A new year when cheer will give way to grim economic reality

Relief of normality will be overshadowed by a crippling financial crisis.

A new year when cheer will give way to grim economic reality Getty Images

The news on the various Covid vaccines has allowed us all to peek beyond the Hogmanay bells and contemplate a 2021 when life might just get back to normal.

For it looks like being a year when getting together, moving around with fewer restrictions and travelling abroad will once again be enjoyed, but probably not until the year’s end.

Holding on to any glimmer of impending normality is sustaining many, worn down by the sheer tediousness of lockdown with its effortless ability to drain morale.

This year of life in limbo will end. The relief of the prospect of a new normal will, however, quickly give way to an ongoing crisis that will bite even harder, that in Britain’s economy.

Yesterday, the Chancellor gave his spending statement. When taken with the forecasts from the Office for Budget Responsibility (OBR) and the invaluable service provided by the Institute for Fiscal Studies (IFS) we were treated to a blizzard of figures.

Economic statistics, like those detailing the key numbers of the pandemic, can desensitise to a fundamental reality. Behind every statistic lies a person, a family, a business, a way of life.

Yesterday confirmed that the New Year will be a case of hope on the health front but a cause for real concern on the economy as a grim new reality takes hold.

Today, the Resolution Foundation put this into perspective with two observations that capture the scope of the squeeze on family budgets.

First, since the financial crisis of 2008 household incomes will have grown by just 10% to 2023, compared to a 40% growth in the 15 years preceding the banking crisis.

And compared with pre-pandemic forecasts, pay packets will be reduced by £1200 by 2025 as pay freezes in both the public and private sector further impede the drive to increase aggregate demand in the economy and put the break on runaway unemployment.

Rishi Sunak says unemployment will hit 2.6 million next year. That’s one million job losses to come. Some forecasts believe even that might be hopelessly optimistic. The OBR says that figure will be much higher in the event the UK does not strike a trade deal with the EU.

The Chancellor’s spending plans make no provision for the uprate in Universal Credit beyond March, which will mean six million families losing £1000 per year. Every penny of that money is probably spent in a local community, purchasing household essentials.

The freeze on public sector pay for those not employed by the NHS or earning less than £24,000 is an incitement to anger. Many of these workers were told by Theresa May and Boris Johnson and indeed Sunak that austerity was dead. That austerity saw their pay squeezed after 2008 and on the current trajectory of thinking many will see it continue well into the future.

Ben Zaranko from the IFS says “relative to pay in the private sector, public sector pay prior to the pandemic was at its lowest point in more than 25 years”. As the unions circle to try and reverse this policy, it might just be a case of ‘now is the summer of our discontent’.

In a pooled interview with Channel 4 News yesterday, the Chancellor, as he did with his BBC and Sky interviews on Sunday, parroted well-rehearsed lines in response to specific questions. From ending the Universal Credit uprate to the prospect of higher taxes, his set-in-stone countenance waited for the question to end before the automaton spoke.

As the IFS chart the sheer mind-boggling sums involved in borrowing, not only this year but in the years ahead, the issue that is not being addressed is when and how this will be paid back.

Tax increases will not happen in the next tax year (2021/22) since that would make the task of getting people back to work more difficult. I suspect that they won’t happen in the year after that (2022/23) since tax hikes would threaten any recovery.

2023/24 looks the most likely year for the day of reckoning but that would mean putting up taxes in the run up to a UK general election. Sunak may well be in search of long grass in which to kick that particular political football.

I suspect between now and the day when the spend, spend, spend Chancellor becomes a bearer of tightening the fiscal screws, the Treasury will be modelling endless scenarios at clawing back money to pay for the current largesse.

Higher rate tax payers will be hit, that I would have thought is a given. For those on the basic rate, well that’s trickier. He might need to introduce another tax band to protect those on average earnings from being squeezed into real difficulty.

Three holy tax grails in the Conservative orthodoxy could well rewrite the rules for a Tory chancellor. Capital gains tax looks set to rise, so too corporation tax and I suspect he will also look at changes to inheritance tax.

Since public sector workers once again are being hit with austerity mark II, it does not seem unreasonable that those who can enjoy a capital gain or a business that is highly profitable or those who have estates bloated not by hard work but by a rising property market, should pay more.

The problem is simple. The sums are so huge that putting up all taxes could still leave the Chancellor needing to find more. That’s why economic growth is so vital, for it can drive down unemployment and help increase the tax take. For that to happen it is essential he does not increase tax too early into the recovery period.

This Parliament will be remembered when a Tory chancellor played against type. State intervention in the form of huge cash injections followed by large tax rises is the stuff of right-wing propagandists caricaturing Labour economic policy.

But this is not caricature. This is Conservative economic policy.