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Spending Review highlights long-term economic impact of Coronavirus pandemic
26 November 2020

The Chancellor’s statement to Parliament setting out his Spending Review decisions came against a backdrop of predictions from the Office for Budget Responsibility (OBR), which indicated that the UK economy will shrink by 11.3 per cent this year – the largest fall in output for 300 years.

In response, he said that the Coronavirus Pandemic would leave “long-term scarring”, which could mean that the UK’s economic output may not return to pre-pandemic levels until the final quarter of 2022.

Despite the damage to the economy, the Spending Review highlighted that the UK was now experiencing growth and that unemployment had risen slower than expected thanks to the economic support delivered during the last seven months.

Borrowing and public sector spending

Government borrowing will reach almost £400 billion this year, which is around 19 per cent of UK GDP – the highest level in peacetime.

The Chancellor announced a freeze on public sector earnings, apart from around one million NHS workers, who will continue to benefit from a cash increase of £33.9 billion a year by 2023-24.

The Government will also support public workers earning below the UK median wage of £24,000, who will be guaranteed a pay rise of at least £250 next year.

Employment

While the COVID-19 financial support measures may have slowed down the rate of unemployment, it does still continue to rise.

The Chancellor is committing £2.9 billion to fund a new three-year UK-wide programme, which will provide innovative and tailored support to help more than a million long-term unemployed people.

He also confirmed that the Government will increase the National Living Wage (NLW) in line with the recommendations of the independent Low Pay Commission (LPC) and continue to increase the National Minimum Wage (NMW) as well.

From April 2021, the NLW will increase by 2.2 per cent from £8.72 to £8.91. The age threshold for the NLW will also fall from 25 to 23, as per the recommendations of the LPC.

The other Minimum Wage (NMW) rates will also increase from April 2021 as follows:

• 21 to 22-year-olds – increase by 2.0 per cent from £8.20 to £8.36 per hour
• 18 to 20-year-olds – increase by 1.7 per cent from £6.45 to £6.56 per hour
• 16 to 17-year-olds – increase by 1.5 per cent from £4.55 to £4.62 per hour
• apprentices – increase by 3.6 per cent from £4.15 to £4.30 per hour
• daily accommodation offset rate – increases by 2.0 per cent from £8.20 to £8.36.

The Government will also increase the 2021-22 Income Tax Personal Allowance and Higher Rate Threshold in line with the September 2020 CPI figure of 0.7 per cent.

This figure will also be used as the basis for setting all National Insurance limits and thresholds, and the rates of Class 2 & 3 National Insurance contributions, for 2021-22, according to the Spending Review.

Those with pensions should be aware though that the Retail Price Index (RPI) will be reformed to align it with the Consumer Price Index, including owner occupiers’ housing costs (CPIH), from February 2030. This could affect pension pots and investments and may cost savers up to £96 billion, according to some estimates.

Infrastructure spending and levelling-up

During his speech, the Chancellor also announced the creation of an “infrastructure bank”, which will be set up and headquartered in the north of England.

This new organisation will finance major projects across the UK from next spring.

The Government’s investment in economic infrastructure will be £27 billion in 2021-22, which will be part of the Spending Review’s £100 billion total investment next year.

A new £4 billion levelling-up fund will also be created, which will allow local areas to apply for funding for major projects next year.

These projects, the Chancellor announced, would have to have “real impact” and be delivered within the lifetime of the current Government.

Changes to taxation

Despite some fears that the Chancellor may signal his intention to announce tax rises as soon as the Budget next spring, he remained silent on the matter.

Given the complex relationship between taxation and the economic recovery, it is likely that the Chancellor is deferring any decisions until nearer the next Budget.

If you are concerned that announcements made in the Spending Review may affect your business in some way, please contact us.