Rachel Reeves’ Spending Review does more than set budgets. It exposes a contradiction at the heart of Labour’s approach to government: a party that wants to rebuild the state won’t take the hard decisions needed to make that possible. The review was more painful that it needed to be for Labour, because Labour MPs have shied away from serious welfare reform.
Two mistaken ideas dominate much of the progressive conversation about the public finances. The first is that the state can go on doing more and spending more forever, with no real constraint. The second is that all talk of welfare reform is right-wing cruelty. Unless and until Labour challenges both ideas head-on, hopes of ‘national renewal’ will be forlorn.
A pound spent on welfare cannot be spent on services.
Zoom out a bit from the spending review and you see that the big story is this: the government is now squeezing the departmental spending budget (known in Whitehall as the Departmental Expenditure Limit, or DEL) not because it wants to, but because it has avoided confronting the larger challenge of welfare (part of Annually Managed Expenditure, or AME).
In this Spending Review, DEL totals around £600 billion, covering the entire range of public services: education, local government, defence, justice, and more. AME is also around £600 billion, of which more than £300 billion is welfare and pensions. That last total includes things like the winter fuel payment, if you’re wondering. The latest OBR forecasts show that welfare spending will be £373 billion by 2028/29 – 10.8 per cent of GDP.
A pound spent on welfare cannot be spent on services. No government can credibly promise better public services – in education, housing, policing, or local government – while letting welfare continue to rise unchecked.
The numbers tell the story clearly. This year, welfare and pensions will consume more than a quarter of all public spending, and more than the NHS and schools budgets combined. Housing benefit alone exceeds £30 billion. Disability benefits are rising by billions each year. The Office for Budget Responsibility warns that without intervention, total welfare spending will reach £373 billion by the end of the decade – 10.8 per cent of GDP.
In the face of all this, Rachel Reeves is doing what serious chancellors have to try to do: holding the line on the public finances, maintaining market credibility, and trying to restore a sense of control to government spending. She might not be getting much love from her colleagues these days, but people who manage serious money know she and her agenda are a big part of what makes Britain a viable investment prospect. Hence endorsements from people like Jon Gray at Blackstone this week.
Wall Street and Westminster are far apart, however. She remains an essential part of the Labour government but in SW1, Reeves is being made to carry the political cost of choices the wider Labour party refused to make. The squeeze in departmental budgets is not simply the result of Treasury caution or ideological parsimony or the failures of the last lot. It is the consequence of a collective failure to act on welfare.
This is the real argument Labour must now have – with itself. The idea that refusing to touch welfare is a sign of compassion is a luxury belief. The people who feel the effects of tighter departmental budgets are not the comfortable. They are the users of struggling schools, underfunded councils, overstretched housing services, and a broken justice system. If you want a capable state, it needs capacity – fiscal, administrative, and political. And that means making choices.
The Scottish experience offers a sobering warning. There, SNP ministers have made generous promises on welfare – from expanded child payments to free prescriptions – all in the name of social justice. But the fiscal arithmetic is unforgiving. The Scottish Fiscal Commission has warned that spending commitments on welfare are rising faster than revenues and that, without reform, significant cuts will be required in other areas to keep the budget balanced. In other words: if you don’t reform when you can, you will be forced to cut when you must. And the cuts will land hardest where they hurt most – on services for everyone.
Labour MPs in Westminster would do well to study that lesson closely. Because the same pressures are now unfolding across the UK. A refusal to act on welfare spending will require ever more brutal decisions on departmental budgets. This undermines the very institutions progressives claim to value – and plays straight into the hands of those who argue that the state itself is broken beyond repair.
None of this means abandoning the principles of social justice. A strong, compassionate welfare state is a hallmark of any civilised society. But a sustainable welfare state is essential to a functioning society. Reforming welfare is not about punishing the poor. It is about preserving the system – and making sure it can continue to command the trust and consent of the public.
Disability benefits are the clearest case in point. Forecasts from the Institute for Fiscal Studies show annual increases of 9 per cent, driven in part by looser eligibility rules and assessments increasingly disconnected from work potential. If this continues, the entire system risks losing legitimacy — not just financially, but politically. The danger is not just overspending. It’s public backlash and declining support for the principle of collective provision. Progressives should not wait until that moment arrives to make their case for change.
Labour grumbling at Rachel Reeves for this tough Spending Review is misplaced. She is not the villain of this story. She is dealing with the consequences of Labour’s wider reluctance to confront fiscal reality. The real question isn’t why the Chancellor is holding firm – it’s why more of her colleagues didn’t help make her job easier.
If you’re a Labour MP who found this Spending Review painful then you need to trace that pain back to the choices you’ve refused to make on welfare. If you still can’t support sensible, necessary welfare reform (yes, winter fuel payments again) then be honest: you’re not protecting the vulnerable. You’re starving the services that vulnerable people rely on most.
The language of priorities isn’t a soundbite. It is the essential discipline of governing. And Labour is now in government. If the party wants to lead a serious renewal of the British state, it has to match its ambitions with equally serious choices. Reforming welfare isn’t a betrayal of the progressive tradition. It is the only way to uphold it.
Because if Labour lets the unchecked growth of welfare spending destroy the state’s ability to function, it will not be the rich who suffer. It will be the people the left exists to serve. The people who most need a capable, compassionate, focused government that works. The people who will turn to Reform if a state hollowed out by unchecked welfare spending fails them and their communities.
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