The ‘conspiracy of silence’ is finally over. The outcome of the rapid audit of public spending, instructed by the new Chancellor Rachel Reeves in her first week of office, shows a forecast overspend of £21.9bn for the current financial year (around 1% of GDP).

The sources of these pressures are multiple: policies from the previous government that were unfunded; the impact of inflation on public spending; ‘events’, including providing military assistance to Ukraine, a growing asylum backlog; and the new government’s decision to issue 4-6% pay increases across the public sector.

The politics of yesterday’s announcement will play out over the coming weeks and months. Industrial-scale finger pointing - across the dispatch box, the air waves, and social media - will commence as the governments of today and yesterday seek to pin the blame on who takes responsibility for the condition of the public finances. We can expect this to play out up to 30th October, the date of the next Budget. Lucky us.

The big picture from an economic standpoint is whether, taken together, the measures announced yesterday pass two tests:

1. Do they restore stability to the public finances?
2. Do they lay the foundations for higher economic growth?

On balance, I think it will be difficult for the government to credibly claim that these measures pass both of these tests.

It is unquestionably the right move for the government to want to bring an end to the multiple ongoing pay disputes with the public sector. The financial costs of industrial action are high in both the short-term (£1.7bn of direct costs on the NHS in England alone in 2023/24) as well as the long-term (rising healthcare waiting lists and ill-health related inactivity). Likewise, the government is right not to have shirked the costs of maintaining our ongoing support to Ukraine.

A move to spending reviews every two years, that will set spending plans for a minimum of three years of the five-year forecast period, is also welcome. This is not least because a significant proportion of the costs that prompted yesterday’s intervention are linked to inflation in departmental budgets set in 2021. The return of multi-year financial settlements for local government is long overdue, and a major win for us at CPP who have been campaigning on this for years. Similarly, we welcome the suggestion that the next Spending Review will bring greater investment in prevention, delivered through greater devolution and integration of services. These reforms will provide greater stability to the public finances of national and local government that can lay the foundations for higher, longer-term public investment. Both tests: tick, tick.

Despite the good intentions, it is difficult not to take many of the proposed spending cuts as anything other than selling tomorrow to pay for today.

The important thing for the here-and-now is not necessarily the specific ‘savings’ on the table. What matters is that they imply that there is an instinct within the new government to prioritise on short-term book balancing over raising our long-run economic potential. This instinct is political and not economic. Markets have strongly signalled that they’d tolerate higher levels of lending above current rates given the UK's lack of public and private investment.

Or, to put it another way, what was revealed yesterday was the tension between the government’s desire to maintain “iron clad” fiscal discipline while also achieving the highest sustained growth in the G7. The natural instinct of the new government, it seems, is to prioritise the former over the latter.

Let’s take two examples:

1. Perhaps the most significant ‘savings’ decision taken yesterday is to not take forward adult social care charging reforms. Although the Chancellor cited difficulties in implementing them in her statement , this decision more or less puts an end to the Dilnot reforms, but without any other substantive plan for social care reform in their place.
2. Cuts to various transport commitments and a ‘review’ (read: scaling back) of the New Hospital Programmes signal that the government is willing to look again at its capital commitments when day-to-day pressures are running hot.

These two examples demonstrate this tension because we know the costs of inaction on social care reform and improving our crumbling infrastructure grow with each and every day we neglect them. The decisions taken yesterday imply the government thinks the “cost of inaction” line works for day-to-day spending, as we see in the decision to boost public sector pay, yet it does not hold in the same way for longer-term structural reforms and capital projects. We know from our recent history that kicking the can down the road on public service and infrastructure investment adds costs of its own.

Both tests: no ticks.

We will have to wait until the Budget to see whether the government can produce alternative proposals to carry forward social care reforms and more capital projects.

But I stress the importance of what these decisions signal because this is, ultimately, the beginning. The new government has been dealt a very difficult hand and the Chancellor has signalled that more ‘difficult decisions’ on spending, welfare, and tax, will come on Budget day.

It is vital that the upcoming Budget and Spending Review strike a balance between managing short-term fiscal risks with laying the foundations for higher levels of growth within this parliament. That must include a more positive agenda for public investment in particular, on which the UK ranks among the lowest in the OECD, as that is ultimately how we dig ourselves out of this hole.

But on principle, after yesterday it is important we remind ourselves where being penny-wise and pound-foolish has taken us. If this government makes a habit of repeating the mistakes of the past, then we should not be surprised if similar consequences of past decisions return to bite us once more.