Last week the government published its Spending Review, which set out how both investment and current spending will be allocated across departments over the next few years. It covers the period up to 2028-29 for current (or day-to-day) spending, while on capital spending (investment) it extends to 2029-30.
While the Chancellor set the overall envelope for both types of spending at last autumn’s Budget, this Spending Review was her opportunity to divide this up and show where the government’s priorities lie over the rest of the Parliament. In our last edition, we covered the Review’s context and background. This week we’re diving into what the decisions on both current and capital reveal about the government’s economic strategy.
As a reminder, the political and economic backdrop to this Spending Review has been sub-optimal to say the least. Low growth, sticky inflation and turmoil in the global economy have seen the OECD and IMF downgrade their forecasts for the UK economy.
Meanwhile cuts to disability benefits – a decision the Chancellor made partly to meet her self-imposed fiscal rules – have shown that the UK’s fiscal framework continues to incentivise short-term book-keeping. Some have blamed the backlash to these cuts and the largely reversed cuts to the Winter Fuel Payment for Labour’s poor performance in last month’s local election. With disquiet brewing on the government’s backbenches, polling in the run-up to the Spending Review also revealed that a clear majority of Labour MPs wanted an economic reset to boost investment and avoid damaging spending cuts.
Rachel Reeves made investment the key theme of the Spending Review, asserting that ‘in place of decline, I choose investment.’ In fact she mentioned investment a whopping 50 times in her speech, tying it variously to ‘opportunity’, ‘security’, ‘stability’ and ‘renewal’. After criticism that Labour’s messaging has been muddled since the general election last year, such a strong focus on investment suggests they have decided to place it at the centre of their refreshed economic narrative. Housing Secretary and Deputy Prime Minister Angela Rayner confirmed this at the weekend, saying that Labour are ‘staking everything’ on investment to reverse Britain’s decline.
The headline numbers seem to back up Reeves’s and Rayner’s assertions: capital (CDEL) spending is on course to rise 3.6% a year between 2023-24 and 2028-29 – over twice the 1.7% annual increase in day-to-day (RDEL) spending. And looking at where this investment has been focused, Rayner’s department has done well out of the Spending Review. £39bn was allocated to the Affordable Homes Programme over the next 10 years. The settlement has been widely welcomed in the housing sector, with the housing charity Shelter calling it a ‘watershed moment in tackling the housing emergency’. However, the funding may be less generous than it initially seems. Analysis by the IFS and the Financial Times finds it is heavily backloaded, with spending for the next few years – essentially up until the next election – barely higher than the current Affordable Homes Programme budget.
DESNZ. Elsewhere in Whitehall the big winners included the Department for Energy Security and Net Zero (DESNZ). Its settlement, described as a ‘quiet victory’ for Ed Milliband, included a 16% increase in average annual real growth over the Spending Review period – the highest of any department – as well as billions of pounds of investment in nuclear energy.
Defence. Following major geopolitical developments and the Prime Minister’s commitment earlier this year to increase the defence budget to 2.5% of GDP, it’s no surprise that defence also saw a significant boost in the Spending Review. By 2029-30, the department’s capital budget will increase by 7.3%.
Transport. There were also some wins for the Department for Transport, with £15.6bn confirmed for city region transport outside of London. This includes £1.5bn for trams and buses in South Yorkshire, £1.6bn for the Liverpool City Region, and £1.8bn to extend the Newcastle to Sunderland metro.
The settlement for day-to-day spending was much tighter than for capital spending, rising just 1.7% per year. Many departments saw significant cuts, including the Department for Transport (5%), the Department for Environment, Food and Rural Affairs (2.7%) and the Home Office (1.7%). The Foreign, Commonwealth and Development Office has the steepest cuts – current spending will fall by an average of 6.9% each year.
Of course, cuts have real-world consequences, and those to the Home Office and Ministry of Justice budgets have been highlighted as a particular threat to plans to tackle violence against women and girls (VAWG). The End Violence Against Women Coalition, a charity, has said the Spending Review ‘fails women and leaves survivors at risk’.
The cuts to the overseas aid budget have also been widely criticised and 'will come back to haunt us' in the shape of increased global instability, according to Conservative ex-International Development Secretary Andrew Mitchell.
A health service with a country attached? The NHS has been described as the “big winner” of the Spending Review, accounting for around 90% of the increase in day-to-day spending (although its capital budget is projected to stay flat). That said, this 2.8% per year boost still falls short of the NHS budget’s 3.6% historic annual growth rate – although it is significantly higher than the 1.7% average over the 2010s.
While the government was unsurprisingly keen to focus on the genuinely positive story it has to tell on investment, capital spending only accounts for a fifth of the total Spending Review envelope. Given its often long-term focus, investment can also take time to bear fruit, which also means it will take time for the public to feel the benefit. It’s also important to remember that the £113bn of extra investment allocated at the Spending Review was only enough to avoid the deep cuts pencilled in by the previous government’s spending plans. It will take much more to properly repair the damage caused by decades of underinvestment: the UK’s level of public investment has been below the OECD average for over 20 years.
On the current spending side, there are reasons to be worried. The Resolution Foundation points out that Labour’s decision to increase current spending for health, defence and education means that ‘spending on the rest of day-to-day public services will fall slightly in real, per-person terms between 2025-26 and 2028-29 – by 1.3 per cent on average, the equivalent of cuts of £2.4 billion by 2028-29.’ Yet improving services remains a priority for the public: research from Persuasion UK shows that ‘rebuilding public services in particular remains central to Labour’s mandate’, and that committing to significantly increase funding for the NHS and other front-line services is the policy that would be most likely to make the average Labour voter stick with the party, reducing the likelihood of them voting for either Reform or the Green party.
And should growth slow even more, tax receipts and the government’s day-to-day budget will be further squeezed. The Chancellor’s current fiscal rules – which she remains wedded to – do not allow for borrowing for day-to-day spending. In this scenario, she would then face a choice between even harsher cuts to departmental budgets, and raising taxes at the Budget in autumn. Tax Justice UK has argued that “there’s plenty of money in Britain to… avoid damaging cuts” and that the government must now consider wealth taxes. This approach is winning support from an increasing number of sources – including from within the cabinet, according to recent reporting. The Treasury remains sceptical, but if economic forecasts continue to sour it may be forced to reassess that scepticism.
Note to readers: NEB will be published fortnightly rather than weekly over the summer months
Poverty rates. Progress on solving poverty in Wales has stalled over the last 20 years, according to a new report from the Joseph Rowntree Foundation. Headline rates of poverty have flatlined since the 1990s, hovering around 22%, or 700,000 individuals. Poverty has also been deepening, with nearly half a million living in deep poverty, and 310,000 in very deep poverty.
Disability and poverty. The All Party Parliamentary Group on Poverty and Inequality has also published a new report, which finds that disabled people are twice as likely to live in poverty as non-disabled people. The report argues that the proposed changes to disability benefits risk making a dire situation far worse, urges an immediate withdrawal of the “catastrophic” proposals and calls for a fairer social security system co-designed with disabled people.
Climate finance. ‘A major root of inadequate climate finance is not a lack of affordability but countries’ weakened tax sovereignty’, the Tax Justice Network argues. Implementing a minimal wealth tax and making multinational corporations pay the tax they’ve dodged ‘could cover the majority of countries’ climate costs, and leave most with billions in tax revenue to spare towards public services’.
Capital flight? The Tax Justice Network has also dug into the myth that millionaires are exiting the UK, and found that no exodus has taken place.
Bus investment. “Good buses drive a strong economy, healthy environment and thriving society”according to Marcus Johns and Dr Maya Singer Hobbs from the Institute For Public Policy Research. They recommend more investment for buses, alongside better devolution and a bigger focus on decarbonisation.
Pay inequality. The pay gaps between CEOs and their employees at the UK’s largest companies remain as wide as they were 5 years ago, according tonew analysis from the High Pay Centre. Their research shows that a CEO of a FTSE 100 firm is paid 78 times more than their median employee.
