Taking the high-spend, high-tax economy to a whole new level.
Presented by the Chancellor, the Spending Review is intended to set each government department’s budget. This latest review, the first from Rachel Reeves, has pledged to increase Britain’s public spending by 2.3% annually in real terms, meaning the current spending figure of £1.2 trillion per year, which is around £17,000 per person, would rise to over £18,600 per person by the end of this parliament in 2029.
Reeves’s goal, apparently, was to boost economic growth, alongside improving public service delivery and infrastructural growth. It’s not entirely clear how a stream of promises for more (and seemingly endless) spending on local government, devolved assemblies in Scotland and Wales, and over £190 billion ($258 billion) just in “day-to-day operations” of public services will deliver these. It feels like the fallacy of sunk costs writ large.
There are, undoubtedly, necessary spending commitments that need to be made. For example, our population is nearly 15 million more than it was in the early ’90s, but we have not built a single reservoir since 1992. We have what I have referred to as an infrastructural problem, and (being charitable) there are clearly attempts to fix what is practically a 30-year old problem.
This, however, is not the way to do it. The gaping fiscal black hole that is the National Health Service (NHS) is due to widen, with an extra £29 billion ($39 billion) per annum dedicated just to day-to-day operations. That’s actually only about 20 days of the current NHS budget. Alongside this, £10 billion ($14 billion) is being pledged to support the NHS “digital health system.” This is probably the only part of this spending package that makes sense—but the structural problem of the NHS always needing more and more money (which the current Health Secretary criticized before the election) is not being addressed. So, this amounts to nothing more than papering over the cracks.
The government has also committed to pushing ahead with its widely-criticized Great British Energy (GBE) plans, the first renationalization of energy in Britain for nearly 50 years. For those readers unfamiliar, GBE is a government-owned company that was established by the newly elected government in the middle of last year to facilitate the transition to make Britain a “clean energy superpower.” In other words, it’s a way of baking Net Zero into the government’s energy policies. This is a plan that has already caused Britain’s energy prices to soar to the highest in Europe and will only require more and more government spending as time goes on.
Snuck into Reeves’s review was a reduction in spending on asylum seekers by moving them out of hotels, which has been a constant chafing issue to the public since it became public knowledge. But the £1 billion in savings is likely to be outweighed by the subsequent spending on housing subsidies and welfare support that the current system requires.
None of the announcements read as a coherent plan. Instead, they indicate a government that cannot get over the British malaise of committing more and more money in more and more areas that frankly do not need the stifling hand of government interference to flourish. Take AI as an example: in DeepMind, Britain had a world-leading AI company that was truly innovative and promised an exciting future in British technology, so of course it was sold off to Google in the mid-2010s. Now, the government has announced £2 billion for an “AI action plan,” ostensibly to solve a problem it created.
How is all of this going to be paid for? Same as ever—more borrowing and more taxes. The Institute for Fiscal Studies (IFS), an independent think tank examining the (dire) state of Britain’s finances, warns that this spending review is likely to lead to an eye-watering £140 billion ($190 billion) in extra borrowing.
Borrowing in our current economic climate is short-termism on a deadly scale. Our public debt is already an astonishing £2.7 trillion ($3.6 trillion), an unsustainable 96% of our GDP, but as Paul Johnson, Director of the IFS, has warned, this will only lead to higher debt interest costs. If this spending review’s goal was to address and improve Britain’s long-term economic resilience, it has failed.
And while tax rises are almost always a bad idea, these proposals are particularly disastrous at a time when our millionaires are fleeing the country and businesses are pulling out. As I wrote last month, we are already feeling the pinch as our Capital Gains Tax (CGT) receipts have plummeted alongside an exodus of wealth and the wealthy. While it will take a couple months to feel the impacts of this spending review, it could be hammered home by a devastating budget in the Autumn Statement that will take advantage of the supposed need for greater taxes.
You cannot tax, regulate, and spend your way into prosperity, but this government does not seem to recognize that reality. All we can hope is that it will make a U-turn by the time of the Autumn Statement.
