Rachel Reeves gave her Spending Review Statement today. It was largely a tepid affair. She spent a large share of the speech rehearsing Labour’s alleged ‘achievements’, standard Labour speech bingo about VAT on private schools and Liz Truss, an absolutely lame joke about Kemi Badenoch upgrading her own skills and a slightly better joke about Nigel Farage going to the Two Chairmen pub.
The spending announcements were highly non-transparent. As expected, there was £39 billion for social housing. There was a high-profile promise to end asylum hotels (though how asylum-seekers will be housed instead was not spelled out). There was £2bn for the AI action plans and some billions for nuclear power and fusion power research. The defence budget target was set at 2.6% of GDP – way short of the 5% demanded by Donald Trump of Nato members, or even the 3% Keir Starmer has set as an aspiration. It remains to be seen what the Americans will think of that – e.g. could it affect our ability to close out the comprehensive UK-US trade agreement still under negotiation?
There were the usual regional love-signals one always gets in these kind of speeches, with spending on this or that transport scheme. There was a nice-sounding worthy section on funding regeneration of parks and fighting graffiti in deprived areas. There was also a lot of protectionist guff about how important it is to produce in the UK more of what we consume and use here. This led into a long passage in which Reeves seemed to say the word ‘steel’ about twice a second.
The most material announcement was that NHS spending will rise at least 3% every year of this Parliament – twice the 1.5% average real terms growth the OBR forecasts for GDP over the same period. So the NHS will become a much larger share of GDP over this Parliament.
The NHS is also scheduled to become a much larger share of public spending. A 3% annual rise in NHS spending means roughly zero increase in current spending in other departments. She alluded to this, saying a zero-based spending review had identified efficiency savings. She didn’t spell it out in the speech, but individual departments face material real-terms cuts in day-to-day spending over the next three years. For example, the Home Office is scheduled to see cuts of 1.7% per year; Transport cuts of 5 per year; along with DBT and DEFRA cuts. It will be interesting to see whether the Chancellor manages to hold the line and stick to that. Other departments will surely look at the NHS and feel it’s a case of ‘austerity for some but not for thee’.
There was no report from the Office for Budget Responsibility today. This means we’re back to the old school pre-2010 world for such events where the media awaits the Institute for Fiscal Studies and City report verdicts to find the hidden nasties, the overall impact on growth and how the public finances might be changed. Yet the key fiscal message is clear and was clear before Reeves even stood up: the fiscal rules are unlikely to be met as things stand and in the Autumn, Reeves is likely to announce additional tax rises.
A lot of attention will go on the departments seeing day-to-day spending cuts, and questioning whether they will actually happen – especially given that spending cuts Reeves has announced before, such as to the Winter Fuel Allowance, have not survived the political backlash. Will a backlash regarding departmental spending cuts be big enough to make Reeves U-turn there as well?
But even if that doesn’t happen, this Spending Review is another case of overall spending rising inexorably and the NHS gobbling an ever-increasing share of our economy with no apparent prospect of any politician being brave enough to say No.
Our fiscal situation is hopelessly beyond the capacity of our politics to address it. Tax and spending is so high, and so concentrated in unproductive activities such as NHS spending, that it is bearing down on growth, creating a doom loop of insufficient tax revenues to keep our debts from rising leading to increased tax rates leading to lower GDP growth leading to lower tax revenues. The only ways out are fiscal crisis, inflating away our debts or brute luck. What’s my guess? I’m still betting on luck, with new technologies boosting growth enough for us to escape, but crisis is getting nearer and nearer with every month that passes.
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