Labour bets big on an infrastructure-led recovery

Good morning. When Keir Starmer became leader of the Labour party, the thing he would say privately is that he had to be Neil Kinnock and John Smith who turned the Labour party around after its nadir in 1983, and Tony Blair, who led Labour to victory in 1997.

Having done so, Starmer now has to be Margaret Thatcher, John Major and Tony Blair. The country has sluggish economic growth: figures out today showed GDP fell by 0.3 per cent in April, the steepest drop in almost two years. Britain’s economic model has been in deep trouble since the financial crisis (which means the government needs to perform a revival comparable to the one the Conservatives achieved from 1979 to 1997), while public services have deteriorated (which means Starmer’s administration needs to achieve a transformation comparable to the one New Labour managed from 1997 to 2010).

One reason his government is unpopular is it has appeared to be overwhelmed by that dual challenge. Were the priorities and plans set out in the comprehensive spending review yesterday enough, and what are the risks? Some thoughts on that in today’s note.

Dual faces

Rachel Reeves has set out the government’s spending plans from now until the next election, betting big that a programme of big spending on infrastructure (funded by borrowing) coupled with fairly constrained spending on public services (paid for by taxes) will turn around Britain’s prospects, or at least create enough of a sense of forward momentum that people re-elect the government.

The risk here is that while there is largesse in infrastructure policy, these are pretty tight budgets when it comes to social spending.

Remember this is just resource departmental expenditure limits (RDEL). Government spending is split into two parts: departmental budgets (RDEL), which are fixed, and annually managed expenditure, which covers more unpredictable costs such as unemployment benefit, which fluctuates due to forces outside the government’s control.

That’s why the DWP emerges as a loser and is a relatively small chunk of this chart of day-to-day spending. (My thanks to Georgina for all of today’s data visualisation, which you can toggle on the website.) Upward pressure on that department’s budget is still a real challenge for the government. But the big winner here is the NHS, with health and social care set to account for coming up to half of all government spending by 2030. We are becoming, as the Resolution Foundation’s Ruth Curtice puts it, “a National Health State”.

These are big numbers, in historic terms. What this means is that capital spending is set to rise a lot in this parliament, while day-to-day spending on public services outside the NHS is set to be very tight indeed. Most significantly, as planned, that tightness in day-to-day expenditure is pencilled in for the end of the parliament.

What has consistently happened these past 14 years is that tight spending settlements, promised for the end of the parliament, have not arrived. That’s part of why the UK keeps overshooting its budget forecasts (very handy explainer on that by Sam Fleming and Valentina Romei here).

Labour’s big bet is that an infrastructure-led recovery will emerge in time to re-elect the government and ease some of these tensions, and that its cabinet ministers are sufficiently committed and effective public sector reformers to get more from less.

Now try this

I saw The Ballad of Wallis Island. Frankly I had not planned to see the film, because, as Danny Leigh puts it in his review, “the film is a British comedy low in budget and high in whimsy, a combination I for one have learned to dread”. But I saw on Bluesky that Robert Shrimsley had seen it and liked it, so I thought I’d give it a go.

I’m really glad I did: it’s an absolutely delightful film. Funny, sad, cleverly done, with a wonderful soundtrack. Do go and see it if you can, I can’t recommend it enough.

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