Keir Starmer and Rachel Reeves were adamant that economic growth would be their first priority in government. It is hard to square that with the decisions the Chancellor has announced this week.
The Chancellor claims to have discovered a £21.9 billion ‘black hole’ in the nation’s finances, yet she has created the largest part of that sum by deciding to spend £9.4 billion on inflation-busting pay settlements for public-sector workers without asking for reforms in return.
This, it seems, is the first Reeves doctrine: pay now to avoid strikes later
Junior doctors are to receive a rise of more than 20 per cent, spread over two years. But it is also the way that Reeves has justified the move that may well cause her trouble in the future. The cost of not awarding these rises is even greater, she argued – her implication being that the unions would impose strikes.
Set aside the fact that the junior doctors are not underpaid once their generous pensions are factored in. The Chancellor is explicitly saying that they are getting more money because of the damage they have inflicted on the NHS and its patients through repeated strike action – and the plausibility of their threat to do more. This, it seems, is the first Reeves doctrine: pay now to avoid strikes later. It shows other unions that strikes work.
If Reeves thinks she has granted a one-off, corrective pay award to the public sector she will be disappointed. Unions will now expect pay rises of well above inflation every year – and without having to agree to any changes in their working practices. The NHS itself has been told to find a
third of the money for the rises, which means that less will be spent on patients. This perpetuates the problem that Labour inherited: a lot more cash spent on the NHS and increasingly poor results.
Reeves should at least have taken the opportunity to use pay as a lever to try to reverse the lamentable slump in productivity. According to the Office for National Statistics, productivity in public services is now lower than when Tony Blair became prime minister. This is an astonishing record of non-achievement, especially given the technological advances over the past quarter of a century which have offered ample opportunity to increase efficiency.
Wes Streeting, the Health Secretary, should have used the 22 per cent pay offer as collateral in order to demand the fundamental changes that will be necessary to stop the service collapsing. To buy off striking workers without asking for anything on behalf of the public is more Callaghan-era Labour than it is Blair.
The confected ‘black hole’ drama at least gave Reeves political cover to cut back on middle-class welfare. The Winter Fuel Payment is being reduced, as is the cap on care-home costs which would, in effect, have seen the average taxpayer subsidising families who could afford to pay for their own care.
What Reeves is doing – cutting spending while preparing for tax rises – was dubbed ‘austerity’ by those who opposed such measures in the 2010s. But not all tax hikes or spending cuts are created equal. Deciding what to axe and what to protect shows a government’s priorities. The other big decision Reeves made this week was an alarming one: to choose public-sector pay over infrastructure spending.
She axed several transport projects and intends to further reduce public investment – already meagre by international standards and forecast to fall to a 15-year low by the end of the parliament. This, combined with Reeves’s threat to raise taxes, rather makes a mockery of her claims that growth is her main priority. To increase capital gains tax (as she looks likely to do) will deter investment and raise little money. It is hard to see, as things stand, where she expects growth to come from.
Her decision to publish her own figure about a £22 billion black hole does not inspire confidence. HM Treasury had become known as the department of smoke and mirrors: can we really trust what Reeves asked it to produce? Its dossier has allowed her to say that ‘I think we will have to raise taxes in the Budget’. This is quite a difference from what she said during the election campaign. Voters who took her on her word will have reason to feel misled – and that deception may be just the start.
Of course the Conservatives can hardly claim the moral high ground when it comes to managing the public finances. They did indeed leave a lamentable inheritance, even if not one as bad as Reeves makes out. David Cameron and George Osborne made a brief attempt to start balancing the books, but momentum was soon lost and we ended up with a government that grew out of all proportion to its usefulness.
When Starmer moved into No. 10, Peter Mandelson (who writes the diary article) offered him a very public piece of advice: to identify the difficult problems and address them soon, because they will not become easier to solve as time goes on. Welfare and NHS reform are the nettles that Reeves and Starmer will have to grasp. Now, however, they can add the prospect of more public-sector strikes.
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