by Shimeon Lee, policy analyst
It is the eve of the spring statement and the chancellor is expected to announce billions of pounds of spending cuts in order to meet her budgetary target, which is for day to day spending to be covered by taxes. Despite much hand wringing over a supposed return to austerity, the only real surprise is that it did not happen sooner. Our recent briefing note on the history of public spending lays bare the unprecedented level of spending that was planned by the government prior to the spring statement.
Public spending was set to reach a record high of £1.27 trillion in 2025-26. This is £23.2 billion more than spending at the peak of the pandemic in 2020-21, and 20 per cent higher than pre-pandemic levels. While the spike in spending due to the covid-19 pandemic was to an extent understandable, unlike previous instances where spending fell after a crisis ended, spending post the covid-19 pandemic is set to remain persistently high.
For context, public spending under Keir Starmer is set to average 45 per cent of GDP until 2028-29. This level of public spending was only ever reached on three occasions since the end of the second world war, firstly in 1975-76 during the sterling crisis, secondly in the wake of the great financial crisis in 2009-11, and thirdly at the height of the covid-19 pandemic in 2020-21. Continuing to spend more than we did at the height of the pandemic is simply unsustainable. In her last budget, the chancellor raised taxes by £40 billion, with measures including imposing punishing taxes on jobs and family farms, the effects of which are still reverberating in the economy. This was far more than the supposed ‘£22 billion black hole’ she had to fill, yet even this was not enough to pay for this government’s lavish spending plans.
Instead, politicians have had to rely heavily on borrowing in order to balance the books, with the national debt rising at an astonishing £543 million every single day according to our debt clock. None of this is free with debt interest topping out at over £100 billion per year. If debt interest were a government department it would be the fifth largest by spending, 50 per cent more than our defence budget. It should be recognised that the insatiable appetite for spending is not exclusively a Labour problem. At its lowest point in 1988-89 public spending was 34.6 per cent of GDP. Contrary to claims of ‘austerity’, it has steadily increased under governments of both stripes to reach a whopping 45 per cent of GDP today.
The promise to end ‘austerity’, defined sometimes as real terms increases, sometimes as spending rising in line with historical averages and sometimes as maintaining public spending as a proportion of GDP (depending on which was most politically convenient) was therefore either impossibly unrealistic or entirely meaningless. As we warned back in October of last year, playing fast and loose with the definition of ‘ending austerity’ would inevitably lead to disappointment.
Reckless spending today will be paid for by taxpayers one way or another, either today or in the future - just as we are currently paying the price for past spending. The interest rate on government debt has risen sharply since autumn which, when combined with the more £2.6 trillion in debt that has been accumulated by previous governments, results in significant pressure on the public finances. It seems that the chancellor is finally being forced to live up to her promises of fiscal discipline after six months of little to no growth and public sector spending that more resembles a kid in a sweet shop than a government facing a £22 billion black hole.
Cuts to welfare benefits and a reduction in the size of the public sector will undoubtedly be politically difficult, and it is unclear if Labour will be able to overcome their high tax high spend instincts to actually deliver these reforms. But what is clear is that continuing on the trajectory of ever increasing spending and an ever expanding state is not an option if we ever want to see healthy public finances again.