From a fragile to an agile state: is the Spending Review enough to enable the Starmer government to deliver on its growth mission?

NATHAN CRITCH, DARCY LUKE, PATRICK DIAMOND, DAVID RICHARDS, SAMUEL WARNER AND ANDY WESTWOOD

The June 2025 Spending Review (SR) is a potentially decisive moment for the Starmer Government. It promises a shift to the next stage; that of delivery, focusing on investment in security, health, and economic growth.  Unlocking productivity gains across the UK will be central to delivering growth and, to that end, the SR sets out major capital spending on transport infrastructure, housing and R&D investment as the means to address underlying and enduring weaknesses in the UK economy.

A key driver to Britain’s poor productivity performance is its dysfunctional governance and institutional arrangements, an issue our Productivity Institute project ‘The UK Productivity-Governance Puzzle: Are the UK’s Governing Institutions Fit for Purpose in the 21st Century?’ investigates. Our research sets out a series of clearly identifiable problems: the centralised system of government; the silo-driven culture of Whitehall; and a pattern of fragmented and uneven governance across the UK.  We reveal a system that consistently produces short-term, reactive and poorly designed public policies that compromise the ability of central government to deliver on its goals.

The Starmer government has shown awareness of the governance dimension of the UK productivity puzzle. Its response has been to establish “mission-oriented” government to foster cross-departmental working, tackle centralisation and unevenness by ‘completing the map’ of English devolution, alongside an agenda aimed at “rewiring” the central state to make it more ‘agile and productive’.

There are parallels here with the 1997 Blair Labour Government. New Labour quickly found that to secure promised improvements, it needed to reform how British government operated. In the first 1998 SR, the focus was on ‘money for modernisation’, an agenda which meant funding came with ‘strings attached’ in the form of performance targets as part of an evolving delivery framework. By its second term, it had honed in on delivery, experimenting with a raft of approaches to implementation including cross-government units to spur collaboration, modest devolution of power to local government and Regional Development Agencies, while bringing alternative providers into the delivery of public services. It took several years for the Blair/Brown administrations to alight upon a settled approach to delivery, and that was in the benign context of rising growth.

The economic and political circumstances confronting the Starmer government are markedly different. It inherited a fragile state, debilitated by over a decade or more of stagnant growth and a programme of austerity that has left public services in a parlous state. It brings into sharp focus the need for wholesale governance reform to improve both delivery and poor public service performance. The concern emerging from SR2025 is that Starmer’s Government, while speaking the language of a renewed, more agile state, lacks an overarching governance vision.  Instead, its  Plan for Change accompanied by five missions and  six ‘measurable’ milestones has been criticised for mystifying its reform vision, rather than providing a clearly defined route-map to drive forward an agenda to transform the UK.  Below, we explore the importance of this shortcoming in three key policy areas.

1. Industrial Strategy

The development of a coherent sectoral industrial strategy has been central to the growth mission since Labour came into office. The ambition of the industrial strategy was described by the Chancellor as putting an end to the ‘policy merry-go-round’ which has long plagued economic policy-making, and which contributed to the UK’s woeful productivity performance. The absence of a strategy – whose publication has again been delayed until the end of June – means that it is difficult to discern the link between the SR and Labour’s broader economic agenda. While businesses have responded well to some commitments announced in the SR, doubts will remain until the industrial strategy is launched.

Clearly, the industrial strategy is a lynchpin of economic policy. Its absence in the context of the SR means a lot of detail on how capital investment will address productivity weaknesses remains to be seen. It is still unclear what ‘theory’ of growth this government is committed to. At various junctures, Starmer’s ministers have described the growth mission as AI-driven, defence-driven, devolution-drive, and so on. This uncertainty over how to achieve growth is central to the government’s political and economic weakness.

2. Artificial Intelligence (AI) Reforming the State?

Digital technologies and AI play a critical role in the SR. Underpinning the Departmental Expenditure Limits (DELs) are agreements reached by departments with the Office for Value for Money on administrative savings and technical efficiencies. Many of the efficiencies pivot on the implementation of digital and AI measures to make work more efficient, and blunt the impact of workforce reductions. This is the central component of Labour’s efforts to make the central state more ‘agile’. However, while Starmer’s government talked the language of fundamental re-wiring, the focus within the SR on efficiencies betrays a markedly watered-down set of ambitions which stop short of the transformational change which has been promised.

That said, the tech-driven efficiencies specified in the SR are more realistic than those projected previously, given they are complemented with worked out departmental efficiency plans and funding to drive adoption. The question remains whether the application of new technology will make the state more agile or more fragile, and how the government will oversee the delivery of this transformation in a still under-capitalised public sector.

3. Devolution

English devolution has also been central to the Starmer government’s economic agenda, and remains so within the SR, which commits to local growth funds and integrated settlements for strategic regional authorities. That said, the SR highlights ambiguity in the overall strategy for devolution. On the one hand, the promise to concentrate local growth funds on areas ‘with the highest productivity catch-up and agglomeration potential’ indicates a focus on driving growth by focusing on large cities where green shoots are already emerging. On the other hand, the rhetorical and policy focus is on investing in “left-behind” areas through the trailblazer neighbourhood fund and transport projects for the North of England and Wales.

This suggests a recalibration of government priorities following the recent local elections and the rising threat of the Reform Party. The Government’s focus previously had been on London and the South East, particularly through the revival of the Ox-Cam Arc and the launch of the first ‘AI Growth Zone’ in Oxfordshire. In productivity terms, this make sense, but it reflects a long-standing tendency (reinforced by the Treasury) to focus resources on the already-most productive regions, failing to adequately address the political spatial inequalities that have long bedevilled the UK. Another tension in devolution is between investing in second-tier cities versus levelling-up disadvantaged areas on the periphery.

Conclusion

Mission-led government is supposed to transform how Whitehall operates, with a focus on long-term goals and cross-government working to join-up delivery.  While their impact can be detected in the individual departmental settlements, the SR has once again been driven by a series of bilateral negotiations between HM Treasury and Whitehall departments. It does not appear to be the zero-based exercise that was mooted, potentially to the detriment of allocative efficiency. The absence of coherent delivery mechanisms – particularly for missions – is palpable. New Labour in the late 1990s learned the hard truth that effective delivery is essential to tackling Britain’s most intractable problems.  Starmer’s Government might have political capital given the size of its Parliamentary majority, but it lacks the time to learn the lessons from recent years. Given the substantial cuts to administrative capacity and a narrow focus on technical and technology-driven efficiency, the governance dimension of the productivity agenda still appears to be missing from Labour’s economic strategy. It needs to rectify this swiftly through its forthcoming Industrial Strategy as time is running short.