Money, Money, Money

Next Wednesday, the Chancellor will stand to announce the outcome of the Government’s Spending Review. The results of fraught closed door negotiations of recent weeks, between the Treasury Spending team and Whitehall departments, will become clear.

The settlement will set the spending envelope for the majority of this Parliament. And, as we have already seen this week - and expect to see more of over the weekend - the Treasury is hoping to make the Spending Review about more than just Departmental budgets. The story the Chancellor hopes to tell is one of increased spending on infrastructure and public services in the parts of the country where Labour needs to show voters it is delivering for them. 

Some Departments that settled earliest, such as the Foreign Office and Culture Department, received some of the harshest settlements. Treasury officials will likely be pleased with the resolution with the Foreign Office, a traditional source of tension over the control of international development spending. These Departments will have to implement cuts to programmes (and headcount) in the coming months.

With the quasi-independent Strategic Defence Review published, and all the recommendations subsequently agreed by the Government, the Defence Secretary faced difficult questions over the timeframe for reaching the 3% of GDP spending target. No.10 and the Treasury have already adapted their position once by committing to reach 2.5% by 2027. Questions plagued the publication of the SDR in Parliament and in the press on a commitment to reach 3%. At the NATO summit in the Hague in less than three weeks, the Government will face pressure to go further to 3.5%. Questions and pressure that have significant implications for the overall defence budget, as well as the rate at which spending rises over the course of the parliament. Both factors that will weigh on the Chancellor ahead of the Autumn Budget.

The nature of the Government’s fiscal rules has flavoured the spending review negotiations. With capital spending removed from the fiscal rules, and the focus on day-to-day spending, it leaves some optionality for the Treasury. Some Cabinet Ministers have traded capital spending for revenue efficiencies, helping the Treasury stay within their fiscal rules and maintain the Chancellor’s fiscal headroom ahead of the Autumn Budget.  A marked divergence from the Coalition-era Treasury led by then Chancellor George Osborne, who reduced capital spending initially only to increase it in later years of the parliament.

The Home Office and MHCLG remain outstanding. The Energy Department settled late with less than a week to go. With negotiations with these remaining Departments ongoing, the prospect of a Treasury imposition looms. It’s been reported that two Cabinet Ministers – Ed Miliband and Angela Rayner – at one point walked out of negotiations with the Treasury. To force negotiations, the Home Office - through the Police Chief Constables - adopted a different tactic by going straight to the Prime Minister.

While the Treasury’s strategy echoes the approaches of earlier Conservative administrations, whether or not a Labour Chancellor will announce that Labour MPs will go into the next general election promising real terms cuts in some unprotected departments remains to be seen.

This week’s intervention from the OECD, the totemic economic equivalent of NATO, that forecast slightly weaker economic growth in the UK will be worrying some in the Treasury. However, the comments from the Governor of the Bank of England to the Treasury Select Committee will be more worrying for MPs.  The Bank Governor said that inflation will trend downwards, but “how far and how quickly is now shrouded in a lot more uncertainty, frankly”. At the Spring Statement in March, the OBR forecast that inflation would not fall below the Bank’s 2% target until the third quarter of 2026 – after the Scottish and Welsh parliamentary elections in May 2026. In light of 5654’s recent polling on the cost-of-living challenges, the prospect of delays to reducing inflation will not be welcome news. 

The international bond markets, already rattled by President Trump’s policies, wait to judge the Treasury’s review. Labour MPs nervously anticipate the results. The political and fiscal knock-on effects of the announcements at the Spending Review will be felt throughout the remainder of this Parliament.  

However, one certainty remains. The Spending Review will reinforce the Government’s political strategy for the General Election – to boost economic growth, transform the NHS and enhance national security. The test will be whether meaningful delivery in each area is felt by voters in time.