Labour has learned that austerity is hard to avoid

As long as economic growth remains anaemic, pressure on spending will endure.

It is becoming increasingly commonplace to hear complaints from the left that this Labour government is proving to be rather right wing. On the big tax and spend decisions, it is alleged, Keir Starmer and Rachel Reeves are acting like Tories. The criticism is set to get louder in a few weeks when Reeves seeks to meet her fiscal rules by imposing welfare cuts. It will feel very much like something from the George Osborne era of austerity.

Ministers, of course, will deny this and argue that the circumstances today are very different to those of 2010 and subsequently. But as someone who was part of Osborne’s Treasury team at the time, I am not sure they are so different.

The starting point has to be the fiscal situation. We could debate which government had the worst inheritance. The coalition government inherited a much larger deficit (9.9 per cent of GDP), most of which was structural, which meant that it would not simply disappear with economic growth. This government inherited a lower deficit (4.2 per cent) but far more fragile public services, with spending plans that looked undeliverable. This government also has the misfortune to be in office at a time when our closest security ally has ceased to be an ally, requiring a significant rise in defence spending.

Both in 2010 and today, the bond markets are twitchy. After 2010, the bond markets’ attention was focused elsewhere, but there are plenty of reasons to worry about maintaining market credibility at the moment. We are likely to face years of volatility and have very high debt levels to service. The issue of the moment is higher defence spending and some, such as former shadow chancellor Ed Balls, argue that this could be funded by higher borrowing. But if we are going to have higher defence spending for the foreseeable future, it needs to be funded on a sustainable basis. It would be very dangerous to assume that the bond markets would be content with permanently higher defence spending being deficit-financed. Germany may have very low levels of debt compared to us but the markets’ reaction to Friedrich Merz’s ambitious defence spending plans is a warning of the risks.

All of this suggests that a responsible government has to be fiscally cautious. In which case, those on the left may say, raise revenue by putting up taxes on the wealthy. Again, parallels can be drawn between 2010 and today. Both governments increased capital gains tax and sought to raise more from non-doms. But a balance has to be struck between raising revenue and not driving away the most mobile people in society (upon whom we rely heavily for tax receipts). Unfortunately, the emerging evidence is that this government has got it wrong and we are seeing a significant proportion of the wealthiest leaving the country. We could easily end up raising less from the wealthy than we previously did.

If neither of the easy answers – borrowing more or taxing the wealthy more – is available, you are left with the difficult options of taxing the general population more or cutting spending. Taxes are already high and will go higher next month when the employers’ National Insurance increase takes effect. Labour’s manifesto ruled out other obvious measures such as raising income tax and VAT. These pledges may ultimately have to be broken but one can see why the government is reluctant to do so.

That leaves spending. Spending plans for unprotected departments are already tight, so this government, like the coalition before it, will look at benefits. This is unavoidable, especially when the health and disability benefits bills is rising so quickly (it is projected to reach £100.7bn in 2029-30, up from £64.7bn at present).

Foreign aid spending is an example where the two governments have diverged, in perhaps surprising directions, with a Conservative-led government sticking to the 0.7 per cent of GNI target and a Labour government fully abandoning it. But that can be explained by different circumstances. With the Russian threat so strong and US support so fragile, it is difficult to believe that David Cameron’s government would have resisted demands to switch much of this budget into defence.

This is not to argue that all governments are the same and that, whoever we vote for, we end up with the “uniparty” in charge. It is just that there are constraints on governments that cannot be ignored. After 14 years in opposition, it must be deeply frustrating for many Labour supporters to find their government cutting spending on benefits and overseas aid and keeping a tight rein on most departmental spending. At the same time, many Conservatives look at their 14 years in office and wonder why taxes are so high. Of course, the Tories did try to ignore all the constraints for 44 days in the autumn of 2022, at which point Liz Truss had to resign.

Ever since the 2008 financial crisis, we have been living in a period in which economic growth has been anaemic, the public finances have been fragile and market confidence fitful. We have had three shocks to our system – Brexit, Covid and the Russian invasion of Ukraine – only one of which was self-inflicted. Trump looks likes constituting a fourth shock.

It has left governments muddling through, repeatedly being forced into choosing the least worst option. Those on the left unsympathetic to the government’s predicament should face up to the harsh realities. And those on the left sympathetic to the government’s predicament might also acknowledge that other governments have been so constrained. As in 2010, we live in austere times.

[See also: Mark Carney can’t save Canada]