‘Britain Will Be Better off for Rachel Reeves’ Spending Review’

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Politics can be a rough old trade, as Sir John Major once ruefully observed. Even for those lucky enough to make it to high office, a lot of time can be spent taking the blame for things that were not their fault, confronting crises not of their making, or having their best-laid plans overturned by “events, dear boy, events”. The compensation, of course, is that now and again, you get the chance to make the political weather, to nudge the arc of history in a direction of your choosing. Setting out her spending review, Rachel Reeves had one of those moments today. 

The Chancellor knows more than most about the vicissitudes of politics. Her poll numbers are plumbing depths last reached by Kwasi Kwarteng, architect of Liz Truss’s mini-budget. She has spent the past year grappling with the disastrous Tory legacy, a challenge made harder by Labour’s cynical, if understandable, decision to rule out raising most taxes. She has paid a high price for a politically inept cut to winter fuel payments and a hike in national insurance payments that was resented by business. The global economy and bond markets are being roiled by the Trump shock. Everywhere one goes, one hears the lament that she has no plan. 

No one can say that she does not have a plan now. It’s true that the big numbers had been set out in her budget in October, when she announced her updated fiscal rules and the overall “envelope” for departmental spending for the remainder of the parliament. The main contours of the settlement are that current spending will rise by 2.3% a year in real terms, with much of that increase already underway, implying tight limits to come. The big shift was the decision to spend an extra £113 billion on public investment, to be funded by a £140 billion increase in public borrowing. This review was about how that money would be allocated. 

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Reeves’ choices are a valiant attempt to fix some of the most egregious deficiencies in a UK public realm grievously neglected during the reckless Conservative pursuit of tax cuts, while sticking within the constraints imposed by the bond markets. Health and defence were the big “winners”, with NHS spending rising by three percent per year in real terms, and defence spending, now redefined to include intelligence, hitting 2.6% of GDP in 2027. The big losers were the Home Office, the Foreign Office (via the slashed aid budget to pay for defence) and the Department for Environment, Food and Rural Affairs. 

There was a welcome prioritisation of growth-enhancing capital budgets over day-to-day spending. There was £39 billion for a new social house building programme, big investments in nuclear power and clean energy, promises of more money for transport programmes, including Northern Powerhouse Rail and the Oxford to Cambridge east-west rail, and £2.6 billion for a new schools rebuilding programme. The stated hope was that tackling some of the most urgent social challenges, including housing, hospital waiting lists and the asylum backlog, should ultimately reduce claims on the state. A £2.6 billion Transformation Fund has been established to help pay for the much-needed modernisation of the state.  

Nonetheless, three things about Reeves’ plans immediately stood out. The first is that many will question whether these spending levels will prove adequate. In particular, Nato is likely to push for much higher levels of defence spending when the alliance meets at the end of the month, perhaps including a target of 3% of GDP before the end of this parliament. Meanwhile the increase in health spending is less than the long run average of 3.7%, raising doubts as to whether the planned totals will be sufficient to reduce waiting times to below 18 weeks before the end of this parliament. The history of NHS spending suggests not. 

A second concern is whether the Government will be able to stick to its tough current spending limits. The fact that they have already felt obliged to U-turn on the cuts to winter fuel allowance, a relatively minor but entirely rational cut to an unsustainable welfare bill, hardly bodes well. Ministers are already signalling that they will remove the particularly cruel two-child universal credit cap, which will carry a far bigger cost. A rebellion looms on planned cuts to Personal Independence Payments that were supposed to deliver further welfare savings. Any slippage on spending will only increase the likelihood of tax rises at the budget in the autumn. 

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The third question is whether and how soon Reeves’ investment plans might start to deliver improvements to productivity, and thus underpin higher growth. This is the only way out of Britain’s increasingly tight financial bind and is even more urgent at a time when doubts over the health of the global economy and fears over Donald Trump’s trade wars are driving up longer-dated bond yields everywhere. Britain already pays a significant premium on its longer-dated gilts, a legacy of the Truss debacle. That is why Reeves has little option but to ignore those in her party urging her to borrow more and stick rigidly to her fiscal rules. 

Whether Reeves can escape the need for growth-sapping tax rises to placate the bond vigilantes later this year is largely beyond her control. Few in the markets believe they can be avoided. That is the problem with pinning your growth strategy on public investment whose pay-off lies beyond the immediate forecast horizon. But when the inevitable brickbats arrive, Reeves can console herself that she has delivered the biggest social housing programme in a generation, much-needed new transport links in the north of England, massive investment in a new energy system, and a school-building programme. Britain will be better-off for it.