It may have not been on your radar, but this week’s Spending Review was a significant one. Chancellor Rishi Sunak revealed that borrowing is set to be 19% of gross domestic product (GDP), the highest recorded level in peacetime.
What goes on in Westminster may seem very removed from our everyday lives. But how the government balances the books can have a huge impact on our personal finances.
So let’s take a look at the main points of this year’s Spending Review.
What was cut?
Considering the huge levels of government debt, it was surprising that only two spending cuts were announced.
The first was a pay freeze for public sector workers outside the NHS. This will come as a blow to hard working teachers, police and others.
The second was a cut to the foreign aid budget. Rather than the Conservative government’s promise of 0.7% of GDP, it has been reduced to 0.5%.
Where are the spending increases?
Here are the key areas getting a boost from the spending review:
The NHS in England has been given an extra £3bn to tackle the huge backlog of operations cancelled because of coronavirus.
This will increase the Department of Health and Social Care’s budget by £6.6bn. And result in 50,000 more nurses and 50 million more GP appointments.
Schools will receive an increase of £2.2bn next year, and there’s a 291mn boost for further education. However, there is criticism that this extra funding will just be wiped out by the cost of coronavirus measures and supply teacher cover.
The national living wage will be increased by 2.2% to £8.91 per hour for those aged 23 and over.
Rishi Sunak also announced a £4.3bn package to support those without a job. This includes a £2.9bn scheme to help one million unemployed workers with their job search. And £1.4bn of new funding will be available to increase Job Centre Plus capacity.
We apparently now have a ‘National Infrastructure Strategy’. This will see capital spending total £100bn and a £7.1bn national home building fund.
There will also be a new UK infrastructure bank, headquartered in the North of England. The purpose of this will be to work with the private sector to finance new major investment projects across the UK.
Local authorities have been given greater flexibility to increase council tax by as much as 5%.
There will also be a ‘levelling up’ fund worth £4bn to pay for local projects.
How will this affect me?
The chancellor declared that we are currently in an ‘economic emergency’. GDP is forecast to shrink by 11.3% this year. And economic output is not expected to recover to pre-crisis levels until the back end of 2022.
The main way the Spending Review will affect every Briton in the future is the fact that this level of borrowing cannot be sustained. At some point there will need to be a balancing of the books. It will likely come in the form of higher taxes or future spending cuts.
This is unlikely to happen in the short term. But when the economy has recovered, it is likely to come into play.
How can I protect my finances?
While we will experience an economic downturn for the next few years, the pinch point is still to come.
So if you want to put yourself in a strong position financially, there are a few things you could consider doing.
Pay off your debts
If you have any outstanding credit card balances or overdrafts, it would be worth focusing on paying these off. Interest charges on debts like these can be costly and put you in a precarious financial position.
If you are concerned that your income may drop in the future, reducing the cost of your borrowing is always a good first step.
Start a savings habit
It doesn’t have to be a lot. But if you can start putting away a little each month, then you could build up an emergency nest egg. Then, if things become tight in the future, you don’t have to turn to borrowing to see yourself through.
Something like an easy access savings account would give you flexibility. Or, if you are after higher returns, maybe a stocks and shares ISA. Just remember that this comes with an element of risk though.
Improve your credit score
In order to weather any future financial shocks, try to make sure that your credit score is as squeaky clean as possible. Then, if for any reason you do find yourself needing to borrow money, you are more likely to qualify for the more competitive deals.
For tips on how to do this, check out our article on how to improve your credit score.
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