Campaign in a straitjacket, and you need to be a Houdini to govern. Only three weeks have passed since Labour’s “fully costed” manifesto reassured just the right people in just the right places to secure a spectacular triumph under the very particular rules of our electoral game. As a result, Rachel Reeves’s “iron-clad fiscal discipline” is now subject to testing not by focus groups or at the ballot box, but by the stricken realties of a state rendered frail by long years of austerity.
From Nato summit demands that Britain should ramp up defence spending rapidly, to seven Labour MPs being given the boot in a row over a nasty restriction on children’s benefits, those realities are now making themselves felt. No pressure, however, is more intense than the unexpectedly high 5.5 per cent pay rise that has reportedly been recommended for teachers and NHS workers, including nurses.
The reasons why something close to this inflation-busting figure will have to be paid are legion. What the voters want from a Labour government is, more than anything else, public services back on their feet. That’s just not going to happen if, for example, teachers end up on strike in the autumn after being short-changed on the conclusions of the independent review process. That process reached the conclusion it did because teachers’ pay has been squeezed to be, in real terms, 9 per cent lower than in 2010. All hopes for stabilising the NHS rely on boosting the recruitment and retention of health service staff—which won’t be easy when so many of them have also faced a long squeeze. Reeves has effectively acknowledged all this, telling the BBC that as she grapples with making the sums up, she also needs to respect the fact that there “is a cost to not settling.”
The biggest problems for Reeves the realistic chancellor are now the commitments left by the Reeves the spin-conscious shadow chancellor just a short time ago: in particular, her embrace of the Conservative government’s scorched-earth spending plans. In order to rationalise some £20bn in national insurance cuts before the election, the Tories pencilled yet another squeeze on our tottering public services, safe in the knowledge, courtesy of the polls, that they’d never have to implement it. But when Keir Starmer and Reeves claimed they were tough enough to work within similar spending totals, the bind became more real. All the more so after they locked their own straitjacket tighter by vowing not to increase any of the biggest four revenue-raisers: income tax, national insurance, VAT and corporation tax.
There is, of course, a plan for growing the economy (and with it tax revenues) by building homes and infrastructure. Tearing up planning rules and concreting over cherished views is fraught with political dangers in many Middle England seats, but I’m not one of those who sees the economic strategy here as necessarily doomed. Building pulled Britain out of the Great Depression in the 1930s, and—as long as it’s not done so clumsily as to trigger an unmanageable backlash—it might spur growth again. What it can’t do, however, is generate revenue fast enough to deal with all the immediate crises. Laws need to be changed, particular planning applications made, and consultations—even if abridged—need to be held. This growth and the resulting revenue is a couple of years away, even if it comes good.
£3bn could soon become something closer to £10bn if the whole public sector expects similar treatment
Thus, everyone is left scratching their heads as to where, exactly, the government is going to find an immediate unbudgeted £3bn or so for teachers and nurses. If that were the end of it, a flash of good fortune—a month or two of unexpectedly strong revenues—might cover it, but £3bn could soon become something closer to £10bn if the whole public sector expects similar treatment. And this is no one-off outlay. Amid all those other competing pressures, this is a permanent step-up in the baseline for a huge slab of state expenditure: the public pay-bill represents around 10 per cent of GDP, and a quarter of all government spending.
There is a theoretical option of ordering the increase without providing any new cash, leaving schools and NHS trusts to figure out where to find it. But as former education mandarin Jon Coles has written, budgets are so tight the effect would “be bankruptcy territory for many schools.” And he acknowledges that the scale of the NHS problem is even larger.
So something’s got to give: Reeves and Starmer are going to have to find a way to wriggle at least part-way out of the straitjacket that they were recently proudly parading themselves in. But how?
In the past, new governments would sometimes claim to “open the books” and find they were worse than feared, thereby granting themselves licence to tax and borrow to a greater extent than they had previously suggested to voters. Reeves has conceded that this old trick won’t wash as it used to, now that the main revenue and borrowing forecasts are produced and published by independent Office for Budget Responsibility (OBR).
But on public service expenditure, the OBR still has no real choice other than to rely on the government’s own “planning assumptions.” In step one of Reeves’s great escape she has just tasked Treasury officials with reviewing “the state of our spending inheritance.” They’ll duly report back—surprise, surprise!—that the pre-election planning assumptions were dodgy, and key public services will be “revealed” as desperately short of cash. At least some pages of “the books” can thereby be deemed to have been “worse than was feared.”
Step two will then be a tax-raising Budget later this year. Even while Labour was still officially protesting that its manifesto plans were “fully costed,” once the winning line moved into sight during the campaign, it started whispering to friendly newspapers about various raids on the wealthy it was keeping up its sleeve. These are virtually certain to arrive in the autumn.
The remaining question is whether or not there will also be a step three. This would involve wriggling some way free of two self-imposed borrowing rules. One is about getting the national debt down, but might there be scope to have a fresh look at exactly which measure of debt to target? There are always different series—one of many potential variations is including or excluding Bank of England debt—which may allow for a bit more or a bit less wriggle room.
The other rule promises never to borrow other than “to invest.” What, exactly, counts as “investment” is moot. Accountants apply particular definitions, but the underlying economic idea is simply expenditure that yields a return down the line. Dwell on that and it is, for example, obvious that the bulk of education budget—teachers’ pay included—could count as investment, given the work that it does in boosting future earnings and income tax receipts.
To reclassify all education spend would be seen as too much of a fiddle—stoking unmanageable expectations of blank cheques elsewhere, and denting credibility with the markets. But the basic logic for shifting chunks, particularly large chunks, of future-improving spending from the “current” to the “investment” column is sound. There is considerable room for manoeuvre here, just so long as there is a willingness to make an argument.
Britain voted for change, the one-word title of the Labour manifesto. But the public realm will be looking at very small change for a long time to come until the straitjacket has gone. With her official review of the spending inheritance, Reeves is about to free one arm; with a fresh look at the definitions of debt and investment she can shrug off the rest. She has a plan which at least has a chance of boosting growth for the future. But she may not get to that future unless she can first find a way to pay for teachers, nurses and so much else today.
