Skip navigation
The Progressive Policy Think Tank

Spending Review 2020: IPPR response

Spending review misunderstands 'basic economics' and will leave economy needlessly damaged

  • Chancellor has delivered only a quarter of the cash needed to fully restore the economy, according to think tank’s analysis 
  • 'Missed opportunity' to build fairer, stronger and greener economy for generations to come 
  • Borrowing more now for targeted investment would leave UK with less debt compared to GDP, because of faster growth 

The progressive think tank IPPR has responded to the Chancellor’s spending review, declaring it falls short of what’s needed to restore the economy to its full potential. 

Earlier this week, IPPR argued in its paper, The Chancellor’s Challenge, that the economy needs an ambitious cash injection of £164 billion in the year 2021-22, to restart it fully after the Covid crisis and set it on course for a fair, strong and green recovery.  

Its analysis revealed that borrowing more to set the economy moving faster would actually mean lower debt as a share of GDP than the more cautious approach being urged by some. Failure by the Chancellor to take action on sufficient scale would risk leaving the UK up to seven percentage points behind its potential next year, IPPR’s report found.

The increase announced today is only one quarter of the total needed to prevent that, IPPR says (see Chart A in Notes below), so puts full recovery at continued risk.

Carys Roberts, IPPR Executive Director, said: 

“With the economy contracting by 11.3% this year, and unemployment set to reach 2.6 million by Spring, it is essential that the government steps in to shore up spending and economic activity. This is not controversial but basic economics.  

“Our estimates this week showed a fiscal stimulus of £164 billion was needed to support the economy and prevent needless, permanent damage to businesses and incomes. Yet only a little over a quarter of that was committed in announcements today. 

“The Chancellor has acted too timidly, and in doing so has failed to live up to the scale of the challenge. He has missed an opportunity to build not just a stronger economy but one that is fairer and greener. And, ironically, he will find it harder to achieve fiscal sustainability as a result, because tax receipts reflect the state of the economy.  

“This is poor economic management: he should have listened to the economists telling him that fiscal stimulus really is fiscal responsibility.” 

Carsten Jung, Senior Economist, said: 

“Today’s announcement did nowhere near enough to boost the economy and employment – and as a result it has weakened public finances. The UK economy continues on track to be significantly below pre-crisis trend over the next year. It did not have to be this way. Absent a stimulus of sufficient size, future tax receipts will be hit and our debt will be harder to repay.  

“And too little has been done to address structural weaknesses of the economy. Some catchy announcements conceal the fact that public investment has not in fact been increased compared to plans made before the pandemic – as if nothing had happened. An investment boost could have helped bring the economy back towards its potential and help unlock new sectors. But overall only two thirds of total public investment that's needed has been committed.”

On investment to reach the UK’s net zero emissions target and restore nature, Luke Murphy, associate director for energy, climate, housing, and infrastructure, at IPPR said: 

"There is little new today for the climate and environment, other than confirming what the Prime Minister announced in his 10-point plan last week. 

"While those commitments were welcome, there remains a wide policy and investment gap on net zero that needs to be filled. Today was a missed opportunity to do that. An extra £33 billion a year investment is needed above previous spending plans to tackle climate and nature crises – and so far the government has committed to only a fraction of that. 

“The commitment to a new National Infrastructure Bank and the funds for levelling up could prove significant if both are laser focussed on delivering our climate and nature ambitions. 

"However, cutting international aid in the year of COP 26, when a core part of the remit as host is to increase support to vulnerable countries, is bad policy and a poor signal to send." 

ENDS 

Carys Roberts (IPPR Executive Director), Carsten Jung (Senior Economist) and Luke Murphy (Head of IPPR’s Environmental Justice Commission) are available for interview 

CONTACT 

David Wastell, Head of News and Communications: 07921 403651 [email protected]  

NOTES TO EDITORS  

1. The IPPR paper, The Chancellor's Challenge: delivering a stimulus for post-pandemic recovery by Carys Roberts and Carsten Jung, published earlier this week, is at http://www.ippr.org/research/publications/chancellors-challenge   
 
It calculated that a £164 billion fiscal stimulus was needed in this spending review to tackle the health crisis and stabilise the economy; deliver all the climate investments needed to reach the UK’s net zero emissions target; and restore public services to their pre-austerity level by the end of the parliament. 

Modelling assumptions and full methodology are set out in an annex to the report. Figures provided are UK-wide.

2. Chart A: Spending increase announced by Chancellor today is only one quarter of the total stimulus needed 
 

 
Source: IPPR analysis of IPPR baseline scenario (below), OBR Nov Fiscal Outlook, OBR Coronavirus Policy Monitoring Database, IMF (2020), HMT Plan for Jobs, HMT Winter Economic Plan, HMT Announcement on increases on financial support for businesses and workers, Conservative Manifesto Costings Document (2020), Jung & Murphy (2020), McNeil et al (2020). 

Note: the required size of the 2021-22 stimulus is calculated such as to close the output gap as much as possible given the supply constraint presented by the pandemic. Size of supply constraint as well as government spending and investment multipliers are taken from IMF (2020).   

3. Chart B: No new public sector investment has been announced; total investment falls far short of what would be needed to ‘level up’ the UK and achieve climate targets 

  

Source: Jung & Murphy (2020a), OECD (2019), OBR (2020b) 

4. Chart C: A stimulus would return the economy towards potential much more quickly, producing jobs growth and tax revenues for the Treasury


 
Source: IPPR analysis of OBR (2020a, 2020b), NIESR (2020), IMF (2020), Jung & Murphy (2020) 

5. Other recent IPPR reports on the policy response to the coronavirus crisis can be found at https://www.ippr.org/coronavirus-response. They include:  
 
A Family Stimulus: Supporting children, families and the economy through the pandemic - http://www.ippr.org/research/publications/a-family-stimulus  
 
Better than before: A Scotland built on social, economic, and climate justice - https://www.ippr.org/research/publications/better-than-before-Scotland   
 
Transforming the economy after Covid-19: a clean, fair and resilient recovery - https://www.ippr.org/research/publications/transforming-the-economy-after-covid19   
 
Rescue and recovery: Covid-19, jobs and income security - https://www.ippr.org/research/publications/rescue-and-recovery