Rachel Reeves faces her toughest test yet as chancellor when she delivers the spring statement this Wednesday. In response to the Office for Budget Responsibility’s latest forecast, which will be published the same day, she is expected to announce further cuts to public spending in several areas, alongside the cuts to disability benefits that the government set out last week. Ministers have spent the past week arguing that these cuts do not technically constitute austerity because they will not be as deep as some of those made during the Conservative years. However, what label you put on these cuts matters far less than their impact. They would increase disability and child poverty and further undermine the provision of public services, an indefensible record for the first term of a Labour government.
Reeves faces the most difficult set of circumstances of any chancellor in recent decades. She has inherited an economy beset by long-term structural problems, exposed by the financial crisis, and that have gone unaddressed by governments of both colours: low levels of business investment, sluggish productivity growth, gaping regional inequalities and, since 2008, stagnant living standards. These were made worse by successive Conservative chancellors after 2010, who introduced tax cuts that disproportionately benefited the better off while slashing financial support for low-income parents – the poorest tenth of families with children lost £6,000 a year on average between 2010 and 2024 as a result of their changes – and who failed to take advantage of historically low interest rates to borrow to invest, instead taking the ideological decision to reduce the size of the state regardless of the consequences.
Global shocks, such as the pandemic and the spike in energy prices, have made the fiscal situation worse. There is more medium-term pain yet to come; Britain’s falling birthrate means that, without increasing levels of immigration, today’s generation of young people will have to pay a higher share of income in tax to maintain the same level of health and social care provision for an ageing population.
The days of easy economic boom fuelled by a burgeoning financial services sector are over. Labour should have fronted up with the public about this going into the last election. Instead, Keir Starmer promised voters that, if they voted for him, a Labour government would be able to fix Britain’s economic woes and its ailing public service infrastructure without taxes going up, or having to borrow more than the government’s self-imposed fiscal rules allow. An effective electoral pitch, but an unachievable governing strategy.
Labour is now in a bind. The government was counting on growth to deliver rising tax revenues, which would allow it to invest in public services and tackle rising levels of child poverty. Instead, it is facing a worsening economic forecast – the OBR is expected to halve its growth forecast for 2025 – and a need to significantly increase defence spending in the wake of president Donald Trump realigning the US away from support for Ukraine and Nato. Reeves has three choices: she can relax her fiscal rules, increase taxes or cut spending. She should do a combination of the first two. Instead, she plans to further hammer public spending. In the budget last autumn, the government’s spending plans were already unrealistic for the last three years of the parliament; Reeves was relying on limiting public spending increases to 1.3% a year, implying significant cuts to areas such as justice and transport. And there were no measures to address rising rates of child poverty; the number of children living in poverty is forecast to grow by 400,000 over the five years of this parliament under Labour’s existing plans
Now, Labour is looking to make significant extra savings from the benefits system, which will drive up poverty levels even further. Its proposals to cut both out-of-work incapacity benefits and to take away the personal independence payments (Pip), worth £4,000 a year from about a million disabled people, will save about £6.5bn. Only a fraction of this will be reinvested in increasing general out-of-work benefits and employment support programmes, which will hit disabled people and their children punitively hard. Some disabled people stand to lose £10,000 a year in one go if they no longer qualify for Pip and their family member also loses carers’ allowance as a result.
There are also suggestions that Reeves is looking to reduce public spending increases to just 1.1% a year after 2025, which would imply cuts of 7% to departmental budgets such as justice, the home office and local government. But after 14 years of Conservative spending cuts, there is no fat to trim: it will mean a further retraction of the state in ways that will impact vulnerable people – such as those who are homeless, have mental health issues or significant care needs – the most.
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There are alternatives. The Resolution Foundation estimates that freezing income and national insurance thresholds for two years would raise an additional £8bn of income in a broadly progressive way. The chancellor has choices other than loading the costs of lacklustre growth and increased defence spending on the most vulnerable, as she appears to be planning. Ministers can make the case to voters that tax rises are painful but necessary, given the changing global situation, with its consequences for both economic and international security. Labour needs to rediscover its moral backbone, fast.
