Rachel Reeves has just announced a series of spending cuts in the House of Commons. These were ‘incredibly tough choices’, she said, to account for the £20 billion surprise ‘black hole’ left behind by the Tory government.
Her announcement means £5.5 billion of immediate, in-year cuts. These include some projects that were tipped to be axed, including the Rwanda scheme, and a review of rail projects (which will include discarding the ‘Restoring Our Railways’ programme). But the big surprise was the decision to withdraw the winter fuel allowance for pensioners who are ‘not in receipt of pension credit or certain other means tested benefits’ from this winter onwards. It’s an estimated saving of £1.5 billion. She has also scrapped the Tory plan to cap care home costs (a major 2019 Boris Johnson pledge).
This is only the beginning Reeves said, as she announced her first Budget for 30 October. The Budget, she said, ‘will involve taking difficult decisions…across spending, welfare and tax’. In short: expect more cuts and more tax hikes. ‘This is not the decision that I wanted to make. Or the one that I expected to make’, the Chancellor said of the winter fuel allowance change. This decision, alongside all the others, were a result of a ‘Conservatives cover-up’ that has forced her hand.
This narrative – the ‘surprise’ fiscal black hole – has been the subject of a great debate for some time now, which escalated over the weekend as news emerged that Reeves would use her speech today to insist the Tories had secretly and ‘deliberately’ hidden plans to overspend in the 2024-25 fiscal year. Her 30-page dossier produced by a Treasury-led audit, we’re told, contains the shocking revelations that could only be discovered once Labour was inside No. 11.
It’s a narrative that has, unsurprisingly, been refuted by the Conservatives – and also by the Institute for Fiscal Studies (IFS), which described the idea of a surprise spending hole as ‘not very credible’ – not least because the Office for Budget Responsibility last did a full breakdown of the public finances just five months ago. (IFS chief Paul Johnson has since tweeted out that a £6.4 billion ‘overspend on asylum this year…does genuinely appear to have been unfunded’.) At the time, the independent body highlighted the trend of the last government to put off tough spending decisions: the government was uncomfortably close to the limits of its fiscal rules, but this was on show for everyone to see.
It seems much of what’s mentioned in the dossier falls in the grey area of political choice. The impact of double-digit inflation on both departmental spending and public sector pay, for example, has taken its toll. But the impact of inflation is not a surprise: rather it has been well-documented by the IFS, which calculated back in March that the Conservative’s pledge to increase public service spending by 1 per cent rise in the next Parliament would leave a £10-£20 billion black hole. It’s a figure neither the Tories or Labour wanted to engage with during the general election, despite being pushed to do so.
Crucially, the £9.4 billion cost of raising public sector pay – which the IFS says accounts for ‘half of [the] spending “hole”’ – is a choice made by the government today. While the recommendations of independent pay bodies may be hard to refuse, it is not spending that the Chancellor is required to green light. Reeves did so this afternoon, confirming the pay hike for teachers and NHS staff.
Like the two-child benefit cap – which Reeves says is a difficult decision not to reverse – a similar argument could be made on public sector pay right now – not least as it currently accounts for 20 per cent of the government’s spending on services. If the goal is to keep costs manageable, the pay rises could have been tweaked (or at least tied to outcomes) including productivity gains in the public sector. This isn’t so much a cost ‘surprise’ as it is a decision made by Labour to prioritise public sector pay over other areas of spending.
In many ways, Reeves’s comments today were unforgiving: ‘It became clear there were things I did not know. Things that the party opposite covered up. Covered up from the opposition. Covered up from this House. Covered up from the country.’ But she was also selective in her language, speaking about the hidden ‘pressures on these budgets’. On inspection, many of Labour’s overspending accusations seem to be criticisms of underinvestment: fundamental institutions, including justice and security, are seemingly at breaking point, with no plans put in place by the Tories to significantly boost resources. It’s a politically painful accusation, but different, in many cases, from spending more than originally stated.
No one really expected the Tories to cut spending, as they pledged to do in the last Budget. No one thought Labour would stick to it either. It’s difficult to dispute that the Tories have left Labour with a hospital pass when it comes to public spending, forcing their hand to make the tough decisions on cuts and tax. But it remains difficult to say this is all surprising news. Both Labour and the Tories were making unfunded promises in their manifestos (on the incredibly expensive NHS long-term workforce plan, for example), avoiding at all costs explaining how to make good on the promises they were offering up.
It is an interesting move from Reeves to make spending cut announcements outside of a formal fiscal statement, after having insisted that the OBR be involved in assessing all government plans around spending: a necessity, Reeves says, after Liz Truss’s mini-Budget fiasco. What emerged quickly however, was that this was Reeves’s Jeremy Hunt moment: the unforgettable announcements made by the former Chancellor when he swooped in weeks after the mini-Budget to clean up the mess. When Hunt rolled back the entire mini-Budget, he managed to calm markets and restore some order. The markets have been calm, but this is Reeves’s opportunity to indicate some fiscal hawkishness. And by rolling back a series of Tory commitments, including Rishi Sunak’s plan for the ‘Advanced British Standard’ alternative to A-levels – a ‘legacy’ project, the Chancellor called it – it came across as an attempt to recreate a similar moment.
Will it work? The Shadow Chancellor clearly didn’t like the parallel, as he sat across from Reeves, shaking his head. The decision to roll back the winter fuel allowance isn’t an easy choice for the Chancellor to make within her own party, as Reeves has responded to cuts in public services with additional cuts in public spending. It’s the kind of move the Chancellor can make right now – but only for so long – and even then she has been deliberate as to try to frame these cuts as an extension of Tory ‘austerity’, by making it the Tory cover-up.
Will the public believe that today’s announcements are a result of revelations made after Labour took power earlier this month? The Tories might have an easier time combating this narrative if the party’s own future had a clearer direction – but that won’t be sorted until the leadership contest finishes in November. Either way, Reeves has packed a punch, with perhaps the strongest performance she’s given to date. ‘If we cannot afford it,’ she repeated again and again, ‘we cannot do it.’
They are powerful words – but also words that can be repeated back to her, as she prepares to lay out her plans for future spending. Even when sticking to fiscal rules, public sector net debt kept rising under the last government. Will Reeves really break that trend?
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