The truth behind the Spending Review headlines
Former New Labour adviser and Bradshaw Advisory NED Lord Stewart Wood looks at the hidden messages within last week's Spending Review.
Spending Reviews are deceptive things. The Chancellor’s speech announcing the review was, by its nature, a list of large numbers and big projects brimming with long-term policy ambitions, telling voters across the country of new goodies that governments will bring your way.
In reality, of course, the Spending Review is not about new money at all. The pie of total public spending is baked at the previous Budget, and the Spending Review simply tells us who is getting what sized slices over the next few years.
But Rachel Reeves’ first Spending Review last week was fascinating in what it told us about her priorities, her politics and the problems ahead.
Her speech was cloaked in the usual smoke and mirrors that all Chancellors bring to Spending Reviews. Nominal and real figures jumbled up, spending increases without the relevant time period, heroic and unexplained assumptions about efficiency savings - the Treasury’s well-honed presentational tricks were on good form. But once the dust had settled and the documents appeared, what emerged was a 3-year Spending Review that was an intriguing mixture of continuity with the Chancellor’s focus during her first year in office, combined with striking departures in tone and strategy.
Its main theme was prioritising capital over current (day-to-day) spending. Overall investment spending will increase by 1.8% in real terms from 2025-6 to 2028-9, compared to 1.2% for current spending (a staggering 90% of which will go to the NHS).
Of the handful of Ministers that emerged happy with their departmental settlements, all did so because of the generosity of their capital allocations. Many of these increases in public investment were focused on the growth agenda that has become the Chancellor’s mantra, and can be seen as the spending counterparts of her supply-side reforms of simplifying planning and boosting pension fund investment (especially money for AI & R&D, £14bn for Sizewell C, £15bn for local transport projects and £40bn over 10 years to transform affordable housing).
Yet half the total increase in investment spending will go to the Ministry of Defence, a priority that has been forced on the Chancellor by world events. And some of the crucial ingredients of rising productivity – in particular skills, universities and local government – did not get the boost that their economic significance merits.
When it comes to day-to-day spending, the numbers are considerably tighter. Consistent with the Government’s overwhelming public service priority - and on top of the huge increase ploughed into health spending last summer - the NHS was the winner. This reflects Starmer and Reeves’ big gamble that significantly reducing waiting lists is the key public service improvement that will persuade voters at the next election to vote Labour. Although even these levels of spending may not be enough for patients to feel the difference, with NHS productivity in decline and above-inflation pay claims on the horizon eating into budgets.
Other departments were less fortunate. Day-to-day spending was cut in real terms for DCMS (-1.2%), the Home Office (-1.7%), DEFRA (-2.7%), & the Foreign Office (-6.5%). Departments receiving sizeable growth-related uplifts for infrastructure spending found their current spending settlements similarly reduced – Housing & Local Government (-1.4%), Business & Trade (-1.8%), and Transport (-5%). Even the schools budget is being frozen in real terms once the expansion of free school meals to 500,000 more children is excluded. All of which will make for a grumbling Cabinet for the next few years, struggling to unveil shiny new initiatives as the next election comes into view.
Underneath the surface, all these numbers rest on some eyebrow-raising assumptions about saving money.
The Treasury claims that £14bn in efficiency savings can be delivered over three years, a figure that Paul Johnson of the Institute for Fiscal Studies criticized as being scarcely credible. In an eye-catching pledge, the Chancellor also announced that the use of hotels to house asylum-seekers would be ended by 2029, though as yet without a plan to deliver on such an ambitious pledge.
Further unaddressed pressure points include uncertainty about how much of the thin settlements will be consumed by public sector pay demands, higher education (40% of universities are currently in deficit), and police and probation officers’ concerns that Treasury funds leave them insufficient resource to cover increased responsibilities. The ambition to transform Britain’s woeful social care system through the Casey Review doesn’t look like it will have a budget to match its recommendations this side of the election.
But perhaps the biggest potential torpedo in the side of the Spending Review comes from one of its big winners: the Ministry of Defence. The government has funded an increase in defence spending to 2.5% of GDP by 2027, but with no further increases beyond that, just as NATO looks set to demand its members hit 3.5% of GDP or more by the early 2030s. It is not inconceivable that a No.10 under pressure from NATO in Brussels and Trump in Washington may soon be asking No.11 to dip into their pockets once more.
Defence aside, the priorities for the spending review – growth through capital investment, keeping faith (against Treasury instincts) with Starmer and Miliband’s green agenda and going big on NHS funding – have been the government’s domestic priorities since the last election. What has changed in the last few weeks, however, has been the politics surrounding policy and spending choices.
Back in the Spring, the Government was holding the line on cuts to Winter Fuel Payments, no concessions on the two-child benefit cap, announcing major reform of disability benefits and unveiling backing for major infrastructure projects that were focused on the prosperous south east (notably the Heathrow 3rd Runway and the Oxford-Cambridge corridor). The local elections in May shook this approach to its core, devastating Labour in many of its former Red Wall heartlands, and ushering in Reform UK as the greatest political and ideological threat to the still-young Labour Government.
Angry backbench Labour MPs from the north, north-west and Midlands returned to Westminster demanding a reversal on welfare cuts and a focus on projects aimed at their areas. Both the Prime Minister and Chancellor were perhaps justifiably accused of excessive doom-and-gloom rhetoric, rather than setting out a vision of the kind of country they wanted to build. The resulting turnaround in government body language since May has been dramatic. Benefit cuts are all being at least revisited and at most reversed.
The Spending Review unveiled a range of transport and other infrastructure projects located outside of London with Rachel Reeves promising to challenge the Treasury ‘Green Book’ orthodoxy that has skewed public investment towards London. It is in many ways the most Labour moment that the Government has had - a return to the years in Opposition when Shadow Chancellor Rachel Reeves, inspired by Bidenomics, trumpeted the virtues of a more statist approach to economic policy. As Tom Clark noted in Prospect this week: “The Government has finally noticed that it can no longer pretend, at least on economic terrain, that voters to its left do not exist. Instead it has decided to take the public expenditure fight to the state-slashing right”.
Labour MPs will hope that the Spending Review marks a turning point in the Government’s confidence about their economic narrative. In its favour, the Spending Review has given the government multiple large-scale capital commitments that testify to their seriousness about growth. The NHS has been given the best chance that resources allow to turn the corner. And if interest rates continue to fall over the coming year, a Government that is seen to be building for the future while the cost of living crisis eases may not be a Labour pipe dream.
On the negative side, however, the world is getting more not less volatile. Reeves’ spending ambitions already fit extremely tightly within an envelope that may well have to be reduced in her November Budget, when the OBR forecasts recast the fiscal straitjacket within which she has to work. Some argue that, now that three years of spending commitments have been laid out, it is more likely that any enforced changes in fiscal policy later this year will take the form of tax rises rather than spending cuts.
But whatever way you cut it, until the difficult November Budget is completed, the final details of the Spending Review will be seen across Whitehall as a serious plan rather than set in stone.