Good afternoon. It’s the day after the night before and the policy wonks are starting to scrutinise Wednesday’s long-awaited spending review where the British government sets out how the national cake is to be parcelled out over the rest of this Parliament.
In the peroration to her speech, chancellor Rachel Reeves claimed that she had chosen a path of “national renewal” for Britain.
“I have made my choices. In place of chaos, I choose stability. In place of decline, I choose investments. In place of pessimism, division and defeatism, I choose national renewal.”
It’s the chancellor’s job to put the best possible gloss on the hand that has been dealt, but supporting documents published by the Treasury after she sat down tell a rather more pedestrian story about the prospects for rejuvenating the UK.
At the heart of Reeves’ claim is to spend £113bn more on capital expenditure this parliament — investing in roads, railways, hospitals, prisons etc — than her predecessor Jeremy Hunt had promised in the Spring Budget of 2024.
This decision, paid for by a forecast £140bn in extra borrowing over the period, ought to have elicited a great ‘huzzah’ from all those policy wonks who have rightly bemoaned the dearth of public investment since the 2008 financial crisis.
So can we call time on all those stories about the UK not having built a reservoir for more than 30 years, the long waits for grid connections, the hospitals with leaking roofs and the lunar landscape roads? The answer, it seems, is ‘not really’.
The Treasury’s own charts [see 5.4, page 59] put the planned expenditure increase in context. What you see is a sharp increase for the first three years of the parliament, before it then flattens out again.
Compare that to the decade of sustained increases between 2000 and 2010 during the Blair years and suddenly Reeves’ big boast on investment starts to look distinctly more limited.
Reeves revs up health and social spending
As Tony Travers, professor in the government department at the London School of Economics observes, this reflects the fiscal reality of the modern British state, whose resources are increasingly being consumed by the health and social care bills linked to an ageing population.
As the Resolution Foundation analysis explains, in the two decades to 2029, health and social care spending will have risen from 34 per cent of day-to-day departmental spending directly controlled by Westminster to 49 per cent: from a third to a half of all spending.
To put that more into context, while capital investment spending now increases by £45bn between 2023-24 and 2029-30, over the same period, day-to-day spending on health and social care alone increases by £58.2bn. Gulp.
The extra capital spending also means higher borrowing, which as Paul Johnson points out, means more expenditure servicing the nation’s growing debt pile. “The question was always whether the extra investment would bring sufficient benefits to make that worthwhile.” Given the UK’s delivery record on projects like HS2, that is not a given.
None of this is to be churlish — or “defeatist” to quote Reeves — but it speaks to the reality of the situation. These challenges face all advanced economies with shrinking birth rates and sluggish economic growth, but as Travers puts it:
“Government increasing capital expenditure for the state is likely to be a ‘good thing’ but the government is so hamstrung by low growth and the need to spend more on the NHS that the increase in spending is unlikely to be transformative.”
If that’s the macroeconomic reality, the near-term political challenge for a government that has truly struggled to land its message with the electorate is going to be delivering a sense of real-world progress.
Convincing voters to stick with the Labour programme for a second term and not be seduced by the boosterish blandishments of Nigel Farage — or even, who knows, a returning Boris Johnson — will require Starmer to point to actual achievements.
It’s clear cutting NHS waiting lists is going to be top of the bill. Cutting net migration also, but that itself has an impact on the economic growth agenda.
But outside the big bet on the health service, itself reliant on making significant productivity gains in an organisation with ailing infrastructure and an exhausted and disgruntled workforce, the outlook is trickier.
Areas that have done less well
When broken down, the capital spending splurge is heavily skewed to both health and defence and energy, which see a 7.2 per cent and 16 per cent increase respectively over the period — compared with just 1.4 per cent for education and 1.9 per cent for transport.
At the coalface of British life — local government offices, schools, colleges and factories — there is likely to remain a gap between the government’s promise of investment and the rising tide of need that is landing on services already weakened by the austerity decade.
Take schools as an example. The per pupil spend rises by 1.3 per cent annually, but as the Resolution Foundation points out, the effects will be “muted” by the increased free school meals bill and increased special needs spending.
FE colleges get more cash, but this is mostly absorbed by the ‘demographic bulge’ that accounts for the funding for an additional 65,000 places. The Association of Colleges warns that if participation rates keep improving (a good thing) they may find themselves going backwards, despite the nominal increases.
And as the Local Government Association chair Louise Gittins, put it:
“All councils will remain under severe financial pressure. Many will continue to have to increase council tax bills to try and protect services but still need to make further cutbacks.”
All of which is to say that it will be tough, particularly if Reeves has to put up taxes in the autumn, because as the Resolution Foundation plaintively concludes:
“With demand and prices for healthcare rising much faster than the economy, how are we going to pay for it? Either everyone else will be squeezed without end, or the tax side of the equation will have to change.
There are still opportunities for the government to build political momentum — we await the industrial strategy and the skills strategy to come — but as the ‘announcement and review’ phase of their first term comes to close, delivery will now be all.
Britain in numbers
To the point about the gap between rhetoric and reality — and the political risk of overstatement — this week’s chart puts into context the government’s claim that it’s making a “generational” investment in social and affordable housing.
Labour’s spin-doctors did what governments always do on the eve of these events, which was to hand out a “big number” to the press — in this case £39bn — in order to generate a favourable headline, but provide no underlying data by which to check it.
Clearly, given that the market has only delivered 200,000 new homes a year since governments stopped building social housing in large numbers, extra grant funding for housing is vital to delivering the government’s target of 1.5mn new homes in this parliament.
But how transformational is the investment really?
Mercifully, dear reader, you have an FT subscription to help you answer that question. Because as my gimlet-eyed colleagues set out in forensic detail here, the actual story is one of near-flat spending on the Affordable Homes Programme this parliament.
The AHP, which provides grant funding for social and affordable housing, has as much as £3.3bn to spend in the current financial year, according to government officials.
But as my colleagues Jen Williams, Jim Pickard and Jo Cumbo report, the government yesterday refused to provide a breakdown of annual expenditure of the new AHP settlement, which was surprising given it was their flagship announcement.
So we did the maths in any case, and it emerges that actual annual spending will be around £3bn for the remaining years of this parliament — that is more than £2.3bn a year the Tories were spending in the previous programme that runs to 2026 — but not exactly the transformational investment that was billed.
Ben Zaranko, associate director at the Institute for Fiscal Studies, a think-tank concurred with the FT’s analysis, noting that this is why enormous-sounding numbers “should always merit further scrutiny.” Indeed.
Leaving aside the challenge of delivering new homes in an era of higher interest rates, high construction costs and increasing red tape (notwithstanding the government planning reform commitments) there must be political risk to disingenuous announcements that stoke expectations that remain very unlikely to be met.
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