In just ten days, on June 11, the government will release its comprehensive spending review, marking the first under the leadership of Chancellor Rachel Reeves. As attention builds ahead of this event, it is important to analyze the implications and context surrounding the review.

For economists, the spending review resembles a mystery where the resolution is already largely known. The maximum level of spending, referred to as the spending “envelope,” was established by Reeves in her budget last October and further refined in her spring statement in March.

According to the Office for Budget Responsibility (OBR), this indicates a 2 percent real increase in overall spending for the year 2025-26, before dropping to 1.5 percent in 2026-27 and 0.9 percent for the subsequent two years.

Next week, details on how the available funds will be allocated will be unveiled. However, with NHS spending taking a significant share, budget allocations for many other departments are expected to be minimal, reminiscent of the austerity measures from the 2010s. Additionally, the projections suggest that public sector net investment will actually decrease in real terms by 2028-29 compared to 2024-25, creating further challenges for infrastructure projects. This scenario illustrates the government’s push for increased pension fund investments in infrastructure.

While the spending review outcomes are anticipated, it’s worth discussing how we arrived at a point where demands for increased public spending and reversals of prior cuts are so pronounced, especially when current government expenditures are already substantial and tax levels are at historical highs.

This situation largely stems from heightened public spending during the pandemic, which has remained elevated post-crisis. Currently, total government expenditure is projected at £1.35 trillion, constituting 45 percent of GDP. In comparison, spending in 2019-20 was £889 billion, or 39.6 percent of GDP. This suggests a difference of approximately £150 billion to £200 billion more than if spending had merely grown by 1 to 2 percent annually in real terms, adjusting for inflation relative to pre-pandemic levels.

A significant factor contributing to this increased expenditure is the surging costs of debt interest. In 2019-20, the government spent £39 billion on debt interest, but this year’s projections depict a drastic rise to £111 billion, with similar levels expected in the coming years.

Moreover, welfare spending has also risen, now constituting nearly 11 percent of GDP, compared to just over 10 percent in 2019-20, reflecting an approximate £30 billion increase. While other expenditures have escalated, particularly in the NHS, the performance improvements have not matched this rise in funding.

Delving deeper, political unpopularity surrounds any attempts to curtail spending, and discussions have emerged about reversing cuts, such as the proposed elimination of winter fuel payments for most pensioners. The two-child benefit cap, introduced eight years ago, is also being reconsidered, along with recent cuts to disability benefits outlined in the spring statement.

Public perceptions of fiscal responsibility have shifted over the decade. A decade ago, the Conservative Party under David Cameron won a surprise majority in the 2015 general election, despite years of austerity, owing to voters’ concerns about government debt and their trust in the party’s ability to manage it. Currently, public sector net debt exceeds £2.8 trillion, more than 80 percent greater than it was then. Society seems caught in a cycle of increased spending and reliance on debt, with strong resistance to higher taxes and an unwillingness to make spending sacrifices.

The forthcoming spending review is likely to unfold along predictable paths, with each cabinet minister advocating fiercely for their departmental interests. In this context, political success is often measured by maximizing allocation from the Treasury, reinforcing a system that biases towards increased spending.

Reform UK leader Nigel Farage has capitalized on this discourse, now advocating for the reinstatement of winter fuel payments and the removal of the two-child benefit cap, alongside numerous other unfunded promises.

Although criticisms of the Conservative Party and its leadership have been levied, it is noteworthy that Shadow Chancellor Mel Stride chose not to support the call for the removal of the two-child benefit cap. In public statements, he articulated the rationale for its introduction in 2017, aiming to deter families reliant on benefits from having additional children.

While it may not be the most compassionate policy, Stride deserves commendation for his commitment to it, even when facing political backlash.

The current climate evokes a sense of nostalgia for the days when two chancellors, Rishi Sunak and Jeremy Hunt, managed the economic landscape, alongside Stride, who was focusing on workforce welfare. Together, they aimed to address the increase in long-term sickness benefits that predates the pandemic, especially among individuals with mental health issues. Hunt consistently emphasized that his stringent spending targets were feasible with a genuine commitment to improving public sector productivity.

We cannot predict the crises that may have emerged had Sunak remained party leader following last year’s significant electoral defeat, but there was a noticeable absence of the looming fiscal emergency that characterizes the current public financial landscape.

With the spending review scheduled for June 11, Reeves faces the challenging task of crafting a budget that satisfies her party, resonates with voters, reassures the markets, and avoids igniting speculation of further tax hikes in the autumn. Achieving even a couple of these objectives would be a significant accomplishment, while achieving all four may seem nearly impossible.

PS

I recently attended a tribute concert for Creedence Clearwater Revival, known as Clearwater Creedence Revival, held at the O2. The musicians demonstrated remarkable skill and energy, debunking any notion that age diminishes performance.

This experience aligns with recent research from economist Kevin Daly at Goldman Sachs, which highlights a positive narrative surrounding global aging. While the anticipated demographic shift poses challenges, improvements in life expectancy from 78 to 82 and an extended median working life contribute positively to employment rates, rising from 46 to 48.3 percent.

As dependency ratios fall, contrary to earlier concerns, this trend suggests that an increasing number of older individuals are extending their working lives, which is promising. The paper illustrates that while numerous pressing issues confront society, an aging population is one less cause for concern, underscoring the value of longevity.

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