Politics latest: 'Sting in the tail' tax rise in chancellor's plans revealed

The Institute for Fiscal Studies (IFS) reports that while the UK spending review avoids austerity with capital spending rising 3.6% annually, departmental spending is increasing as a fraction of national income, reaching 21.5% by 2028-29. The IFS highlights concerns about the sustainability of the "relentless increase" in NHS funding, projecting it will consume 41% of day-to-day public spending by 2028-29, potentially straining other budgets and leading to challenges in public sector pay and departmental funding.

Analysis

The Institute for Fiscal Studies (IFS) indicates the UK's recent spending review does not represent a return to austerity, with capital spending projected to rise by 3.6% annually and day-to-day public spending by 1.7%. This trajectory will see investment spending as a fraction of GDP increase from a low of 1.5% in 2013-2014 to 2.6% during the current parliament. Departmental spending is also set to expand as a share of national income, reaching 21.5% by 2028-29 compared to 20.7% in 2023-24, signifying a substantial increase in the size of the state over the decade. However, the IFS expresses significant concern regarding the sustainability of escalating NHS funding, which is projected to absorb 41% of day-to-day public spending by 2028-29, a notable rise from 39% in 2024 and 26% in 2000-01. This "relentless increase" may not be sufficient to meet government waiting list targets or fund the workforce plan. Concurrently, commitments to increase defence spending to 2.5% of GDP by 2027 will place considerable pressure on other departmental budgets, limiting scope for public sector pay rises and potentially leading to industrial action. The aid budget, in particular, has been significantly reduced.

Key Decisions for Investors

• Investors should monitor UK fiscal policy for potential tax increases or significant spending reallocations, given the IFS's warning about the current fiscal path and Rachel Reeves being 'dangerously close' to raising taxes.
• Evaluate exposure to UK sectors reliant on public spending outside of healthcare and defence, as these areas face tightening budgets and potential funding cuts.
• Consider the long-term implications of sustained high public spending, particularly in healthcare, on UK government bond yields and sterling, especially if fiscal sustainability concerns intensify.