Economics
Defence economics – the end of the peace dividend For many of us the idea of significantly increasing spending on defence is new. But the world is changing and the recent NATO commitment to spend 5% of GDP on defence – more than twice as much as the UK currently spends – raises important questions for economists. Can you ramp up spending efficiently or will extra funding translate into higher inflation? Big institutions such as the NHS have previously been questioned about their capacity to use significant extra funding efficiently. What will count as defence spending? And, crucially, how are we going to pay for it? Will something else have to give or will we need to raise tax revenue? To put the required increase of ~2.5 pp of GDP into perspective, this is around half of total pensioner benefit spending and two thirds of public education spending in the UK. This will be tricky to achieve for any government.
Spending Review 2025 – Winners and losers but all eyes on tax The Spending Review (SR) is arguably the government’s single most important policy statement as it defines the Labour Party’s priorities for this parliament. The focus on capital spending was necessary as it helps addressing the UK’s huge capital gap. It is at least a start. However, in combination with more generous settlements for defence and health care, many government departments must have felt short changed. It will also mean that it is challenging to see the day-to-day provision of public services improving any time soon. What about tax? While the government remains committed to not raising some tax rates, it has found ways to raise more revenue, for example by keeping allowances and tax thresholds unchanged. This is what governments tend to do but it might not be enough. As unpopular as it might be, increasing broad-based VAT and income tax will probably have to be part of a wider tax reform to fund future spending needs as they make up more than half of all revenue administered by HMRC.
Economics in action – reforming the water industry One of the most fundamental questions in economics is what is the role of government? For example, should governments provide and fund public services themselves or leave this to the private sector and regulate those firms? The UK has been a testbed for this question ever since the privatisation phase of the 1980s. Finding the right answer clearly isn’t easy – and changes with the times. The Labour government recently started renationalising train operators, claiming that private-sector provision had failed to deliver. Now Sir Jon Cunliffe, former Bank of England deputy governor, published his 88 recommendations on what to do with the water industry. Sir Jon recommends many reforms, including the well-publicised abolishing of OFWAT, the current regulator. But the nationalisation of the water sector was not in scope of the Cunliffe Review. With Thames Water we may get nationalisation anyway – for a good discussion listen to Dieter Helm.
Green Book Review As part of the Spending Review, Chancellor Rachel Reeves announced the results of the 2025 Green Book Review. The Green Book, central government appraisal guidance, has been reviewed often in recent years. After a significant revamp in 2018 (the first since 2003) the Green Book was reviewed and revised in 2020, re-issued in 2022 and we can now expect a new edition in 2026. Nonetheless, the latest review makes broadly sensible recommendations, including to radically simplify and shorten the Green Book itself. The latest edition is close to 150 pages and that is before you look at increasing volumes of supplementary guidance. That there is inadequate capability is another finding of the review … luckily, we can help there…courses on Cost-Benefit Analysis below.
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