The night before the spending review
On Wednesday, the government is set to publish the results of its long-awaited spending review. This marks the first such review since 2021 and indeed the first review outside of the pandemic since 2015.
The results will hardly be surprising — only the size of the black hole is yet to be revealed.
The government will respond as it always does, by front-loading spending originally planned for the end of parliament, while sprinkling a few alibi cuts on top to convey the impression that it is serious about fiscal sustainability.
Although Chancellor Rachel Reeves has been stressing her commitment to the fiscal rules, very little suggests that the government actually has a coherent plan to put the country back on a sustainable fiscal path.
Over the weekend, Treasury Minister Torsten Bell took to Twitter to boast that Labour were “ending austerity.” The graph he posted, however, showed that departmental spending has been increasing since 2017. No reversal in sight, of course.
The reality is that successive governments have by now established a track record of being unserious about controlling the country’s long-term spending commitments. This loss of credibility has serious repercussions in the bond market.
The UK now faces the highest borrowing costs of any G7 economy. At a 100% debt-to-GDP ratio and with growth still languishing close to zero, any deterioration of the macro environment or a further erosion of credibility could trigger a large-scale sell-off in the gilt market, similar to the Truss episode in 2022.
Recent policy announcements have reinforced this impression. The U-turn on the winter fuel allowance—a measure which would have amounted to savings of £1.5 billion—suggests that the government does not have the stomach to do what's necessary on the fiscal front.
For comparison, the total welfare bill for 2025/2026 is estimated to be around £315 billion. About half of that is set to go to pensioners alone. Who would trust a government that can't even push through a meagre 0.5% cut to its welfare budget to consolidate spending?
The episode also reveals poor political judgement on the part of the government, not just because it should have expected the blowback that followed the initial announcement, but also because the U-turn will reinforce the image of a government that's fundamentally not serious about reining in welfare spending or lacks any understanding of how bond markets work.
Anyway, I'm sure Wednesday will be fine.