Chancellor will need to confront the good, the bad, and the ugly in the upcoming Spending Review

The Chancellor will need to confront the good (allocating £100 billion of capital spending), the bad (finding £8 billion of further cuts to already stretched public services) and the ugly (a possible downgrade to the economic outlook that would require fresh tax rises, spending cuts or breaking the fiscal rules) in her upcoming Spending Review, the Resolution Foundation said today (Tuesday).

Spending Review 2025 is likely to play a central role in defining the new Government’s first-term record, says the Foundation, as it will shape the quality of public services, while capital investment decisions will affect the UK’s medium-term outlook for growth and living standards.

The ‘good’ challenge will be allocating the £100 billion of capital spending announced in the Autumn Budget. How and where the money is spent will help to determine whether Britain is able to boost economic growth over the medium-term. Here the priority should be improving the UK’s economic and social infrastructure, such as making it easier to live in and commute around major cities.

The Autumn Budget increased day-to-day spending by £43.8 billion a year on average between 2025-26 and 2028-29 relative to plans inherited by the previous Government. But since former Chancellor Jeremy Hunt’s plans implied £20 billion of cuts to unprotected departments, spending for already stretched public services will still remain tight. The Government will need to set out how it intends to cut spending by £8.4 billion after 2025-26, and here departments should be razor-focused on protecting services that improve the lives of poorer families.

Finally, these decisions may be taken against the backdrop of a weaker economic outlook. With official data under-estimating levels of employment in the UK, and therefore over-estimating levels of labour productivity, the Office for Budget Responsibility (OBR) may downgrade its outlook for productivity, which is currently significantly higher than the Bank of England’s forecast. Just a 0.2 percentage point cut in the OBR’s forecast for trend productivity growth would increase borrowing by around £20 billion.

Such a downgrade would leave the Government falling foul of its fiscal rules, unless fresh tax rises or spending cuts are announced.

James Smith, Research Director at the Resolution Foundation, said:

“The upcoming Spending Review is likely to be the big domestic political event of the year and could help to define the new Government’s record in office.

“The Chancellor will need to use the Spending Review to confront the good, the bad and the ugly of UK economic policy. The £100 billion of extra investment announced at the Autumn Budget was hugely welcome, but it will need to spent well to boost growth.

“Even more challenging will be finding further savings from already stretched departments while ensuring that the quality of public services improves over the parliament.

“These decisions may be made even tougher by a deterioration in the economic outlook. That could leave the Government facing an unpalatable choice between announcing further tax rises or spending cuts, or facing criticism for not meeting its rules on sustainable public finances.”