The prospect of a tough public sector spending review this year will cause alarm on Labour’s backbenches and an angry response from many inside the big public sector unions.
Britain could be plunged back into months of industrial action if public spending cuts include restrictions on pay. Worse, the government could come under pressure from its own MPs, wrecking Keir Starmer’s claim of providing the stability and solidity missing from UK politics since 2010.
The message must be to all those that claim to support the government: stay calm and recognise that the UK is in a hole from which it will take years to emerge.
Trade unions, in particular, need to dial down the rhetoric of betrayal should Rachel Reeves need to take a scalpel to departmental spending and delay eagerly awaited projects until she has the money to pay for them.
As looks increasingly likely, she will not have the funds this year after a dramatic slowdown in economic growth, more persistent inflation than was expected and a rise in borrowing costs.
The Treasury’s independent forecaster, the Office for Budget Responsibility (OBR), could say in its March review that all of Reeves’s financial buffer, set aside in the October budget as a cushion against a negative turn of events, has been eaten up, forcing the chancellor to revise her spending priorities.
With a steer from Treasury insiders who say that extra borrowing and higher taxes have been ruled out, spending cuts are the only option left on the table.
There are Labour MPs, trade unionists and some economists who will argue that Reeves should ignore the forces of conservatism inherent in the way the OBR and Bank of England go about their job. That she should press on regardless, telling parliament that borrowing more to pay for public services will be fine. And that the current increase in global interest rates is just a Donald Trump-induced blip, to be ridden out by a confident nation that is looking to a future marked by strong economic growth.
For a measure of how well this can work, we only need to look across to France, where Emmanuel Macron decided some time ago to allow a rise in debt to pay for increases in welfare and investment spending. The payback was supposed to be higher growth and a rise in tax receipts, ultimately bringing the budget back into balance.
Stuck in a similar rut as the UK, and under pressure from international lenders and officials in Brussels to bring down borrowing, Macron’s government must make severe spending cuts.
Labour MPs and trade union leaders should also consider the terrible legacy of the Conservative years – one that goes far beyond the £22bn unfunded hole in the government finances that Reeves highlighted shortly after taking office.
Almost every aspect of state funding has been hollowed out. And one of the key trends in public spending over the last 40 years has gone into reverse, undermining a basic tenet of Whitehall calculations during that time.
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This trend involves two lines of spending, one that has increased and another that has fallen as a proportion of the overall budget – one compensating for the other. One line accounts for the defence budget, the other covers the NHS.
In broad terms, as the defence budget has fallen since the 1980s, spending on the NHS has risen.
From now on, the defence and NHS budgets will both need to rise quickly, putting the Treasury in a double bind. Where once it could rely on annual cuts in defence spending to pay for rising health costs, it must now look elsewhere.
To help the government out of a hole, it may be that the recent turmoil on the international debt markets proves to be momentary.
Sadly, that is unlikely. Or, if it is momentary, it seems certain to be succeeded by some other global threat to the stability of international financial markets – something that is going to be a feature for the rest of the decade.
That means public sector workers accepting lower wage rises than Reeves generously offered last year. Those were generous because it was not her fault that pay packets were still worth less than they were in 2020 once inflation was taken into account; that was Rishi Sunak and Jeremy Hunt’s doing. It also means jumpy Labour backbenchers going back to their constituencies to explain why Reeves and Starmer should be given time to implement government policies.
After a difficult first year as prime minister, Margaret Thatcher said that “‘jam tomorrow’ has never made a very satisfying diet”.
It doesn’t. Yet if those on the left panic now, at the first sign of trouble, there won’t be jam today or tomorrow.
