The state spends £24,000 a year for every adult. Something's got to give

Times

11 hours ago

It's amazing how things change. Just a few months ago Rachel Reeves told us the financial situation was so grim she had no choice but to take the winter fuel payment from all but the poorest pensioners. And now, thanks to Labour, it's all going so well she can afford to give it back.
That was, of course, a lie. But it wasn't the big lie. No, the big lie was that the spending review bore any relation to what we will actually spend.
The traditional recipe for political success is simple: scrimp, then splurge. Get the pain out of the way after the election, so you can splash out before the next one.
• Jobs market is flashing a warning sign to Rachel Reeves
That's not the approach Reeves took. She wanted to show she was ending austerity (such as it was). But the finances were desperately tight. Her solution, apart from raising taxes, was to frontload her spending increases and hope something turned up. The result is a spending profile that resembles a child playing a violin: sharp, then flat.
Between 2025-26 and 2028-29, day-to-day departmental spending is to rise from £518 billion to £568 billion. Factoring in inflation, that means budgets in the last two years of the parliament will grow by just 1 per cent a year — and far less for most departments, since the overall figure includes 3 per cent a year for the NHS (which is getting more than half of all the extra cash).
Will Labour really go into the election amid more 'Tory austerity'? Well, no. It'll want to spend more. Or need to: Reeves's ferociously tight numbers leave no room for downturns, pay strikes, trade wars or shooting wars. Her plans also depend on £14 billion in hazily detailed 'efficiency savings'. And the hoped-for bailout via a mid-term growth bonanza is less likely than ever.
But here's the paradox. From the perspective of the Labour Party, most of those working in public services and her own electoral prospects, Reeves isn't spending nearly enough. But from another perspective, the chancellor is spending far, far too much. Public spending is running at 44 per cent of GDP, a historic high. Taxes, too, are historically high, and universally expected to go higher.
Not only have we been spending like crazy, not least because of the pandemic, but we've been spending money we don't have — resulting in an annual bill of more than £100 billion just to cover the interest on our debts.
These numbers can be hard to put into context. So our team at the Centre for Policy Studies think tank has come up with a different way of looking at it. We estimate that we are now spending £23,757 for every adult in this country: roughly two thirds of the average full-time salary of £37,500. That includes £3,807 on health, £5,817 on welfare and pensions and a shocking £1,955 for that debt bill.
Restrict the calculation to those of working age, and spending is north of £30,000 a head. Factor in economic inactivity, and the state is almost certainly spending more than every worker aged 18 to 65 is earning.
This is very obviously not sustainable. So how to square the circle?
Given the position we're in, shaving departmental budgets just won't cut it, especially when the chancellor claims to have already ruthlessly reviewed every pound they spend (yet somehow set them all the same target for efficiency savings).
We need to accept instead that government cannot actually do all the things it tries to. But we already know how hard that will be. If ministers are going to U-turn on the winter fuel payment and wobble on a set of welfare reforms that barely slow, let alone halt, the rise in disability and incapacity spending, how can they possibly tackle issues like the triple lock, social care or special educational needs and disability (Send) costs for councils? That's before even mentioning the NHS.
So here are a couple of heretical thoughts. The first is that rather than guaranteeing the level of any individual benefit, we should think in terms of total spend.
Let's say we decide that we can only afford to devote 1.5 per cent of GDP to a particular benefit. If more people claim, the totals go down. If people want more cash, they either have to dob in the fraudsters or accept the kinds of policy likely to swell GDP. A gentler version would be to keep benefits from falling, but ensure that they increase only when we can actually afford it. Revolutionary, I know.
The second idea is more fundamental: to accept that government cannot actually move the economic needle.
If you were listening to the spending review, you would have heard pledge after pledge: billions spent on this, billions on that. But that is not how you get the economy growing. You do that by creating the conditions for individuals and businesses to boost it for you.
This may sound like Thatcherite dogma. But it's simple maths. Investment in the UK is roughly 18 per cent of GDP. But the state is responsible for perhaps a sixth of that. Hence Reeves's talk of 'co-investment': using small amounts of state funding to leverage much larger private sums.
Or let's look at affordable housing, one of the few areas that did get some cash at the spending review.
The government is promising an extra £39 billion over ten years. That's useful. But housebuilders knocked up £46 billion in private sector housing in just the past year — a pretty slow year, at that.The point is that even small increases, or falls, in private sector activity have a far larger impact on the economy, and balance sheet, than the endless initiatives that pour forth from government. Which is precisely why Reeves's jobs tax was so damaging.
Generating those increases, or falls, often isn't about money, but common sense. On housebuilding, for example, our system is based on local plans set out by councils. But loads of councils don't have plans in place. And Labour has embarked on a massive local government reorganisation that will delay their publication still further, dooming any hope of hitting its housing targets.
It may be anathema to many on the Labour benches, but if the government is to have any hope of avoiding tax rises not just this autumn but for years to come, it needs to do what it finds hardest: clear the obstacles and let the private sector get on with it. The temptation, instead, will be to hammer work, wealth and business one more time. Which will of course make the task facing the chancellor even harder.