The Financial Illiteracy of the Spending Review and Why Spending Needs to Be Cut Now

Britain faces economic Armageddon. And no, Rachel, we do not have a £22 billion black hole, and your reckless spending spree will only exacerbate the situation. A staggering £2.8 trillion national debt confronts us, projected to increase by £22 billion annually. The budget deficit stands at £153 billion each year. Therefore, the commotion about austerity following the 2010 spending cuts, in the aftermath of the 2008 financial crash, was unjustified. Instead, those measures did not go far enough because they never did balance the books, albeit with a slight reduction in the deficit. Nevertheless, our economic troubles are worse now, due to the surge in debt interest payments driven by rising borrowing costs and inflation. The Office for Budget Responsibility (OBR) found that central government net debt interest reached £104.9 billion in the financial year 2024-2025. This equates to 8.2% of public spending and 3.7% of GDP. But why has this increase occurred?

Before the imposition of lethal lockdowns, resulting in costly experimental policies that ineffectively reduced the rate of infection, interest payments stood at £40 billion a year. Meanwhile, the interest rates on bank gilt yields have risen since 2022, ironically, higher than during the Truss mini-budget crisis, which Rachel Reeves uses as a scapegoat for the economic stalemate. This overlooks the fact that gilt yields, which indicate borrowing costs for the government and serve as a benchmark for other borrowing costs, are a hundred percentage points higher than they were last autumn, when the Bank of England (BoE) decided to lower the base rate from 5.25% to 4.25%. We know that our fiat currency system relies on financial confidence, and the annual debasement of physical currency, driven by the looming budget deficit, is a symbolic indicator of a bleak economic trajectory. Certainly, lockdowns, which doubled prices due to inflation and increased national debt by 25%, implemented after eighteen months, exacerbated the issue. Still, it is paramount to reflect on the failings of this government.

Net borrowing for the financial year ending March 2025 in the public sector was £151.9 billion, which is £20.7 billion more than the previous year. The national debt now accounts for 97.2% of the country's gross domestic product (GDP). The economy contracted by 0.3% of GDP in April 2025, while manufacturing output declined by 0.9% and services output fell by 0.4%. This was a consequence of a disastrous October budget, in which the government raised national insurance contributions for businesses and implemented costly minimum wage increases in the public sector. During this time, long-term borrowing costs remained high due to the adverse reaction of bond markets to the budget, as cuts were not substantial enough to address spending commitments. Where cuts did occur, they seemed ideological, impacting areas such as the Border Agency and farming subsidies, highlighting the government’s disregard for the migration crisis, which has cost taxpayers billions, as well as the farming crisis, crucial for maintaining food security.

It is clear whose side they are truly on, and it is not that of the privately employed white van man. Her decision to splurge on the public sector has contributed to a 0.1% decline in the pound against the dollar and a 0.3% drop against the euro, further aggravated by the tariffs imposed by the US. Britain is once again the sick man of Europe, with a projected 1% growth in GDP for the entire year. However, for some unfathomable reason, this has not led the establishment to abandon its 'spend and borrow now, tax and worry about bankrupt Britain later' unofficial mantra. Starmer's failure to cut wasteful spending means tax hikes are on their way, with council tax increases on working people to fund policing expenditure within the Home Office budget. 

Economists, however, have argued that, given the highest tax burden since World War II, any further increases would only reduce tax revenue, as the wealthiest individuals, who contribute the most to tax income, may be driven out of the country in search of tax havens like Singapore, where they can invest, innovate, and enhance the tax revenue of foreign nations. But what did Reeves get so wrong in October? Economists have pointed out the adverse effects of the budget decisions made in October, including the rise in employer national insurance, VAT on private schools, and inheritance tax on farmers. Instead of focusing on practical solutions and sensible spending cuts, Starmer infused policies with an aggressive left-wing ideology. For instance, an aversion to private schools forced students into the state sector, particularly those who could scarcely afford to attend, as well as independent schools, which were already facing financial difficulties. Even if one supports such a policy, Treasury analysis revealed that it costs the government £650 million, rather than generating the projected £1.5 billion. This occurred because 11,000 students moved from private to state schools, instead of the anticipated 3,000, placing a heavy burden on already-strained comprehensives. The policy was so disastrous that it resulted in the closure of twenty-three independent schools due to the VAT increase. 

Even Reeves’s decision to cut the winter fuel allowance was politically motivated. "Defund the pensioners who don’t vote for us anyway," may have been the discussion during the policymaking process. However, the public uproar over the decision exposed Labour's spinelessness when it reversed the decision. Now, nine million pensioners with incomes below £35,000 will receive it. Even the original savings of £1.6 billion were insignificant in the current economic context, accounting for just 0.2% of the government's budget. The saving now is merely £50 million. Considering that the OBR projected that the national debt will reach 235% of GDP by 2066, with a debt interest of 9% of GDP, it is surely financially illiterate to continue to fork out for pensioners who spend much of their income on recreation while punishing young people who can’t even afford to pay rent.

The other absurd decision in the October budget was to penalise the wealthy through taxation on non-Dom statuses, particularly considering that the richest 1% contribute 30% of all income tax, with most paying tax on other assets. While the adverse effect of increasing the national minimum wage and employer national insurance by £25 billion primarily crippled small and medium-sized businesses, it also resulted in a contraction in the job market, leading to 109,000 job losses in one month and 247,000 fewer employees paid over a year. So, what specifically did this Spending Review address?

The review includes an increase in capital investment of £113 billion for housing, green energy, and transport. Without evidence of how the government plans to source the funds, it will borrow £140 billion, which will raise debt interest costs during a period of higher gilt yields. Even if the infrastructure projects are commendable, issues with construction capacity are likely to cause delays in their execution, hindering any short-term economic impact. Most governments have had to abandon such projects later to meet immediate costs. 

The spending review once again prioritises the public sector, with the NHS receiving a 3% annual increase, totalling £30 billion by 2028. While the funds allocated to other departments are 0.2% higher than the previous year, real-term cuts persist across departments, including the Foreign Office and Home Office. However, the £190 billion allocated to public services exceeds previous plans. This is not the restrained review one might expect from a nation in terminal economic decline. The populist demeanour of Starmer and his allies, who are constantly seeking positive headlines, has led them to commit to financial injections that we cannot afford, to the detriment of the British public. JP Morgan projects that the government will raise £24 billion in taxation to fund the spending increases and offset low growth. Meanwhile, cynics point to the impacts of an ageing population and a bloated welfare state on Britain’s deficit.

Not only does the Spending Review lack financial sense, but it also fails to account for the £150 billion deficit within a context of low productivity, stagnant economic growth, and an increasing number of people relying on out-of-work benefits. It would be better to direct efforts towards encouraging those on sickness benefits, which amount to £100 billion, to return to work and reform the costly pension system. This would be a reasonable response to the increase in debt interest. Furthermore, the British taxpayer currently pays £12 billion in benefits for foreign nationals, and reforming the rules on entitlements could help reduce this expenditure. However, there are other areas where the government could save money if it wishes to prevent a repeat of the 1976 crisis, when the IMF bailed Britain out.

We must return to fiscal responsibility. The objective should be the elimination of both deficit and debt, which will necessitate balancing the accounts. It requires an increase in tax revenue through economic growth, driven by substantial tax cuts and productivity enhancements. If we fail to reduce the debt, the British government may find it challenging to sell government gilts, as evidenced by the experiences in Japan and the USA, where the bond market froze. This freeze transpired due to a lack of investor confidence in the government’s ability to repay interest or capital, stemming from the country's excessive national debt. Likewise, the BoE, commercial banks, and pension funds invest in government gilts, which they repay with interest and capital.

Illustration by Will Allen/Europinion

One method proposed by economists to reduce spending is to abolish the BoE’s quantitative tightening programme. Interest payments on central bank reserves created after the £895 billion quantitative easing (QE) programme, introduced following the 2008 crash and the COVID crisis, are costly. QE characterises the period when banks purchased gilts to lower borrowing costs, creating reserves that earned interest for commercial banks. The low rates of 0.1% to 0.5% enabled the Treasury to profit from the spread between gilt returns and interest payments. However, interest rates are now higher at 5%, reversing this situation. Quantitative tightening, which involves selling gilts back to the market, resulted in an £85.9 billion loss transferred from the Treasury to the BoE after 2022, costing taxpayers £133.7 billion. Given that it was fake money generated to alleviate financial stress on the nation during a time of economic turmoil, it makes sense to remove the obligation to pay the interest on QE reserves to save £35 billion. 

However, this realist, cost-saving approach to politics is unlikely to appeal to the Labour Party, which is dominated by status quo types who seem content to maintain a trajectory of managed decline, opting to spend more money rather than focusing on interventions that could reignite the economy. For instance, it could cut corporation tax to enhance tax revenue from wealth generation, with its efficacy evidenced after the 2010 coalition government reduced it from 27% to 19%.

Moreover, the government needs to wake up and act. There are areas where we could save money, such as the £8.2 million recently squandered on a report assessing the risk of global warming to the UK. Given that we already know Britain contributes less than 1% of global CO2 emissions and that net zero has driven up our electricity prices, further virtue signalling on costly green initiatives does not make financial sense. The transition to renewables has harmed the economy, particularly with the decline of our coal industry, which has led to increased unemployment. It places us at a competitive disadvantage compared to countries like China, which continues to build new, reliable carbon-based energy power plants, making up 30% of its energy sources. By contrast, the fledgling green technologies invested in by this government have cost the taxpayer £22 billion in subsidies. We should anticipate blackouts, as seen in Spain, because the £30 billion investment in wind turbines and solar panels appears to disregard Britain’s energy infrastructure, which lacks the necessary components, including storage facilities, to make the grid entirely dependent on renewables. This necessitates additional costly spending commitments on fallback options, such as nuclear power, as solar panels require 100% backup from imported carbon-based fuels.

On foreign policy, rather than spending more to escalate tensions with Russia—after all, it's not as if we haven't poked the bear enough—we should allocate part of the £3 billion planned for the hundred-year deal towards funding inheritance tax relief for farmers, VAT for private schools, and the Winter Fuel allowance. These expenses total the amount pledged for Ukraine. 

It is correct that the government aims to abolish migrant hotels that cost taxpayers billions. However, the solution of transferring illegal migrants to local authorities at the expense of taxpayers using private rental accommodation remains costly. A sizeable portion of the social housing investment pledged in the Spending Review, including the planned construction of 1.5 million homes, will be allocated to migrants, with approximately seven out of ten in five-year deals. This will further increase house prices for British people, which will price them out of the home ownership market.

Illustration by Will Allen/Europinion

In conclusion, the spending review fails to connect with reality. It overlooks broader economic issues in pursuit of short-term popularity while failing to commit to meaningful and necessary spending cuts, which are essential even without any public spending extravagance. It also reflects the government’s failure to take responsibility for the ongoing rise in gilt yields, or to acknowledge the ineffectiveness of past expenditure cuts driven by dogma that were poorly conceived. Instead, the government should commit to ending quantitative tightening, reduce welfare benefit payments—including reform of entitlements for foreign nationals—defund unreliable and emerging green technologies, withdraw funding from foreign conflicts, and cease the subsidisation of social housing for migrants. Pro-growth policies that lower corporate tax and increase the lowest threshold at which taxpayers must pay income tax are ways to encourage work, boost productivity, and generate economic growth.

Illustrations by Will Allen/Europinion