Spring Statement
Introduction
Central to the government's fiscal policy is a delicate balance between managing welfare expenditure, fostering sustainable economic expansion through increased capital investment, and addressing persistent fiscal pressures. We explore these dynamics, shedding light on how historical spending patterns, policy reforms, and strategic fiscal decisions intersect to shape the UK's economic trajectory over the coming years.
What does the Chart Show?
The chart illustrates the UK's public spending as a percentage of GDP from 2010-11 through to projections for 2028-29. It highlights the substantial spike in expenditure during the COVID-19 pandemic in 2020-21, driven primarily by increased demand-led spending and welfare measures. Post-pandemic, spending proportions stabilised but remained elevated compared to pre-pandemic levels. From 2024-25 onwards, the forecasted data notably indicate a deliberate shift towards increased capital investment, reflecting the government's strategic emphasis on infrastructure and productivity-led growth. Welfare expenditure remains relatively stable, albeit at high levels.
Why is the Chart Interesting?
Over the past decade and a half, welfare expenditure in the UK has experienced notable shifts, reflective of broader political and economic conditions. Following the financial crisis, the Conservative government's austerity measures significantly curtailed welfare budgets, reducing spending as a share of GDP. Driven by commitments to fiscal consolidation, the coalition and subsequent Tory governments introduced reforms like the benefits cap, tightening eligibility for benefits such as housing allowance and incapacity benefits. Consequently, welfare expenditure as a percentage of GDP steadily declined, easing the public purse but prompting considerable social debate about poverty and inequality.
However, the COVID-19 pandemic marked a dramatic reversal of this trend. The furlough scheme, temporary Universal Credit uplifts, and various emergency measures caused welfare spending to surge to unprecedented levels. These extraordinary interventions were crucial in protecting incomes and stabilising the economy but inevitably placed substantial pressure on public finances.
Between 2022-23 and 2023-24, welfare spending again spiked, reflecting inflation-linked uprating of benefits and rising costs linked to economic uncertainty and higher unemployment-related claims. Rachel Reeves' Spring Statement responds directly to this renewed expansion, implementing measures projected to yield welfare savings of £4.8 billion by 2029-30 through tightened eligibility, particularly targeting Personal Independence Payments and Universal Credit. These measures represent a return to tighter welfare management, echoing previous conservative approaches aimed at controlling fiscal outlays.
Despite the £4.8 billion savings by 2029-30 through reduced incapacity and disability benefits, the total welfare spending share of GDP shows little overall decline through the forecast period, only slightly reducing from 10.9% of GDP in 2023-24 to 10.8% by 2029-30. A primary driver of this persistent high level is pensions expenditure, exacerbated by the UK's ageing population and the state pension triple lock.
Pensions represent a significant and structurally rising component of government welfare expenditure. Although the government plans to mitigate some costs by raising the state pension age from 66 to 67 between 2026 and 2028, saving an estimated £10.4 billion by 2029-30, pension spending still rises overall.
This trend in pensions expenditure highlights a critical fiscal challenge. The government's measures, including reductions in other welfare areas such as disability benefits, yield significant savings but fail to dramatically alter the trajectory of overall welfare spending due to pensions' increasing dominance. The resulting constraints on public finances are substantial, limiting fiscal flexibility.
Rachel Reeves underscored the government's commitment to invigorating economic growth through a considerable increase in capital investment. This approach is evident in the planned extension of capital expenditure over the forecast period, contrasting with the more restrained allocations of previous years.
Specifically, the government has announced an additional £13 billion in capital investment over the current Parliament, supplementing the £100 billion uplift detailed in the Autumn Budget. This escalation is designed to catalyse private sector investment and address critical infrastructure needs, including transport, housing, and clean energy initiatives.
A notable allocation within this is the £2 billion boost to the Affordable Homes Programme. This initiative aims to support the construction of 1.3 million homes by 2029-30, addressing the UK's housing shortage and contributing to economic expansion. The additional funding is intended to assist local authorities and housing associations in bridging financial gaps for affordable housing projects, with a target of building 305,000 homes per year by 2030.
Furthermore, the government has launched a construction skills package to train up to 60,000 new skilled workers. This £600 million investment is designed to mitigate labour shortages in the construction sector, ensuring that the increased capital investment translates into tangible infrastructure development.
The success of this strategy will depend on the government's ability to manage these projects adeptly, ensuring that increased expenditure translates into improved infrastructure, enhanced productivity, and sustainable economic expansion.