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However, all public spending reviews are as much about the aspirations of the government as what might actually happen. That’s because the world economic situation will inevitably change during the three or four years they project ahead.
So there are two basic points. One is that the global context will play a huge role in determining whether these plans will turn out to be realistic, or whether this government, like so many of its predecessors, will be blown off course.
We saw a small example of the importance of those international forces on Wednesday. Initially there was a calm reaction on the markets to her plans, and that was encouraging. But then, as she was speaking, both equities and gilts suddenly jumped in the right direction: the FTSE100 index went up, and gilt yields came down.
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If the world economy grows solidly over the next three years, big UK-based businesses will grow along with it. That will bring in additional tax revenues, create more jobs and so on. That in turn will help take the pressure off national finances, and make it easier for the Chancellor to fund her current spending promises.
Jobs numbers a worry
On growth, there is a problem. Rachel Reeves’s objectives are clear but the increases in taxation in the Budget last autumn have already led to a reduction in payroll employment. If HMRC’s numbers are to be believed, employers have cut 250,000 jobs since the Budget increased their national insurance contributions.
In addition, consumers seem to be keeping their spending down, and tax receipts for the first month of the financial year have been disappointing. The Government’s deficit is running higher this financial year than it was last year, not lower.
Market analyst Pantheon Macroeconomics sums up this view in the City: “The spending review lays bare the tight fiscal picture facing the Government, which continues to cast doubt on its ability to meet the spending plans it has laid out for the coming years… The only question is how much, rather than whether, taxes will need to rise to meet rising spending pressures in the coming years.”
Need to know
Whether Britons will be better off after Rachel Reeves’s spending review will depend on one thing and one thing alone. Will it deliver faster economic growth?
That said, thanks to the additional investment announced in the review, there will be a clear positive in three main areas: housing, infrastructure and defence. There were no surprises here. The rising population of the UK will need many more homes, and easing the planning restrictions on housebuilding must be beneficial.
There will be some disappointment in the lack of investment in roads, which affects more people than improvements to the railways, and there will inevitably be concerns about the delivery of nuclear power plants, given the delays of the past. But the direction is welcome.
And overhanging everything is the question: how will this spending be paid for? The Chancellor’s commitment to her fiscal rules should enable her to fund the investment side of her plans at whatever the yield on the global bond markets turns out to be.
So a mixed bag. Good intentions, and sensible identification of the weaknesses of the previous government. But if the spending review does not deliver faster growth, then we will end up poorer, not richer, as a result.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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