Rishi Sunak’s comprehensive spending review returns British politics, in theory at least, to its pre-2017 shape: a Conservative Party arguing for more cuts to public spending and Labour arguing for greater levels of investment and job creation.
The politics of that approach was very lucrative at first for the Conservatives, but by 2015 the party had started to run out of cuts that a) would raise sufficient revenue to meet their targets and b) weren’t politically toxic.
There’s a dead-end argument in Labour circles about the role of Jeremy Corbyn’s leadership and the party’s transition to a much clearer anti-austerity position in 2015: the reality is that Corbyn’s election as Labour leader was itself part of the same set of factors that caused the Conservatives growing difficulties in 2015-17. He was both cause and symptom.
The coronavirus crisis means that government debt is going to be permanently higher for the rest of our lives, and there simply isn’t sufficient capacity left in the British state to tackle that without substantial cuts to spending or tax increases. And it would be impossible to get political consent for the required changes in spending or tax to reduce debt to something resembling pre-coronavirus levels.
Three measures in Sunak’s announcements all, in different ways, demonstrate the political and policy difficulties of a new round of cuts. The spending review continued the unbroken pattern of local government austerity under the Conservatives, who even as they abandoned the language of austerity after 2017 and lavished greater sums on health, education and the police in order to defeat Corbyn’s Labour, continued to oversee painful reductions in local authority spending.
Sunak has given local councils a measure of relief by increasing their capacity to raise council tax. Now, of course, tax rises in a recession are also a form of austerity, and just as George Osborne sought to devolve blame for his cuts onto local councils, Sunak is now seeking to devolve blame for tax rises onto local councils. The problem is that the measure may not work politically and, because of the pressures on incomes, it may fail to raise sufficient revenue to get cash-strapped councils out of their difficulties.
Then there is the public sector pay freeze for workers outside of the NHS. There are two consequences of this: first, any freeze is painful for public sector workers in the bottom half of the income distribution, though these employees are the ones with the least freedom to move on to other work, and they will in any case receive a pay increase of at least £250. This makes the argument that “the public sector should have to absorb a wage freeze because the private sector has it tough” redundant: it’s in the bottom half of the income distribution that the private sector is being outpaced by the public sector, and the bottom half is not having its wages frozen.
It’s in the top half of the income distribution, which is seeing a freeze, where wages in the private sector are now better than the public sector. This is part of the reason why the British state has been facing a retention crisis among doctors, teachers, senior police officers and other highly qualified public sector workers.
There are two risks here for Sunak: the first is that the painful consequences of the freeze deepen the United Kingdom’s economic problems and we don’t recover quickly from the coronavirus recession. The second is if we do recover quickly, or if vaccination reopens the option of a lucrative and life-enhancing move to Australia or New Zealand for teachers or doctors, the British state ends up facing the same pressures it did by 2017, and with the same political difficulties that saw the government lose its majority in the general election that year.
Then there is the prospect of a parliamentary defeat over plans to cut the foreign aid budget from 0.7 per cent of GDP to 0.5 per cent. There are more than enough Conservative MPs who oppose the cut to defeat the government; it is not clear that enough of them are willing to go so far as to rebel. But it is possible that the government ends up having to retreat on the foreign aid cuts and on the public sector pay freeze and provide more direct funds to local government.
The truth though is that even if these measures do all happen, they aren’t sufficient to meet the stated ambition on debt reduction. The £4bn cut in foreign aid will be very heavily felt in some of the poorest parts of the world and may also compromise the government’s climate diplomacy and its global green agenda, but it is small beer in the context of government spending. When you factor in the increase in defence spending, it means that the United Kingdom’s foreign policy commitments are going to be as costly by 2025-26 as they are today.
In terms of beginning to slow, let alone reduce, the UK’s mounting coronavirus debts, fiscally this equates to announcing an ambitious plan to save up for a mortgage by taking away your kids’ weekly Mars Bar: even if you can do it, you’re not going to be completing on a house any time soon.
That needn’t be a problem provided that jobs, wages and the economy continue to grow, and in many ways the effectiveness of the infrastructure spending and projects Sunak announced today will matter a lot more than his cuts or any future tax rises he might have planned, both to the British economy and to the Conservative Party.
What I suspect does matter is that the foreign aid cut – to my eyes by far the most likely of the three measures to survive intact until 2024 – allows the Conservatives to have an argument with Labour about austerity, which remains popular in theory, even though the cut in question is very small in terms of government spending, while avoiding an argument about spending cuts or tax rises in practice.
Despite David Cameron’s opposition to the foreign aid cut, it is in many ways a political move straight out of his playbook: a painful cut, but one that happens to someone else’s voters, far from the view of the people that Sunak needs to keep onside if the Conservatives are to be re-elected in 2024.