On 11th June, the Government released its Spending Review. Against a backdrop of uncertain economic growth and fragile fiscal position, this review targets growth by front-loading spend and relies on efficiency in day-to-day spending in the long-term.
The Spending Review has come at a critical juncture for the UK Government. Growth is stagnating, the UK economy shrunk by 0.3% in April, and there's a tight fiscal position and stretched public services. Alongside these internal pressures, the UK is increasingly navigating uncertain global trends, including trade disruption and spikes in global conflict, which have implications for interest rates and defence spending. These factors will test the Chancellor’s ability to deliver prosperity against a tough economic backdrop.
The tight fiscal position left the Chancellor with little room to increase current spending (an average increase of 1.5% annually across the forecast period), with the focus of this review being the difficult departmental trade-offs. While Health, Housing, Defence and Education are beneficiaries of this review, other departments will be expected to drive significant cost savings over the period.
The Home & Foreign Offices, as well as Transport (excl. major capital projects) will see real terms funding fall over the period, requiring close scrutiny over the next five years to ensure that the quality of public services is not impinged.
Predictably, the Spending Review focussed on significant capital investments, where the Chancellor has greater fiscal flexibility. More broadly, the changes announced demonstrated the Government’s intention to leverage the capital budget and prioritise “good-debt” as a means of bolstering growth in the medium to long-term. Of the programmes announced, Defence, Transport and Energy / Net Zero all offer strong potential to drive further economic growth through attracting significant private sector investment.
Geographically, the intention to distribute investment increasingly outside of London was clear, with the announcements of Transport links in the North East (to the tune of £15.6b) as well as investment in Nuclear Energy and Schools.
Though the announcements do not change the outlook for the UK’s debt position, the Government will be monitoring fiscal headroom closely as we move into Autumn. The probability that the fiscal mandate is met is likely too low for the Chancellor not to take action and increase tax receipts, especially given rising borrowing costs. That being said, the route to raising funds is less clear. Increased taxation of higher income households would be politically easier, but less direct methods (including reductions in Tax Reliefs across ISAs and Pensions) are the more likely tools for the Chancellor.
For consumers, the short-term impact is likely to be small, but in the longer term, the changes announced will bolster disposable incomes via lower energy bills and improved transport links across regions outside of London. Similarly, we expect that consumer confidence will be boosted by recent rebounds in real wages and optimism following the Spending Review.
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