Spending Review 2020 Highlights

The Chancellor has unveiled public spending announcements for the year ahead, without disclosing a full Budget with tax changes, prioritising jobs, businesses and public services

£280bn has been committed already in public spending this year, with another £55bn next year, with the highest level of public borrowing in history.

A Spending Review normally covers three years, but current conditions make it wise to only covers one year, until the impact of the coronavirus pandemic can be more clearly understood on government finances.

This is, however, the third year running that we have had a one-year Spending Review. 

The review, which was preceded by the Prime Minister's Winter Plan, does not necessarily signal tax rises (e.g. Capital Gains Tax), although this has certainly been a year of change, as highlighted by four versions of the Winter Economy Plan listed below.

Some details of what will be included in the next finance bill have also been previously published, including and welcomed, a one-year extension of the £1m Annual Investment Allowance.

Key Announcements

Rishi Sunak has outlined the government’s departmental spending plans for the 2020-21 financial year that starts on 1 April 2021.

  • Previously announced £24bn four-year rise in defence spending, and £3bn extra for the NHS 
  • The UK economy will contract by 11.3% this year, the biggest contraction in 300 years
  • By 2025 the economy will be 3% smaller than projected in the March 2020 Budget
  • £2.9bn to help over 1m people who have been unemployed for over a year to find new work
  • NHS nurses and doctors will get a pay rise
  • Other public workers will have a pause in pay rises
  • Minimum wage to rise 2.2% to £8.91 per hour - extended to those aged 23 and over.
  • The Office for Budget Responsibility (OBR) expects unemployment to rise to 7.5% (2.6m people) in the second quarter of next year
  • Increased flexibility for local authorities to raise more for healthcare services
  • An increase in the schools’ budget by £2.2bn. Every pupil will see a year-on-year funding increase of at least 2%.
  • Funding confirmed for the rebuilding of 500 schools over the next decade
  • £100bn in infrastructure spending
  • A new infrastructure strategy 
  • New infrastructure bank to be launched in spring 2021
  • £14.6bn funding for R&D
  • New £4bn levelling up fund
  • Foreign Aid cut to 0.5% in 2021

What the Chancellor did not say

There will be a full Budget in March 2021, and the Chancellor has decided to keep quiet of tax-raising until then.  The key areas that are now expected to be addressed are:

  • Aligning Capital Gains Tax (CGT) rates with income tax and possibly scrapping a major CGT relief.
  • Scrapping higher-rate tax relief on pension contributions in favour of a flat rate.

The Government has previously ruled out rises in income tax, VAT and national insurance, although the Chancellor has indicated a possible rise in national insurance for the self-employed at some stage.

We do not know for sure that he will make tax changes, but there is time to take action, where sensible, in advance of announcements next March.

On the non-tax front, the Chancellor was silent on whether this year's temporary £20 per week increase in universal credit will continue beyond next April. There have been calls by various groups for it to be made permanent.

Brexit impact not factored in

As was picked up by the Shadow-Chancellor, Brexit was not mentioned by the Chancellor, when this will impact from 1 January 2021.  The OBR report assumes that the UK and EU will conclude a free-trade agreement (FTA) and that there will be a smooth transition to a new trading relationship after the transition period ends on 31 December 2020.

The OBR has factored no such short-term disruption into its forecasts for Brexit, as it assumes that an FTA will lower both export and import intensity over time, and that productivity will be 4% lower in the long run than if the UK had remained a member of the EU.

The OBR, however, does say that a ‘no deal’ Brexit could reduce real GDP by a further 2% in 2021, due to various temporary disruptions to cross-border trade and the knock-on impacts.

The OBR also cites the Bank of England's concern that around a third of UK firms are either only partially prepared or not prepared at all for Brexit, even if a FTA is agreed.

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