Described as a pivotal moment in British economic policymaking, the Labour government aimed to translate its economic philosophy into tangible fiscal actions, scrutinizing every aspect of public spending and reshaping government operations for the foreseeable future.
So, did the spending review meet its lofty expectations?
The straightforward answer is no. However, anticipating significant changes and groundbreaking shifts from spending reviews might lead to disappointment. In such cases, it’s best to take a moment to relax in a quiet room.
The overarching framework for this review had been established well in advance. The projected trajectory of government expenditure in the upcoming years had been evident for some time (in essence: minor increases in day-to-day spending; substantial boosts in investment).
Latest Financial Update: Will there be a need for tax hikes in the upcoming budget?
The key question remaining was how the allocated funds would be distributed. The outcome held little surprises. Similar to previous reviews in recent memory, the primary beneficiary was the healthcare sector, expanding not only in absolute terms but also in its share of public expenditure.
As anticipated, the largest recipient of investment spending from the Chancellor was defense, primarily to fulfill the approximately 2.5% of gross domestic product (GDP) commitment made by the prime minister earlier in the year.
Additional funds were allocated to transportation, although uncertainties lingered regarding the potential requirement for more resources for HS2, especially when it undergoes a financial «reset» (meaning: costs will exceed initial estimates) next year.
In essence, there were no major revelations. Nevertheless, this review was never intended to revolutionize the governmental landscape, unlike the reviews overseen by Gordon Brown during his tenure as Chancellor at the turn of the millennium. Those reviews typically raised day-to-day spending by about 5% annually, whereas this one only saw an increase of less than 2%.
Further Reading:
Key Highlights from the Spending Review
Answers to Your Spending Review Queries
This scenario sheds light on the constraints faced by the Chancellor. Presently, the national debt surpasses its 2000 levels significantly. Similarly, the tax burden, debt interest expenses, and healthcare costs for an aging population have all escalated.
When juxtaposed with the Chancellor’s fiscal regulations (which restrict excessive borrowing except for investments), the dilemma becomes apparent. There is limited flexibility for additional expenditures.
An abrupt economic downturn (e.g., due to a trade conflict) could jeopardize compliance with the rules. Hence, this spending review fails to resolve the looming question: will tax hikes be necessary to balance the books? With predetermined expenditure levels in the upcoming years, options are dwindling in case of unexpected challenges.