2020 Spending Review
Policy and Public Affairs Assistant, Katy Little, offers a glimpse into the key announcements from the 2020 Spending review.
The 2020 Spending Review was this year’s most highly anticipated fiscal event. The one-year (rather than three-year) review came at a time of mounting economic pressure caused by COVID-19. One of the questions we have all been grappling with is what the economic impact of COVID-19 will ultimately be?
The headlines from the OBR forecasts note that the UK economy will contract by 11.3% in 2020, and pre-pandemic levels of growth are not expected to return until 2022. The Treasury has also somewhat had its hand tied by COVID-19 spending. The cost of the furlough scheme has meant that spending has rapidly increased along with government debt – 19% of GDP to be precise. These two factors undoubtedly meant that the Chancellor has had to make some tough decisions on where to allocate money and where to withdraw it. There were key announcements on infrastructure in support of the Government’s ‘levelling up’ agenda, as well as a public sector pay freeze and a cut to foreign aid spending.
Here is a round-up of some of the key announcements that will impact on the IFoA’s policy work over the coming months:
One of the welcome announcements was the creation of the UK infrastructure bank, which will work with the private sector to finance new major projects from Spring 2021. Through our Infrastructure Working Party, the IFoA has already been considering how such an infrastructure bank should operate and be governed, which will be vital to its success. The infrastructure bank is just one component of the much-delayed National Infrastructure Strategy, which was launched alongside the Spending Review. The key elements of the Strategy are, in the short term, recovery from the pandemic and rebuilding the economy; and looking further ahead, levelling up across the UK, and decarbonising the economy. The Strategy is clearly influenced by the earlier work of the National Infrastructure Commission (NIC) in assessing the UK’s long-term infrastructure needs – something which we very much welcome.
Changes to the Retail Price Index
Earlier in the year the UK Statistics Authority and HM Treasury consulted on changes to the Retail Prices Index (RPI) Methodology, and the outcome of the proposals were published alongside the Spending Review announcement. By 2030, RPI will be replaced by the Consumer Prices Index including owner occupiers' housing costs (CPIH) which is generally thought to provide a more realistic reflection of inflation. However, the phasing out of RPI in favour of the consumer prices index plus the cost of housing CPIH will have a significant impact on traditional defined benefit pension schemes. Although the RPI is widely considered an imperfect measure, the Government needs to assess the full impact of these statistical changes and seek to minimise the financial pressures that will be faced by employers and pension schemes, especially during this unprecedented period of economic uncertainty. View the IFoA’s consultation response to the proposals.
There were always going to be winners and losers in this year’s Spending Review, especially at a time of extreme financial difficulty. Whilst Government investment over the past year has increased to try and balance the economic fallout of COVID-19, the key thing to take from this review was that it cannot be expected to continue in the future. One of the biggest difficulties for those working in public policy, throughout this particular Spending Review, and indeed throughout the pandemic, has been a focus on the short term, and the necessary. Issues such as the long term funding of social care, and even, climate change and Brexit have not received the attention they deserve whilst COVID-19 takes centre stage, and it is important that that Government looks to the longer term economic issues facing the UK as we move towards an early 2021 Budget.