Post-COVID recovery and the November Spending Review

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By Professor John Bryson
Department of Strategy and International Business, University of Birmingham

The first sentence of Tolstoy’s novel Anna Karenina is famous – “Happy families are all alike; every unhappy family is unhappy in its own way”. The November Spending Review makes me think of this sentence. All ministerial roles are all alike; every ministerial role is unhappy in its own way.

At this time, who would want to be the Chancellor of the Exchequer, Rishi Sunak, or even the Prime Minister, Boris Johnson? We know the answer to the latter position, but not the former. Any announcement made by the Chancellor of the Exchequer, or the Prime Minister, is going to be declared to be wrong by some of the British public.

The government is caught between a rock and a hard place. There is still no immediate solution to COVID-19. In the medium-term, vaccination appears to offer a pathway back to the time when the news was not dominated by the word COVID. Nevertheless, we are heading into a very different economy. COVID-19 has encouraged disruptive innovations that have transformed some economic sectors.

There are some knowns about the November Spending Review. The review will be focused on expenditure rather than taxation. This includes the additional allocation of £16.5bn for defence. Some of this expenditure will enhance cybersecurity, as digitisation is providing many benefits for the UK economy and to everyday living, but it comes with enhanced cybersecurity risks. Warfare is much more focused on cyberattacks that have the potential to take out core systems, for example, the National Grid, the internet, the UK financial system or the digital parts of the NHS. These systems are the new battlefields and must be protected and defended against attack.

An increase in funding for the NHS is a political necessity. The key for the Spending Review is to balance revenue expenditure against capital investments. Revenue expenditure is a variable cost and exposes future taxpayers to a continual stream of expenditure. Capital expenditure must be targeted at two problems. First, dealing with infrastructure problems that reduce growth or lead to disadvantage for the most vulnerable. Second, infrastructure spending must focus on greening the UK economy and on decarbonisation.

One of the current government’s political mantras is based around the concept of ‘levelling up’. Levelling up is partly a geographic project based around a very old problem – the North-South divide. This process will involve an increase in infrastructure expenditure in the north and perhaps a relative reduction in the south. All such expenditure must be targeted at decarbonisation.

There is no point in building infrastructure to support the economy as it was – the pre-COVID and the carbon-intensive economy. The post-COVID economy will be more online, and addressing decarbonisation requires a fundamental and radical alteration to lifestyles. In social terms, this can be conceptualised as a process of levelling up for those who are disadvantaged combined with levelling down for those with carbon-intensive lifestyles.

The Spending Review will be driven by a concern with spending to enhance the post-COVID recovery. Nevertheless, the alternative mantra will be based around a public sector pay freeze. In any case, there needs to be an inclusive debate regarding pay and one that acknowledges the pressures on both private and public sector employees and employers.

The current media commentary is one based on a UK economy that in four or five years will be around 4%-5% smaller than before the pandemic. One can add the COVID-19 effect to that of Brexit. There are two problem with these predictions. First, they are predictions made by individuals or organisations who do not account for economic change, and second, they tend to be extrapolations based on existing trends. These two problems mean that such predictions tend to be wrong.

One should never predict the future. Nevertheless, my predication is that by 2025, the UK economy will be around 5%-8% larger than before the pandemic and this might be as high as 12%. The immediate post-COVID economic recovery will be extremely rapid.

What is behind this prediction? Both COVID-19 and Brexit represent significant disruptive events. Both are about creative destruction as existing structures, companies and ways of living and working are destroyed. Nevertheless, creative destruction goes together with creation reconstruction. It is this process of creative reconstruction that will drive economic growth. We can expect the UK to experience a whirlwind of creativity that will be transformational.

There are two final points to make. First, the Spending Review must underpin this whirlwind of creativity. It must not focus on the economy and society as it was, but on laying down the foundations for a new decarbonised economy. Second, over the next three years expect significant tax increases. These will include increases in VAT, income tax and national insurance, which underpins the NHS, the educational system, social welfare, and defence.

We tend not thank those who hold some of the Great Offices of State for the decisions they must make on behalf of all citizens, although some of these decisions will be right and some wrong. We should do so. Many of these decisions can only be judged at some time in the future. These decisions must be made and be made now.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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