Fiscal choices
We are one week away from the Chancellor’s Spring Statement, which she insists is not an emergency budget (it is).
As usual, the national media have already gone into overdrive, warning of “the biggest budget cuts since austerity” (The Guardian) and the de facto “end of the welfare state” (Sky News).
Criticism of Labour’s budgetary approach usually comes with a dig at its “self-imposed” fiscal rules. If only Reeves could abandon her fiscal restraint and borrow more money, we wouldn’t even need to think about welfare cuts.
So here are some numbers:
In January, public sector net debt (PSND) stood at 95% of GDP. For the fiscal year 2024-25, the Office for Budget Responsibility (OBR) expects the government to spend a total of £104.9 billion on debt interest. At 8.2% of total public spending, interest payments are already the third-largest item in the budget.
8.2% of total public spending is 3.7% percent of national income.
This figure might rise even further, depending on various factors, including economic growth and the Bank of England’s commitment to Quantitative Tightening.
The truth is that Rachel Reeves faces some fiscal choices that will determine not only the long-run trajectory of the government’s finances but also its ability to invest in growth.
Of course, whenever a budget event rolls around, the commentariat tells us that the only way to free up capital for public investment is by borrowing more money because there is no more room for cuts, or that there isn’t any money for investment at all. Neither is true.
Over the last three decades, successive Conservative and Labour governments have made fiscal choices. They have chosen to prioritize welfare, the NHS, and pensions over defence, education, and infrastructure spending.
These are political choices. There is no law of nature stating the government must spend £138 billion pension benefits.
There is, however, what economists call a budget constraint. At almost 100% debt to GDP, it is entirely unclear how much more the government can borrow. But that has nothing to do with how we spend our tax revenue—that’s a choice.
Hopefully, Labour are starting to make the right ones.
Johannes Matt