Rachel Reeves will apparently tell us today that she has chosen stability over chaos. It is one of the Chancellor’s standard lines, but it is very much beyond her control. Bond markets will have the ultimate say. They didn’t much like her Budget in October – indeed, long-term borrowing costs are higher now than they were in the wake of Kwasi Kwarteng’s mini Budget in September – and they might not like the spending review much more.
That is a potent mixture for economic gloom – it is the economy’s mental health we should be worried about most
The underlying synopsis behind today’s fiscal event is that the government is running a £150 billion deficit, and is already having to spend £100 billion a year on debt interest – more than it spends on defence or education. Moreover, economic growth is virtually non-existent, with productivity bumping along the bottom and ever-increasing numbers of workers opting out of the workforce in preference for a life on out-of-work benefits, quite often using their mental health as an excuse. That is a potent mixture for economic gloom – it is the economy’s mental health we should be worried about most – and absolutely nothing of the above will change as a result of today’s spending review.
It has become a standard tactic of chancellors to float the ‘bad’ news in advance so that headlines on the day itself can – hopefully – be dominated by ‘good’ news. I put ‘bad’ and ‘good’ inverted commas because in Reeves’ mentality – and in the mentality of most Labour politicians – higher public spending is good and lower public spending bad. We have been prepped for a series of minor spending cuts – for example from farming subsidies and the Border Agency – which may have given the impression that Reeves is about to deliver a fiscally-hawkish statement at lunchtime. But as the hour approaches, we are suddenly been led along by suggestions of spending increases in many areas. We know there will be £14.2 billion for Sizewell C nuclear plant; it is being trailed that there will be £30 billion for the NHS and £40 billion for social housing, and more for schools, too. It is the usual Labour story, in other words: crowd-pleasing spending splurges for the areas which really catch the public attention.
While she won’t announce it today, we can also be pretty confident that the government will this year cave into yet more extravagant pay demands from public sector unions. Keir Starmer has already appeared to backtrack on defence spending, downgrading his promise to increase it to 3 per cent of GDP to a mere aspiration. But like it or not, the government is going to be dragged into higher defence spending as other European countries up their spending. As Nato secretary-general Mark Rutte suggested yesterday, fail to build proper defences and much of the government’s schools’ budget might one day have to be spent on Russian lessons.
Three decades ago, European governments used to talk about a ‘peace dividend’ – the extra money which could be spent on social programmes now that the Cold War is over. The corollary, with war once again in Europe, ought to be that we now need to cut social programmes in order to return to higher defence spending – but don’t expect that with Labour in charge. It is unlikely to have happened under the Conservatives, either. We will be left with the same old story: with a Chancellor opening the spending taps on social programmes as well as defence, a few token cuts elsewhere – and a forlorn hope that economic growth will somehow save the day. Bad sadly it won’t. High taxes and spending are acting as a drag anchor on the economy. The National Insurance rises in the Budget have contributed to a fall of 274,000 payrolled employees, revealed by the Office for National Statistics revealed yesterday.
Britain is heading for a very deep fiscal crisis; we may well be talking of what happened in the bond markets under Liz Truss as a mere rehearsal for what is to come. Reeves may save her skin as Chancellor today by spending just enough to satisfy grasping Labour backbench MPs – but it won’t save her from the bond markets.
