Sunak Cuts Spark Fury as U.K. Faces Worst Slump for 300 Years

(Bloomberg) — A minister quit the U.K. government after Chancellor of the Exchequer Rishi Sunak moved to cut the foreign aid budget in an effort to tackle the “economic emergency” caused by coronavirus.

As he set out state spending plans, Sunak tried to balance more support for jobs with paying back the huge debts the country has built up, warning that unemployment will hit 7.5% in the worst recession for 300 years.

But his decision to slash the foreign development budget prompted an immediate backlash, with the Church of England, senior Tories and campaigners all condemning the cut, while a junior foreign minister resigned. The chancellor said he had little choice.

“Our health emergency is not yet over and our economic emergency has only just begun,” Sunak told Parliament when he outlined his spending review Wednesday. “Our immediate priority is to protect people’s lives and livelihoods.”

Sunak’s statement to Parliament marked the start of Britain’s painful reckoning with the financial consequences of the pandemic, with some tough decisions on how to address a ballooning budget deficit. Government forecasts put the U.K. on course for its deepest recession since the Great Frost of 1709.

Sunak’s Spending Review – Key Points
Unemployment to peak in the second quarter of next year at 7.5%, or around 2.6 million, before falling for the rest of the periodThe economy is expected to contract 11.3% this year, the biggest drop in more than three centuriesThat hit won’t be recovered until late 2022, while long-term scarring means the economy will be around 3% smaller in 2025 than expected in MarchThe U.K. is forecast to borrow a total of 394 billion pounds ($526 billion) this year, equivalent to 19% of GDP, and the highest recorded level in peacetimeOverseas aid spending will be cut to 0.5% of national income from 0.7%Pay rises for public sector workers in non-health roles will be pausedThe National Living Wage will increase to 8.91 pounds an hourSpending on “economic infrastructure” such as roads, railways and broadband worth 27 billion pounds in 2021-22 to support the recoveryLocal authorities will have more flexibility to raise spending power by 4.5%, with “extra flexibility” to set council tax.

With renewed lockdowns threatening further economic damage, the chancellor focused on support for jobs and the unemployed, plowing tens of billions of pounds into infrastructure spending, and ensuring the health care system can cope with a resurgent wave of infections.

Worst Since 1709

© Bloomberg
Worst Since 1709

Sunak’s choices set the tone for the ruling Conservative Party’s approach to the fiscal legacy of the coronavirus.

One of the most noteworthy announcements was the biggest uptick in defense spending in three decades: a four-year, 24 billion-pound investment in the country’s armed forces that pleased traditional Conservatives. The chancellor also confirmed a cut in the U.K.’s foreign aid budget to 0.5% of national income, breaking a promise to spend 0.7%.

The drop in overseas development spending dismayed other Tories, who warned it will hamper renewed efforts to display Britain’s global role just as Brexit takes effect. Junior foreign office minister Liz Sugg resigned, telling the prime minister it was “fundamentally wrong” to cut aid spending. “This promise should be kept in the tough times as well as the good,” Sugg said in her resignation letter to Johnson.

Archbishop of Canterbury Justin Welby, spiritual leader of 85 million Anglican Christians around the world, said the aid cut was “shameful” and urged members of Parliament to block it.

Sunak said the existing 0.7% aid commitment was “difficult to justify” to the British people. “I have listened with great respect to those who have argued passionately to retain this target,” he said. “But at a time of unprecedented crisis, government must make tough choices.”

Curbs to public sector pay also provoked an immediate backlash.

“Earlier this year the chancellor stood on his doorstep and clapped for key workers, today his government institutes a pay freeze for many of them,” Labour’s shadow chancellor, Anneliese Dodds, told Sunak. “The beginning of his speech was that our economic emergency was only just begun. Try telling that to people who’ve been out of work since March.”

U.K. Boosts Debt Sale Plan to $648 Billion to Bolster Economy

A new infrastructure strategy detailed planned projects to deliver on 100 billion pounds of projects pledged over the course of the five-year Parliament that started last December. Sunak also unveiled a new financial institution to help attract private money into such programs.

The chancellor has found himself spending in a way that no Conservative chancellor would easily countenance. Costs totaling 280 billion pounds have been racked up or earmarked to tackle the virus and support jobs and businesses through the crisis in the current fiscal year, Sunak said.

Debt Binge

© Bloomberg
Debt Binge

More borrowing will be needed, with the government now planning to issue a record 485.5 billion pounds of bonds in this fiscal year.

The Office for Budget Responsibility forecast that the already dire economic situation will be made worse if the Brexit negotiations end without a deal. In that scenario, unemployment would peak at 8.3%, while the economy wouldn’t reclaim its pre-virus size until well into 2023. The long-term GDP scarring of virus would be 5% rather than 3%, according to the OBR’s latest forecasts, published Wednesday.

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