David Gauke: If economic growth was the objective, Labour’s Spending Review missed its mark | Conservative Home

David Gauke is a former Justice Secretary and was an independent candidate in South-West Hertfordshire at the 2019 general election.

A year ago, we were in the midst of a General Election campaign.

As is normally the case, the news coverage of the day focused on the parties’ tax and spending plans.

‘Labour will put up taxes’, said the Conservatives.  ‘Not true’, declared Labour.  ‘Any higher spending will be paid for by higher levels of growth.’

Labour’s plans for growth were not as heavily scrutinised in that campaign as they might have been.  There were some bold proposals for planning reform, to be fair, but not much else.

We had to wait until after the election before we got a better sense of a growth strategy.

Having reassured the markets that this was a government willing to take tough decisions by cutting winter fuel allowances (remember that?), there was a loosening of the fiscal rules to allow greater investment spending.  The borrowing target was changed as was the definition of debt.  The effect of these changes was to allow greater borrowing to invest.

The Chancellor took full advantage of this additional freedom in her autumn Budget.

Capital spending had been increased substantially for the final years of the Conservative Government and, by UK standards, was at the historically high level of 2.6 per cent of GDP but, under the Conservative plans, was set to fall back to 1.7 per cent of GDP over the next few years.  By changing her fiscal rules and putting up taxes, Rachel Reeves was able to set out plans to maintain capital spending at 2.6 per cent.  How that higher level of capital spending was to be allocated was to be set out in the spending review.

We will return to the choices that the Government made in a moment, but it is worth taking a diversion to discuss the recent history of capital spending.  It is a commonplace critique of the austerity years that the country (and, in particular, the then Treasury team of which I was a part) missed an opportunity to borrow more to invest when interest rates were practically zero.  Instead, we saw falls in capital spending in the years after 2010.

There are four points to make in response.

First, at the point at which we came into office in 2010, this was not by any means clear that there was scope to borrow to invest more.  The markets were jittery with the Euro crisis and inflation was above the 2 per cent target until  November 2013.  It was not until 2016 that both the 10-year and 30-year bond yields were consistently below 2 per cent.  Certainly in those first few years, a looser fiscal policy would have resulted in a tighter monetary policy.

Second, capital spending was cut after 2010 but was consistent with the fiscal consolidation plans we had inherited from Alistair Darling.  In subsequent Budgets, some of these cuts were reversed so that even though we cut overall spending more aggressively than the plans we inherited, we invested more than the Darling plan envisaged.

Third, even though there were still cuts in capital spending, this was in the context of a spike in capital spending in response to the global financial crisis.  If you look at the levels of capital spending in the preceding years, they are broadly comparable.

Fourth, one can easily overstate the significance of this matter.  If one listens to some commentators, one could be forgiven for thinking that if only we had invested more in these years, our economy as a whole and our public services in particular would be roaring successes.  Perhaps we could have invested tens of billions of pounds more, and some good would have come of it but in the context of £2,500 billion economy the difference would have been limited.

Nonetheless, the critique of the austerity years that we failed to invest sufficiently is well-established, particularly (but not exclusively) in Labour circles.  Rachel Reeves has repeatedly made the argument that higher levels of investment are essential for the UK economy to transform itself (with which it is hard to disagree) and that the state should play a big role in delivering that (which deserves some scrutiny).

If one listened to her statement to the House of Commons when presenting the spending review, one might have got the impression that this was exactly what she was delivering.  By loosening her fiscal rules, putting up taxes and by keeping current spending relatively tight for the end of the Parliament, Reeves had given herself plenty of room to announce various capital projects.  Combined with the briefing suggesting that transport was a big winner from the review, one was left with the impression that the next few years were going to be a bonanza for growth-enhancing transport projects.

It is true to say that the Government has prioritised capital spending and will be maintaining what was a temporary spike into a sustained period of higher capital spending.  But when looking at the cash increase in capital expenditure from 2023/24 to 2029/30, the big winner is defence and intelligence, up by £14.2bn.  Energy and net zero also does well (up £9bn, much of it for Sizewell C).  Public services, including affordable housing, get £9.1bn.  But the economic infrastructure departments – Science, Innovation and Technology and Transport – get just £5.6bn between them, with transport capital investment actually falling.

To be fair, this is not to say that there is no need for more investment in these other areas.  We need to spend more on defence and, specifically, replenish kit that has been given to Ukraine.  As warfare becomes more technologically advanced, it makes sense to invest in technology.  Energy security requires greater use of nuclear power, which is not cheap.  And if we want public services to be more productive, we will need to invest more.  The point here is that even after prioritising capital spending, the spending review is not delivering substantially higher levels of investment in economic infrastructure.

This is not going to be transformative for growth.

There is a second element to the Government’s approach to capital spending that deserves even greater scrutiny.

It has long been popular to criticise the Treasury’s Green Book approach to allocating resources, with complaints that London does too well at the expense of the rest of the country.  But there is a very strong logic to investing in transport projects in densely populated, highly productive parts of the country.  These are the projects where the economic benefits will more likely outweigh the costs, allowing London and the South East to continue to subsidise the rest of the country.  In other words, the traditional Green Book approach makes sense if the priority is economic growth.

Instead, it looks likely that social policy and the objective of reducing regional inequality (or, to the more cynically minded, the political objective of fighting off Reform in the Red Wall) is trumping economics.  When a Treasury document says that a benefit-cost ration of less than one “does not automatically constitute poor value for money” (bearing in mind that lots of projects with a ratio much higher than one get rejected), there is a concern that these resources are going to be allocated badly.  This is not just bad news for London and the South East, but the economy as a whole.

This was not an easy spending review to deliver and required some difficult choices.

But if the expectation was that the spending review was going to provide an answer as to how Labour was going to deliver economic growth, that expectation has not been met.