Next week’s government spending review will set out a divisional funding plan for the next three years.
Prime Minister Rachel Reeves has reaffirmed the government’s commitment to fiscal rules and pledged not to raise taxes on workers despite economists warning about the “inevitably tough choice” ahead of the spending review next week.
Reeves will outline the division and investment budget for the next three years on June 11th.
Speaking in Rochdale Wednesday, she described the financial rules as “unnecessary” and claimed it would “never” put market confidence in the ability to manage government spending.
The Prime Minister saw an increase of £40 billion, excluding tax cuts comparable to the budget last October.
“We’re not going to repeat our budget again on that scale,” she said.
Despite plans to provide more than £300 billion in public spending over five years, Reeves acknowledged that the funds cannot meet the needs of all sectors.
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“I had to say no to what I wanted to do too,” she admitted, denounced what she called a mismanagement of the conservative government’s public finances.
A first glimpse into the government’s spending plans was the announcement of a £15.6 billion public transport package for the North and Midlands.
Reeves said the investment is part of a broader effort to tackle “uneven distribution of opportunities” across the UK. The funding will support extensions of the metro system in Tyne and Ware, Greater Manchester and West Midlands, and updates to Southern and West Yorkshire transport links.
Financial rules under scrutiny due to increased spending pressure
Reeves’ financial strategy is designed to maintain market stability and enable long-term investments, but economists warn that it has little room for operation.
The Institute for Fiscal Studies (IFS) said the government is facing an inevitable trade-off. The demand from the NHS and workers’ proposed boost to defence spending means that other sectors are likely to see real estate cuts.
According to Capital Economics, the Prime Minister faces three core paths to manage growing financial pressures.
One option is to shift funding across sectors and cut down some areas to fund other areas.
This will reduce spending in some areas and fund priorities such as public sector wage increases, estimated at 3-5%. However, such reductions are politically at risk after years of austerity.
Another possibility could ease government borrowing rules and free up around £17 billion in additional expenditure output. However, such a move risks damaging Reeves’ financial reliability in the financial markets’ eyes.
Metropolitan Police Commissioner Ir Mark Lowry will arrive to issue a statement outside News Cotland Yard in central London on 11 February 2025. James Manning/PA
Reeves says she didn’t enter politics because she “cared passionately about fiscal rules,” but she emphasized that the rules “do” “material” and pointed out that they changed in the past when they stopped supporting stability and investment.
The third option (treasury of taxes) is politically sensitive. Workers exclude increases in VAT, income tax, national insurance and corporate tax.
Taxing wealthy individuals and businesses may seem attractive, but economists warn that such measures will not generate enough revenue to fill the funding gap.
Proposals such as an extended threshold freeze and changes to interest on the Bank of England reserve could bring up to £20 billion, which is still inferior to what is needed.
Analysts now believe that the most likely outcome is a combination of all three strategies. Selective spending cuts, limited borrowing and a modest tax change.
While each route has political and economic risks, economists suggest that some form of tax hike is increasingly likely.
The public sector is seeking emergency assistance
Pressure is growing from across the public sector for greater investments ahead of spending reviews. Senior police leaders and government watchdogs warn that further spending cuts could undermine core services.
Metropolitan Police Chief Ir Mark Laurie has written to Prime Minister Kiel and warns that if the budget is cut, police will face “wide consequences,” including prioritizing the crimes they investigate.
His concerns were reflected in another letter with domestic abuse chair Dame Nicole Jacobs and victim Commissioner Barones Helen Neurob, who warned that victim support services were “pushed on the brink of sluggish funds and rising.”
She expressed concern over the report that the Ministry of Housing is one of the “unprotected” departments heading for reviews. Eshalomi warned that without proper investment, the government’s pledge to build 1.5 million new homes during this assembly is a serious risk.
As Reeves prepares to provide her first full spending review, the act of balancing between financial discipline, economic stability and increased demand for investment in public services will be the central setting.
