From the Desk of the Chief Economist The Spending Review

The Spending Review: finally…

For departmental non-capital spending, budget allocations have been set for the three years 2026-27 to 2028-29 although the overall spending envelope had been set at the Autumn Budget and tweaked at Spring Statement. Under capital spending, there’s £15.6 billion for transport schemes in the city regions for the period 2027-28 to 2031-32 covering Manchester, Liverpool, West Yorkshire, the North East, the West of England, and the East and West Midlands. Some £86 billion has been allocated to R&D over four years, although this only leaves spending flat in real terms. There’s £39 billion for affordable housing as well.

Meeting the needs of business

On public sector spending generally, both the efficiency of spending and the quality of public service delivery will affect the climate for business. When we asked businesses what they were looking for from this Spending Review, the top priority was to address efficiency and waste. And there’s a whole section in the Spending Review document on creating a productive and agile state, including through creating a “cost-conscious culture” and harnessing technology. One thing to note is that public sector budgets are perhaps not quite as constrained as depicted. Public sector current spending will rise by on average 1.2% per year in real terms over the next three years, stronger than the preceding three years (average real growth of 0%). But it’s a bit less rosy when it comes to capital budgets. While capital spending may have been boosted relative to previous plans to the tune of £120 billion over the parliament, public sector net investment still declines in real terms by 0.6% per year. The distribution of funds for infrastructure aligns reasonably at least with IoD member priorities of existing rail, nuclear energy generation and roads. But if the government wants to drive up UK investment, it is clearly reliant on the private sector stepping in. Increasing the lending capacity of the British Business Bank and pooling pension funds to unlock efficiencies will help. However, following the damaging tax measures in last year’s Autumn Budget, and the risk that the Employment Rights Bill will increase regulatory burdens on business, there remains a pressing need for a strategy to underpin business investment.

Looking to the Autumn Budget

Across the package as a whole, this Spending Review does tick some boxes for business. The commitment to raising productivity and addressing waste in the public sector is the first chapter. A focus on regional infrastructure investment will help address the UK’s unbalanced growth, and support a more resilient economy. But there aren’t substantive signs of spending restraint nor is there much in there for business beyond the headline infrastructure announcements and overall net investment falls over the SR period in real terms. Business leaders are also interested in policy having a longer term focus and being more stable and for that, we await the Infrastructure and Industrial Strategies – both of which will have 10 year horizons.

Does the SR tell us anything about the Autumn Budget? Even with an overall real-term rise in spending, a small-scale effort to demonstrate commitment to reducing spending via Winter Fuel payments has been almost entirely over-turned less than a year after it was originally announced. This bodes ill for overall public spending discipline. The outlook for tax receipts meanwhile is underpinned by the growth forecast, and there, risks abound. Optimistic productivity forecasts from the OBR, downside risks to growth from erratic US policy, pressure on government borrowing costs and a tight margin against the fiscal rules leave the public finances vulnerable. The Chancellor may find that her fiscal rules undermine the very stability to she seeks.