Charlotte Street Partners



It's only just begun

Written by Alex Massie
26 November 2020

In 1967 Enver Hoxha, the Albanian dictator, delivered a new year’s message to his long-suffering, much put-upon people, that is grimly relevant for our times too. “This year will be harder than last year,” he said, “on the other hand, it will be easier than next year”. 
That, in essence, was the message of the spending review announced by Rishi Sunak yesterday. This has been a terrible year for public – and mental – health, but the real difficulties are still to come, and it will be some time before a full reckoning can be made. As the chancellor put it: “our economic emergency has only just begun”. 
Understandably, the public has been so preoccupied by the virus itself, and the restrictions on social activity necessary to contain it, that the true extent of the economic difficulties that lie ahead has not yet sunk in. There may be a vague appreciation that tough times lie ahead but I suspect many, perhaps even most, voters prefer not to spend too much time contemplating this gloomy future. There is a limit to how much bad news the public can be expected to absorb at any one time. Now is not the time for pondering such things. 
Government, however, cannot afford the luxury of ignoring looming reality. And the numbers are extraordinary. As the Institute for Fiscal Studies noted, the £113bn allocated to public services in response to the coronavirus emergency amounts to more than £4,000 for every household in the country. The government will borrow £394bn this year, a sum simply unprecedented in peacetime. Next year’s borrowing is forecast to be £164bn and the government expects to borrow around £100bn every subsequent year until the end of this parliament. 
With borrowing costs currently at a record low this is both appropriate and sustainable in the short-term. Over the ‘medium-term’, however, Sunak was at pains to insist such levels of borrowing are “clearly unsustainable”. That implies – and the government’s published plans confirm this – a renewed era of astringency later in this parliament. Indeed, despite all this borrowing, Sunak’s figures cut around £10bn from departmental spending next year and in all subsequent years. 
Some of that can be paid for by the cuts to foreign aid – bad policy but, I’m afraid, good politics in as much as voters tend to think this money a luxury at best and, more often, a waste – and freezing the pay of higher-salaried, non-NHS, public sector workers. But only some of it. Since the NHS is effectively protected from these spending cuts, it is inevitable other departments will see their share of government expenditure squeezed once again. 
That imposes any number of difficult choices, bringing to mind an old story about Abraham Lincoln who, contemplating the thousands of applications for government posts he received, noted they could not all be satisfied for the very good reason that “there are too many pigs for the tits”. In like fashion, choices that advantage one section of the population – NHS staff, for instance – must necessarily inconvenience another. Each pound may only be spent once. 
Even so, the Conservatives’ obsession with returning to what Sunak calls a “sustainable fiscal position” is something that, by the government’s own estimation, cannot be delivered in this parliament. If unemployment reaches the predicted 2.4m next year there will be other, more urgent, matters requiring attention. 
Tax rises next year would clearly be both an economic mistake and, in any case, a political impossibility. Even so, the chancellor has signalled that last year’s election commitment to maintain current rates of income tax and VAT is no longer set in concrete. At some point bills must be paid, if only in part. That means, one way or another, taxes will be higher at the end of this parliament than at its beginning. When the facts of life change, prudent governments shift to take account of this. 
This may be anathema to Boris Johnson but the alternatives of prolonged austerity or simply ignoring reality are so costly that even this prime minister must eventually be compelled to accept the gravity of the situation in which the country will shortly find itself. It may be depressing to contemplate the fact the United Kingdom is likely to suffer an unusually severe economic contraction as a result of the virus, but so be it. 
In the medium- to long-term, growth is the only answer. To that end, there is some encouragement to be drawn from the fact that public sector net investment is forecast to average 2.9% a year from 2021-22 to 2024-25, a figure double the average seen over the past 40 years. That being so, a rise in borrowing costs – which would otherwise torpedo the government’s plans for recovery – should perhaps be seen as a welcome indicator that economic life is returning to something close to what we used to think normal. 
All these figures, mind you, are soaked in what the IFS coyly deems “huge uncertainty”. Even on the upside, however, they guarantee difficult political – as opposed to economic – decisions in the years to come. And, painful as it may be to bring this up, the chancellor’s spending announcement was just as notable for what was not said as for what was. For there was no mention at all of Brexit, an event that, whatever you may think of it and however voters might wish to ignore it, is going to happen in one shape or form or another. 
Let us trust, then, that the government’s estimation that Brexit will actually be good for the British economy proves correct. I have my own views on the probability this will prove to be the case, but there are times when it would be pleasing to be proved mistaken and this is one of those. I have my doubts, however, and so, once again, the old Irish joke applies: if that’s where you wish to go, you wouldn’t wish to start from here. But, alas, here is where we are. 

About Beyond the Street and Alex Massie

We are all guilty of being too inwardly focused sometimes, especially as we navigate these changed times. It is all too easy to be caught up in the problems close to home, and for overarching trends to pass us by.

To remedy that short-sightedness, Charlotte Street Partners has enlisted the ingenuity and talent of the writer and commentator Alex Massie. As our new correspondent at large, Alex will look at the bigger picture for us each week. We have challenged him to come up with something a bit different: broad, lateral thinking, thematic insights and a more global perspective.

Alex is a freelance journalist and commentator based in Edinburgh. Not only is he Scotland editor of
The Spectator, but he also writes a political column for The Times and The Sunday Times. He features regularly on the BBC as a political commentator and has written in the past for The Telegraph, Politico, The Washington Post, the Los Angeles Times, The New York Times, the New Statesman, The Observer, and TIME magazine, among others. He was also the Washington correspondent for The Scotsman and assistant editor of Scotland on Sunday

We hope you enjoy his work – and do feel free to forward this email on to colleagues and friends you think might be interested. They can subscribe to Beyond the Street and our other regular briefings here

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