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Chancellor's spending review explained

Greater Birmingham Chambers of Commerce

Chancellor of the Exchequer Rishi Sunak (pictured) has announced the outcomes of the Government’s 2020 Spending Review, setting out budgets for each governmental department over the coming year, and presenting the Office for Budget Responsibility’s (OBR’s) latest forecasts for the economy and public finances.

This spending review was originally due to cover three years. However, due to the continuing uncertainty surrounding Brexit, this was replaced with a one-year roll-over review. The spending review indicates what the government’s priorities are for spending and investment to tackle and move forward after the COVID-19 pandemic.

Support for businesses

The Spending Review builds on existing government support to help businesses survive through COVID-19 (as set out by the GBCC’s COVID Support Grid, here).

The review confirmed £519 million of funding in 2021-22 to support the continued delivery of Covid-19 loans, including paying for the 12-month interest free period on the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme.

Additionally, it announced freezes the business rates multiplier in 2021-22, which the treasury projects will save businesses in England £575 million over the next five years.

The review also set out plans to provide an additional £56.5 million in 2021-22 to support the vitality and entrepreneurship of the UK by expanding the British Business Bank’s Start-Up Loans to meet the increase in demand and support entrepreneurs to start and grow their businesses.

Levelling up

The Chancellor announced a new £4bn ‘levelling up’ fund in order to pay for projects chosen by local areas across the UK. The fund would focus on ‘place based’ investment and would be managed jointly by HMT, DfT and MHCLG. In particular, local areas would be able to secure funding to build the facilities most wanted by local people such as transport improvements and investment in high streets.

Employment and Skills

The Spending Review provides £3.6 billion of additional funding in 2021-22 for the delivery of labour market support.

This includes funding for a new 3-year long £2.9 billion Restart programme to provide intensive and tailored support to over 1 million people who have been out of work for more than 12 months and help them find work. The scheme will be launched with around £400 million of funding in 2021-22.

It also includes plans to invest £1.4 billion to build on the Plan for Jobs commitment to increase capacity in Job Centre Plus and double the number of work coaches, and £200 million in other job search support measures, including Job Finding Support schemes, alongside traineeships, sector-based work academy placements and the National Careers Service.

Additionally, the Government set out plans to invest £1.6 billion in the Kickstart Scheme in 2021-22 which the Treasury says will fund over 250,000 new jobs for young people across the country.

The spending review also announced the chancellor’s plans to make available £2.5 billion of funding for apprenticeships and further improvements to the apprenticeship funding system for employers.

The spending review states that from August 2021, a new pledge function will be introduced for the bulk transfer of unspent levy funds to SMEs. The government also set out plans to also introduce, from August 2021, a new online service to match levy payers with SMEs that share their business priorities. From April 2021 the treasury further stated plans to allow employers in construction, followed by health and social care, to front-load training for certain apprenticeship standards and explore whether this offer can also be made available in other sectors. Perhaps most crucially, the spending review announced that incentive payments for hiring a new apprentice introduced in the Plan for Jobs will be extended to 31 March 2021 (previously 31st January 2021).

The 2020 spending review also reaffirmed the government’s 2019 commitment to increase the core schools budget by £7.1 billion by 2022-23, compared to 2019-20 funding levels. The schools budget will increase from £47.6 billion in 2020-21 to £49.8 billion in 2021-22 – an uplift of £2.2 billion.

Further, the spending review committed that the government will also provide £220 million for the Holiday Activities and Food programme to provide enriching activities and a healthy meal for disadvantaged children in the Easter, Summer and Christmas holidays in 2021.

It also confirmed funding of £1.5 billion over six years to deliver the government’s commitment to bring all Further Education college estates in England up to a “good” condition and £291 million for Further Education in 2021-22, to ensure that core funding for 16 to 19-year-olds is maintained in real terms per learner.

Wages

As Covid-19 continues to impact the public finances, the Chancellor announced in the review that the government will temporarily pause headline pay awards for some public sector workforces. However, pay rises for over 1 million NHS workers and the lowest paid will continue as planned.

Following the recommendations of the independent Low Pay Commission (LPC), the government has committed in the 2020 spending review to increase the National Living Wage (NLW) for individuals aged 23 and over by 2.2 per cent from £8.72 to £8.91, effective from April 2021.

The government has also accepted the LPC’s recommendations for the other National Minimum Wage (NMW) rates to apply from April 2021 including:

  • increasing the rate for 21 to 22-year-olds by 2.0 per cent from £8.20 to £8.36 per hour
  • increasing the rate for 18 to 20-year-olds by 1.7 per cent from £6.45 to £6.56 per hour
  • increasing the rate for 16 to 17-year-olds by 1.5 per cent from £4.55 to £4.62 per hour
  • increasing the rate for apprentices by 3.6 per cent from £4.15 to £4.30 per hour

Further, the government will increase the 2021-22 Income Tax Personal Allowance and Higher Rate Threshold in line with the September CPI figure. The government will also use the September CPI figure as the basis for setting all National Insurance limits and thresholds, and the rates of Class 2 & 3 National Insurance contributions, for 2021-22.

Brexit

The Chancellor announced that Funding for the UK Shared Prosperity Fund will ramp up so that total domestic UK-wide funding will “at least match” receipts from EU structural funds, on average reaching around £1.5 billion per year. In addition, to help local areas prepare over 2021-22 for the introduction of the UKSPF, the government will provide additional UK-wide funding to support communities to pilot programmes and new approaches.

It was also announced that an additional £217 million will be committed to deliver Future Borders and the new, post-Brexit points-based Immigration System.

Infrastructure

The Government is committed to capital spending of £100bn next year related to infrastructure projects. In addition, a new national Infrastructure Bank will work with the private sector to finance new infrastructure projects across the country. The Chancellor also announced plans to spend £7.1bn on a new national home building fund.

Mental Health

The Spending Review announced an additional £3 billion will be spent to support the NHS’s recovery from the impact of Covid-19.

This includes a £500 million package to address waiting times for mental health services, give more people the mental health support they need, and invest in the NHS workforce.

What is the Chamber’s view on the 2020 Spending Review?

The Chancellor laid bare the stark realities facing the country as we attempt to overcome the damage caused by Coronavirus – record levels of borrowing and unprecedented levels of unemployment will naturally undermine attempts at reviving our fragile economy over the next six to twelve months.

Government support for businesses struggling through this crisis has been unprecedented and is very much welcomed, however the Chamber’s Keep Business Moving report (here) sets out an action  plan for national government on areas requiring further, urgent intervention for business survival and longer term efforts for business revival.

The concept of a Levelling Up Fund sounds promising but for it to be truly effective, party political differences will need to be put aside in order to attract much needed investment across parts of our region.

The Bank of England has forecasted a rise in national unemployment to nearly 8% by the middle of next year (from 4.8% currently). With an unemployment crisis on the horizon, it was also pleasing to see a substantial commitment to retraining unemployed workers, sharpening the effectiveness of the Apprentice system and upgrading colleges – all vital elements in helping young people develop the skills they need to secure work in such an unstable environment. However, the government must take lessons from previous schemes to ensure new programmes such as Restart and Kickstart are delivered successfully.

Beyond a vague reference to the Shared Prosperity Fund, there was very little information on how the Government will help businesses transition to a post Brexit landscape and clearly firms are still lacking the clarity they require to make longer term decisions related to investing in their people and products.

The Government adage of Building Back Better was at the heart of the Chancellor’s announcements related to infrastructure and we welcome the additional capital spend that is going to be required to strengthen the foundations of the domestic economy. We await the release of the National Infrastructure Strategy later today to find out more about the Chancellor’s intentions to bring prosperity to all four corners of the UK – with a commitment to delivering HS2 in full very much required at the heart of this evolving plan.

Finally, financial support for the NHS and mental health services are also very much welcomed. The coronavirus has had a catastrophic and multifaceted effect on the physical and health and wellbeing of people across the country. The British Chambers of Commerce COVID-19 Business Tracker (6th July 2020) indicated that 26% of Westmental  Midlands region businesses had experienced an increase in workforce mental health concerns compared to the same period the in 2019.

Image: Cubankite/Shutterstock.com