What kills Labour governments? A look back over the century since the party first took power suggests one overwhelming culprit: cuts in social expenditure.
In 1931, Ramsay MacDonald’s second administration collapsed when trade unions and many MPs refused to accept his plan to slash unemployment benefits by 10 per cent. In 1950-51, the once all-conquering Attlee administration fizzled out amid rows over domestic retrenchments to fund the Korean War. In 1978-79, the “Winter of Discontent” that doomed James Callaghan was defined by traditionally stoic public-sector workers—hospital porters, binmen, even gravediggers—finally snapping and going on strike after long years of cuts and squeezed pay.
Keir Starmer’s dramatic move this week to fund higher defence expenditure exclusively from foreign aid cuts runs many risks, not least for those who rely on UK-funded programmes. But the prime minister is attempting to dodge the greater political peril of deepening austerity at home. Even before Europe’s Trump-induced defence emergency, the upcoming spending round looked like it could be fateful for the prime minister’s young administration. The available expenditure “cake” will be baked on 26th March. That day, the chancellor’s spring statement will reveal what adjustments—if any—she will make following updated forecasts from the Office for Budget Responsibility. That cake is then set to be carved up between services in a Spending Review in “late spring”.
Rushing the aid-to-defence flip out early isn’t only intended to give Starmer something pleasing to say to the aid-slashing strongman when he visits Washington today (though there’s definitely a bit of that). It’s about sending a signal of resolve to Moscow and other European capitals, and it’s designed to avoid the Spending Review having to take an axe to too many of the domestic budgets by which, barring a catastrophic slide into outright war, this government is ultimately likely to stand or fall. Ruthless as the move is, however, it is unlikely to be sufficient.
Last October, Rachel Reeves’s tax-raising Budget provided an emergency injection into public services for the coming financial year, but she pencilled in a tight settlement for the rest of the parliament. Assuming the NHS gobbles up the spending rises it has virtually always required—under Conservative as well as Labour governments—the expectation in the autumn was that cuts of a little over £8bn were going to have to be distributed among the various “unprotected” departments. For the country’s creaking councils, courts and colleges, Starmer’s vow of “no return to austerity” was already ringing hollow.
It's hard to exaggerate how much the picture has darkened since. The balance of economic news has been unhelpful to the public finances. The Exchequer’s gains from inflation and population growth have been more than offset by losses from sluggish growth and rising debt interest. That £8bn in cuts had already looked set to creep up. Much, much worse fiscal news, however, is the building expectation of rapid rearmament against Vladimir Putin.
As Trump throws his lot in with Moscow, borders across eastern Europe are looking exposed in a manner unknown since the 1930s. The moment the German election concluded last weekend, the Federal Republic’s new chancellor-in-waiting, Friedrich Merz, identified one urgent priority: building up “European defence capability” so as to achieve “independence from the US”. Starmer is heading to Washington in the shadow of the US having joined Russia and the governments of Kim Jong Un and Benjamin Netanyahu in voting against a European resolution on Ukraine at the UN General Assembly.
Careful thought is needed about exactly what the UK could or should do about Trump’s pivot to Putin. When Russia invaded Ukraine three years ago, it was taken as axiomatic that “the west” couldn’t risk direct war with what remains a nuclear superpower. If the US is no longer a reliable part of our bloc, that calculus can hardly have improved. But there’s no doubting that the stakes are very high, nor that the provision of weapons, materiel and other support proved invaluable in preventing Ukraine from being overrun. It’s not for nothing that the prime minister has spoken in resolute terms about standing with Ukraine.
His problem until now has been that such rhetoric had become abjectly incompatible with Treasury plans for defence spending merely to crawl up from 2.3 to 2.5 per cent of GDP. And yet from the Treasury’s position, the foot-dragging is not hard to understand. Before the PM’s aid raid, getting to 2.5 per cent rapidly would at a stroke—on a crude calculation—have pushed up those previously expected £8bn cuts across “unprotected” domestic departments to something like £14bn.
The idea of deep foreign aid cuts as “the answer” to military needs is clearly a populist—and probably a popular—posture. It may seem like an escape route from all those nasty dilemmas. But it will merely have postponed, rather than avoided, tough choices closer to home. Remember how, in the early stages of the Covid pandemic, various economic interventions that the government conceived—and presented—as big and decisive soon proved to be too small, and had to be expanded into a full furlough scheme? If we’re entering a true crisis of European security, the same could happen again.
Indeed, the prime minister immediately bolted onto his initial defence spending commitment a further promise to rise gradually from 2.5 to 3 per cent. With world events moving at a frightening speed that “gradually” sounds too slow, and it’s becoming possible to imagine a scenario where there is soon a demand for domestic cuts of £20bn or even £30bn.
This isn’t sensationalism. Ever since the demobilisation after the Korean War, the great story of Britain’s public expenditure has been a reduced defence burden creating room for more social spending. We shouldn’t be surprised if there are profound consequences as that goes into reverse. But nor is it sensationalism to say that Starmer's premiership would likely be sunk by such vast cuts.
To get a sense of the political pain £20bn or £30bn in cuts represents, just recall the means-testing of pensioners’ winter fuel payments. The government identified this as “low-hanging fruit” that could defensibly be picked while protecting the poorest. And yet it catalysed an extraordinary drop in the prime minister’s personal ratings. It became—whether fairly or not—his signature policy in the public mind. And it saved just £1.4bn.
Today, the structural dangers of the Labour movement coming unstuck over social spending are greater than in the 1930s, 1940s or 1970s. This is because, where unions were historically strong right across the economy, around 60 per cent of union members are nowadays in the public sector. And the broader context is anything but supportive. David Runciman, the sage host of the podcast Past, Present, Future, recently mused that “this could well be the last Labour government”. That may sound like wild talk mere months after the party’s landslide win, but progressive parties are on the run around most of the world, and Labour’s problems at home are unremitting.
Even before this week’s aid cut, the UK has been experiencing the opposite of progress on many causes that originally drew many members and MPs to Labour. Instead of cutting child poverty like the last Labour government, this one seems to be hoping that school breakfast clubs will distract from the remorseless, impoverishing logic of the two-child welfare limit. Instead of boosting development to tackle poverty abroad, it is now cutting that too. Local councillors, who form the backbone of the party, are still desperately hoping for relief from austerity. The Scottish Labour party is now on track to be battered at Holyrood yet again next year—despite running against an exhausted SNP that will have had nearly two decades in office.
So if the prime minister has concluded that there is no conscionable alternative to dramatically raising defence spending, what on earth was and is he supposed to do? As he confronts a grave security emergency, he also needs to be mindful of the ways in which his decisions could warp into a fatal crisis for his leadership, and perhaps for Labour.
In a political emergency, creative and flexible thinking has a higher value than respectability. With even Germany’s conservative incoming chancellor talking about reforming a major fiscal rule—the so-called debt brake—and the EU readying itself to exempt defence spending from EU budget rules, this is not a moment to be boxed in by accounting conventions. Starmer is entitled to remind his chancellor that her fiscal strictures are self-imposed rules of thumb which, in a crisis, may need to be bent. There are times, the Second World War being one, where it makes sense to regard all defence spending as an “investment”, where the rules allow more slack.
Sadly, a much higher defence budget can’t be achieved with a bit of “boldness”. After recent bond market jitters, it’s no good pretending that there is some risk-free way to borrow freely. The bigger pivot needed is on taxation. The chancellor may well have meant it when she vowed post-Budget that she wouldn’t be “coming back” for more, but the world has rapidly changed. Again, the Second World War illustrates just how far things can move when they have to: the standard rate of UK income tax doubled between 1937 and 1943. Millions of modest earners were drawn into the system for the first time, and rates on investment income got close to 100 per cent for the very richest.
Such extreme charges might not be workable in today’s more mobile world, but taxing swollen stocks of private wealth even at relatively modest rates could make an important contribution. In the early days of his leadership, Starmer sometimes seemed to be thinking that way, but on his march towards last year’s election he closed down such ideas. After the baby-steps towards taxing some forms of wealth in the Budget ran into the fury of farmers, he may try to shut down the wealth question again. But as the storm clouds gather over Europe, the PM may find he has no politically feasible alternative to revisiting it—along with Labour’s imprudent pre-election promises not to raise any of the main tax rates.
Of the various historic Labour cuts crises I opened with, the closest parallel to today is with rearmament for Korea. Aneurin Bevan and Harold Wilson walked out of the cabinet when the chancellor insisted on imposing charges for dentistry and spectacles in the then new NHS. We’re not likely to see a replay of that today, because a fiery character such as Bevan would not be allowed anywhere near Starmer’s cabinet table (and there’s every chance his disciplinarian chief whip, Alan Campbell, would have found a reason to boot him out of the party entirely). This time around, the political dangers of banking too much on spending cuts are very different, but if anything they are greater.
When rearmament reared its head, Attlee’s reforms had already earned him a lot of credit. Starmer is not in the same position, either with Labour’s base or progressive opinion beyond it. Where the broad-church Labour party of 1951 left office with a record-high vote for a losing party, the narrow Labour operation of 2024 arrived in power with a lower share of the ballot than any previous government. Starmer’s mega-majority is made up of hundreds of MPs with modest local pluralities. They could easily be swept out of power if the price of rearming turns out to be public services going from bad to worse.
Of course, raising taxes is politically risky, too. For a Labour government in particular, however, following up slashing foreign aid by funding defence through further cuts to social services would be no ordinary risk. It could result in oblivion.
