Løfte kontra levering: Vil Storbritannias utgiftsgjennomgang redde regjeringen?

by Joseph Hardcastle

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.

Challenging Political Context

The government is in a precarious political position, facing a threat from the right,and a lesser-known, but arguably more politically dangerous, threat to the left flank. The populist right-wing Reform party is snapping at their heels on immigration, and has maintained a sustained polling lead. Meanwhile the Liberal Democrats and the Greens to Labour’s left believe they can capitalise on Starmer’s centrist tendencies and offer a progressive, liberally-spending alternative. Both opposition forces are economically Keynesian, and advocate for greater spending to address their priorities.

This pull from both the left and right to spend on their priorities, such as immigration and increasing NHS funding respectively, may restrain the ability of the spending review to effectively outline a much-needed policy reset. Labour has been cornered into increasing spending which, whilst delivering on pre-election promises, lacks the long-term economic viability to fit into its fiscal rules and truly deliver on the promise of increased economic growth. In this challenging political context, Labour needs to be seen as delivering on the central promises of the government or it will be even harder to rebuild public support, and this push to spend without subsequent tax increases to pay for it may cause future problems.

A Political Turning Point?

Financial markets reacted with indifference to the review, and were more interested in the news, 24 hours later,  of a sharper than expected 0.3% contraction in GDP in April. Not great timing for the Chancellor. If Labour was hoping the Spending Review will reset its standing in the polls, early signs suggest otherwise.

With fiscal rules already stretched to their limit, and political headwinds building, economists and businesses will begin to look towards the Autumn Statement, where Rachel Reeves will need to explain more about how everything will be paid for. The Spending Review has laid out Labour’s intent. But without clearer delivery mechanisms, and a more flexible fiscal stance, this risks becoming less a reset, and more a missed opportunity.