Invest, invest, invest: Rachel Reeves’ £70 billion downpayment on growth and renewal

As one former comrade-in-arms put it to me on Wednesday night, ‘Now *that* was a budget’. Rachel Reeves used her first, substantive appearance at the despatch box to issue a course correction to UK economic policy, setting out the Labour government’s stall as the champion of investment-led growth. The spectre of renewed austerity – inherent in the spending projections she inherited from former Chancellor Jeremy Hunt – was banished. 

The decision to raise £41 billion in new taxes, the largest increase on record, combined with extra borrowing to the tune of £32 billion per year by 2029, to help pay for this investment, is a ballsy one – and suggests Sir Keir Starmer and Rachel Reeves intend to change, fundamentally, the UK’s prevailing economic model as they attempt to rescue the country from its post-2008 torpor. Think less Singapore-on-Thames and more Social Democratic-continental. 

Making this shift up front is the right decision. It gives the Chancellor’s reforms the maximum opportunity to bed down and bear fruit before the next general election. Considering the tight confines of Labour’s manifesto commitments, the package of tax increases seem broadly logical – with initial Treasury number-crunching suggesting that they will be targeted at the better off, which can only be a good thing. And the decision to borrow to invest, specifically to cancel what the Resolution Foundation yesterday referred to as the ‘growth-sapping public investment cuts in the [Chancellor’s] inherited plans’ will hopefully turn the page on the UK’s ‘usual pattern of low and volatile public investment.’ 

However, when it comes to reform of how the state is funded, and therefore how it works (our focus here at FGF), the budget presents a more mixed picture. Logically, investment and infrastructure are the main beneficiaries, with the new Public Sector Net Financial Liabilities (PSNFL) measure as the centrepiece of the reformed fiscal rules.

Figure 1: UK national accounts measure

This supersedes and expands on the Public Sector Net Debt measure, which included all debt held by public sector bodies minus a small number of liquid assets (such as cash and foreign exchange reserves), but, crucially, excluded other financial assets. In contrast, PSNFL includes illiquid, economically productive assets, which frees up an extra £21 billion for institutions (like the newly-minted National Wealth Fund) to invest. And while we didn’t see the full-fat Public Sector Net Worth approach (which fully ‘recognises the benefits’ of investment in the way the Chancellor has spoken about, see figure above), moving away from a narrow focus on debt and deficits is still a fundamental structural change, and one that will enable the government to pump an additional £100 billion of capital spending into our investment-starved public and economic infrastructure over the next five years. 

The Budget was not mission-driven per se, although the mission areas of health, education and housing were notable beneficiaries. Calls for specific measures to bear down on poverty will meanwhile go unanswered, at least until the government’s child poverty review reports in the Spring. The 2025 Spending Review will need to do more to promote mission-driven practice across Whitehall and beyond, although wriggle room will remain tight beyond 2026. However, how the resources of government are generated, structured, and invested will be material to how this practice is nurtured. Investment in services and assets that is long-term in outlook, a catalyst to innovation, collaboration, and public service reform, and lively to the essential role of places, will go a long way, constraints notwithstanding. 

If you wade through the full Budget report, there are some signs that Whitehall’s mission cogs are whirring. There will be a new Public Sector Reform and Innovation Fund to support the development of new approaches to improving public services, ‘partnering with mayors and local leaders, and developing new approaches to public service reform with a focus on experimentation and learning.’ There is also the announcement of a new social impact investment vehicle, led by Chief Secretary to the Treasury Darren Jones, in partnership with colleagues from DCMS, with the aim of bringing public, private and social sectors together to tackle complex social problems and deliver the missions. Expect the Spending Review to shed more light on the finer detail and how all of these moving parts slot together.

As for English devolution, the combined authorities in Greater Manchester and West Midlands emerged as the big winners, with the Chancellor confirming they will receive more cash and greater discretion over how to use it. Both authorities are set to receive single, integrated settlements in 2025/26, upholding the promises made by the previous government. The £1.3 billion top up in grant funding was modest, and while the promise to streamline local government finance is undoubtedly necessary and will be welcomed in many quarters, anxiety – notably on social care – will be ongoing until next year’s Local Government Finance Settlement.

Arguably, the prospect of a wholesale re-organisation of local government will have the most substantial impact on English devolution. There is a broad commitment to ‘move to simpler structures that make sense for their local areas’, but exactly what this will look like remains to be seen. These changes will be hotly contested, with the debate over whether the benefits of re-organisation outweigh the disruption it would create far from settled. Fortunately, we only have to wait a few weeks to find out, with the Devolution White Paper expected this side of Christmas.

Most Budget coverage this week has been dominated by the debates on trust and taxes. But if this Budget does what it says on the tin – delivering more investment and taking meaningful steps towards rebuilding our economy and public services – it will have served the country well. It’s time for Sir Keir and Ms. Reeves to get cracking.