Short-termism vs long-term strategy: rethinking the UK's fiscal frenzy

The Spring Budget confirms why the UK needs fewer fiscal events. Instead of tax reform and long-term thinking on how to spend effectively, government has become consumed by delivering the headlines. Indeed, with a general election looming, politics trumped sound economic policy to the tune of ￡40 billion in spending by 2028/29. This comes off the back of an Autumn Statement only three months prior where the Chancellor announced a staggering 110 growth measures.

The underlying economic and fiscal fundamentals in the UK remain largely unchanged. Growth in the economy fell into a mild recession last year following very little recovery since the pandemic. To finance his 0.5% of GDP worth of tax cuts, Jeremy Hunt has had to rely on lower debt interest payments (thanks to larger anticipated falls in inflation), higher taxes (such as nondomicile, vaping and holiday lets) and presumed tax hikes post-election. This is set within the context of an already back-breaking tax burden with tax as a share of GDP set to rise to its highest level since 1948.

Demand pressures on public services will require more taxes, not less. According to our latest Performance Tracker, performance in most services is still worse than before the pandemic and much worse than in 2010. The outlook is likely to deteriorate further due to the convergence of tighter than expected current spending plans, a persistent underinvestment in capital and workforce problems including recruitment and retention. Although the Chancellor confirmed his intention to raise spending by 1% in real terms, the OBR estimates that this will require at least a 2.3% cut to unprotected departments – a heroic ask following more than a decade of austerity.

Despite several section 114 ‘insolvency’ notices this year, and warnings from nine other councils on the brink, Hunt made little mention of the dire state of local authority finances. Starting with the positives, government action to tackle business rates avoidance is finally gaining some traction with an extension to the empty property relief reset period and greater access to the Digitalising Business Rates programme. Councils will also benefit from ￡165 million to support additional capacity in children’s social care placements.

?Funding to the sector, however, remains reactive. Multiyear settlements should become the default as would a decisive move away from competitive grants aimed at pet projects that lack the necessary monitoring and evaluation to deliver good value. For example, the announcement of ￡100 million in extra levelling up funds should align with medium to long-term financial planning. Instead, it continues with an incremental approach lacking the longevity and scale necessary to address even the ￡2.4 billion funding gap anticipated this year. Synchronising tax and spending decisions with the less frequent spending reviews would make more economic sense.

Productivity featured prominently in the Chancellor’s plans to regrow the economy and improve living standards which had been on a downhill trajectory. A renewed focus on efficiency savings across public services may be difficult after years of fiscal consolidation but the ￡900 million announced, including ￡400 million for digitisation initiatives across the criminal justice system, will help improve case management and data sharing processes. Moreover, investments to update the NHS’s outdated IT system and accelerate achieving the NHS’s productivity plan will be needed if core services are not to be cut.

Investing for the long-term will require ringfencing capital and preventative spending budgets that are still too often treated as reserves to draw on for shortfalls in resource allocations. Unfortunately, the degree of flexibility built into the Chancellor’s fiscal rules make accountability elusive. Funding tax cuts today with unspecified spending cuts tomorrow simply kicks the decision-making into the next spending review or parliament. Indeed, there is a risk of yet another Autumn Statement occurring before the general election if the economic and fiscal outlook improve materially. The ability to bake-in permanent changes to policy based on such volatile projections is not a responsible way to manage the public finances.

In conclusion, the Spring Budget serves as a stark reminder of the pitfalls of prioritising short-term political gains over robust economic strategy and long-term fiscal health. The tendency to focus on immediate, headline-grabbing announcements rather than substantive tax reform and sustainable spending undermines the UK's economic stability and growth prospects.

As the nation grapples with a high tax burden, underinvestment and the looming pressures on public services, the imperative for fewer, more thoughtful fiscal events aligned with comprehensive spending reviews has never been more evident. The path to fiscal resilience and economic prosperity lies in strategic, long-term planning that transcends political cycles and addresses the fundamental needs of the economy and society.