Spring Statement: Potentially unpalatable trade-offs loom for Labour

BBC News

25-03-2025

"The world has changed" is the mantra we are hearing from the government.It is a phrase designed to explain and justify the chancellor's argument on Wednesday in what is known as her Spring Statement.The Conservatives are branding it an "emergency Budget", which ministers insist is nonsense, but it is certainly true it is a bigger event than it was expected to be just a few months ago.We won't see Rachel Reeves standing on the steps of 11 Downing Street waving a red box around and it will be shadow chancellor Mel Stride responding to her in the House of Commons, rather than the leader of the opposition as happens on Budget Day.
But other elements of the day will have a Budget day feel, not least in the overall vibe of whether Parliament and the country feel confidence in the government's economic prospectus.The backdrop is pretty bleak.When Labour won last year's general election, they said the first of their "missions" was to "kickstart economic growth".The thing is, there isn't any - the economy is flatlining.Plus, inflation is up and government borrowing costs are up.Then there are the big-picture challenges: the UK has an aging population, the benefits bill is going skywards, the dangerous international picture is demanding more money for defence and the country is saddled with huge debt, which attracts huge debt interest payments.Add to that the wild unpredictability of US President Donald Trump, the looming prospect of tariffs and the vast uncertainty over Ukraine's future and European security.All of which prompts the question: if the world really has changed, how much appetite now or in the future might Labour have for a really far-reaching re-examination of how it approaches government?With big and potentially unpalatable trade-offs looming, what alternatives could there be?There are loads of ideas it could explore, from the left, the right and everywhere in between. But let's take a look at a few, all floated publicly by some on their own side.
Loosen the fiscal rules?
At the heart of the political conversation this week are the government's self- imposed "fiscal rules". The government has chosen them in the hope they illustrate financial responsibility, a trustworthiness on the international stage that the UK can pay its way and service its debts.The two rules are that day-to-day costs are met by tax revenues and that debt is falling as a share of the economy five years ahead.They are, ultimately, arbitrary: managing the national finances is complex and multilayered and while governments will often impose limits on themselves in the hope of portraying credibility, precisely what they are can vary significantly.Former Labour cabinet minister Lord David Blunkett told the BBC at the weekend he "would like the Chancellor to loosen a little the self-imposed fiscal rules", adding that they amounted to "Treasury orthodoxy…at its worst"."I would lift them marginally. I would raise the self-imposed rule by at least £10-15 billion and I would spend a great chunk of it on what we did back in '97 with the new deal for the unemployed," the former work and pensions secretary told BBC Radio 4.Lord Blunkett isn't the only one – Jagjit Chadha, Professor of Economics at Cambridge University, has written in The Guardian this week of his scepticism about the value of the fiscal rules. There is another parallel that could be drawn too.Last week the German parliament voted to allow a massive increase in defence spending.The new law will exempt spending on defence and security from Germany's strict debt rules.Could, should, the UK do the same?Both the German parallel and Lord Blunkett's suggestion get short shrift from senior government figures."When people say change the fiscal rules, that means borrowing more money," is how one source put it to me."We have got to be honest about the implications of higher borrowing. If we did what Germany is doing, it could add £4bn to borrowing costs, not far off the prisons budget," they added.It is also pointed out that Germany's national debt is vastly smaller than the UK's as a share of national income.And there is no appetite to do anything that might provoke the international markets to go wobbly about the UK again, as happened when Liz Truss was prime minister.
What about a wealth tax?
Some on the left of the Labour Party have been calling for this, as have the Green Party and others.The idea would attempt to do what it said on the tin, but observers such as Paul Johnson of the Institute for Fiscal Studies are cautious about its likely effectiveness as a revenue raiser.Before the last Budget in the autumn a cross-party group of MPs suggested it, while Labour MP Richard Burgon raised it as an idea at Prime Minister's Questions earlier this month. Reeves has long distanced herself from the idea, arguing in 2023: "I don't see the way to prosperity as being through taxation." Reeves and Prime Minister Sir Keir Starmer are fearful of being portrayed as high taxers and high spenders, an image plenty within Labour think has previously cost them dearly at elections.But could a one-off such tax ever be tempting as ministers confront awkward spending squeezes in places and that ever growing demand for defence spending?
Other taxes rises in spotlight
What about cranking up income tax, national insurance or VAT?After all, these are the big levers of revenue raising for any chancellor.But there is a catch: Labour promised not to in its election manifesto.They did, nonetheless, put up national insurance, albeit on employers not employees – a rise that is due to kick in next month and is causing considerable anxiety for many businesses.So why not ratchet up one of the others?Some say, for a start, it could further depress an already stagnant economy, as well as further depress the outlook of many on politicians' capacities to keep promises.On the other hand, increases to these taxes tend to lead to a reliable big uptick in tax revenue and because they reach significant swathes of the population, they don't energise smaller, often well organised sectors who can then vociferously oppose a more targeted and less revenue rich idea.A good example of this are the dozens of tractors on Whitehall as farmers in their thousands made their views known about changes to inheritance tax. Thinking about all this was hinted at, alongside changes to the fiscal rules, by the now former international development minister, Anneliese Dodds, in her resignation last month over the cut in the international aid budget to bolster defence spending. In her resignation letter to the prime minister, she wrote that she had hoped the government would "collectively discuss our fiscal rules and approach to taxation, just as other nations are doing".She added: "It will be impossible to raise the substantial resources needed just through tactical cuts to public spending. These are unprecedented times, where strategic decisions for the sake of our country's security cannot be ducked."Smashing manifesto promises is not something governments do lightly and Labour would tread particularly carefully around these flagship pledges on the economy, so often for many a perceived weak spot in the party's credibility.The tax burden, on average, is also generationally high – another reason these ideas could be a mighty hard sell even if ministers were willing to break their promises.And if ideas from their own side, like these three, aren't palatable, all of which make an already big State even bigger, there are those suggested by the Conservatives and others.
Reducing benefit spending
Cutting benefits much more is one such idea.The former Conservative and UKIP MP Douglas Carswell, writing in the Telegraph, suggested closing eight government departments, saving £24bn by cutting the public sector workforce and instituting a two year public sector pay freeze.He reckoned these ideas alongside others could cut government spending from 45% of national income to 40%.Many of these might not be instantly palatable to a Labour government, just like those from their own side, but all of this brings us back to where we began: has the world changed? By how much? For how long?And just how bold might the government have to think – and soon – if it really has?