Yesterday's Spending Review: Spend now, tax later?

Yesterday’s Spending Review confirms my deepest concerns about this Government's fiscal trajectory. As a former Treasury Minister, I have witnessed firsthand the delicate balance required to maintain public confidence while delivering essential services. What we saw yesterday, however, was a Chancellor unwilling to acknowledge the pressures she faces, and hemmed in by a lack of growth, her fiscal rules, and her backbenchers.

While the Chancellor announced a 2.3% annual increase in departmental spending through 2028-29, the economic fundamentals tell a different story. Since Labour took office, inflation has surged from 2.2% to 3.5%, while unemployment has climbed from 4.1% to 4.6%. This morning’s ONS data showing GDP fell 0.3% in April, with services output down 0.4%, provides further evidence that the economy is stalling under Labour’s stewardship. Meanwhile, borrowing costs have climbed significantly, with 10-year gilt yields reaching near record highs. These deteriorating conditions can be directly traced to the Chancellor’s misguided tax policies last Autumn, which have severely undermined business confidence and choked off the productive capacity that drives economic growth.

The £29 billion real-terms increase for NHS day-to-day spending and £39 billion for housing programmes may sound impressive, but they come against a backdrop of public spending reaching 45% of GDP, unprecedented levels outside of the pandemic.

The pattern of unfunded commitments continues unabated. The Winter Fuel Payment reversal creates a £1.25 billion liability. Public sector pay settlements total £6.9 billion beyond budgeted amounts. The £8.3 billion GB Energy commitment, the costly Chagos Islands agreement, and speculation about reversing the two-child benefit cap add further pressure.

Leading economists' warnings about fiscal sustainability are being vindicated. NIESR announced that, given the small spending buffer from the Spring Statement, future tax rises are “almost inevitable”. The aspersions cast by experts, as well as the uncertainty of the Economic Secretary, who is “neither ruling in” “nor ruling out” future tax rises, mark a stark contrast with the Chancellor’s comments to the Treasury Committee on the 6th of November last year, where she said defiantly “We have now set the envelope for spending for this Parliament, and we are not going to be coming back with more tax increases or, indeed, with more borrowing”.

This Spending Review exposes a fundamental mismatch between fiscal reality and policy ambitions. While it is for the Government to write budgets and set out spending priorities, they cannot continue to ignore the overburdening impact of their tax decisions last autumn. The Chancellor’s reliance on deferred commitments coupled with the latest growth figures and her insistence on abiding by her strict fiscal rules raises grave concerns about ongoing fiscal sustainability. The fundamental lesson remains clear: you cannot tax your way to growth. This Government, however, risks trapping itself in a vicious cycle of declining economic performance and an ever-increasing tax burden on families and businesses.