The Chancellor’s spending review appears to have succeeded in its most important mission – not to spook financial markets – but can it create growth?
- The bellwether 10 year gilt yield remained untroubled by the Spending Review
- The big winners were health and defence.
- £113bn has been earmarked for capital spending
After a promising start to the year, the UK economy faltered again in April, falling 0.3% over the month. The Spending Review announced this week was designed to kick start growth and resolve some of the deep-seated barriers to productivity. However, the budgetary constraints give the Chancellor little room for miracles.
The first battle for the Chancellor was to keep financial markets on side. In this, she appeared to be successful. The bellwether 10 year gilt yield remained untroubled by the Spending Review. It rose around 0.6% on the day, but most of that was in early trading and it dropped intra-day after the details of the Review had been announced.
Oliver Faizallah, head of fixed income research at Charles Stanley, said movements in US treasuries are becoming more important than domestic spending plans: “While fiscal concerns in the UK will no doubt keep gilt yields higher for longer, daily volatility in gilt prices will also come from data and decisions from the other side of the Atlantic.”
Elsewhere the big winners were health and defence. Paul Johnson of the Institute for Fiscal Studies said: “The money largely followed Chancellor Rachel Reeves’ long-stated priorities and the Government’s missions. There was more cash for the English NHS, which as usual was the biggest winner from the Spending Review process. Defence spending is planned to hit 2.5% of national income (2.6% if you include the security services) and stay there, with its budget bolstered by a sharp increase in capital funding, treated kindly by the Chancellor’s fiscal rules.”
Aneeka Gupta, director, macroeconomic research at WisdomTree says defence is not just about readiness for conflict “but stimulating industrial development, especially in the north of England and coastal areas. Unlike health or social care, which aim to stabilise the present, defence is structured to transform the future—economically, technologically, and militarily.”
However, the stock market winners were focused on construction and housebuilding. £113bn has been earmarked for capital spending, with areas such as green energy projects, transport infrastructure outside of London and the South East, new prisons, and housing the priority. Share prices for companies in both sectors rose on the day. This included specific winners such as GP surgery-focused REIT Primary Health Properties, which should be a beneficiary from the boost to NHS Budgets.
The Chancellor is making all the right noises about investing in the fabric of the nation to boost the UK flagging productivity and unlock talent. However, she is battling ingrained decline. Whether it will succeed in creating growth, rather than just not frightening bond markets, is anyone’s guess.
