The true extent of the financial fallout of the pandemic has long been broadly known; but somehow having it spelt out precisely on the record still came as something of a jolt. Whatever politicians, the media and the public felt before he stood up in Parliament on Wednesday 25 November, few can have been left in any doubt about the draconian impact on public finances that the pandemic has had by the time that he finished. In his speech to Parliament Mr Sunak warned that 'the economic emergency has only just begun'. There have already been budgetary victims of the fallout. The government was legally committed to deploying 0.7% of GDP to overseas aid but now plans to cut it to 0.5%. Although Dominic Raab, the First Secretary of State (in effect Boris Johnson's deputy as well as being the Secretary of State for Foreign, Commonwealth and Development Affairs), attempted to reassure the House that this was just a temporary expedient, his carefully chosen words that the budget would be raised again when public finances allow hardly provided reassurance that this would be happening any time soon.
The broad figures Mr Sunak quoted are eye-watering. GDP is forecast to drop by 11.3% this year, the largest fall for 300 years. Government borrowing is planned to rise to £394 billion, a peacetime record, and unemployment is expected to jump to around 7.5% by the second quarter of 2021. To add to the sense of gloom, independent forecasts from the Office of Budget Responsibility (OBR) predict that the economy will contract by a further 2% if no deal is agreed with the EU as part of the ongoing, and currently uncertain, Brexit negotiations. Mr Sunak attempted to play down the impact of a no deal situation but many remain unconvinced.
So far Mr Sunak's stock has been relatively high during the pandemic. In its early days in particular his job and income support schemes were much welcomed. However as he attempted to phase out furloughing and the like criticism has mounted. Now not only is the aid budget under threat but he has also mentioned that many public sector workers (excluding frontline NHS staff) will possibly need to accept a pay freeze in an attempt to get back to balancing the books. This will inevitably increase scrutiny of his performance. Being relatively new to government, Mr Sunak has little previous experience of this kind of intense public scrutiny and it will be revealing to see how he deals with it.
For businesses too, the months and years ahead look tough. Many have been battered over the past eight months. Now bodies such as the Institute of Fiscal Studies (IFS) have warned that given the state of public finances we can look forward, if that is the right phrase, to another round of austerity or increased taxation in an attempt to plug the fiscal gap. Business has so far been significantly protected by the Chancellor though as always some will say he could and should have gone further than he has. However, given the size of the hole in public finances the next few years appear to be set to be one of pay back. As Mr Sunak implied, the economic challenge has only just begun.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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