British Exchequer To Review All Its Spending Plans For The Next Five Years

Summary

• The British government has incurred an unprecedented debt in the recent past to support the pandemic-struck sluggish UK economy
• Chancellor Sunak clarified that the review is not a rethink of the commitments made by the government in its March 2020 budget and the government shall fulfil all its promises

Rishi Sunak, the British Chancellor of the exchequer, made an announcement on 22 July 2020 that a comprehensive review of all public spending proposals till 2025 has been initiated. While the review is in no way a clawback of the extensive infrastructure development plans announced by the government during the budget earlier this year, it is a much-needed exercise in view of the massive public debt that the government has taken on during 2020 . The outbreak of the pandemic had necessitated a large-scale public expenditure exercise to roll out stimulus packages to support businesses from collapsing and people losing their jobs. This exercise has, however, also meant that now less would be available for the infrastructure spending plans that were scheduled for the next few years.

The current state of the economy in the United Kingdom

The British economy is currently one of the worst hit economies in Europe as a result of the Covid-19 pandemic. While the first case of the infection was reported on 31 January 2020 York, it took almost two months for the government to announce a nationwide lockdown on 23 March 2020. The economic activity in the country had already started to get hampered by that time, but after that, almost all businesses in the country except for those involving essential goods and services came to a complete standstill. The six weeks of lockdown gave the British economy a massive economic jolt. The GDP for the country fell by as much as 2.2 per cent during the first quarter of 2020, which was its worst quarterly slump recorded since 1979. Further, during April 2020, it fell by a record 20.4 per cent, lowest ever estimated monthly fall. The unemployment figures reached a high of 3.9 per cent, and the public debt levels are expected to reach a level of £370 billion by the year-end.

As a result, the British government rolled out several stimulus measures to boost the all-time low consumer demand and get production output rolling to pre-corona levels, across sectors. It rolled out a furloughing scheme whereby it pays for 80 per cent of the staff salary of small and medium-sized companies who could not afford their wage-bills due to a severe business slowdown. It came out with the coronavirus business interception loan scheme which provided loans on lucid terms to companies to pay for essential expenses during the lockdown and the bounce back loan scheme which was targeted towards small and midsized businesses to help them jumpstart their operations after the lockdown was lifted.

When the economy re-opened during the first week of May 2020, a mild business activity resurgence was registered across several sectors. The housing, construction, and the retail sectors started to show gradual improvement. They are trying to retain the momentum, but social distancing norms and a very slow uptake in the consumer sentiments is delaying a complete turnaround, despite government support.

The case of unsustainable levels of public debt

Providing fiscal stimulus across various sectors has costed heavily to the British exchequer, substantially public debt levels. A recent report published by Office of Budget responsibility (OBR) stated that the government would have to raise taxes by as much as £60 billion which is nearly 50 per cent more than what it is raising now if it wants to keep the nation’s fiscal condition under control.

These debts, if not retired within a stipulated period of time, could seriously harm the British economy. Firstly, it could devalue the country's currency in the long-term. Secondly, the country's trade deficit with the rest of the world could increase significantly. Finally, it would be very difficult for the country to retire off its debts.

The development expenditure plan of the government as outlined in the budget

Given the state of the economy, the government currently has no plans to cut down on its expenses. Despite providing the notable Covid-19 support stimulus, the UK government has emphasized that raising public expenditure would only improve the country’s GDP, thereby building enough ground raising taxes later to pay back these loans. It does not believe in the austerity approach adopted by the labour party after the 2008 financial crisis to deal with an emergency situation. Instead, it presumes that doing so will put undue pressure on the economy. Any forthcoming growth will be truncated without government stimulus, and the economy will get into a vicious circle of slowing down further.

It is also time that the government comes out with a plan to retire the debts it has incurred in the past few months. The plan will not only set a clear path for the country to take but will also instil confidence among investors and citizens that the country can meet its financial obligations without any difficulty. A review of the public expenditure plans for the next five years will provide a strong basis for that.

Therefore, in sum, the British government's decision to review its expenditure plans for the next five years comes as a right move at the right time. Given the high-debt levels, it is important to review and re-prioritise plans. The pandemic induced slowdown is a good opportunity to bring about any structural reforms to put the economy on a sustained path of growth.