The chancellor, Rishi Sunak, has asked Whitehall departments to find budget savings after launching a review of government spending, while warning that “tough choices” will be made in response to the Covid-19 outbreak.
Against a backdrop of rising public borrowing as the government pumps billions of pounds into its pandemic response, the chancellor announced that a comprehensive spending review would be used to set out its spending priorities for the parliament.
The review, to be published in the autumn, will set out the budgets for day-to-day resource spending for government departments up until 2023-24. It will also set out capital budgets for transport and infrastructure investment until 2024-25, as well as the grants for devolved administrations in Scotland, Wales and Northern Ireland.
With unemployment rapidly rising as Britain plunges into the deepest recession for three centuries in the wake of the coronavirus outbreak, the spending review will be viewed as a litmus test for whether the government imposes a renewed austerity drive in response to high levels of public borrowing.
The launch of the review came after official figures showed government borrowing reached almost £130bn between April and June, more than double the amount that Britain borrowed over the whole of last year.
At the outset of the process, Sunak has not set a fixed range for spending and he said departmental budgets would grow above inflation to meet the Tories’ promises to “level up” the British economy.
However, the chancellor said “tough choices” in other areas of spending would be made as a consequence of the Covid-19 crisis. As part of preparations for the review, the Treasury said Whitehall departments had been “asked to identify opportunities to reprioritise and deliver savings”.
The Office for National Statistics said earlier on Tuesday that public borrowing in the first three months of the 2020-21 financial year jumped to £127.9bn, the highest quarterly sum since comparable records began in 1993.
According to the latest snapshot, borrowing in June was £35.5bn, roughly five times the level in the same month a year ago, albeit a gradual decline from even higher levels of borrowing in April and May during the earlier stages of the pandemic.
Britain’s national debt – the sum total of every annual deficit in history – increased by £195.5bn year on year to almost £2tn, roughly equalling GDP, and standing at the highest level as a share of the economy since 1961.
Speculation has been mounting that Sunak could use his autumn budget later this year to either raise taxes or reimpose austerity.
However, experts have warned warn that cutting back spending or raising taxes too soon risks choking the economic recovery before it fully takes hold. Economists argue that higher levels of borrowing can be sustained by cheaper borrowing costs for the state, helped by the Bank of England’s quantitative easing bond-buying programme.
Jeremy Thomson-Cook, the chief economist at financial services firm Equals, said debt levels did not matter in the short term. “If your house is on fire you do not tell the fire brigade to only use a certain amount of water,” he said.
“The UK economy continues to burn, and the government’s spending taps need to remain open for the foreseeable future in order to give businesses and consumers every opportunity to support each other as we gradually return to normality.”