Reeves' Spending Review - one for the geeks (you should all be geeks...):

 

DAVID SMITH | COMMENT

Double counting and the dark arts of government spending reviews

Everybody should look very closely at how many of the infrastructure projects announced are genuinely new, and how many are reannouncements or reheated projects

David Smith

, Economics Editor

Tuesday June 10 2025, 4.10pm, The Times

It is nearly 30 years since I was introduced to the dark arts of government spending reviews, of which we are about to see Rachel Reeves’s first effort. Let me take you back to July 1998, and the first of these three-year comprehensive spending reviews, under the chancellorship of Gordon Brown.

The 1998 review was important. The Labour government, under Tony Blair, was still in the process of convincing the financial markets that it could be trusted with the economy. After the 1997 election, it had pledged to stick to spending that the previous Tory chancellor, Kenneth Clarke, had described as “eyewateringly tight”.

• Spending review: follow live

It was a surprise, therefore, that the 1998 spending review, which had a title, “Modern Public Services for Britain: Investing in Reform”, highlighted what sounded like some very big figures for additional public spending, notably £19 billion more for education and £20 billion extra for health, over three years.

I was of course very, very young at the time compared with now, but I was old enough to realise that this sounded a bit rum. This, after all, was during Brown’s “iron chancellor”, prudent period. And, as conventionally measured, with the additional spending in the third year of the spending review period, these were massive increases.

In 1998-99, annual health spending by government was £37.2 billion, a fraction of this year’s UK health spending of more than £200 billion, so £20 billion would have represented an increase of more than 50 per cent in just three years, which seemed highly implausible, as indeed it was.

The £20 billion figure had been arrived at by what became known as triple counting, so the first year’s increase was counted three times, the second year’s twice, and so on. There was still quite a big increase in health spending — £8.8 billion in cash terms, or more than 20 per cent, added to the annual budget after three years — but well short of what was presented.

I would like to tell you at this point that lessons have been learnt, and that nobody would dream of doing things like this these days. Sadly, no. When Sir Keir Starmer announced recently that defence spending would rise from 2.3 to 2.5 per cent of gross domestic product (GDP) in 2027, he claimed that this would mean £13.4 billion a year of additional spending. In doing so, the prime minister appeared to have discovered some magic numbers, finding £13.4 billion of additional defence spending from £6 billion of cuts in overseas aid.

The truth was that the figure was only arrived at by assuming that defence spending would be frozen in cash terms at this year’s level until 2027, which was never going to happen. Instead, increasing defence spending by 0.2 per cent of GDP, means raising it by about £6 billion, which is the true figure, rather than Starmer’s dodgy one.

• Chancellor should focus spending on functions only government can provide

In the run-up to this year’s spending review, there is an explicit example of multiple counting, used by Reeves in a recent speech and highlighted by the Institute for Fiscal Studies director Paul Johnson in these pages on Monday.

As he put it: “You may already have seen reports of Treasury briefing about an additional £300 billion of spending over the parliament. Now, £300 billion is a very big number indeed. It is about half of total annual departmental spending. But what the Treasury does not mean is that annual spending will be 50 per cent, or £300 billion, higher by the end of the parliament than it was at the beginning.

“Rather, what they are doing is taking total spending in each year under current plans, comparing that with — essentially fictitious — spending plans set out by the last government, and cumulating the difference over a five-year period.”

Within that highly questionable £300 billion is an extra £113 billion of additional infrastructure investment, which suffers from the same problem. The big picture, as set out by the Office for Budget Responsibility (OBR) in March, is that there will be no infrastructure bonanza this week. Public sector net investment is officially projected to be slightly lower in real terms in 2028-29 than last year, 2024-25, and quite a bit lower in 2029-30, which is why the government is so keen to tap into pension fund investment.

While on infrastructure projects, this is a rich vein in spending reviews. We will hear a long list of announcements, covering the length and breadth of the country. In the days when there were more local papers, this was essential for coverage.

Everybody should look very closely at how many of these are genuinely new, and how many are reannouncements or reheated projects. Improvements to the A303 near Stonehenge, cancelled by Reeves last July, have been announced and cancelled so many times, that if you looked back far enough you might find improvement plans from the prehistoric folk who built the monument. As for the rest, from the regeneration of Tipton town centre to the electrification of the Cardiff-Swansea railway, more things are announced than ever see the light of day.

The curious thing about that 1998 spending review, which used cash figures (another dodgy device) as well as triple counting, was that the spin was not needed. The settlement, an average increase in current spending of 2.25 per cent a year adjusted for inflation, with much bigger real increases for health and education, was quite generous. Bigger increases were to follow.

This week the chancellor is working within a much tighter framework, real increases in spending of fractionally more than 1 per cent a year, much of which will be gobbled up by the National Health Service.

The necessary U-turn on winter fuel payments, which was very messy, has emboldened Labour MPs who are looking for further welfare concessions. The labour market is softening, partly in response to Reeves’s tax rises, except for public sector employment, which is still going up, including the NHS, which now employs an astonishing 2.06 million people.

She will need all the spin she can get to make a silk purse out of this sow’s ear. Keep an eye out for that spin.

David Smith is Economics Editor of The Sunday Times
david.smith@sunday-times.co.uk

If you thought a "£22bn black hole" was bad, consider France:

French PM Michel Barnier unveils shock therapy in 2025 budget 

Minority government bets on mix of spending cuts alongside tax rises on companies and the wealthy 

 Prime Minister Michel Barnier said: ‘We cannot sacrifice the future of our children or continue to write bad cheques that will fall on them’  Leila Abboud in Paris 

The French government has proposed a budget for next year with some €60bn worth of spending cuts and tax increases on companies and the wealthy, as it seeks to narrow its widening deficit. Prime Minister Michel Barnier has cast tackling France’s “colossal” public debt as his biggest priority, despite the political risk such measures entail for his fragile minority government. 

 “We cannot sacrifice the future of our children or continue to write bad cheques that will fall on them,” Barnier said on Thursday. “The attractiveness [of France] and credibility of the French signature must be preserved.” 

 In the proposed budget, some 440 large corporations with revenues above €1bn would be hit by an “exceptional” tax lasting two years with the aim of raising a total of €12bn. Share buybacks would also be taxed. The state-owned electricity utility EDF will pay a special dividend to government coffers — together these changes, and others affecting business, would raise €13.6bn. 

 If passed, the moves would break with the economic policies espoused by Macron since 2017 that include lowering taxes and curbing strict labour protections in an effort to boost growth and competitiveness. 

 Passing the budget in the fragmented National Assembly will be Barnier’s first real test since Emmanuel Macron named him premier in August. His appointment came after shock snap elections which forced the president’s centrist camp into an awkward power-sharing government with Barnier’s conservative Les Républicains. 

 Few lawmakers believe the budget can be adopted without Barnier using a constitutional clause that allows him to override parliament, but doing so could open him up to the risk of a no-confidence vote.

 At stake is Barnier’s ability to both calm investors’ jitters about lending to France and withstand pressure from Brussels, which has admonished Paris for its excessive deficit. French borrowing costs now exceed not only those of Germany, but also Spain’s. 

 The government claims two-thirds of the €60bn effort in 2025 will come from spending cuts, such as on medical costs, unemployment, and reducing the number of public servants. The rest will come from tax increases. 

 But an independent government advisory body, using a different calculation method, recently estimated taxes will account for 70 per cent of the effort. The divergence matters because Macron’s centrists staunchly opposes tax increases, while Barnier’s own party also wants more spending cuts. 

 Barnier has said the budget draft is a starting point for lawmakers, but warned them not to derail the goal to reach a deficit to 3 per cent of national output by 2029. 

 Another hit to companies will come from delaying a planned cut in production taxes, which groups pay on their activities regardless of whether they are profitable. Cutting these was a hallmark of Macron’s supply-side strategy. 

 Airlines and private jets face a new levy on flights to generate €1bn next year, while container shipping companies, including Marseille-based CMA-CGM, will be slapped with a separate levy that would raise 800mn in the next two years. 

 Businesses will also be affected by higher labour costs caused by scrapping tax breaks on low-income workers and phasing out apprenticeship subsidies. Although Barnier has argued working people will be insulated, households will be affected by higher taxes on electricity bills. 

Individuals are also likely to face higher healthcare costs if the government scales back reimbursements of doctors’ visits and medicines as planned. In another shift from Macron’s approach, France’s wealthiest are being asked to contribute €2bn in a new tax on those who earn about €500,000 annually, who are estimated to represent 65,000 households. 

 The deficit will stand over 6 per cent of GDP by year end. The government aims to trim it to 5 per cent by the end of 2025, although public spending will still increase next year because all the spending cuts and taxation will only slow the pace of increase. 

 France has repeatedly overshot its deficit targets since last year, prompting concern that the government has lost control over spending and also cannot accurately predict tax inflows. Its debt pile represented 110 per cent of GDP as of July, the third-worst in the EU behind Greece and Italy. Successive French governments have not presented balanced budgets for decades. 

The public has a renowned appetite for costly welfare programmes and supports a high level of income redistribution. One of Barnier’s particularly controversial proposals asks retirees — long protected by politicians as a key voting bloc — to delay the annual inflation-adjusted increase to their state pensions by six months. The move would save about €3.6bn. Several parties have already railed against it, including the far-right Rassemblement National. Pushing the issue is risky for Barnier because Marine Le Pen’s RN is the key swing voting bloc needed for a no-confidence vote to pass.

And the winner is... a Land Value Tax:

 

The radical land tax proposal that has garnered support from both the Right and the Left

Property is in the crosshairs as Reeves scrambles to plug Britain’s £22bn ‘black hole’

Melissa Lawford26 August 2024 • 12:00pm

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Residents in the wealthy area of Wimbledon would be among the hardest hit by a land tax overhaul Credit: Greg Balfour Evans/Alamy Stock Photo

Early in his career Winston Churchill attacked what he called “the mother of all other forms of monopoly”: land.

Profits from rising land values were not only “unearned”, Churchill warned in a 1909 speech, but “positively detrimental to the general public” because high land prices become a barrier to development.

Churchill would go on to lead the traditional party of rural landowners – the Conservatives. But at the time he was in the ruling Liberal Party, whose chancellor, David Lloyd George, had proposed a land tax.

However, instead of redistributing wealth across the country, the plan triggered a constitutional crisis and two general elections.

More than a century on, calls are growing for Rachel Reeves, the incumbent Chancellor, to do what Lloyd George couldn’t: abolish Britain’s current system of property taxation – which now consists of council tax, stamp duty and business rates – and replace it with a land tax.

Liberal chancellor David Lloyd George proposed a land tax more than a century ago Credit: George Rinhart/Corbis via Getty Images

Such a levy would be a flat tax charged annually based on the value of people’s land, and potentially the buildings on top of it.

The radical proposal has garnered surprisingly broad support, from John McDonnell, who once brandished a copy of Mao’s Little Red Book in the House of Commons, to a former adviser to Rishi Sunak.

Campaign group Fairer Share is preparing to send a joint letter from a variety of cross-party MPs and peers to the Chancellor in the next month, calling on her to look at the idea. Supporters of the campaign include Labour peer Dame Margaret Hodge and Kevin Hollinrake, shadow business secretary.

Writing in the Financial Times earlier this month, Charles Goodhart, former Bank of England economist, argued that Reeves has “the best chance since Lloyd George” of introducing a land tax.

Labour has a massive majority and the House of Lords is no longer as dominated by Tory peers as it was back in 1909, he told The Telegraph.

Punishing the wealthy

Supporters argue that a land tax could simultaneously unlock growth and provide additional revenue for the Treasury.

But overhauling the system would punish wealthy land and property owners from Wimbledon to Windsor. If it were done wrong, it could also trigger a heavy slump in property prices that would hurt anyone on the property ladder.

Even many critics of a land tax agree, however, that our existing system of property taxation is a mess.

Stamp duty is only charged when people buy a house and therefore discourages people from moving, making both our housing market and labour force less efficient.

Council tax is based on property valuations from 1991 and contributes to major regional inequalities.

In Westminster, one of the richest boroughs in the country, the annual council tax bill for a typical home this year is £973. By contrast, in Hartlepool, a heavily deprived part of the country, homeowners in the equivalent tax band are charged £2,278.

“Imagine if Labour were to serve two terms – that 10 years of government would take us to 2034,” says George Dibb, associate director of economic policy at the Institute for Public Policy Research (IPPR).

“We’d be looking at using property valuations that were more than 40 years old for council tax. That just seems utterly unfeasible to me.”

Then there are business rates, a land-based tax for businesses that critics say is out of date and doesn’t reflect the rise of online shopping nor the declining value of high street premises.

Supporters of reform put forward several possible solutions.

Stuart Adam, senior economist at the Institute for Fiscal Studies and an author of the 2011 Mirrlees Review of the tax system, argues that the best route would be taxing the value of both land and buildings for residential property, while only taxing land for business properties.

Goodhart argues tax should only be imposed on the value of land, not the buildings on it, so as not to discourage construction.

Fairer Share argues that some tax needs to be imposed on buildings otherwise local authorities with very low land values would receive too little council tax.

It proposes scrapping council tax and stamp duty and replacing both with a flat 0.48pc rate across the whole value of a home.

Winners and losers

There would be winners and losers. Analysis for Fairer Share found its proposals would mean a tax cut for 77pc of the country and a rise for 23pc.

Residents in the City of London, Westminster and Wimbledon would see the largest proportions of homeowners losing out.

A typical homeowner in north Cornwall would save on average £700 per year while a typical homeowner in Kensington would see their tax bill go up by £1,100.

A typical homeowner in North Cornwall would save on average £700 per year Credit: John Lawrence

Fairer Share has suggested capping the extra cost for wealthier households at £1,200 per year until a person moves and gets the benefit of paying no stamp duty.

Land tax has widespread support on the Left.

John McDonnell, the former shadow chancellor and now an independent MP, is president of the Labour Land Campaign, which has campaigned for a land tax since the 1990s.

The centrist Tony Blair Institute (TBI) has in recent years also called to “shift the balance of taxation away from earned income towards unearned income and land and property”.

“The UK’s warped system of property taxation is in urgent need of reform – the current system is a constraint on growth,” says Thomas Smith, the TBI’s director of economic policy.

Surprisingly, there is serious support on the Right too.

Tom Clougherty, formerly head of tax at the Centre for Policy Studies and now head of the Right-wing Institute of Economic Affairs, has called for land-based taxes very similar to the proposals put forward by Adam at the IFS.

Tim Leunig, a former adviser to Rishi Sunak, last week published a paper with the centre-Right think tank Onward calling for stamp duty and council tax to be replaced with two separate forms of a proportional property tax.

He argued for council tax and stamp duty to be scrapped and replaced with both a local and national land tax.

Reeves may be being presented with the idea closer to home.

Reeves has made clear that tax rises will be in pipeline in her maiden Budget in October Credit: Kirsty O'Connor/Treasury

In 2021, IPPR published a report arguing that replacing stamp duty and council tax with a combined property and land tax would address inequality and build a stronger economy. Carys Roberts, the think tank’s former executive director, was hired as a special adviser in the Downing Street Policy Unit in July.

The Labour manifesto did not discuss residential property taxes, bar a plan to add one percentage point to stamp duty rates for overseas buyers. It did promise to “replace the business rates system, so that we can raise the same revenue but in a fairer way”.

The Treasury declined to comment on whether the Chancellor is considering a land tax.

Reeves has made clear that tax rises will be in the pipeline at the Budget as she scrambles to fill a £22bn blackhole in the public finances. But most of the economists backing property tax reform argue that it should be revenue neutral at least initially.

Using land tax as a revenue raiser would be potentially destabilising if it were introduced too fast. Goodhart calculated that raising £22bn immediately through a land value tax would trigger a 7pc drop in property prices.

Andrew Dixon, founder of Fairer Share, isn’t holding his breath.

“I don’t think, at this stage, she will be brave enough to tackle the property tax issue,” he says of Reeves.

But he adds: “The thing that may sway it is the need for growth.”