This report challenges the flawed assumptions underpinning the UK Government’s fiscal strategy, exposing the long-term economic damage caused by sustained spending cuts and regressive welfare policies. Drawing on new evidence, we demonstrate how applying our Common Sense Spending Multipliers reveals the true value of public investment as a powerful driver of long-term growth.
Using evidence from 25 advanced economies between 1996 and 2019, we find that capital spending creates a long-term resource that remains available for many years into the feature, while current spending acts as a short-term economic boost that can help navigate downturns and lift productivity through sustained investment. Some forms of spending yield quick returns such as medical treatments to help individuals return to work, others lay the groundwork for stronger more productive generations in the years to come such as education, public health interventions and childcare services.
Crucially, these multipliers work both ways. Cuts not only reduce services, they actively damage the economy and erode the tax base. Over the past 15 years, billions in lost investment have triggered compounding harms that continue to ripple through the system. And yet, the Government’s proposed welfare reforms threaten to do more of the same.
Using our Tax-Transfer Model, we find that the proposed changes will deliver meagre savings at best, while inflicting deep income losses on households with disabilities, particularly in regions already grappling with poverty. Meanwhile, planned capital investments in the upcoming Spending Review fall far short of what’s needed to rebuild Britain. Worse still, these investments are undermined by cuts to current spending and ongoing austerity across most departments.
Our “Act Now” programme offers a route to national renewal that is fully funded through updated multipliers and progressive tax reform. Spending to renew Britain is the only way out of our deepening economic crises.
Our Common Sense Spending Multipliers in Two Parts
- A change in capital spending (e.g. on infrastructure, research and development, schools and hospitals) has a peak multiplier effect of 2.99 in year 9, with even longer-term benefits likely. This means that every additional £1 results in a peak return of £2.99 for the economy. Assuming an increase in tax receipts based on the existing figure of 40% of GDP, the Government would receive £1.20, making a profit in that year alone.
- A change in current spending (e.g. on public sector salaries, welfare, health and education) has a peak multiplier of 1.35 in year 2 of the projection, before declining to effectively zero by year 6. This means that there is a peak annual return for the economy of £1.35 for every £1 spent on delivering public services and that the costs of delivering those public services in achieving hugely improved social and economic outcomes is much lower than the OBR assumes. Around 54p of each additional £1 should return to the Exchequer in year 2.
Impact of the Proposed Welfare Reforms
Based on our Landman Economics Tax-Transfer Model (TTM) projection, the Government’s proposed welfare reforms will result in the following average annual household income losses in 2029-30 after housing costs are taken into account:
- A fall of 7.2% for the poorest decile (10%) of households with two or more disabled people. Deciles 2-7 all lose at least £1,000, with deciles 3 and 5 losing almost £2,000.
- Households with no disabled people will receive a negligible increase from the main rate of Universal Credit, but at most 1.9% for Decile 1. Approximately £100 per year for deciles 1-3 is catastrophically outweighed by the potentially devastating losses experienced by households with at least one disabled person.
- Losses are worst in the areas with the highest rates of disability, including 1.1% in Wales, 1.0% in the North East. On the other hand, London loses just 0.2% and the South East 0.3%. This is a transfer of funds away from both the households and the regions who need it most, including in Red Wall constituencies. This is likely to exacerbate the long-term trend of disaffection among traditional Labour voters and undermine faith in Government more broadly.
Our Common Sense Recommendations
- Replacing fiscal rules with new economic rules to break through short-term thinking, failed orthodoxy and minimal misplaced growth.
- Institutional reform to drive economic success, growth and long-term debt-reduction.
- A return to public investment for the public good.
- Tax reform to close the fairness gap, streamline the system and shift the burden from productive, socially beneficial work to passive wealth and environmentally harmful activity.