This week's spending review is going to leave the Tories with a hugely significant strategic decision for the next decade. It can be the low tax party, or the party of fiscal responsibility - but not both. THREAD

With Covid spiking again, the Chancellor delayed the Budget + scaled the SR back to a 1 yr review (with a few exceptions). Rationale was it's v hard to make long-term tax + spend decisions against such an uncertain economic backdrop, as per @PJTheEconomist https://twitter.com/PJTheEconomist/status/1318830599965114374

Critique of this was that it was a retreat into HMT “orthodoxy”: when economic conditions are highly uncertain, public sector should provide certainty to anchor / co-ordinate private sector expectations, particularly on investment. See this from @MESandbu https://www.ft.com/content/14a62562-a0d6-4d85-939b-3b92cc85a3fd

Reality though is this will be more a multi-year SR with a few 1 yr exceptions than the other way round. HMG had already committed to multi-year deals for NHS + schools. Add in defence, that's c60% of departmental day-to-day spending. See table A.3 of SR19 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/829181/Spending_Round_2019_print.pdf

So this is a much more significant moment for the future path of public spending than the 2019 Spending Round – with three key Qs to be answered. First, how generous will the settlements for the NHS / schools. They already have multi-year deals, but how big will their top ups be?

Second, what assumption does the Chancellor give the OBR for overall spending for the forecast period (i.e. to 2024-25), and how much of that is there left for other departments (getting 1 yr deals this week) once you factor in what NHS / schools / defence are getting.

Third – and related – within that overall spending envelope what is HMT assuming about the permanent increase in spending from Covid (e.g. will the NHS get a permanent uplift for PPE / T&T, or to deal with backlog non-Covid backlog).

And will this cash be given straight to departments or will HMT maintain control through a central reserve. See p.297 of @TheIFS Green Budget https://www.ifs.org.uk/uploads/CH6-IFS-Green-Budget-2020-Spending-Review-2020.pdf

Wherever HMG comes out on these Qs, it seems certain there will be no return to significant spending cuts, despite the dire state of the public finances. That is the right decision. After a decade of restraint, public services are under strain, and the public won’t wear more cuts

But it leaves the Tories with an important strategic choice. 1st forecast to be unveiled by new OBR Chair Richard Hughes on Weds will make grim reading, w/ both @theIFS + @resfoundation reckoning we'll need a consolidation of c£40b a year by 2024-5 to get borrowing under control

So medium-term the Chancellor has two choices. He can argue that in an era of ultra-low interest rates, we can live with this extra borrowing. Our debt may have soared because of Covid, but interest payments will actually fall. Short term this is politically much easier, clearly.

But it's also risky. Economically, with our debt at levels unseen since the aftermath of WWII, we are highly exposed both to small changes in interest rates and future shocks. As per @t0nyyates, future generations will have their own disasters to fight https://www.prospectmagazine.co.uk/economics-and-finance/if-all-governments-are-borrowing-to-fight-covid-who-is-lending

Politically, while more borrowing is easier short-term, attacking Labour’s plans as unaffordable has - to varying degrees - been a key plank of the Tories' 4 election victories in a row. They won't be able to do that in 2024 unless they have fiscally disciplined plans themselves.

Alternative is to raise tax. Tax revenues as a share of GDP are at historically high levels in the UK, but they are still below the OECD average. Tax rises would be painful for the economy but other prosperous economies have higher tax shares. See here https://www.oecd.org/tax/revenue-statistics-united-kingdom.pdf

Politics obvs v hard: scale of rises needed haven't been seen for decades (see '93/mid-'70s). But there's a strong Conservative case for them: not wasting billions on interest; building capacity for future shocks; not passing debts to next generation

The Chancellor has done a v impressive job in hugely difficult circumstances so far. Going forward, he faces a stark choice with no easy option. This week looks like giving us a big clue as to which road he is planning to take the Tories down /ends