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News

Welfare spend expected to outpace economic growth.

Written by Connor Mullins on Aug 30th, 2024 Time to read: 2 minutes

Things will get worse before they get better.”

If not quite the line from D:Ream’s famous 1993 pop hit, then a rather dreary prophecy from the Labour government this week.

To characterise Prime Minister Starmer’s speech as apocryphal is perhaps unfair, but his message underscored the difference between political aspiration and political reality. The reality is that Labour inherited an economy with the fastest growth in the G7 across the first six months of this year,  inflation at 2.2%, and near record highs in employment. For context, (as a percentage of our economy) we are borrowing less than the US, have more people in employment than France and are growing faster than Germany. So why the doom?

This is where the aspiration begins to fade.

The Labour government wish to increase spending in some areas (and will be forced to in others), above official forecasts. However, the Conservative government were already borrowing in excess of £100 billion a year, just to keep the lights on, and Labour previously pledged, to act with considerable prudence in their budgeting. So, more tax rises are ahead.

The headwind for the UK economy (and ageing societies in general) is that an increasing share of public spending is ‘index-linked’ (or linked to inflation). Welfare (namely pensions) and NHS spending are ‘political hot potatoes’ – hell mend a government which doesn’t maintain spending ‘in real terms’ within these two key areas. So health and welfare are consuming a greater share (%) of yearly government spending, to the detriment of other key areas (such as capital investment or education, for example).

If forecasts from our ‘Office for Budget Responsibility’ are correct then nominal welfare spending will have increased more than 35% in the 6 years to 2028, whilst our economy will have grown only 26%. The forecast increase in capital expenditure (ie. local and public investment) over the same period will be less than 1%**

You cannot increase the potential growth rate of an (ageing) economy by prioritising the spending on the elderly (pensions) and the sick (NHS), over the young (education) and the future (investment), whilst simultaneously increasing the tax burden on both the employed and the employers. This is where Labour’s aspiration may ultimately fail.

True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.

 

Sources

** Nominal welfare spending: Pg 150. Table A.7: Total managed expenditure

Economy growth:  Pg.146. Table A.3: Determinants of the fiscal forecast

Capital expenditure: Pg 150. Table A.7: Total managed expenditure

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