Spending Review: ‘Keep your eye on the key test – boosting living standards’

Today’s spending review will serve many different purposes. Far from a dry accountancy exercise, it is dripping in politics. It will determine the number of police on our streets, nurses in our hospitals and new tram lines in northern cities. It will show what this government really prioritises, in the zero-sum game of resource allocation. With Labour losing both on the progressive and conservative ends of its coalition, it is an important opportunity to show voters how this government is different to the last. And to calm the nerves of MPs desperate for tangible good news for their constituents.

With that in mind, there is one priority this government has put front and centre, which risks falling by the wayside, because in practice it is split between numerous departments – living standards. The spending review needs to answer the question ‘how will the government make people better off?’

‘Decline in disposable income is adding fuel to discontent driving people to Reform’

Real household disposable incomes (RHDI) declined in the last parliament – people were poorer at the end than at the start, for the first time on record. This is a major reason why the Conservatives lost that election so spectacularly. And it continues to be a major concern, adding fuel to the discontent that is driving people toward Reform and other political parties. It contributes to the toxic feeling that things are not getting better – because, in terms of people’s incomes and living costs, they simply aren’t. 

Many of the causes were longer-term. From underinvestment in transport and R&D that drives up productivity, to the legacy of the financial crisis, austerity and Brexit. Our productivity growth went from second highest in the G7 in 1997-2007, to second lowest in 2010-2023 and that translated into lower wage rises. We were then poorly prepared for the cost-of-living crisis that followed Covid-19 and the Russian invasion of Ukraine. And poorer families felt the biggest squeeze because, on top of all this, many saw social security entitlements cut significantly.

Some of these factors were outside of government control but, in many ways, it was the country reaping what Conservative-led governments had sown from 2010 onwards. And Rishi Sunak paid the political price for the actions taken by the many Tory Prime Ministers that came before him.

READ MORE: Spending Review: Some MPs resigned to cuts but others warn PLP won’t play ball

‘Spending Review needs to answer ‘how will government make people better off this parliament’

Repairing this will take time – far longer than one parliament. This spending review has the unenviable task of both investing long term to set a course for productivity growth across at least two parliaments, while also tackling poverty and dealing with the short-term challenges facing family budgets.

Recent announcements of fresh billions on transport and R&D are an important down-payment on that longer-term goal of raising our productivity. It is encouraging to see the north and midlands being recognised for their dynamism and massive potential to grow the national economy, not as charity cases needing government largesse. It is also encouraging to see local leaders taking more of a lead on economic development. This should help raise productivity and wages both in the regions and at the UK level over time.

But the spending review also needs to answer the question ‘how will the government make people better off – this parliament?’ Our work at the Fabian Society shows that they will need to coordinate several different departments, from those focused on growth and wages, to those responsible for social security and the cost of living. These departments all need to collaborate to meet the government’s milestone of improving real household disposable income by the end of the parliament.

Subscribe here to our daily newsletter roundup of all things Labour – and follow us on  Bluesky, WhatsApp, Threads, X or Facebook.

‘Spending Review will help set the terms of next election campaign’

We recommend prioritising policies which raise living standards, and a Treasury-led taskforce to maintain that focus and coordination throughout the parliament – and especially during budgets and spending reviews. Working in this way can strengthen the government’s offer, making a range of disparate policies cohesive, so that together they are greater than the sum of their parts.

There is every reason to believe this government takes living standards very seriously. They have learned from the last government’s mistakes, and setting a living standards milestone sends a really important signal. 

This spending review will pass the ‘living standards test’ if it provides departments with the budgets they need to raise incomes and take control of the cost of living. But every budget and every spending review needs to have this test at its heart, to make sure people really are better off as a result of the actions of this government.

The next election may be three or four years from now. But today’s spending review will help set the terms of that election campaign. If the government gets it right, they may get the chance to follow through with a second term. They must maintain a relentless focus on living standards to do so.

Read more of our 2025 Spending Review news and analysis:

• SHARE: If you have anything to share that we should be looking into or publishing about this story – or any other topic involving Labour– contact us (strictly anonymously if you wish) at [email protected].
• SUBSCRIBE: Sign up to LabourList’s morning email here for the best briefing on everything Labour, every weekday morning.
• DONATE: If you value our work, please chip in a few pounds a week and become one of our supporters, helping sustain and expand our coverage.
• PARTNER: If you or your organisation might be interested in partnering with us on sponsored events or projects, email [email protected].
• ADVERTISE: If your organisation would like to advertise or run sponsored pieces on LabourList‘s daily newsletter or website, contact our exclusive ad partners Total Politics at [email protected].