LONDON – Confronted with historically poor polling just months into its term of office, the UK’s Labour government hopes its first Spending Review will help to reset the political narrative. By outlining a four-year financial roadmap, it aims to project stability, assert long-term vision, and reassure both markets and voters. Pledging big public investment against the backdrop of a sluggish economy is a calculated but risky move for a government already under pressure.
This Spending Review, the first since the pandemic, is arguably the most consequential moment of Prime Minister Keir Starmer’s premiership so far. But the economic reality that Labour faces, and its self-imposed fiscal restraints, challenge the government’s ability to deliver on pre-election promises of economic growth.
The Chancellor’s Gamble
The review pledges substantial spending promises: a £14.2 billion nuclear power plant investment, more than £20 billion for new R&D funding, increasing the NHS budget by 3% annually as well as billions in infrastructure investment and almost £40 billion for new affordable housing.
But, contrary to prior speculation, the cuts go nowhere near as deep as expected – with only the Foreign Office and Home Office seeing any substantial immediate cuts. In fact, total departmental spending will rise by 2.3% under the report’s framework. This is despite the accompanying plans to cut all departmental budgets by 15% by 2029, that have not been fully enumerated.
Labour appears to have learnt the lesson from the Tony Blair government that political goodwill in politics is a depreciating asset, and that governments need to front-load the most significant, difficult changes at the beginning of their term to reap the benefits later. However, the increased spending presents a series of ever-looming problems on the horizon for the Chancellor of the Exchequer, Rachel Reeves, in substantially increasing Britain’s vast public sector debt.
The Chancellor is gambling that the review will reinvigorate business confidence and boost economic growth, and that this will negate the high-spending nature of the review. However, she is in danger of making herself a hostage to events beyond her control that may well come to overshadow this gamble.
The “Fiscal Straight Jacket”
Reeves has repeatedly stated her fiscal rules, no rises in income tax and strict limits on borrowing, are “non-negotiable.” This is reflected throughout the review, in what has been described as the Chancellor’s “fiscal straightjacket”.
This rule has been described as hampering the Chancellor from raising the capital necessary to fund the promised investments. High spending without subsequent increases in taxes has sounded the alarm in financial markets, as most analysts predict that taxes in the autumn will have to rise to compensate. The fiscal rules imposed by Reeves, who has yet to rule out any tax rises later this year, are currently at their absolute limit and, like a rubber band stretched too far, if the current course continues without a change then they will pull back and snap. The figures published by the Treasury have also fallen under criticism from the Institute for Fiscal Studies who said that the review “did not appear to be a serious effort to provide any useful information to anybody”, alleging that the figures have been massaged and are a continuation of plans laid out by the previous Conservative government. Labour also finds itself constrained from going further in cutting spending due to the need to protect the ‘flanks’ from political rivals.
