(Bloomberg) — Chancellor of the Exchequer Rishi Sunak said he will increase spending on public services this week in a bid to shore up the U.K. economy amid the “enormous stress and strain” of the coronavirus pandemic.
The chancellor will unveil departmental budgets on Wednesday as he seeks to balance the need to support the economy against the long-term risks of ballooning government borrowing. Even as he battles with the current crisis, he has an eye on ensuring the public finances are prepared to weather future shocks, he said on Sunday.
“You will not see austerity next week,” Sunak said in an interview with Sky News. “What you will see is an increase in government spending on day-to-day public services, quite a significant one, coming on the increase that we had last year.”
Forecasts from the Office for Budget Responsibility will show the stress on the economy is “enormous” and ministers are looking at the effect of measures to stop the spread of the pandemic “in the round,” Sunak said. He refused to answer questions about potential tax rises, saying Wednesday’s announcement is focused on departmental spending.
“Now is the right time to focus on responding to the crisis and that means, yes, we will be borrowing quite frankly an enormous sum this year,” Sunak told BBC TV later on Sunday. “We could always do more on everything. We have to prioritize where we’re best using our resources.”
Sunak’s spending has driven debt above 2 trillion pounds ($2.7 trillion) for the first time on record, exceeding the size of the economy for the first time since the 1960s, and the chancellor said it is “clearly not sustainable” to borrow at such a high level once the pandemic has passed.
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The closure of retail and hospitality businesses to stop the spread of the virus has been “extremely damaging” to the economy and the effect will be at the forefront of considerations when ministers meet on Sunday afternoon to decide on the next round of pandemic restrictions, Sunak said.
The focus of Wednesday’s spending review will be on tackling the impact of coronavirus, which will overshadow the effects of Brexit as the “dominant shock” for the U.K. economy, Sunak said.
There is progress in talks with the European Union and “we will prosper in any eventuality,” he said. “The most important impact on our economy next year isn’t going to be Brexit, it’s going to be coronavirus.”
The chancellor refused to rule out a freeze in pay for public sector workers, saying it would be considered alongside data on wages and prices in the wider economy.
Office for National Statistics figures in September showed public sector workers earn on average 7% more than those in the private sector, after including pensions and adjusting for skill levels and job characteristics.
“It would be fair to also think what’s happening with wages, with jobs, with hours across the economy when we think about what the right thing to do in the public sector is,” Sunak told Sky.
Labor unions have reacted with anger at the suggestion pay would be frozen, arguing that it was their members who kept the U.K. economy afloat during the darkest days of the crisis.
“There’s still time for the government to step back and I would encourage them to think again, this is not smart politics, it’s morally obscene and it’s bad economics too,” Frances O’Grady, general secretary of the Trades Union Congress told Sky News. “This is absolutely the wrong time to be talking about pay cuts, and instead we need to start talking about fairness.”
(Updates with economic forecasts, further Sunak comments starting from fifth paragraph.)
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