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Rachel Reeves has an unenviable task as she puts the final touches to the government-wide spending review she will unveil on Wednesday. It will be a defining moment for the Labour government as she sets out departmental spending limits up to the next general election.
The headlines garnered in the run-up to the chancellor’s big day are misleading. We have been promised £15.6bn for local transport projects, mainly in the North and Midlands; £4.5bn a year for schools; £22.5bn a year for science and tech, and £187m to bring digital skills and AI learning into classrooms and communities.
While all are worthy, the government is playing a rather cynical game. Some of its pre-announcements stem from the extra £113bn of capital spending for which Ms Reeves created room last October by sensibly changing her fiscal rules so investment projects do not count towards her target to balance revenue and spending by 2029-30.
However, her determination to stick to her fiscal rules to prevent a wobble on the financial markets means that Wednesday’s statement will impose a squeeze on day-to-day budgets. Although overall spending will rise by an average of 1.2 per cent a year on top of inflation, big increases for health and defence will mean real-terms cuts for other budgets, possibly including the Home Office (which funds the police), housing and local government. So there has been a bruising round of negotiations between the Treasury and ministers such as Angela Rayner, who is responsible for housing and councils, and Yvette Cooper, the home secretary. During a media round on Sunday, Peter Kyle, the science secretary, did not rule out real-terms cuts to the police and housing.
While the squeeze will technically be less severe than the austerity over which George Osborne presided from 2010, the danger for Labour is that it will feel like austerity 2.0 for many voters. Labour backbenchers are well aware of this and, after the party’s poor results in last month’s local elections in England, have pushed ministers into a U-turn on Ms Reeves’s disastrous decision to means-test the pensioners’ winter fuel allowance and extracted a promise from Sir Keir Starmer of more measures to combat child poverty, possibly by easing the two-child limit on benefits.
There could also be a tweak to the £5bn of cuts to disability and sickness benefits hurriedly announced in March.
The government must prioritise the fight against child poverty; without intervention by ministers, it would rise significantly over the five-year parliament, which would be an indictment of Labour. Ms Reeves must find a way to make good her promise in her article for The Independent last week to ensure “every young person can fulfil their potential”.
Admittedly, that will not be easy, given all the conflicting pressures on her to spend more. Although Wednesday’s statement will not be a Budget, Ms Reeves should do more than rattle off a list of spending commitments without making clear where the money will come from. There is already a risk of doing so on defence. The strategic defence review unveiled last week is based on the government’s ambition to raise defence spending to 3 per cent of GDP in the next parliament but it has not yet allocated the funds to go beyond a rise from 2.3 per cent to 2.5 per cent by 2027. The UK will come under pressure to commit to 3.5 per cent at a Nato summit later this month.
Ms Reeves should also provide clarity on which pensioners will receive winter fuel payments in the coming winter. The about-turn has been slow and messy, to the consternation of Labour MPs.
In responding to such pressures, the chancellor and prime minister have cited the economy’s 0.7 per cent growth in the first quarter of this year but there is no guarantee that will be maintained. They should not lose sight of the need to balance higher spending with genuine public sector reform. There will be a limit to how much can be achieved through “efficiency savings”.
The suspicion is that, in spending more on defence, winter fuel payments and child poverty, Sir Keir and Ms Reeves are willing the ends without providing the means. They should level with the public about how their sums will add up.
For now, they may be tempted to adopt a Micawberish approach in the hope that the fiscal picture improves by Ms Reeves’s second Budget in the autumn. Again, that is far from certain: more holes might be blown in her headroom against her rules by an uncertain global economic outlook in the age of Trump 2.0 and the Office for Budget Responsibility downgrading its optimistic forecasts for productivity growth. Unless she changed her rules to allow more borrowing, the chancellor would then have to implement tax rises or spending cuts or a combination of both.
When things might get even worse, the chancellor needs more than a strategy of hoping for the best.
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