Arbuthnot Banking : The Spending Review highlights fiscal and economic costs of the coronavirus pandemic

The Spending Review highlights fiscal and economic costs of the coronavirus pandemic

Date: 30^th November 2020

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 2020 Spending Review:

• Spending Review 2020 (SR20) was announced by the Chancellor on 25 November 2020, and was primarily, though not exclusively, concerned with setting departmental resources and capital budgets for FY2021.
• SR20 confirmed an additional £55bn of spending in response to the coronavirus pandemic for FY2021, after £280bn of spending in FY2020.
• 'Core' departmental resource funding (non-capital spending, excluding spending on Covid-19) was planned to rise by a, not insubstantial, annual average of 3.8% (YOY) in real terms between FY2019 and FY2021.
• Capital departmental spending was planned to be £100bn in FY2021, very significantly higher than FY2019's £70bn.
• The delayed National Infrastructure Strategy (NIS), outlining the long-term infrastructural investment strategy, was released. It is planned to invest £600bn over 5 years.
• Public sector net borrowing (PSNB) was projected by the OBR to be £394bn (19.0% of GDP) in FY2020, in its central forecast. Even though borrowing was thereafter forecast to decline, it was still as high as £100bn in FY2025.
• The OBR projected a public sector debt/GDP ratio of 105.2% for FY2020 in its central forecast.
• The OBR constructed three economic scenarios. In its central case, GDP would fall by 11.3% in 2020, rising by 5.5% in 2021. The return to the pre-pandemic peak (2019Q4) was projected for 2022Q4 and the long-term economic scarring was expected to be 3% of GDP. Unemployment was expected to peak at 7.5% (2.6 million) in 2021Q2.
• Concerning quarterly data, the OBR now expects a fall in GDP of 2.7% (QOQ) in 2020Q4, before growth resumes in 2021Q1.

Lockdown update:

• The second lockdown (England) will end on 2 December, to be replaced by a toughened up three-tier system, with most of the country placed in tiers 2 and 3.

Economic data update:

• The Markit/CIPS flash UK composite output index fell to 47.4, compared with October's 52.1, signalling a renewed downturn.
• The Markit flash Eurozone composite output index fell to 45.1 in November, below the no-change 50 mark, after October's 50.0. Renewed contraction was noted for France, but German continued to expand, albeit at a slower rate.
• The Markit flash US composite output index picked up to 57.9 in November, after October's 56.3, suggesting a pick-up in growth momentum.

Ruth Lea said 'The Spending Review, along with the OBR's revised forecasts, highlighted the enormous fiscal and economic costs of the Covid-19 pandemic, and the Government's response to it. A GDP fall of over 11% in 2020 and public sector borrowing of 19% of GDP in FY2020 are without precedent. The latest Markit survey suggests activity fell back in November, reflecting lockdown conditions. Even though lockdown (England) will end on 2 December, most of the country will remain under tight restrictions. Suffice to say, the restrictions will continue to bear down on the economy, especially the hospitality industry, frustrating economic recovery.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
[e-mail]

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