UK faces choice next week between health and other spending, IFS think tank warns

By David Milliken

LONDON (Reuters) -British finance minister Rachel Reeves' key decision in next week's multi-year spending review will be how much to spend on healthcare versus other public services, the Institute for Fiscal Studies think tank said on Sunday.

Reeves is due to set out day-to-day spending limits for other government departments on June 11 which will run through to the end of March 2029 - almost until the end of the Labour government's expected term in office.

Britain has held periodic government spending reviews since 1998, but this is the first since 2015 to cover multiple years, other than one in 2021 focused on the COVID pandemic.

The non-partisan IFS said this spending review could prove to be "one of the most significant domestic policy events" for the current Labour government.

Prime Minister Keir Starmer's announcement in February that defence spending would reach 2.5% of national income by 2027 had already used the room for further growth in public investment created in Reeves' October budget, it said.

"Simultaneously prioritising additional investments in public services, net zero and growth-friendly areas ... will be impossible," said Bee Boileau, a research economist at the IFS.

Non-investment public spending is intended to rise by 1.2% a year on top of inflation between 2026-27 and 2028-29, according to budget plans which Reeves set out in October - half the pace of spending growth in the current and previous financial year.

The IFS sees no scope for this to be topped up, as Reeves' budget rules leave almost no room for extra borrowing and tax rises are now limited to her annual budget statement.

This forces Reeves and Starmer to choose between the demands of the public healthcare system - plagued by long waiting times and a slump in productivity since the COVID-19 pandemic - and other stretched areas.

In past spending reviews, annual health care spending has typically risen 2 percentage points faster than total spending.

If that happened this time - equivalent to an annual increase of 3.4% - spending in other departments would have to fall by 1% a year in real terms, the IFS forecast.

Raising healthcare spending at roughly the same pace as other areas - a 1.2% rise - would only just keep pace with an ageing population and not allow any reversal of recent years' deterioration in service quality, the IFS said.

Spending cuts could be achieved by scaling back services provided by the state, reducing public-sector employment or real-terms cuts in public-sector pay, it added.

But it warned the government needed to be specific about how it planned to make cuts, or risk financial markets losing confidence in its ability to keep borrowing under control.

The review does not cover spending on pensions or other benefits, which the government is tackling separately.

(Reporting by David Milliken, editing by Andy Bruce)