Spending Review: £70bn for transport, homes, energy

Sara White, Editor, Business & Accountancy Daily

Chancellor Rachel Reeves has set out a massive public spending programme but is the front loaded spend going to lead to more taxes.

At her first spending review, set out billions of pounds in public sector investment in infrastructure, with Reeves telling MPs her priority was to ‘invest in Britain’s economic renewal… investment to rebuild our transport networks, rebuild our defence capability, and to rebuild our energy security. In short to grow our economy.’

‘Today I am allocating the envelope I set out in the spring,’ the chancellor told MPs, adding she had been ‘crunching the numbers, looking at the assets and the liabilities’.

On spending, there will be an increase of 2.3% to £190bn for day to day running of public services and departmental spending in real terms.

Reeves stressed her fiscal rules would not be changing and set out significant investment and funding increases for protected departments, but the Home Office was one of the losers.

HMRC was also given more funding to hire additional staff over the next five years and overhaul ancient IT infrastructure. There was also earmarked funding for HMRC to improve its poor customer service levels.

On spending, the chancellor stressed she would not be going back to austerity. ‘Let’s be clear. Austerity was a destructive choice for the fabric of our society and it was a destructive choice for our economy too, choking off investment and demand, creating a lost decade for growth, wages and living standards. That is their legacy,’ Reeves said.

‘My choices are different, my choices are Labour choices. The choices that are in this spending review are only possible because of my commitment to economic stability.’  

But the concern for businesses is the hike in spending will result in more tax rises in the Budget this autumn.

Robert Salter, a director at Blick Rothenberg, said: 'Given the size of the government’s planned spending increases, significant tax rises are inevitable in the coming months. The increase in the defence budget of around £11bn per annum is on its own equivalent to an increase of approximately 1.5p on the basic rate of income tax.

‘While Rachel Reeves talked consistently in her Spending Review about economic growth, economic security and the importance of these issues for workers, many measures that the government have previously announced, such as the increase in employer’s National Insurance contributions (NIC) have actually increased unemployment.’

This view was echoed by Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC): ‘The government is correct when it says that only growth can right the fiscal balance and fund our public services. You can’t tax businesses into growth – especially when those firms need to be investing. Any spending commitments made rest on the backs of the future success of British business.

‘The missing piece of the puzzle in all this, is delivery. Despite talking about the need for a deep pool of talent, there was little on workforce today – yet we know this is the critical part of getting where we need to go without further tax rises.’

The spending plans announced in the 136-page Spending Review Blue Book are spread over a 10-year investment plan with Reeves setting out £15.6bn funding for local transport projects in England’s city regions and £2.3bn for local transport improvements outside of these nine regions, set to be completed by 2032, although some projects will see earlier open dates. Spending is slated to start from the next tax year, 2026-27.

On the transport front, there will be upgrades to Cardiff Central station, continued work on the TransPennine route upgrade between Manchester and Leeds to speed up travel times, and progress on the delivery of a Midlands Rail Hub, improving connections from Birmingham across the West Midlands. Earlier promises made at last autumn’s Budget to push through the Oxford Cambridge rail link have also been costed into the plans with an interchange in Milton Keynes. Reeves also announced a four-year settlement for Transport for London to give longer term financial stability.

On housing, Reeves announced the biggest cash injection into affordable and social housing in 50 years, with some cities already signed up to build new homes in Blackpool, Preston, Sheffield and Swindon.

Central to the housing announcement was the creation of a brand new Affordable Homes Programme set up with £39bn of government – taxpayer – investment earmarked over 10 years to build social and affordable housing. There will also be a 10-year social rent settlement pegging rent rises at CPI+1% from 2026, to ‘enable providers to borrow and invest in new and existing homes, while also protecting social housing tenants’, the Treasury said.

For SMEs, there will be more funding for the British Business Bank to support growth, while the Department for Business & Trade is going to revamp its guidance to make it easier to support companies, creating a single information portal. 

Nuclear projects were also flagged with £14.2bn for the first state funded nuclear power station at Sizewell C, which will be developed with French owned EDF, and is expected to provide electricity to over six million homes when complete. A final opening date has not been suggested, with experts saying construction could take up to 20 years based on progress at Hinkley Point C in Somerset.

The NHS was also given a record £29bn investment to 'get the NHS back on its feet', with the priority to cut waiting lists, improve patient care and modernise services.

Jake Finney, economist at PwC, said: ‘While it’s clear there will not be a return to 2010s-style austerity, the combination of a tight spending envelope and reasonably generous settlements for health and defence means some departments are likely to face real-term cuts in the second half of the decade.

‘Maintaining the quality of public services under those constraints will make the government’s drive to boost public sector productivity even more critical.’

With late October/early November slated for the Budget, businesses have the summer to get through first with the shadow of the Employment Rights Bill also waiting in the wings ready to ramp up costs for employers.

Joe Nellis, economic adviser at MHA, said: ‘The chancellor’s plan for front-loaded capital expenditure, financed through borrowing but kept within her fiscal investment rule, will be welcomed by many in the business community. However, the sustainability of this spending spree will ultimately hinge on reigniting economic growth.

‘Without a robust rebound, the chancellor may find herself forced to contemplate tax increases in the autumn Budget to keep public finances on track.’