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On an empty lot next to Leeds General Hospital, posters promise a revamp of local healthcare, but many in Yorkshire are unconvinced it will ever come. Attached to the gate is a large banner with the message: “Leeds needs the new children’s and adult day hospitals it has planned – the government must keep its promises.”
The site had been chosen for one of Boris Johnson’s 40 new hospitals But, as local MP and now chancellor Rachel Reeves said this week, the last Conservative government failed to provide “anywhere near the funding needed to deliver them”. Reeves has put the whole programme under review.
His statement on Monday was: as expectedan exercise in which the previous government was first blamed and then borrowed and raised taxes. Its main purpose was reasonable and desirable. Reeves set out to produce a sensible baseline for public spending in 2024-25 so that the new government can properly plan for the remainder of this term. That required getting rid of some unfunded capital projects, cancelling some government programs and recognizing that everyday public services will need more money than previously allocated.
Some of that money represents decisions that Labour has made – sensible decisions that ensure public sector wages do not fall further behind those in the private sector and that the government recognises the costs of rising asylum seeker numbers.
Despite cuts to capital projects and the withdrawal of some welfare payments, such as the winter fuel allowance for most pensioners, this is not an austerity budget. Public spending will be around £16bn higher than forecast in the March budget, once the additional costs of the Conservatives’ overspending have been taken into account. The harsh reality is that we will have to spend more and get less from public services than previously promised.
However, if nothing else changes, borrowing will continue to decline in 2024-25, showing that the government has struck a balance between spending more and keeping public finances on an improving path.
But Reeves is not done with clearing out all the inherited rubbish from the public finances. Among the additional horrors are the demographic pressures that will increase during this term as baby boomers retire and the number of very old people rises dramatically. This will fuel demands for further spending increases through the end of the decade and stimulate the need for improvements in public sector productivity.
There will also be further losses due to the Bank of England’s quantitative easing programmes, which means that the actual level of government debt is already higher than reported, but not rising as quickly. And the losses are two or three times more like those of other countries. A thorough research exercise would recognize These losses in advanceI would also cut the BoE interest payments to commercial banks to bring the costs of QE closer to those of other countries.
Labour’s manifesto does not rule out any of these measures and both would limit the scale of the “tough decisions” Reeves must make on social rights, public spending provision and taxes in the Budget on 30 October.
Here, he should prioritise tax rises and spending restraint that do the least damage to growth prospects, suggesting more broad-based tax increases, such as pursuing the Conservatives’ plans to raise fuel taxes and freeze income tax allowances for longer, and limiting big increases in distortionary taxes that raise relatively little money, such as capital gains.
It would have been better if Labour had not pledged to avoid raising the main tax rates (income tax, national insurance and VAT), but that can no longer be changed.
The goal of Monday’s statement was to bring the government’s plans and promises back to reality and normality. Politics aside, Reeves has made significant progress, but there is still a painful road ahead.