Austerity Is Back, Baby
Stop me if you’ve heard this one before: a new chancellor moves into 11 Downing Street, looks under the rug and discovers that the finances are worse than they could ever have imagined. Cue a stern address to the Commons and the announcement that tough choices will have to be made.
But this isn’t 2010. The state has already been cut to the bone and, after the last 15 years, no one really believes that cuts will lead to growth. But the new chancellor Rachel Reeves is still determined to balance the books. What remains to be seen is how she will do it.
What we’ve seen so far is worrying. First Reeves chose to start a public fight about her “discovery” of £35.3bn in unfunded government spending plans, most of which she’s blaming on Tory profligacy. She then announced a series of austerity-inspired sticking plasters: axing £5.5bn from budgets for what remains of this financial year, with a further £8.1bn by 2026.
Some of these cuts should be celebrated. £2.2bn will be saved by scrapping Rishi Sunak’s Rwanda deportation scheme and a further £1.2bn by spending less on consultants. But most are eerily reminiscent of the Cameron-Osborne years: £6.3bn in “efficiency savings”, £2.9bn saved by means-testing benefits for pensioners; more cuts to road and rail infrastructure; cancelling plans for a cap in adult social care costs; and nixing 30 new hospitals. And these cuts could be just the start. The Treasury publication that accompanied Reeves’ announcements contains an ominous promise of “a process for identifying further savings” before the full budget in October.
There have been some more positive signs. The biggest single item in the £35.3bn overspend – one Reeves intends to stick to – is the £9.4bn she wants to spend on public sector pay rises, with most public sector workers getting 5-6% pay bumps and junior doctors 22% over the next two years. Labour has also just announced an extra £750m for renewable energy projects. So, despite their rigid adherence to the Tories’ “fiscal rules” (rules which are increasingly under attack from all sides), Labour does look like it’ll be willing to spend in some areas.
On Tuesday night, Reeves also announced that she plans to raise taxes in the autumn statement. In an era of high interest rates, Labour does face a real trade-off between austerity and tax-and-spend and any move towards the latter should be welcomed. But Labour hasn’t given itself much room for manoeuvre, having ruled out increases to corporation tax, national insurance, income tax or VAT. What’s left is capital gains and taxes on non-doms and private equity managers – none of which are likely to generate the revenue we need to properly fund social care or the NHS.
Growth without investment.
In the heat of Reeves’ fight with Jeremy Hunt about who lied to whom, it’s easy to lose sight of the more important question: how does Labour hope to balance its fiscal orthodoxy with its “number-one priority”, sustained economic growth?
This tension has been visible for some time. On her trip to Washington last year, Reeves gave a speech which endorsed Joe Biden’s $2tn industrial strategy and then promised to build her own on the “rock of fiscal responsibility”. Marrying the two still looks like wishful thinking. But judging by what the new Labour government have announced in its first few weeks, we can now see what its plan for squaring this circle might look like.
On the one hand, Reeves is hoping that reforms to planning and housing will kickstart a wave of construction and infrastructure projects funded by private developers. There has been lots of scepticism about whether these reforms will go far enough to actually unlock Britain’s notoriously slow planning process. But the bigger issue is that if the government doesn’t want to spend any of its own money, then the investment will have to come from somewhere else. And that probably means asking the asset managers who run so much of the global economy for handouts. As the economist Daniela Gabor recently put it: “The Labour party has a plan… it will get BlackRock to rebuild Britain”.
There are several problems with this approach. First, as decades of public-private partnerships have shown, these arrangements normally involve privatising profits and socialising risks. When things are going well, private investors make a killing, but when they fall apart, the government picks up the bill. Second, it’s not even clear that private capital will be prepared to invest on the scale that’s required. Just last week, one of the UK’s largest pension funds announced that it would be scaling back investment in public infrastructure after effectively writing off its £1bn stake in the troubled utility company Thames Water.
The dullness dividend.
The other strand of Labour’s growth-without-investment strategy is the wonderful sounding “dullness dividend”. Having won an election by doing and saying as little as possible, Labour now wants to draw in investment by reducing the amount of policy the government produces. This has already been celebrated across the business press and has become something of a mantra for Reeves.
A key part of this project to “stabilise” economic policymaking is to hand over more power to technocrats. Alongside the cuts, Reeves has also announced a revised Charter for Budget Responsibility, which has three key strands. First, creating more medium-term stability by lengthening budget cycles and promising only one “major fiscal announcement” per year. Second, giving the Office for Budget Responsibility (OBR) greater oversight of Treasury data (this is part of Reeves’ allegation that Jeremy Hunt “lied” when presenting his spending plans to the Commons earlier in the year, something the OBR has announced it will look into). Third, legislating for a new “fiscal lock”, which means that any significant spending announcements would automatically be assessed by the OBR.
These reforms are sure to achieve their primary aim of making it even harder for the British state to invest. Whether they can generate enough confidence in the business community that private investment fills the gap is less clear. Either way, these technocratic reforms won’t do anything to address the deeper challenges of poor infrastructure, lack of investment in education and training and the longterm decline in growth rates that dates back to the 1970s.
So Starmer and Reeves have a plan, but it’s one that nobody thinks will be able to deliver on the scale that’s required. This isn’t (yet) a full-throated embrace of austerity. But there are plenty of worrying signs that Labour will shy away from the big challenges: cancelling much needed infrastructure projects, kicking the social care crisis even further down the road and hoping that private sector investment saves the day. The challenge for the left will be to try to nudge them back from the brink before Labour’s first full budget in October. One thing is for certain: we can’t afford another decade of cuts.
Matteo Tiratelli teaches sociology at University College London.