Spending Review

As an occasional commentator, it is easy to pontificate about motives in today’s Spending Review… Having looked at it again, I now think that it is a fairly complex and nuanced response to an environment that has changed – with a deepening of the security crisis in Ukraine, and a clamouring for more targeted funding for the police, and  increasing capital expenditure for the Department of Justice, in the prison building program… For the first time since coming to power Rachel Reeves has exhibited some maturity, not just as Chancellor of the Exchequer, a role that she had held in Shadow position for many years, but as one of Labour’s key figures. Arguably given the flack that she has faced in the past year with the truly misguided increase in Employers’ National Insurance Contributions, had she not made a very credible fist of this Spending Review, then her tenure as Chancellor would become yet more fragile.

“This is not a return to austerity”, she said, as she also spoke about reform, and the need for investment and renewal. The specifics were considered: across the Western world, arguably mirroring the rise in nationalism, the political classes have deemed it acceptable to reduce the Development Aid budget. The most extreme example of this was the dismantling of USAID by the Trump administration. More to say on that another time, however it provides a useful fig leaf for the squeezing of the Foreign Office by 6%, both in capital and day-to-day spending, notably through it’s foreign Aid budget. 

The sophistication of Government financing is often lost on the public, in that I am sure few voters would realise that a large portion of the Foreign Aid budget was actually allocated directly to cover the housing costs of UK illegal immigrants and asylum seekers. With a cancellation of this cost by 2029, as this function is now being brought in-house, with the building of specific accommodation. Commentators repeatedly mis-attribute the funding for these hotels to the Home Office when it actually largely comes from the Aid budget of the Foreign Office.

Debt interest payments at around £131Bn, are now slightly higher than the budget for the Department for Education, itself the second largest spending Government Department, after Health. Yet, like Health, it’s infrastructure is in quite dire straits. Apparently we are to await news on a separate infrastructure and industrial strategy positioning paper in the not too distant future, which should tie these aspects together into a more coherent and hopefully integrated strategy.

By relaxing the rules on Government Debt, to facilitate capital spending, the Chancellor has taken full advantage of the leeway this has afforded her. However she will be pulled back into the cycle of bond market vulnerability, should this spending profile not directly accord with what the Office of Budget Responsibility lays out before the autumn Budget.

The subtleties within the spending shows, in my eyes, the first time I can discern any sophistication in the day-to-day actions of this Government. The technology budget of the NHS will increase by 50% during this review period. Defence spending will rise to 2.6% by 2027, though apparently this also includes spending on the Intelligence Services (which is not universally agreed to form part of the NATO definition of Defense spending; equally with the technical and electronic sophistication of Defense, nor is it condemned) 

Realistically given the wafer thin margin, evident even after the relaxation of Government Debt rules, we now believe there’s a greater likelihood of tax rises in the autumn Budget.

#spendingreview #RachelReeves #capital #infrastructure