Chancellor Rachel Reeves presented Labour’s first budget in 14 years by promising to put an “end to short-termism”.
British governments typically see budgets as an opportunity to present policies providing short-term gain in terms of public popularity, even if they do little to improve Britain’s long-term economic prospects. Over the past ten years, governments have adopted and then abandoned 11 different economic strategies, and seven different fiscal rules.
The last Conservative government’s budget contained a range of tax cuts, most notably a 2p cut on National Insurance. Little consideration was given to the medium-term implications of these cuts. Labour inherited a funding squeeze, alongside the need to balance the books over a five-year period based on the previous fiscal rules.
This kind of short-termism is a familiar feature within British economic policymaking. A winner-takes-all, majoritarian electoral system encourages governments to prioritise electoral considerations over a longer-term economic strategy.
Here’s how Reeves is taking a different approach in her first budget.
1. Long-term strategy
Reeves has underscored Labour’s commitment to long-termism through various institutional reforms. The government had already announced the creation of a new body to drive a new industrial strategy. This will now be accompanied by a new National Wealth Fund to provide private investment into infrastructure.
The launch of the Office for Value for Money will scrutinise spending decisions. And the Office for Budget Responsibility’s role in assessing the impact of capital investments, government policies and departmental spending will be enhanced.
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2. Investing for growth
Alongside a few surprises such as an uplift to the minimum wage, increased tax on private jets and the continued freeze on fuel duty, the main theme of the budget was investment-led growth for the long-term.
To that end, Reeves has changed the government’s fiscal rules around debt to enable more headroom for investment. She also raised national insurance contributions for employers to fund this investment wave.
These measures will be used to plough £6.1 billion into “growth sectors” such as engineering, biotechnology and medical science. The chancellor committed £1 billion into the aerospace industry, £2 billion into electric vehicle development, and £500 million into life sciences. In total, the public investment will amount to £100 billion over the next five years.
3. Infrastructure projects
Reeves also committed to funding a number of high-profile infrastructure projects. On transport, the TransPennine Route upgrade, East West Rail, and HS2’s link into central London were all green lit. She also promised £5 billion to build 1.5 million new homes in five years. Additionally, £20.4 billion in R&D funding was also protected in the budget.
4. Regional growth
The budget highlighted the importance of regional growth and place, reflecting Labour’s emphasis on continued devolution since taking office. Reeves has committed to providing an extra £6.6 billion to the devolved nations through the Barnett formula.
She also revealed that the West Midlands and Greater Manchester would receive integrated financial settlements from 2026-27. These moves indicate some ambition and long-term vision around empowering devolved governments to drive regional economic growth.
5. Public services
Another long-term focus of the government has been “fixing the foundations” of Britain’s public services. Reeves linked low levels of investment to crumbling services. As such, she committed to significant spending on education and health, alongside £1.3 billion to address the crisis of local government funding.
These measures signpost a renewed interest in an industrial and economic strategy to address Britain’s economic weaknesses and drive growth. Both require a focus on the medium and long-term.
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Remaining challenges
Collectively, these measure suggest some long-term thinking by Labour, but do they go far enough and will they stick?
Delivering on a long-term industrial strategy requires greater coordination across government, especially between the Treasury and the Department for Business and Trade. But other departments too, will be key to driving long-term growth and must be brought on board with Labour’s approach .
And while the integrated financial settlements will empower the West Midlands and Greater Manchester, the approach stops short of fully downloading financial independence to the regions. A focus on selective regions also only adds to existing asymmetries in the powers regions have. A systematically thought-out approach that covers the whole UK would go further, but remains remote.
Finally, while the government has spent big on education and health, real departmental funding is only set to rise by 1.5%. Pre-budget, concerns were raised about the effect tight funding settlements might have for non-protected departments, especially when these cuts come to bite in 2028-29.
The spectre this raises for Labour is that a short-term squeeze on day-to-day departmental spending risks undermining the work it has done to secure long-term investment for growth.
Nathan Critch receives funding from 'The UK Productivity-Governance Puzzle: Are UK’s Governing Institutions Fit for Purpose in the 21st Century?' - The ESRC Productivity Institute https://www.productivity.ac.uk/people/professor-david-richards/Andy Westwood receives funding from ESRC/UKRI as co-leader of the Governance and Institutions theme at the Productivity Institute.Dave Richards receives funding from two projects related to this article: 1. 'Public Expenditure, Planning and Control in Complex Times' - Nuffield Foundation, https://sites.manchester.ac.uk/public-expenditure-planning-and-control/ 2. 'The UK Productivity-Governance Puzzle: Are UK’s Governing Institutions Fit for Purpose in the 21st Century?' - The ESRC Productivity Institute https://www.productivity.ac.uk/people/professor-david-richards/