Spending Review Special | Doctors and Drones

Hi all,

I continue to be hugely impressed by the work of RF staff, not least as they digested the Spending Review (SR) at such incredible pace this week. We’ve rustled up our TOTC take on the SR for you, but I wanted to get a bugbear off my chest before we get to the charts.

It looks like we were sadly mistaken in our analysis last month when we assumed money had been set aside for employment support. We learnt this week that it is actually just recycled DWP efficiency savings, not new money.

Now clearly, if DWP deliver those efficiency savings and invest it in employment support, that is a good thing. But it seems unlikely to deliver the “substantial increase in either level or effectiveness of such activity” that the OBR rightly reminds us is necessary to “increase the level of potential output materially”. This looks like continued efforts to improve the effectiveness of job centres, not a significant increase in the resources available to do so.

Have a great weekend – I’ll be camping through the thunderstorms….

Ruth

Chief Executive
Resolution Foundation

Cash was splashed…just not yesterday.

The Chancellor has faced criticism on two contradictory fronts: accusations of unsustainable spending from some and outcry about a return to austerity measures from others. So, what’s going on?

Basically, the Chancellor *is* allocating significantly more funds than Jeremy Hunt committed to (the bars second from the right) back when he was in charge. She is also letting spending grow by more than it did in the 2010s. This definitely isn’t austerity.

*But* that spending has been front-loaded, as you can see in the steep drop-off between SR 2024 and SR 2025. So, after boosting budgets / filling a blackhole (delete according to taste) in the autumn, the spending allocated on Wednesday for the next three years grows at a historically slow rate – tighter in fact than the past three Spending Reviews  by the last government. These slower growth rates do start from a higher level of spending, so that by the end of this decade the overall level of real per-person departmental spending returns to pre-austerity (2009-10) levels. But can the Government return public service performance to those levels too?*

*For the aficionados, this isn’t easy, of course, because the economy got at least a little bit bigger in the meantime and Baumol’s cost disease is real….

The long wait for productivity

There’s a similar confusion around spending on the NHS. While 90 per cent of the new funding allocated by the Chancellor went to the health service –  this is widely perceived to be insufficient to transform its ailing performance.

How can the NHS get nearly all of the new spending, and it still not be enough?

Clearly, rising demand is a big part of the answer. We have previously estimated that half of the increase in real health spending between 2009-10 and 2024-25 is explained by demographic change. On a national (and individual) level, we’re getting older – and older people tend to cost the NHS more.

NHS funding is historically high (and health will be half of all departmental spending by the end of this Parliament) reflecting that growing demand. This chart – showing growth rates in spending and change in NHS waiting times – looks into historical precedent for higher health spending improving performance. The last time waiting times fell was after a period of sustained high spending. The settlement this week is somewhere between what it got then and the average in the 2010s.

With a sluggish economy and a greying population though, we basically can’t afford to accept that cash is the only answer – not least after the collapse in NHS productivity post-pandemic. The autumn saw a chunky uplift in capital investment for the NHS, but that will then stay flat for the next three years. Wes Streeting will need to spend it wisely to transform NHS performance.

The bit that really matters.

Ok, so hopefully by now our theme is becoming clear. There’s a lot more money knocking around than the last lot planned for, but there won’t be much more knocking around at the end of this Parliament than there is right now.

The spending announced yesterday (and last autumn) means that the Labour MPs  can reasonably boast about boosting living standards for normal families by delivering additional public services funding and valuable benefits-in-kind (in the form of medical care, education, childcare, etc.), when compared to the previous Government’s stated plans. That means a middle-income household benefiting from an additional £1,500 worth of public services (the purple bars) under this Government.

But Labour MPs should brace themselves for disappointment at the doorstep. Turns out, people don’t care much about hypothetical counterfactuals. Instead they care about feeling better off tomorrow than they did yesterday. The blue bars in the chart show the change in the value of those benefits-in-kind between now and the end of this Parliament . Those are much smaller, at nearly £200 for the average household. Once again, for things to feel substantially better, the Government will need to deliver a reformed public sector, not just sustain a larger one.

The long wait for growth.

A lot of the chat this week has been on whether it’s a waste of political capital to do backloaded investment which won’t bear fruit for a long time. Let’s get one thing straight – any Government that works to address one of the major causes of UK stagnation should be applauded for it.

The next chart examines where that extra investment has gone. Comparing where we now expect to be in 2029-30 to where we were in 2023-24, this Government is essentially maintaining investment in social infrastructure (like schools and hospitals), and increasing investment in defence and economic infrastructure (especially energy and transport). Today’s shocking events remind us that the world has changed since last autumn, when the Government presumably didn’t anticipate how much they might need to spend on defence. So, the decision to fund the increase in defence spending within the existing envelope, and to make it capital heavy, has presumably come at the expense of greater investment in economic and social infrastructure.

As the headlines this morning demonstrate, the world is already a very different place compared with when this Government came to power. As a result, they have invested in drones, not hospitals.

Where do we go from here?

Before the ink was even dry on the spending review (at about 5am), all anyone wanted to talk about was the possibility of future tax rises. I’m afraid that’s what happens when a Chancellor maintains nail-bitingly narrow headroom against her fiscal rules, especially at times of economic uncertainty.

We have said we think it likely that the Chancellor will need to come back for more tax revenue in the autumn. Here is one chart to show why. It draws together a range of forecasts of growth in 2026, all of which have shifted down since the OBR’s March forecast. Even if the OBR remains as optimistic (relative to up-to-date private-sector forecasts in the purple and gold lines) as they were in March, the Chancellor still faces a 0.5 percentage point downgrade to economic growth. That itself is chunky, but the downgrade would be much bigger if they were to move into line with other forecasters…

But I can see I’m at risk of ending up on an apocalyptically gloomy note on this sunny Friday afternoon. So, let’s step away from the unknowable future for a second. There are (at least) two valid ways to think about this Spending Review settlement. If you’re inclined to see a half-empty glass, you could note that the modest boost to the health budget won’t make it easy to reduce NHS waiting lists, while the settlement for other public services may be too tight for them to repair themselves after decades of decline. But for those with a glass half-full you can hope that public service spending returning to pre-austerity levels is enough to improve performance, with a changing shape of the state that reflects the public’s priority of the NHS.