How to approach a spending review
Plus: striking doctors, the space economy, and family taxation
In ten days, the government will announce the results of the first multi-year spending review since the pandemic. In principle, the overall ‘spending envelope’ has already been set; this review will simply allocate that spending to different departments and activities.
It’s quite common at these reviews for the government to ‘top up’ spending in the short term, while penciling in greater fiscal discipline towards the end of the forecast period – the natural result of fiscal rules that mean you are trying to hit a target which is always five years away.
However, given the Chancellor’s limited headroom against those fiscal rules – and the possibility that borrowing costs, growth downgrades, and below-expectation tax receipts have already eaten that headroom up – even the customary short-term generosity may be in short supply.
As a result, hard choices need to be made. In research published today, the Institute for Fiscal Studies points out that higher spending on health, defence, and capital investment will necessarily require real terms cuts elsewhere – “ruthless prioritisation” will be needed.
I would go further. It’s been a quarter of a century since we ran a budget surplus, despite the tax burden being at a record high. And an ageing population means things are going to get much worse over time if we simply maintain current policy settings. Genuine radicalism is required.
We are told that the current spending review will offer a root-and-branch, zero-base review of public spending. But it won’t. What we will see in ten days will be the same old tinkering around the edges – the same old ‘extend and pretend’ – that we’ve had for the last fifteen years.
Coalition-era ‘austerity’ never grappled with the real problem – that the state simply tries to do far too much. Instead, it ran down some parts of the public sector (including core functions like policing and the courts) in order to push more money towards pensioners and a dysfunctional National Health Service. As things stand, I expect more of the same.
We need to rethink what the state does and how it does it – and transition to a public sector that employs fewer people to do fewer things. A meaningful spending review would start by listing everything the government does, rank those activities by importance and effectiveness, and then fund down the list until the money runs out. Anything that doesn’t make the cut should be shut down, or left to the private sector.
That sort of approach obviously sits uneasily alongside the inherent short-termism of elected politics. But without bold action, we will be stuck with an ever-larger, less effective state – and a precarious fiscal future.
Tom Clougherty
Executive Director
P.S. Earlier this week, I discussed the upcoming spending review with Kamal Ahmed and Tim Stanley on The Daily T podcast.
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IEA Podcast: Communications Manager Reem Ibrahim, Executive Director Tom Clougherty, and Editorial Director Kristian Niemietz discuss Reform UK’s family tax plans, the looming threat of junior doctor industrial action, and the space economy, IEA YouTube
The Space Economy
The new space race between the US and China has already started, and Governments should embrace private enterprise.
Private companies, such as Elon Musk’s SpaceX, now account for 82% of space industry revenues, with government and military sectors making up the remainder.
Regulatory and bureaucratic obstacles remain the biggest threat to further expansion.
A more liberalised policy framework is paramount to competing with China.
A new review of literature on the space economy, published by the Institute of Economic Affairs (IEA), highlights the rapid expansion of private enterprise in space exploration and its potential to outpace traditional government-led initiatives.
Exploring the Space Economy, by Dr. Rainer Zitelmann, outlines how market-driven innovation is lowering costs, accelerating technological breakthroughs, and making space more accessible than ever before. With estimates suggesting that the space industry could be worth $1.8 trillion by 2035, the report argues that regulatory barriers must be minimised to allow competition and entrepreneurship to flourish.
How capitalism will conquer space, author Dr Rainer Zitelmann writes in CityAM
Brexit freedoms could put rocket under UK in new space race, The Express
Space race offers $1.8trn, The Times (Print)
News and Views
Executive Director Tom Clougherty is quoted in The Telegraph on the Reform Party’s plans to introduce transferable tax allowances.
Tom Clougherty, executive director at the Institute of Economic Affairs, said: “I do think it is good tax policy. As things stand, two households with the same overall income can pay wildly different amounts of tax based on how that income is distributed between partners. That seems unjust.”
Director of Communications Callum Price interviews Robert Jenrick MP about barriers to economic growth in the UK, IEA YouTube
Politicians like to claim they will take the tough decisions, but they’re shying away from necessary action on the Triple Lock, argues Callum Price in Conservative Home
Badenoch made some good points about means testing but was quick to clarify she wouldn’t be looking at the triple lock when attacked by both Labour and Reform. Farage recently declined to be drawn on the triple lock, but the aforementioned attack against Badenoch gives a good sense of Reform’s commitment to it. And the Government remains committed to it, with even former critic Torsten Bell going native in the Treasury. The Liberal Democrats? The triple lock was their idea.
Communications Manager Reem Ibrahim appeared on Good Morning Britain to discuss the threat of industrial reaction from junior doctors, ITV Good Morning Britain
Your Professor Lied to You About Capitalism | Yaron Brook | IEA Live, IEA YouTube
EU deal risks stifling the UK’s thriving gene editing sector, the IEA’s Matthew Bowles writes for CityAM
Universities: what can we learn from the US?
By Peter Ainsworth, author of Shares in Students: A New Model for University Funding
2025 Vinson Centre Conference in the Classical Liberal Tradition
Welcome to the 2025 Vinson Centre Annual Conference! Join us at the Vinson Centre for the Public Understanding of Economics and Entrepreneurship for a day filled with insightful discussions, networking opportunities, and engaging sessions.
Tom you are correct that the upcoming review will not deal with our financial crisis because the people running the country are not fit for purpose. They also follow others also not fit for purpose. We should focus on balancing the " books" by supply side growth not demand growth.
Tom, a good précis. But you’re missing an obvious point. Our problem is not how we cut our government spending to fit the income of tax revenue. But we should look at the economy and find a way to increase that tax revenue by making the ‘system’ work better to afford ALL our needs!… it’s easy to cut expenditure to fit an amount of money, any idiot could do that and they seem to be doing it again! These politicians of all denominations have had a go at it, as you say over the last 25 years. It’s too easy to borrow money to plug the gap so instead of cutting essential services they have all decided to increase borrowing to make ends meet. Now Reeves, in a deluded attempt to outdo a conservative agenda by being more Conservative than the Conservatives has gone ever further by cutting benefits to OAP and the disabled and overloading business’ and their tax burden! What s stupid policy! She should be sacked immediately. Instead we need the brains to look at how tax is triggered so as to increase the flow of money into the economy by improving or in my view changing the ‘system’ that provides tax revenue to the exchequer so as to increase the tax take! If the exchequer needs more money, we need to look at how we can turbo charge the daily economy to make the money we need! What I don’t see, hear or read anyone looking at this answer? We hear about ‘growth’ and to get growth we need ‘investment’ . But, what I don’t hear is what is meant by ‘growth’!??… When we owe £3,000,000,000,000.00 yes, 3 trillion pounds how can we grow from that minus position to grow anything? We are hanging on by our fingertips to the present ability to meet our present tax demands. And as you say, that is well short of balancing the books. So it’s absurd to talk about growth in that sense and what is the ‘investment’ we need to to see to expect that growth to be achieved? Investments as we know do not guarantee any profit or return! So it’s an absurd and ridiculous expectation. What annoys me is how when top economists agree we need growth from investment! It’s like a driver who assumes they know about cars lifting a car bonnet after breaking down diving in to attempt to fix the problem when actually the car had run out of petrol! They are looking in the wrong place and the wrong direction and every AA or RAC man who turns up because he has the bonnet open all dive in too! It’s amazing the way economists can’t see what is needed! Rachel Reaves means ‘more tax revenue’ when she says “growth”. If she said that she might start looking in the right direction! Also instead of ‘investment’ she then says “we need more money” to give us the tax take we need she might start to see what we as the goose who lays the golden eggs to give her that tax revenue she may see or start to see the answer materialising in front of her! I still have my doubts she would but, I can live in hope! The key to affording our required expenditure is to turbo charge the economy by making more money move through it quicker and in more weight than it is at present! So how do we get more money in our daily economy? Well not by borrowing it! That costs and that easy out has been the go to for all governments for decades! There is a question of have we enough money in our economy in the first place? For example, an economy of 100 million people needs more money in it than say a population of 500,000 people. Thats a question for mathematicians. But next we must look at where is all the money and how is it used and taxed? We allow huge sums of money to be held unspent and unused by few individuals, companies and countries for so long that it is NOT in our daily economy! That the problem right there! The Government allow this situation! So they can not allow it? Thatcher took away exchange control regulations in 1979, opening the floodgates for incoming foreign money. But what we see is our money outgoing and not coming back! So put that right! Reestablish exchange controls. Don’t allow money to flow out. Then make it revolve. The more it does the higher the tax take. And by putting a date on it will ensure it is spent! Put a spend by date on income to ensure money revolves. So the economy that pays tax actually can at last pay enough tax to fulfil all our needs. Make as much money as you can! With more money flowing everyone will taste that tsunami of spending. All will earn more. We can afford everything we need. We will have higher wages and increased benefits including a better higher pension! Happiness to all not the few! Income Tax is paid by the employers! Not the employee! It’s smoke and mirrors. The business pay it based on wages yes, but paid from the employer! Most tax is paid by Vat and Duty nit income tax and NI. But that tax is hidden. It’s not in the bill from the petrol station that vat and fuel duty takes a massive amount of tax! Also tax is triggered like that by spending! So all money spent is taxed but guess what? Money not front snd unused is taxed free! Untaxed! Do rich snd wealthy who don’t spend all their earnings pay no tax! Unlike us who have to spend all our income to survive who pay as much tax as possible! So the rich pay no tax on money the hold. And they hold it for years untaxed! Even if h there was a wealth tax it wouldn’t be much as it’s unspent. Our economy needs spending! So they should be rich from what they earn and spend it on not the money itself! Our economy needs money flowing not sidelined. So there is the answer! Make money be spent or get it taken by the exchequer. That’ll keep money moving! Spend it or loose it! Why are you at the IEA not looking at the fuel guage?