U-Turn Rachel's spending review

Going into the spending review Rachel has been talking up the economy after realising that she had been talking it down for so long that people were starting to believe things were that bad.

On Thursday  5th June she said:

"The most recent GDP (gross domestic product) numbers, 0.7% growth in the first quarter, the strongest in the G7, and recent business surveys ... are very positive," ... "That is good news and does show we are beginning to turn the corner."

As a result she felt she could U-turn on the politically unpopular winter fuel payments.

Her comments relate to the first quarter ie Jan - March.  It therefore ignores the introduction of increased employer national insurance contributions and the inflation busting increase to the minimim wage in April.

The Government borrowed more in April than expected.  She borrowed £20.2 Billion  (2x Rachel sized black holes) which was £1Billion more than March.

April tax receipts were up because of the  National Insurance increase yet borrowing still increased. State pension increases in part were due to increased borrowing but the root of the problem is that there are now more people working for the government.  Government is not a product we export or sell so the cost of running government has risen.

So far there are only 10 months of borrowing figures since Rachel came to power and so far she has borrowed £118.1 BILLION.  Whilst Rishi's government for the same 10 months (July 23 to April 24) borrowed £95.7 BILLION.  So Rachel has increased borrowing by 23.4%

Now some may argue that this splashing of the cash has gone on capital projects eg Sizewell, HS2 etc but borrowing is still borrowing.  It doesnt matter if it's a mortgage or credit cards for day-to-day spending.  Borrowing still incurs debt servicing costs.

The interest rate which government pays to service the debt has gone up. For July 2024 when Labour came to power rates averaged around 4.1% whereas for April 2025 the interest rates on government debt was around 4.6% having climbed from Sept 24. 

Part of the increase has been due to external events eg Trump tarriffs and bond markets being less keen on buying government debt in-general. In part the increase is also due to bond markets considering the UK to be higher risk albeit the overall credit rating for the UK remains stable at AA.

So Rachel has borrowed so far an additional £22.4 BILLION compared to the borrowing trajectory they inherited from the conservatives (absolutely borrowing is higher since the books don't balance - this is incremental borrowing over the projected increase in borrowing).  Of course total borrowing is something like £2.8 TRILLION.  The overall economy (GDP) is about £2.6 TRILLION so government debt is bigger than the economy. That's about £37,900 debt per person.

So a 0.5% increase in borrowing costs is not trivial. That's an additional £14 BILLION in interest payments per year on top of the £114.8 BILLION interest payments that were expected. 

Her additional £22.4 BILLION in borrowing so far adds to the debt pile and will incur and additional £1 BILLION in interest payments per year.

The debt pile is growing each month, the rate at which the debt pile is growing is also growing and the cost of servicing the debt pile is therefore growing.  The UK is incapable of living within it's means.

So Rachel from accounts is going into the spending review with some real challenges.  She needs to get debt under control but her Labour cronies will be demanding more expenditure (as we have already seen).

The problem is government is a ponzi scheme.  It's needs suckers to keep paying tax into the system.  Unfortunately increasing national insurance has spooked the real engine of the economy - business and she has managed to encourage rich tax paying millionaires to flee the country at a rate of 1,000 per week.

Employers have started laying off workers, not replacing leavers etc as Labour has increased the cost of employment significantly (circa 23% for someone on minimum wage).  Unemployment has risen to 4.6%  by 0.1% in the period Feb 25 - Apr 25. So the full effect of the national insurance increase has yet to ripple through.

More unemployment means more benefit payments and less tax receipts which means government borrowing will increase.

I predict that the spending review will become irrelevant by the Autumn budget as the cost of borrowing and demands to splash the cash will not be supported by tax income as unemployment rises.  

Something will break.

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Well Rachel has now delivered her spending review. She has promised an increase in departmental spend of 2.3% in real terms (ie above inflation) resulting is £190 BILLION in additional spending over the parliamentary term ie £47.5 BILLION per year.

Given Rachel made such a big fuss about the supposed £22 BILLION black hole she "inherited" (or caused), it does beg the question where she is going to find the money for these all these extra Black Holes she has promised to fund.

The economy is growing at about 1.3% per year whilst CPI inflatiom is likely to average 3.5% in 2025 so the economy is in fact contracting 2.2% percent per year (ie not growing at the same rate as inflation).  The £190 BILLION in additional spend will have to be borrowed and cant be funded out of tax receipts since they will be falling in real terms.

We dont know the phasing of this £190 BILLION spend but do can guess how much it's going to add in interest payments by hitting the credit card.  The interest payments will be an additional £8.5 BILLION per year on top of the £129 BILLION per year we already pay.  

I'd love to see the magic money tree where this is all coming from. 

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Less than 24 hours after Rachel's upbeat spending review where she said the economy was turning a corner and that Labour's actions had enabled the UK to be the fastest growing economy in the G7, the ONS has released the latest growth data for April.

It's hard to believe that Rachel did not have early visibility of the ONS growth data. 

The ONS data paints a very different picture of the state of the UK economy comapared to Rachel's rose tinted view.  The economy contracted 0.3% (ie economic output fell).  Manufacturing out fell 0.8% and the service sector output also fell (this seems to be due to the legal profession where property transactions were front loaded in March to avoid Rachel's stamp duty tax increase).

April's numbers are hardly a surprise.  Rachel's employer taxes hit in April with massive increases in National Insurance and inflation busting increases to minimum wage.  For companies employing low paid staff this was an overnight increase of 23% in wage costs. 

If Rachel hadnt seen the ONS data early it suggests she doesnt have her finger on the pulse of the economy and is out of touch with what is happening.

If she had seen the ONS data then she is wreckless committing to spend £190 BILLION when it's clear the UK economy is not turning a corner.

The pound has fallen against the dollar and euro on the bad news. If this continues it's going to increase the cost of borrowing on future gilt issues increasingly making Rachel's spending spree less affordable (which it's not affordable anyway).

Either way it looks like a bumpy ride ahead.  If she ploughs on with the spending spree then with declining tax revenues the cost of servicing the ballooning debt will become worse.

She may be tempted to raise taxes - breaking her election promise. 

Taxation is at the highest level since the second world war and the Laffer curve suggests that further increases will result in overall less tax revenue.  We are probably already seeing the impact of this with with 1,000s of millionaires leaving the UK each week to move to more tax friendly countries like Italy. If we have 1,000 millionaires per week leaving for a whole year then that leaves a Rachel sized black hole of £45 BILLION less (lost) tax revenue.

Certainly I'm weighing up my options.  Do I move abroad?  Do I opt out of working since the reward is not there ?  Maybe early retirement? 

The bulk of tax income comes from the £100k - £125k earners who are paying a marginal rate of 60% and a further 2% of national insurance (ie only getting 38p of every £1 they earn).  If you are unfortunate enough to live in Scotland then you will be paying more.

Working for free from January until end of August for Rachel before I earn any of my own money doesnt appeal to me.  I would rather spend August on the beach drinking beer.

If this group of tax payers doesnt abandon ship then they might decide to take other action like electing to work 4 days per week rather than 5 - they would in real terms be better off doing this.  

Tax revenues will be down. Productivity will be down.  GDP will be down.  Rachel will be down.

Measurement drives behaviour and people are not stupid.  They don't want to be Rachel and Kier's tax slaves.

But of course Rachel and Kier  think we are stupid.