Spending Review: Now the hard work starts

Yesterday Rachel Reeves played a poor hand well but alone these plans will not deliver change people can see by 2029

This was an authentically Labour spending review. The spending limits were the product of Rachel Reeves’ wise decision last year to raise taxes and borrow to invest: the fantasy numbers in the Tories’ pre-election plans are a distant memory, thank goodness. And the allocations made yesterday reflect Labour values and priorities too – national security, clean power, social housebuilding, the NHS and free school meals.

The investment plans in particular bear a firm Labour stamp. No government since the 1960s and 1970s has sustained such a high level of capital spending as a share of GDP. There was enough money for the chancellor to do justice to all the key calls on investment – defence, transport, energy, homes, R&D and the public realm. The only question is whether ministers have a sufficient plan to generate the skills that will be needed.

The day-to-day spending plans make for harder reading. The announced real annual increase of 1.2 per cent until 2028/29 is in line with Labour’s last spending review in 2007 rather than the Osborne austerity years. Nevertheless, it is a lot less than any uplift unveiled since Theresa May was prime minister. It is also frontloaded, so things will get harder in 2027 and 2008.

No Cabinet minister can have been delighted with their departmental deal. Even the three per cent real growth secured by Wes Streeting for the NHS is well below the long-term trend for healthcare. It will fund pay rises and extra treatments for a sicker, older population but not much else. Without reform we cannot expect this uplift to deliver a big reduction in waiting times or transformation in the quality of care.

Across Whitehall there is just enough money to implement key manifesto pledges, such as more childcare and police, and to address urgent problems from prisons to SEND. One bright note is the decent settlement for local government, which shows that Labour understands that precarious state of council finances. With extra funding for poor communities coming, Labour can mount a fightback where Reform is challenging. But there are also risks baked into these numbers, from university insolvencies to public sector strikes. Across the board, it is best thought of as a neutral, standstill budget for day-to-day spending. Public services shouldn’t get visibly worse over the next four years, but the public may not notice much improvement either.

Just one stepping-stone

This is not to blame the chancellor. Given the Conservative legacy and the state of the economy, Rachel Reeves has played a poor hand well. It is especially commendable to invest in long-term renewal that will not yield results for many years. But the Spending Review must be just one stepping-stone on Labour’s path to re-election. These plans alone will not be enough to deliver change that people can see by 2029.

The government now needs to deliver in three other ways to complement the spending review. First ministers should drive through a massive wave of reform to public services. Reeves’ statement set out efficiency targets to reduce some of the post-Covid excess. The government needs to cut costs in ways that genuinely improve services by replacing people with user-friendly technology, and high-intensity services with prevention. The Treasury has created a modest transformation budget to reconfigure some parts of government, but this approach will need to be applied across all public services for voters to see change. Progress can’t just be achieved by centralising functions and pulling national levers which Labour ministers have found don’t always work. Success also requires devolving money, trust and power to local leaders.

Second, ministers need to be more radical in driving growth and renewal in ways that do not cost public money. On growth, Labour is already deregulating planning and boosting pension investment. The economy would leap forward if the party were equally bold in five other areas - energy markets, tax reform, congestion charging, high-skilled migration and EU economic ties. Now is the time to be brave. And ministers should be similarly ambitious with respect to living standards and social wellbeing. After their changes to employment law and tenants’ rights, the next task is significant regulation to tackle the determinants of disease and mental illness, from teenage screen-use to unhealthy food.

Third, the chancellor needs to start preparing for future budgets. The chances are that taxes will need to rise again to maintain spending in the face of Trump’s assault on global economic growth. But Labour also needs to start preparing the ground for tax rises to top-up public spending as the Parliament progresses. Reform of pension tax relief, a tax on high-value properties and more freezes to tax thresholds should all be examined. And, after being left out this week, London should be allowed to raise its own money to invest through planning gain charges and a tourist tax.

Such fiscal flexibility matters in part because public services will need more money before the next election. But the main reason is because Rachel Reeves has not yet brought forward policies that will meaningfully boost living standards for low-income Britain, particularly working families struggling to get by. She will need money to soften disability benefits cuts, tackle child poverty and make work pay. These are not just policies that deliver social justice, they will also help see off the Reform challenge in working-class seats.

Yesterday was a good day for Labour but it was only the end of the beginning for this government. Now the hard work starts.

This article first appeared on LabourList