Our economy remains in a perilous state
With the long-awaited Spending Review, the UK Chancellor finally gets to reveal the goodies rather than simply be the baddie. We have been led to expect the Chancellor will announce a number of significant infrastructure projects across the country to boost energy, transport and defence, along with a smattering of extra commitments to widen the impact of day-to-day expenditure in hospitals, policing and prisons. But there will be one question lurking behind every line item, behind every pound pledged and every Treasury footnote: how are you going to pay for it?
Spending Reviews didn’t use to be like this. They were Whitehall affairs, wrapping up the world of Westminster but rarely troubling the man on the Clapham Omnibus. Overall tax and spending decisions are taken at the annual Budget, with spending rounds less frequent as they cover anything up to four years. With the big numbers agreed in the budget, the spending review is more of an opportunity to deliver political priorities and instil discipline between competing government departments. We shouldn’t need to ask how it will be paid for, as that should have been dealt with at the Budget.
The fact there is such a focus on this review gets to the heart of the perpetual problem facing Rachel Reeves. Can she deliver productive growth whilst delivering on public services? She had to convince the market of the former whilst rewarding disgruntled voters with the latter – all with the straitjacket of the highest debt-to-GDP ratio for sixty years, swollen by pandemic-era government debt issuance. Every basis point increase in Gilt yields makes the job harder.
They say you can’t please all of the people all of the time. So far, the Chancellor has failed to please anyone, any of the time.
Markets have charged a higher risk premium on UK government bonds; voters have been upset by the removal of the winter fuel payment; businesses have been hurt by the rise in national insurance; farmers have hated the inheritance tax changes; and her own MPs are now baulking at threatened cuts to disability payments. All of these unhappy policy tweaks have been to satisfy the OBR that she could meet her fiscal rules whilst also meeting manifesto pledges not to raise the big three taxes: income tax, national insurance and VAT.
Boxed in on all sides
The Spending Review is an opportunity to redress the balance. There is to be £14bn investment in the Sizewell C nuclear reactor and £2.5bn towards creating the first small modular reactors. £15bn is due to go on local transport projects mainly in the North and the Midlands, including trams in Manchester and Birmingham. Over the next four years the government will spend £86bn on ‘research and innovation’.
The focus on investment is no accident. The Chancellor gave herself a little more leeway on her fiscal rules by adjusting the definition of public sector debt so that it would look at the “net financial liabilities”, or offsetting the liability with the asset created by the investment. So if £10bn is borrowed to create an investment asset worth £10bn, that cancels out and is not included in the calculation of the overall level of debt. This allows the government to invest in improving the productive capacity of the economy without breaking their fiscal rules, something that they hope will please financial markets – and please voters, as with investment usually comes jobs.
But it takes time for the impact of such investments to be felt. A spade in the ground is a good start but nuclear power can’t be switched on overnight. Meanwhile the rise in employers’ national insurance has already kicked in and the latest jobs numbers suggest it has already crimped hiring. If businesses fear adding workers because it increases costs during an uncertain climate for growth, then consumers retrench over fears of job losses. We have already seen a sign of this in the latest BRC retail sales survey which showed “consumers put the brakes on spending with the slowest growth in 2025 so far”.
Consumers, like markets, are evidently unconvinced of the promised sunlit uplands ahead. It doesn’t help when the government already unpicks its own past decisions, with the u-turn on the removal of winter fuel payments. If that can be done, then why not pay rises for junior doctors? Or new schools? Or more police officers? And if it is going to be done without, as the Treasury pledges, leading to “permanent additional borrowing”, then what spending must be cut, or tax must be hiked, instead?
This means that once the Spending Review is out of the way, attention will inevitably turn to the Autumn Budget and what horrors it might contain if the government’s plan for growth doesn’t pan out. From markets to voters, from Labour MPs to the OBR, Rachel Reeves is boxed in on all sides. She will come out fighting but as Mike Tyson once said, everyone has a plan until they get punched in the face. Without a credible plan, the blows will just keep coming. Credibility once lost is hard to regain.
Helen Thomas is chief executive of Blonde Money