Reeves Defends Economic Choices, Touting UK Spending Plans

(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves will defend her fiscal choices and trumpet billions of pounds of infrastructure investment in the UK spending review on Wednesday, as Keir Starmer’s government seeks to regain momentum after a faltering first year in power.

Reeves will detail government spending plans through to the end of the decade, laying out how hundreds of billions of pounds will be allocated to investments in transport links and energy projects, and rebuilding hospitals and schools. She’ll also lay out plans to direct £39 billion ($53 billion) of public money over 10 years to an affordable homes plan, the Treasury said late Tuesday in a statement.

The chancellor is due to speak at about 12:30 p.m. in the House of Commons, allocating funds raised in her tax-raising budget in October between government departments.

The intervention marks a defining moment for Starmer and his chancellor, as they seek to reshape the narrative of their government away from rigid adherence to budgetary rules and toward the huge up-tick in capital investment they plan in coming years. Their decisions will shape the quality of Britain’s public services — and voter perceptions — for years to come. Reeves will characterize her plans as an investment in “Britain’s renewal” made possible by her decisions last year to increase taxes by £40 billion and loosen borrowing rules.

“The choices in this spending review are possible only because of the stability I have introduced and the choices I took in the autumn,” Reeves is due to say, according to pre-briefed remarks from the Treasury. “I have made my choices. In place of chaos, I choose stability. In place of decline, I choose investment.”

Opinion polls highlight the hole the Labour government finds itself in, despite surging to a landslide election win just 11 months ago. A YouGov survey published Tuesday put Labour on just 23%, trailing Nigel Farage’s insurgent populist Reform UK Party by six points. The Conservatives — ejected from office last year after 14 years in power, were on 17%.

Moreover, the economic backdrop is unhelpful after official data Tuesday highlighted the impacts of Reeves’ tax-raising budget in October, whose flagship measure was a £26 billion hike in the national insurance payroll tax that took effect in April. The latest figures from the Office for National Statistics showed UK employment plunging by the most in five years in May and wage growth slowing more than forecast, a sign the budget is fueling a deterioration in the jobs market.

Reeves will seek to counter that narrative, arguing the UK is turning a corner and pointing to a string of recent interest rate cuts as well as data showing the UK enjoyed the fastest growth among Group of Seven nations in the first quarter. Those growth figures, however, came in the period before her national insurance increase took effect and before the imposition of US President Donald Trump’s tariffs that have roiled global trade.

In a bid to draw attention to the rosier parts of her spending review in recent days, the government has trailed announcements including investing £14 billion in the Sizewell C nuclear project, £86 billion in British science and committing £15 billion for new transport infrastructure across the north and midlands of England.

The social housing funds aim to help ministers reach a target of building 1.5 million homes by mid-2029. Annual funding will hit £4 billion in 2029-30, almost double the level of the past five years, the Treasury said. It also announced a 10-year social rent settlement that will limit rent rises to inflation plus 1% starting next year.

But Reeves’ plans are also likely to include real-terms cuts to some government departments given more generous spending allocations in areas like the National Health Service and the military, which is likely to cause a backlash from some Labour Members of Parliament. The chancellor only assigned a 1.2% uplift in day-to-day government spending for the next three years, but with the health and defense departments receiving settlements in excess of that, other ministries will have to lose out.

“She will face really tough trade-offs between health and other areas, and even within her expanded capital budget,” Ruth Curtice, chief executive of the Resolution Foundation think tank told Bloomberg TV on Wednesday.  

Economists at the Institute for Government think tank said in a note on Friday that some departments “will be left disappointed,” and that “settlements will determine the scale of the challenge that ministers face in improving the performance of public services, many of which are performing badly.” 

The pressure on the funds available for day-to-day spending — which are separate from Reeves’ more generous pot for capital investment, where she has an extra £113 billion to deploy compared to the previous Tory government’s plans — has led to tense clashes with senior figures in Starmer’s government, including a stand-off over police funding with Home Secretary Yvette Cooper. London Mayor Sadiq Khan is also set to lose out, with the UK capital due to miss out on extra funding for new infrastructure projects as Reeves focuses on investment elsewhere in the country.

Reeves is hoping her spending review will turn the page on a turbulent period for the chancellor, where she’s seen her popularity ratings fall to the same levels as those of former Tory chancellor Kwasi Kwarteng after his disastrous mini budget in 2022, according to pollster Ipsos. The decline in popularity has come amid controversial decisions such as cutting welfare payments for the disabled and stripping winter fuel payments from most pensioners, a policy the government U-turned on this week.

The winter fuel reversal followed a bruising set of local election results for Labour in May, which confirmed the ascendancy of Farage’s Reform. The right-wing outfit has consistently led Labour in national polling in recent months, and Starmer has identified it as his party’s main political threat. Ahead of the spending review on Tuesday, Reeves conceded that not enough people are feeling progress under Starmer’s government — while maintaining her spending choices would make people better off.

“This government is renewing Britain,” she will say on Wednesday. “I know too many people in too many parts of the country are yet to feel it. This government’s task – my task – and the purpose of this spending review – is to change that.”

(Updates with comment from Resolution Foundation starting in 12th paragraph.)

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