My sympathies, Rachel Reeves. Cutting public spending isn't easy

Telegraph

4 hours ago

This week's Spending Review will expose the obvious predicament of the Government: there is no money. While Labour will continue to blame the Conservatives, it is responsible for most of what has happened in the past year. Decisions it has made have exacerbated the problem.
Right from the beginning of its administration, the Labour Government was strangely committed to increased public spending.
The train drivers, less than eight weeks after the election, received a 'no strings attached' offer of 15 per cent over three years. Within 48 hours of the deal being broadcast to the world, Aslef announced a fresh campaign of strikes.
In addition to the generosity shown to the train drivers, about 1.3 million NHS workers – including nurses and paramedics – and around 500,000 teachers got a pay rise of 5.5 per cent.
Junior doctors, who had staged a series of strikes over pay since early 2023, struck a deal which showed an average 22.3 per cent pay rise over two years.
You can argue that all this was necessary, but the announcement of these sweetheart deals, after only weeks in government, looked too much like a bargain that had been struck before the election itself.
To pay for this largesse, the Labour Government proceeded to revert to a tax policy that many commentators have described as, frankly, Marxist.
Marx divided society into three groups, namely landowners, capitalists and workers. The Labour Party pledged not to increase taxes on workers. It raised taxes on employers and farmers instead. It increased national insurance for employees on the former and inheritance taxes on the latter.
It didn't realise that putting taxes on employers would harm workers. This point was made by none other than the Office for Budget Responsibility, which said that 65 per cent of the £25 billion raid on business would be paid by workers, in the form of higher prices for goods and lower wages.
Removing the winter fuel payment from pensioners only made sense to Treasury officials. Yes, it saved approximately £10 billion. But for a Labour Government that vaunted its social-democratic 'values', the policy was a disaster. It went against the core message of the Labour Party – that it was 'caring' and benevolent, even when money was tight.
This policy has been reversed. People think politicians embark on U-turns to regain support. This is naive. Politicians know that the damage has been done; the U-turn merely prevents further loss of support.
There have been swerves, U-turns and missteps. The backlash from Labour MPs against any suggestion to reduce the welfare bill or reform the system suggests that Reeves will not be able to reduce public expenditure, as she would like.
In addition, it is obvious that more money will have to be found for defence. There is an expectation, particularly after President Trump's equivocal statements about US support for Nato, that Labour will have to increase defence spending. The Prime Minister himself has said that he would commit his Government to spending 2.5 per cent of GDP by April 2027.
Where will this money come from, if no attempt can be made to constrain welfare spending?
Higher taxes, of course. Yet the problem here is that tax levels are already very high. VAT is at 20 per cent; the top rate of tax is at 45 per cent and kicks in at £125,000. Changes to the non-dom regime have resulted in wealthy people leaving the country, and the so-called 'Energy Profits Levy' is now proving to be a major disincentive to invest in the North Sea.
A lot of this foolishness can of course be attributed to the last government, of which I was a senior member. The Conservatives, remarkably, introduced the Energy Profits Levy. We changed the non-dom regime – influenced by the Civil Service, I expect.
We were always told that we had to spend more money. Of course, to our social-democratic establishment, spending more money meant more tax revenues, not by growing the economy and increasing wealth, but by imposing ever higher tax rates.
The logic of this cycle will result in new taxes, as there is only so much 'ketchup' you can squeeze out of the existing 'bottles', so to speak. Capital taxes, a mansion tax and increases in capital gains tax will surely be on the menu presented to the Chancellor if, as is likely, growth rates are revised downwards in the autumn.
The fiscal situation cannot be understood simply as a result of the past few years. All governments in the Western world have faced increased public expenditure without a commensurate increase in growth rates or national wealth. All Western governments are saddled with welfare payments, exacerbated by high levels of immigration. All except the United States have experienced anaemic growth rates since the financial crisis of 2008.
Yet, in the UK, it has been Labour that has been buffeted around more than most other governments, by giving in to spending demands.
Much like an overweight man trying – and then promptly giving up – his umpteenth diet, the Government seems to have simply stopped bothering to reduce public expenditure.
In this way, the tail of welfare spending starts to wag the dog. The productive economy – indeed all the nation's economic activity – begins to be seen as merely an appendage of the welfare state. It is as though the only justification of economic activity and wealth creation is to pay for ever-increasing welfare spending.
This cannot be the right way to run an economy. In fact, for most of British history, entrepreneurialism and innovation have been driven by the private sector. That is what made the UK prosperous.
Today, under this Labour Government, public spending will crowd out the private sector. Higher taxes are already stifling productive enterprise. Wealthy people are leaving the country, while our borders seem out of control.
The sadness is that this Government has reached this position after less than a year. Who can tell what another four years of the same policies will bring? Higher taxes, higher immigration and flatlining growth seem the most likely outcome. If this happens, the Government will simply be turfed out, like the last government, much to everybody's relief.