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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
On a vacant plot next to Leeds General Infirmary, hoardings promise a local healthcare renewal. But many in Yorkshire are clearly not convinced it will ever arrive. Tied to the gate is a large rainbow banner, saying: “Leeds needs its planned new children’s and adult day hospitals: government must honour 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 did not provide “anywhere close to the funding required to deliver them”. She has put the whole programme under review.
Her statement on Monday was, as expected, an exercise in first blaming the previous government and then borrowing and taxing more. Its core purpose was reasonable and desirable. Reeves aimed to produce a sensible baseline for public spending in 2024-25 so the new government can plan properly for the rest of this parliament. That required ditching some unfunded capital projects, cancelling some government programmes and recognising that day-to-day public services will need more money than previously allocated.
Some of this money represented choices Labour has made — sensible ones, that ensure public sector pay does not fall further behind the private sector and the government acknowledges the costs of the rise in asylum seekers.
Despite the cuts to capital projects and the withdrawal of some welfare payments such as the winter fuel allowance for most pensioners, this is no austerity budget. Public spending will be roughly £16bn higher than planned in the March Budget once the additional costs of Tory overspends have been taken into account. The difficult reality is a recognition that we will have to spend more and get less than previously promised from public services.
If nothing else changes, however, borrowing will still come down in 2024-25, showing the government has struck a balance between spending more and keeping the public finances on an improving path.
But Reeves has not completed the job of ditching all the legacy junk in the public finances. Extra horrors include demographic pressures that will mount during this parliament as baby boomers retire and the number of very elderly rises sharply. This will fuel demands for further spending increases to the end of the decade and spur the need for public sector productivity improvements.
There will also be further losses from the Bank of England’s quantitative easing programmes, implying that the true level of public debt is already higher than stated but not rising as quickly. And the losses are two to three times as much as those of other countries. A full kitchen-sinking exercise would recognise these losses up front. It would also trim the BoE’s interest payments to commercial banks to bring the QE costs closer to those of other countries.
Labour’s manifesto does not rule out either of these measures and both would limit the scale of the “difficult decisions” Reeves needs to take on welfare entitlements, public spending provision and tax in the October 30 Budget.
Here, she should prioritise tax increases and spending restraint that least damages growth prospects, suggesting further broad-based tax increases such as applying Conservative plans to increase fuel duties and freezing income tax allowances for longer, and limiting large rises in distortionary taxes that raise relatively little money such as capital gains.
It would have been better if Labour had not committed to avoid raising the main tax rates — income tax, national insurance and VAT — but this cannot now be changed.
The purpose of Monday’s statement was to bring reality and normality back to government planning and promises. Stripping aside the politics, Reeves made significant progress, but there is a painful distance still to travel.
