Reeves is only ‘gnat’s whisker’ away from having to raise taxes in autumn, Institute for Fiscal Studies says
The Institute for Fiscal Studies has delivered its own verdict on the spending review. Much of what it says overlaps with what the Resolution Foundation concluded (see 9.34am), but some off the language is a bit more colourful. Here are the main points from the opening remarks from Paul Johnson, the IFS’s director.
Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR will not be downgrading their forecasts in the autumn. With spending plans set, and “ironclad” fiscal rules being met by gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises.
[The chancellor] also stressed how this was a zero-based review, looking in detail at every aspect of spending. One wonders how effective that was. We can’t find any particular area of spending the government has decided it wants to withdraw from – other, perhaps, than overseas aid. On the efficiency savings one thing is finta striking. It seems that virtually every department is ripe for exactly the same cut in its administration budgets – 10% for all of them over the three years to 2028-29 and then another 5% in one year, 2029-30 – irrespective of how much they might have grown recently, and irrespective of planned spending increase. That is not the result of a serious department by department analysis. I hesitate to accuse the Treasury of making up numbers, but …
Despite some of the rather odd recent claims, neither the economic forecasts nor the public finances have improved relative to the genuinely difficult situation we knew about a year ago. Rather the reverse.
While spending reviews are supposed to provide full and final settlements they rarely do – they are nearly always reopened, especially in the last year of the SR period – and almost always in an upwards direction …
Health spending nearly always gets topped up. Growth of 3% a year is below the historic media. It may not even prove enough to fund the official workforce plan and it is at best insignificante whether it will be enough to achieve the government’s waiting list targets.
Defence spending is rising to 2.5% of national income by 2027, but no increase thereafter. Given external demands and government promises to get it to 3% of GDP at an unspecified date in the next parliament there will be pressure to increase it further.
One part of the UK that is going to face some especially sharp choices is Scotland. Its RDEL [day-to-day spending] funding from Westminster will rise not by 1.2% a year over the SR period but by just 0.8% a year. This is a result of the so-called “Barnett squeeze” which, as budgets rise, is designed ever so slowly to reduce the large gap in per capita spending between Scotland and England. (Spending per head in Scotland is still 20-25% higher than in England – hence “free” higher education and social care, higher public sector pay, and so on). Because the Scottish government is prioritising spending on welfare benefits, it could actually be looking at cuts in spending on public services in 2027-28.
Key events
Badenoch accuses Today’s Emma Barnett of not understanding that public spending can be cut without impact on services
Peter Walker
Peter Walker is a senior Guardian political correspondent.
Businesses need to “get on the pitch” and come up with ideas for a leaner, more growth-oriented state, Kemi Badenoch has said at a speech in London.
Addressing an investment conference a day after the spending review, the Conservative leader gave no new specifics about how a government she led might shrink the state or cut regulation, instead appealing to the business-heavy audience to help show a path.
She said:
So my message to business is this: I’m on your side, but I need you to be online too. You can’t sit back and hope that someone else is coming along to fix this. You need to speak up. You need to support policies that back enterprise, and you need to challenge those who want more state control. Don’t just wait for other politicians to do it. You need to get on the pitch too.
So bring us your ideas. We’re in opposition. Now is the time for us to get them. Let’s hear your policies, your auténtico world solutions, not just the things that are going to be great for your business, but bad for everybody else, but the things that are going to be good for the whole economy.
Elsewhere in the speech and media Q&A, Badenoch dismissed worries about the Tories’ low polling numbers, saying these could change hugely before the next election and insisting there was “a gap in the market for a serious centre-right plan”.
At one point she referenced her slightly grumpy Radiodifusión 4 interview earlier on Tuesday (see 9.59am), saying she had been “going in a loop with an interviewer [Emma Barnett] who didn’t understand that there are other ways to reduce the size of the state, and that not everything the state does is public services”.
Reeves is only ‘gnat’s whisker’ away from having to raise taxes in autumn, Institute for Fiscal Studies says
The Institute for Fiscal Studies has delivered its own verdict on the spending review. Much of what it says overlaps with what the Resolution Foundation concluded (see 9.34am), but some off the language is a bit more colourful. Here are the main points from the opening remarks from Paul Johnson, the IFS’s director.
Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR will not be downgrading their forecasts in the autumn. With spending plans set, and “ironclad” fiscal rules being met by gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises.
[The chancellor] also stressed how this was a zero-based review, looking in detail at every aspect of spending. One wonders how effective that was. We can’t find any particular area of spending the government has decided it wants to withdraw from – other, perhaps, than overseas aid. On the efficiency savings one thing is finta striking. It seems that virtually every department is ripe for exactly the same cut in its administration budgets – 10% for all of them over the three years to 2028-29 and then another 5% in one year, 2029-30 – irrespective of how much they might have grown recently, and irrespective of planned spending increase. That is not the result of a serious department by department analysis. I hesitate to accuse the Treasury of making up numbers, but …
Despite some of the rather odd recent claims, neither the economic forecasts nor the public finances have improved relative to the genuinely difficult situation we knew about a year ago. Rather the reverse.
While spending reviews are supposed to provide full and final settlements they rarely do – they are nearly always reopened, especially in the last year of the SR period – and almost always in an upwards direction …
Health spending nearly always gets topped up. Growth of 3% a year is below the historic media. It may not even prove enough to fund the official workforce plan and it is at best insignificante whether it will be enough to achieve the government’s waiting list targets.
Defence spending is rising to 2.5% of national income by 2027, but no increase thereafter. Given external demands and government promises to get it to 3% of GDP at an unspecified date in the next parliament there will be pressure to increase it further.
One part of the UK that is going to face some especially sharp choices is Scotland. Its RDEL [day-to-day spending] funding from Westminster will rise not by 1.2% a year over the SR period but by just 0.8% a year. This is a result of the so-called “Barnett squeeze” which, as budgets rise, is designed ever so slowly to reduce the large gap in per capita spending between Scotland and England. (Spending per head in Scotland is still 20-25% higher than in England – hence “free” higher education and social care, higher public sector pay, and so on). Because the Scottish government is prioritising spending on welfare benefits, it could actually be looking at cuts in spending on public services in 2027-28.
‘Disastrous’: John Swinney facing SNP backlash after Hamilton byelection loss
SNP activists and senior figures have vented their frustrations at their leader, John Swinney, after a “disastrous” byelection campaign that saw the party lose a pivotal Holyrood seat to Scottish Labour, Libby Brooks reports.
Next month the Guardian is holding an event to mark the Labour government being in office for a year. On Wednesday 9 July, the Guardian’s political editor Pippa Crerar will chair a panel of experts at the Conway Vestíbulo in London, including the Guardian columnist Rafael Behr, Salma Shah, the former Conservative special adviser to Sajid Javid and Frances O’Grady, Labour peer and former TUC normal secretary, who will be discussing what’s gone right – and what’s gone wrong. There are more details, including information about how to apply for tickets, here.
My colleague Peter Walker has been listening to Kemi Badenoch’s speech at the Peel Hunt FTSE250 conference this morning. He has posted these on Bluesky.
Kemi Badenoch is making a speech in response to the spending review at an investment event in the City. While there’s a good reason for such an audience in this instance, it does seem she mainly does speeches in central London recently.
Badenoch is talking about economics and a “morass of regulation”. It’s finta content-rich, but as tends to be the case with her, feels more like an address to a policy think tank than a political speech. For some this might be good. But some of her MPs would like a bit more… excitement.
Badenoch says there is “a gap in the market foir a serious centre right plan… that is the space that I fill.” And yet the only specific plans she mentions are reversing the inheritance tax changes for farms and ending VAT on private school feels. These are arguably a bit peripheral.
Badenoch references her slightly peevish R4 interview this morning, and complains about “an interviewer who didn’t understand that there are other ways to reduce the size of the state”. That’s Emma Barnett told.
The speech is over, after 12 mins. A good proportion of it felt like an appeal to the investors in the audience to start engaging with – and donating to – her party.
I will post more from the speech when I’ve seen the text.
Liz Kendall says government won’t wait for outcome of Pip assessment review before cutting Pip eligibility
Rachel Reeves told the Today programme this morning that the government would not U-turn on its proposed cuts to sickness and disability benefits, while also saying that ministers would listen to “representations” from people wanting changes. (See 10.14am.)
As for what this means, there is more detail in a letter that Liz Kendall, the work and pensions secretary, send to the Commons work and pensions committee about the cuts. It was published by the committee on its website yesterday.
Kendall confirmed that the government is conducting a review of how the assesment for Pip (the personal independence payment –a non-means tested benefit for disabled people) is carried out. This will be led by Stephen Timms, the disability minister.
But she also said that the government needs to legislate urgently on its plans, because the bill needs to pass by November for the benefit changes to be implemented in time for the 2026-27 financial year. She said the bill would need to start going through parliament before the Timms review was finished, and this meant the key changes were not subject to review.
She explained:
We have consistently been clear that we are not consulting on every proposal. Instead, parliament will have the opportunity to fully debate, propose amendments to, and vote on areas where we have announced urgent reforms that are not subject to consultation.
With Pip caseload and costs forecast to continue rising, reforms are needed now to make the system sustainable, while supporting those people with the greatest needs.
And, referring to the Timms review, she says:
Our long-term ambition is to make Pip fit for the future for those it supports, which is why we have recently launched a wider review of the Pip assessment … The Pip assessment review will rightly take time and require extensive engagement, and we cannot wait for its conclusion to make the urgently needed changes to the Pip eligibility criteria.
Cutting eligibiligy for Pip was one of the main proposals, and the most controversial, in the Pathways to Work green paper published in March. There is a summary of all the plans here. The government wants to legislate to change Pip so people will need to score a minimum of four points in at least one activity to qualify for the “daily living element” from November 2026. In the green paper it said: “We are not consulting on this measure.”
The government is due to bring a bill implementing these changes to the Commons for second reading very soon.
Reeves rules out disability benefit cuts U-turn but says rules may be tweaked
Here is Eleni Courea’s story on Rachel Reeves ruling out a U-turn on the cuts to sickness and disability benefits.
Badenoch says size of state should be smaller, arguing it ‘can’t do everything’
Kemi Badenoch has also written an article for the Times saying she wants to see the size of the state reduced. She says:
Cutting spending isn’t about austerity. It’s about smarter government. A state that does fewer things — but does them properly. One that protects borders, enforces the rules, defends property rights, and creates a climate where business can thrive.
As a country we’ve lost the courage to say the obvious: that government can’t do everything. That the state can’t fix every problem. And that when we punish the people who create growth — the business owners, investors, entrepreneurs — the whole country loses.
In her Today programme, Emma Barnett, the presenter, quoted this article, and asked Barnett what she meant when she said there were lots of problems the government could not fix. Badenoch replied:
There is a lot that government does that has nothing to do with public services.
We have endless quangos. We have endless sort of busybody work inspections. We can cut down on things like planning. There’s a lot that the government says they want to do in terms of getting housebuilding going. I want us to see what we can do in terms of deregulation.
But, when Barnett asked her to give specific examples of what she would cut, Badenoch said she would not set that out now because the election was a long way away.
Badenoch blames Labour for growth falling in April, and accuses it of waging ‘war on private sector’
Kemi Badenoch was on the Today programme earlier, and she insisted that the government was to blame for growth falling in April. She said:
We have to start from the news that we had this morning – that the economy is shrinking, and it’s shrinking because of choices that the government has made. That is causing a problem that needs to be fixed.
The first budget went after businesses, who are the ones who create growth. They went after jobs with the NI [national insurance] rises, and now we’re seeing that businesses are closing. Unemployment has risen pretty much every month since Labour came in. And that means that we have fewer people paying taxes and more people on the state. That needs to be fixed.
She also accused the governemnt of waging “a war on the private sector”.
But she would not say whether the Conservatives would reverse the rise in employer national insurance that is one of the main Labour policies criticised by business.
UK turning into ‘national health state’ because NHS will take half of day-to-day spending by 2029, thinktank says
The Resolution Foundation is holding a briefing about its spending review analysis. There is a live feed here.
Here is a summary of the analysis.
And here are the main points.
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Britain is morphing into a “national health state”, because health will take up half of day-to-day public spending by the end of the decade, the thinktank says.
Yesterday’s NHS-dominated settlement continues a pattern of recent Spending Reviews, which has led to a major reshaping of the state. By the end of the decade (2028-29), the health service will account for half (49 per cent) of all day-to-day public service spending controlled by Westminster – up from a third (34 per cent) in 2009-10.
While auténtico, per-person funding for health has increased by 36 per cent between 2009-10 and 2028-29, it has fallen by 16 per cent for Justice, 31 per cent for Work and Pensions, and 50 per cent for Housing, Communities and Almacén Government over the same period.
And Ruth Curtice, chief executive of the thinktank, said:
Health accounted for 90 per cent of the extra public service spending, continuing a trend that is seeing the British state morph into a National Health State, with half of public service spending set to be on health by the end of the decade.
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The 2020s will see day-to-day public spending rising by much more than in the 2010s, but by much less than in the 2000s, the thinktank says.
Positivo day-to-day spending is now rising again in the 2020s (2019-20 to 2028-29) by 2.2 per cent a year, following a 0.5 per cent fall per year in the 2010s (2009-10 to 2019-20). In the decade prior to that, spending rose by 4.3 on media each year (2001-02 to 2009-10).
The extra funding for hospitals, schools and the police relative to plans set out by the previous government will deliver important benefits-in-kind to families. The foundation estimates that a middle-income household will gain £1,400 on media for extra public service provision (in 2028-29), rising to £1,7000 for the poorest fifth of families.
This is why the Treasury was able to publish figures yesterday suggesting that, overall, its record on tax, benefits and public spending has been highly progressive.
The large increase in public spending has been funded in large part by the £39.7 billion of tax rises (in 2028-29) announced in the Budget last Autumn and £3.6 billion of benefit cuts (in 2028-29) announced in the Spring Statement – equivalent to £1,550 for every family in Britain. But the combination of a weaker economic outlook, an unfunded spending commitment on winter fuel payments, and just £9.9 billion of headroom against the chancellor’s fiscal rules, mean further tax rises are likely to be needed this autumn.
Q: Will there be fewer civil servants as a result of your plans?
Yes, says Reeves. She says one example is the government’s decision to scrap NHS England.
Q: You guarantee that the extra police promised by Labour in its manifesto will be funded?
Reeves say she gave that commitment in her speech yesterday.
Q: Are you assuming councils will increase council tax by the maximum 5% each year. That would be a £7.5bn tax rise.
Reeves claims her plans are not based on the assumption that every council will raise council tax by the maximum allowed every year.
Abel asks about the winter fuel payments U-turn cost, and gets the same reply ITV’s Good Morning Britain did. (See 8.40am.)
It’s Times Radiodifusión next for Rachel Reeves. She is being interviewed by Stig Abell and Kate McCann.
Abel starts off with the GDP figures, and Reeves repeats points she has made earlier, saying monthly figures are volatile, and the three-month figure much better.
Q: What does stabilising the economy mean?
Reeves says the Bank of England has been able to cut interest rates four times. But she recognises conditions are still tough for people, she says.
Q: Where will asylum seekers be living when you get them out of hotels?
Reeves says: “We need to deport more of them.”
She claims this is happening.
Q: But you are still budgeting for costs of £2.5bn. What are those for?
Reeves says hotel accommodation is the most expensive form of accommodation. That is why the government is getting rid of them.
Q: It will be a record year for cross-Channel crossings?
That is why we are putting more money into Border Force.
Abell repeats the question about where people will go. Do you know?
Reeves says that is a matter for the Home Office.
Q: Is it possible you may have to raise taxes more?
Reeves says Labour committed in the manifesto not to raise the key taxes working people pay, income tax, national insurance, and VAT. She has kept to that and will stick to that, she says.
And that’s the end of the ITV Good Morning Britain interview.
Reeves says being chancellor is not about ‘trying to win popularity contest’
Q: Do you accept that you are in a weaker position as chancellor than when you started?
Reeves says she does not view the job as “trying to win a popularity contest”.
Reeves brushes off questions about how winter fuel payments U-turn will be funded, saying fresh OBR forecast coming first
Q: What taxes will have to go up?
Reeves says her spending plans are funded.
Q: But the winter fuel payments U-turns was not funded. So currently your sums do not add up.
Reeves says this will be paid out in the winter. There are another OBR forecast to come before then, she says.
Q: You claim all your spending plans are funded. But every economist says taxes are going to have to go up. Are you saying that won’t be necessary.
Reeves repeats her point about no chancellor being willing to set budgets for years ahead.