By Evie Ryan & James Watson

Campaigning is just the beginning

With voter intention polls continuing to put Labour comfortably ahead, it’s looking increasingly likely that Sir Kier Starmer and Rachel Reeves find themselves at the helm of No. 10 and HM Treasury on Friday morning.

Reeves – if successful in becoming Chancellor – has already promised a Spending Review for the autumn. By then, any summer sun will have given way to colder and darker evenings, and the novelty of any potential success at the Euros will be long-gone. It’ll be time for the hard work to begin and Labour will find itself facing tough decisions.

Spending Reviews, a familiar fixture for Whitehall are often overlooked by the private sector compared to more headline-grabbing Fiscal Statements and Budgets. They’re important indicators for the economic factors behind governments decisions, and provide a helpful tool for long-term scene setting.

Forecasting four big challenges

Supported by the Office of Budget Responsibility and delivered in the same window as the Autumn Statement, the next Spending Review will set the tone for Labour’s first years in office. There is fourfold challenge building for Reeves in what the Review is likely to show about the UK economy, how this will impact public spending, and critically, what this will mean for delivering ‘change’ in the way Labour has been describing during the campaign.

• First, public debt is the highest it’s been since the 1960s, and the tax burden also at its highest since 1948. Compounding this, Labour has consistently promised not to raise corporation tax, income tax, VAT, or increase national insurance to fund spending. The ability to raise further public monies is, therefore, significantly constrained by the current economic reality and Labour’s election campaign pledges leave very little fiscal head room to increase spending in the short-to-medium term.
• Second, to find funding to carry out even some of its less ambitious plans, a Labour Government may need to either cut spending to specific departments or apply a very ‘constructive accounting’ approach. Labour HQ has, so far, shown some willingness to take a hard line on some areas of spending, evidenced by their unwillingness to axe the two-child benefits cap but, critically, there is zero mandate for drastically slashing departmental budgets, as opposed to the then incoming Coalition Government of 2010-2015.
• Third, Labour will need to navigate new ministers chomping at the bit to ensure their departments get a piece of the ever-limited fiscal pie. The prestige of a department, even those outside of the Great Offices of State (HMT, FCDO, Home Office), is in part defined by its spending limit and ability to enact policy and this will, in turn, enable or curtail ministers’ progression around the Cabinet table.
• Finally, the new Chancellor will likely be tempted to undertake an initial 1-year review, as opposed to a comprehensive multi-year programme, to manage the noted fiscal constraints. Both approaches offer benefits and challenges. The former is recommended by the Institute for Government and would give a Labour Government room for manoeuvre in the short-term with a view to focusing on immediate priorities and balancing the books. However, this approach would curtail the medium-to-long term certainty needed for public services and the market. The latter approach would provide longer-term clarity, but could box a future Labour Government into plans that are either unachievable or require adjustment which could, in turn, impact their credibility.

In for a penny, shuffling around the pounds

Labour is already laying the groundwork to tackle challenges heading its way. Sector expertise and access to institutional capital are critical to Labour’s plans for growth and reducing the pressure on the Treasury.  A lot lies with tapping into the private sector and aiming to create the right environment to attract investment, so that government and industry together can invest in public initiatives as well as infrastructure.

Dedicated government funds and new bodies, such as GB Energy and the National Wealth Fund (NWF) are designed to crowd in investment and set the direction of travel. Importantly, business, as the co-pilot in Labour’s vehicle of ‘Change’, will be encouraged to pick up the costs of projects and programmes that sit outside the gift of the Government’s purse but will reap the dividends of growth so long as they conform to Labour’s flight plan for UK plc.

Labour has been working hard to build the relationships needed to put this approach into action. It has already stood up a Taskforce, led by the Green Finance Institute and Brookfield Asset Management, to advise on delivery of its planned £7.3bn National Wealth Fund. This fund will be expected to crowd in at least £3 from the private sector for every £1 invested by the state, with a focus on driving growth in key sectors to ‘reindustrialise’ Britain[i]. Alongside the NWF, Labour has established its British Infrastructure Council (BIC) to assemble leading finance organisations to support the drive for investment.

Both the Fund and the BIC exemplify Labour’s new era of public-private partnership and an effort to get business working for Britain and reduce demand on its coffers.

Reeves’ Global Investment Summit, due to occur within the first 100 days of a Labour Government, offers another glimpse into Labour’s plan to encourage the flow of foreign capital to UK shores. The agenda for this event remains unclear but it will likely mirror similar summits hosted by the Tory Government in recent years, which have reaped significant amounts of capital.

Factoring in the forecast  

Ultimately, the Spending Review is going to confront the new Labour Government with difficult decisions within the first few weeks of its tenure. The recent report from the Institute of Fiscal Studies is stark in laying out the scale of this challenge[1]. With the Party committed against an austere approach to spending, it is placing its future success on being able to incentivise enhanced private investment, and crucially, do this at pace.

The Party knows it can factor in reduced headroom for now, what’s less certain is its ability to encourage growth in the way it requires to give more room for the subsequent Reviews and fiscal events over the next five years.

There is clearly an opportunity for businesses of all shapes and sizes to support these plans, even without large reserves of capital. Labour is keenly aware that they don’t have all the answers to public spending and will be looking to industry to provide the sectoral insight and expertise necessary to target investment in the right areas and encourage growth.

Engagement with a Labour Government will be critical in its First 100 Days. Industry should look to the likely consultations on the NWF, GB Energy and all the other initiatives that Reeves will wish to undertake as opportunities to influence how these are shaped, and should not be missed.

[1] https://www.ft.com/content/e529148e-01b4-4fe9-af43-c8c54807c58b

[i] https://www.cityam.com/national-wealth-fund-will-help-create-650000-jobs-over-five-years-reeves-says/