Winners and losers of UK spending review

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0:32Good morning from the Financial Times. Today is Wednesday, June 11th, and this is your FT News Briefing. The UK will lay out its spending plan for the next couple of years, and Citigroup is getting ready for some hard times ahead. Plus, U.S. state and local governments are selling municipal bonds like they're going out of style. We'll tell you why. I'm Mark Filippino, and here's the news you need to start your day.

1:00UK Chancellor Rachel Reeves sets out the Labour government's budget for the next few years today. Funds for the UK's public services have been squeezed hard recently, and some government departments will face even more pressure after today's spending review. Here to tell us what to look out for is the FT's political editor, George Parker. Hey, George. Hi there. All right, so for me and my non-British friends out there, can you tell me a little bit more about what the spending review is? How does it differ from, say, the autumn budget or the spring statement that we just saw earlier this year? Okay, well, the autumn budget or spring statements were events where the government changed its spending plans.

1:38What the spending review is, is an allocation of what's known as the spending envelope. So in other words, the government's already said how much money it's going to spend over the next three or four years. The spending review is the moment when the chancellor of the Exchequer announces how that money, how that cake is going to be split up between different government departments. And through the choices Rachel Reeves makes today, we will see the government's priorities. I like that cake metaphor, George. Let's play on that a little bit. Who are going to get bigger slices? Who are going to get smaller slices?

2:08Who are the winners and losers of this thing? The big choices that Keir Starmer and Rachel Reeves have made is to support two big public spending areas in particular. The first is defence that we all know about, huge pressure on European countries to take on the threat posed by Russia and the possible withdrawal of US military support. The second big area, inevitably, is the National Health Service, which is creaking at the seams under pressure from an ageing population. So the areas which have been protesting most about this whole process are the Home Office, which pays for policing and border security.

2:43Second area will be the local government department, which pays for all the local services that people use, including childcare and adult social care, along with things like rubbish bin collections and all the rest of it. So I think those are two areas which are going to be particularly tightly squeezed. Yeah. And how does Reeves' own party, the ruling Labour Party, feel about the review that you just laid out and its priorities? Well, the Labour Party thinks it wasn't elected to impose cuts on public services or indeed cuts on welfare. So there's a lot of anxiety about this. So a lot of what we'll see later today will be Rachel Reeves allocating some of the£113 billion to projects which she thinks will benefit the wider economy.

3:25So that might be new roads, new railways, new nuclear power stations, green energy projects, housing, things like that. And that money will be distributed across the country. So she'll be hoping that will give the Labour Party and voters a bit of a feel-good factor against a backdrop of a very tight settlement on day-to-day spending. George, why is the UK government facing such a tight budget squeeze to begin with, and what are they going to do about it? Well, they would say they inherited a very difficult fiscal situation from the previous governments, conservative government. Basically, a huge amount of debt was accumulated dealing with, first of all, the COVID crisis and then the energy price crisis as well.

4:04A lot of government spending now is taken up by the servicing of its debt levels. That's been exacerbated by rising borrowing costs for governments across the world, not just in Britain. So as a result, the budget is very tightly constrained. Rachel Reeves has a budget rule which says that day-to-day spending should be met by tax receipts by the end of the forecast period, which is at the end of the Parliament. What she's hoping is that the markets will see the borrowing she's undertaken to pay for capital investment as a long-term bet on Britain's future and one which will eventually increase the growth rate of the economy and then create a virtuous feedback loop and create more money for day-to-day public services.

4:43George, I guess the big question on everyone's mind is, are we going to see higher taxes in the UK because of this? I mean, what are you looking out for? I think the answer, simple answer to that question is yes. Rachel Reeves had a huge tax-raising budget last October. She said this was required to fill a black hole in the public finances. But as I just mentioned, the fiscal situation is still pretty difficult. Pressures are mounting on her. So when it comes to the autumn budget, which is the next big fiscal event, where she will announce tax changes, there's a growing expectation among economists that she will have to come back and raise taxes again.

5:17If I was a wealthy person, I might expect the chance to come knocking on my door looking for a bit more tax revenue in the autumn. That's the FT's George Parker in London. Thanks so much, George. Pleasure.

5:33The UK and four other Western countries are imposing sanctions on two Israeli ultranationalist officials, Finance Minister Belzalil Smotrich and National Security Minister Itamar Bengavir. UK Foreign Secretary David Lammy said Smotrich and Bengavir have, quote, incited extremist violence and serious abuses of Palestinian human rights. The UK restrictions include a freeze on accessing assets in the country and a ban on traveling to Britain. The other countries placing sanctions on Israel include Canada, Australia, New Zealand, and Norway. These are the first Western sanctions against Israeli government ministers, and Israel's foreign minister called the sanctions outrageous on Tuesday and vowed to respond.

6:17Meanwhile, the U.S. is taking a different stance. America's ambassador to Israel, Mike Huckabee, said he didn't think an independent Palestinian state was still a goal of American foreign policy.

6:34municipal bonds are moving like hotcakes. U.S. state and local governments are selling them at record rates, and it's President Donald Trump's budget legislation, you know, the big, beautiful bill, that's driving the pace. It all has to do with a certain tax break. Here to explain is the FT's acting capital markets correspondent, Will Schmidt. Hey, Will. Hey, good morning. So, Will, tell me what's going on here. How is Donald Trump's big, beautiful bill influencing the municipal bond market? Okay, so within the muni bond market, there is a thing called a private activity bond, which is financed with the help of state and local governments, but it's not like pledging their assets as collateral.

7:14It's used instead to build private projects that have some public benefit. So think of like airports, but not airplanes, or hospitals, but not liquor stores, or affordable housing, but not golf courses. These private activity bonds benefit from a tax break that makes exempt the interest paid on those bonds. In 2017, when a reconciliation bill, much like the Big Beautiful Bill, was passing through Congress, some lawmakers tried to get rid of that tax break for private activity bonds. So there's concern in the muni market these days that this could happen again and that tax break could go away. Will, paint me a picture here.

7:50Why would the loss of this provision suddenly be driving up the sale of municipal bonds? because I'm not quite making the connection. Sure. So let's say you want to build an airport, you know, the Mark Livino Airport, and you would like to work with your local county or state or city government to do so. In the past, you were able to get a better deal on the debt you had to borrow by doing a private activity bond. If that tax break goes away, that becomes a less feasible option and maybe not feasible at all. And you'll have to go to the public markets to borrow this debt and it could be a lot more expensive.

8:25First of all, I just want to thank you for the Mark Filipino Airport. That really gave me a chuckle. Yeah, you're welcome. We mentioned that this is causing a rally. Just how big of a rally are we seeing in municipal bond sales because of this threat? So municipal bonds in the U.S. are actually on pace for their best year ever. The reason this is driving up sales as quickly as it is is because municipalities and their private partners worried about the loss of this potential tax break are trying to pull forward some of the projects they had planned for later in the year, early next year, those are starting to get funded earlier.

8:58So they can get the ball rolling here, right? So that they can get it done before the tax break goes away. Okay. So, Will, you mentioned that this tax break was at risk back in 2017, but was ultimately saved. How likely is it that Congress will scrap it now? So from what I can tell, the muni market was really put off guard in 2017. You know, words like shocked and confused and chaos were thrown around when I was talking to folks about it. This time, having had that experience, they are a lot better prepared and they've been doing a little more advocacy behind the scenes ahead of time. This vibe is that the danger is less than it was in 2017.

9:32But because we have really accelerated timeline, you know, I think President Trump wants to get this bill to him by July 4th. So there still is some concern until that bill is signed, sealed and delivered. Yeah, and I think part of the concern is that congressional Republicans are under this pressure to find ways to limit how much the budget bill adds to the national debt. What's at stake here for local municipalities if this tax break is added to the chopping block? Well, that's a good question. They can still build fire stations. They can still build highways, parking garages, anything you would think of when you drive around a city and you see features that are not privately owned.

10:07But it could mean that it takes longer and it's more expensive for those kind of projects to get built. And because those projects do have some public benefit, that could hurt the overall tenor of municipalities. That's the FT's Will Schmidt in New York. Thanks, Will. Thanks, Mark.

10:29Before we go, Citigroup is bracing for some bad news. The U.S. bank said yesterday that it's ready to beef up its provisions for potential bad loans. And not buy a little, buy a lot. Hundreds of millions of dollars in the second quarter. So why does Citi expect so many people to struggle with their loans? Well, a big reason is that people are worried about President Donald Trump's tariffs, that his policies will slow economic growth and raise prices for consumers, and we're already starting to see people hunker down. Consumer sentiment is improving, yeah, but it's still way below what it was when Trump was elected last year.

11:10You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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