In the month since Labour lost two-thirds of the seats it was defending at the local elections, as well as the parliamentary seat of Runcorn and Helsby to Reform, a subtle but unmissable transformation has occurred. Keir Starmer has gone from the man who likes to say “no” to spending public money to the man who likes to say “maybe”.
Pensioners, who, into early May, were being informed that their winter fuel payments were a necessary sacrifice for the sake of economic stability, are now being told they could soon get them back. Scrapping the impoverishing two-child welfare limit has gone from Starmer’s previous public line—“we’re not changing that”—to being briefed as a personal future priority for the PM. Various options for softening cuts to disability benefits are also reported as under consideration.
The new thinking seems to be that sternly responsible unpopulism is an insufficient counter to populism. But in next week’s spending review this political reset comes up against various self-restricting promises that Labour has made over the last few years, as well as the decidedly grim underlying realities of the public finances. So, can the reset survive?
Economists don’t buy Starmer’s argument that unexpectedly buoyant first-quarter growth figures give him some scope to loosen the purse strings. These are extremely tentative numbers, which predate Trump’s trade chaos and the knock-on effect on borrowing costs. But a recent trio of trade deals—with India, the US and the EU—do at least give Starmer a more positive political story to tell about where the economy is headed. Moreover, he can fairly claim that the script always contained some good spending review news, specifically on capital investment. Rachel Reeves made a technical tweak to her debt target back in the October budget, with a view to creating room for more of it. The planned narrative was always “invest to rebuild”. This week’s slew of announcements on new transport projects begins to flesh that out, and gives regional mayors something to shout about.
The problem, however, is that the distinction between “capital” and “current” expenditure is really one of accounting rather than one of serious economics, let alone politics. Accountants class “investment” as something that builds up a capital asset which yields returns beyond the year it is purchased. That sounds clear enough, until you pause on what counts as an asset—and what counts as a return on investment.
From the point of view of the economy, it hardly matters if it’s something specific—like a new building or machine—or just enhanced skills or aptitude that helps someone “return” higher earnings in the future. Look at things that way, and the great bulk of the education budget could arguably be classed as “investment”. As for the experience of the voter, new public buildings and infrastructure will not on their own prove that services are back on their feet—until and unless those facilities are adequately staffed and resourced.
Herein lie deep problems for the government because, when it comes to day-to-day expenditure for most public services, all the signs are that next week is likely to lock in a continuing squeeze. Though warmly welcome, this week’s announcement on extra free school meals is very much the exception, not the rule, with the tight departmental settlements in prospect. The prime minister can give himself flexibility on the two-child limit because social security is worked out separately from departmental spending. Starmer has shunted the decision about the two-child limit off to the autumn budget, but schools, social care, colleges, libraries, courts and the police cannot shelter in the long grass.
According to new Ipsos polling, an outright majority (54 per cent) of Britons—including most (55 per cent) of those who actually voted for the government—believe that a Labour party that promised change is currently presiding over “a period of austerity.” Having whacked up National Insurance back in the autumn to fund an “emergency injection” into public services, the government protests this is unfair, because on average, spending is rising over this parliament. But averages can mislead. With Starmer having resolved to focus disproportionately on health and defence, the resources available per-head for day-to-day policing, justice and many council-run services are very likely to face cuts.
There are possible ways to soften the arithmetic, notably tilting the health settlement towards that (less-constrained) capital spending, so that the NHS does not gobble up all those (more constrained) day-to-day resources for everything else. And of course, the prime minister can and will argue that health is the most important service of all domestically, while increasing defence in a dangerous world is no longer negotiable. But—with international aid already slashed—the corollary of his plans to continue to expand defence through the next parliament too will be squeezes. These will continue into the prime minister’s promised “decade of national renewal” for most public services.
Unless, of course, he accedes to the desire of much of the Labour party (reportedly including his own deputy Angela Rayner). That is, to open up a much broader conversation about tax, which until now he and Chancellor Reeves have preferred to shut down. Until that happens, while the coming spending settlements may not technically constitute general “austerity,” they are going to feel an awful lot like it across much of the public sector. For most services at least, the long years of “no” look set to continue.
