was delivering his Comprehensive Spending Review against a backdrop of the worst economic situation the UK has faced in peacetime. By some measures, for 300 years.
So, despite his habitual cheery nature, there was little his pledges of funding for jobs, the minimum wage and the NHS could do to sugarcoat the miserable state of the country’s finances.
The independent Office for Budget Responsibility smashed down its already-grim GDP forecasts for this year to a contraction of 11.3%. Most economists had been expecting that to come in at around minus-10%.
That is the worst performance since the Great Frost of 1709, which blocked European trade for months as canals, ports and the River Thames froze over.
The cause of the worsening grimness is simple – the November lockdown stamped on all the green shoots that began to emerge in the summer and early Autumn.
That loss of momentum means the recovery next year will be weaker than the OBR originally thought, too.
From its previous expectations of 8.7% growth, it now expects only 5.5% as companies struggle to rebuild that sense of optimism when we were all eating out to help out and returning to the office.
For good measure, the hopefully-unlikely prospect of no-deal on Brexit would hit output by 2% on top of the 4% hit already being factored in from our departure from the EU.
The public finances are awful…
At the same time as companies who generate the nation’s wealth have been slowing down, the government has been spending record amounts keeping the country going.
Furlough schemes, nationalising public transport, massive increases to welfare support have driven the UK’s borrowing to levels not seen in peacetime.
The deficit is likely to hit 19% of GDP – or £394 billion – as tax receipts plunge and spending rises. Debt will rise to 105% of GDP this year, and keep going up to a peak of 109.4% in 2023-24.
These are mindboggling numbers.
…But could be worse
One glimmer of good news, though.
Tax receipts are down as you’d expect, but they are £32 billion better than the OBR predicted in July.
It is the spending, rather than revenue side of the Treasury’s ledger that has been so dire.
This shows the success of Sunak’s 14 major fiscal policy interventions since the March Budget: the tax deferrals, the furlough payments, the loan schemes, have worked to keep businesses alive and paying their taxes.
This public spending will peter out next year, but will still involve £45 billion or so for track-and-trace.
It then falls back more sharply in the following years, partly because the Chancellor has cut departmental spending by £10 billion to £12 billion a year compared to the March Budget.
As his restive backbenchers were reminding him earlier in the year, he can’t keep shovelling money out of the door forever. At some stage, they howled, he has to either stop spending, raise taxes, or both.
Borrowing has never been cheaper
But here’s where the Chancellor has been lucky. Global interest rates are so low that he can borrow his way through this crisis without having recourse to tax rises.
Although our debts have increased so sharply, the cost of servicing them through interest repayments is actually less it was expected to be in March.
Indeed, although we will be having our highest level of debt as a share of GDP since 1958, the actual debt-to-revenue ratio will be lower than it was last year.
This means Sunak could safely dismiss those claiming he has made the public finances unstable.
As the OBR points out, to have not stepped in with all the help he deployed would have destabilised the economy more.
Naturally, with such high levels of borrowing, the UK is vulnerable to an interest rate shock, but nobody in the City is expecting any rate rises for at least a year.
Political wonks may be worried about whether the Chancellor has stuck to his three fiscal rules set in the 2019 election manifesto.
Frankly, it’s doubtful that the electorate will be unforgiving given how the world has changed since. Few will even remember them.
They were as follows: Boris Johnson pledged to
:: balance the budget by 2023-24
:: have public sector net investment 3% of GDP or lower on average
:: have net debt interest spending not exceeding 6% of tax receipts.
By today’s forecasts, in the OBR’s rosiest projections, all three will be met. In the more likely, central, projection the last two will be met but the first is a miss.
All this leads up to what the Chancellor should do with taxes.
Wisely, while acknowledging current rates of spending were “unsustainable” and he had “responsibility” to get the finances back in shape, he said in his speech that now was the time to protect jobs, not crimp growth by slapping on new taxes.
He couldn’t be more right.
The unemployment picture in the UK is undoubtedly awful.
While Sunak laboured the fact that our rates aren’t as bad as in Italy, France and the US, he may regret that boast in the coming months, if the OBR’s expectation of 7.5% unemployment next year comes to pass.
But this state of spend spend spend is anathema to a chancellor who has been hawkish on public profilgacy since his days writing in his boarding school magazine at Winchester.
When the time comes, he will feel obliged to put up taxes.
And, if he wants to make a meaningful dent in the deficit, doing it with capital gains or corporation tax, as some of his advisers have pitched to him, simply won’t do the job.
Income tax is the only one big enough to mend this hole.
But that is a story for next year, when hopefully the world looks a lot brighter.