The Spending Review Marks A New Phase For This Government
4 min read
The NHS was one of the winners at the Spending Review. But unless it becomes more efficient, it will do nothing more than stand still.
Rachel Reeves’ Spending Review announcement on Wednesday was eagerly awaited.
She set out her overall fiscal strategy at the Budget in October, increasing taxes and changing her fiscal rules to allow a modest increase in day-to-day spending and a bigger uplift to public investment spending.
But it was not until this week, 11 months since the general election, that we knew which areas would be prioritised throughout the parliament. At the Spending Review, the government confronted those trade-offs and made its decisions. It now needs to focus on delivery if the choices made this week are to fulfil the promises made in Labour’s manifesto.
The government’s priorities are apparent in where it chose to allocate a major uplift in investment spending. Defence received a big real terms increase to fulfil the government’s promise to reach the 2.5 per cent of GDP target. Elsewhere, the biggest proportional increases were for energy, transport, housing and the business department, all of which will be central to deliver two of the government’s five missions – clean energy and growth. This suggests those commitments are much more than rhetoric for Reeves and Keir Starmer, but the other three missions – those on health, safer streets and opportunity – all look difficult to meet after this Spending Review.
Labour’s election victory owed much to a sense that public services are broken, with many performing much worse than before the pandemic. Reeves’ choices reflect that, meaning the brunt of cuts will fall in other areas like subsidies for rail operators, spending on the asylum system, agricultural spending and Whitehall civil service budgets. But while she managed to protect the budgets of most core public services, the trade-offs on day-to-day spending were much sharper, and the budgets are still tight. The NHS received a 3 per cent a year inflation-adjusted rise, more than other departments, although not especially generous historically. Justice, local government, education and the police also saw their budgets protected with modest increases.
if the government is to succeed, it will need to spend these budgets better than previous administrations.
Departments now know how much money they will have to deliver on the government’s priorities. And those budgets are broadly in line with the government’s missions and other priorities. But if the government is to succeed, it will need to spend these budgets better than previous administrations.
It is one thing to announce big infrastructure spending, but quite another to spend it well. That means managing major projects more effectively. There are countless examples of public infrastructure projects going over time and over budget. Darren Jones, the chief secretary to the Treasury, has promised a more predictable approach, with less of the political tinkering that has beset projects like HS2. A new body within the Treasury has been set up, and a new 10-year infrastructure strategy is expected next week. Even getting spades in the ground before the next election will be difficult on some projects, but if the government delivers effectively, there should be demonstrable signs of progress over the next few years.
The challenge on public services is even starker. Our analysis suggests the NHS, local government and the justice system should have enough funding to match increases in demand over the next few years. But without substantial improvements in the efficiency of how those services operate, that will only be enough to stand still. The public will expect much more than that, given the dire state of many of these services. The Spending Review set out encouraging principles for reform, including a greater focus on preventing demand and joining up services. Those principles will quickly need to turn into concrete change if services are to turn the corner over the next few years.
Attention is already turning to Autumn. Many commentators think further tax rises are likely, especially if the economic outlook does not improve. Reeves’ first round of tax rises last year was unpopular, and further rises could be more unpopular still. Whether this government can succeed hinges on whether it can make those tax rises worth it. Well-targeted and efficiently delivered public investment can strengthen the economy and support the decarbonisation of the energy system, and a reformed approach to public services can transform the public’s experiences interacting with the state.
The Spending Review this week was a major milestone for the government. But the government will not be rewarded for sensibly allocating money – the key is to focus ruthlessly on delivery, to meet its objectives.
Tom Pope is Deputy Chief Economist at the Institute For Government.
