Is the UK facing a new age of austerity?

Another round of expected cutbacks in the spring statement has led some to ask if we’re heading towards more austerity? The return of the A-word to conversations would be very bad for the chancellor, says Mary Dejevsky

Rachel Reeves’s plans for economic growth have faltered, leaving the chancellor with little ‘fiscal headroom’ (PA)

There are ever more signs that the chancellor, Rachel Reeves, will use her spring statement next week to introduce further public spending cuts, augmenting fears that the country could be on the verge of a new age of austerity. How has the growth agenda morphed so soon into something akin to its opposite?

Why might new cuts be needed?

The growth that was the theme of Reeve’s first Budget last autumn has failed to materialise, and economic forecasts have become ever more pessimistic. The Bank of England last month reduced its growth forecast for this financial year by half – from 1.5 per cent to 0.75 per cent, and predicted higher inflation. Worse, according to the National Institute of Economic and Social Research think tank, the combination of poor growth and rising interest rates has reduced the chancellor’s spending buffer – or fiscal headroom – from an estimated £10bn to zero. And while the effect of US trade tariffs could be less damaging to the UK than to EU and other countries, there could still be a cost.

Hasn’t the government done enough?

Well yes, and no. The latest spending cuts – to sickness and other benefits – announced by the work and pensions secretary Liz Kendall this week were more about the longer term and will save only £5bn and will mostly take effect in two to three years time, and some are subject to further discussion. The money saved from the recent reduction announced to foreign aid was simply transferred to the defence budget. Savings from the abolition of NHS England will be reduced in the short term by redundancy and reorganisation costs.

The savings from means-testing the pensioners’ winter fuel allowance were minuscule compared with other spending, and carried a political cost, while the much bigger gains from raising employers’ national insurance contributions may have had an as yet uncalculated negative effect on potential economic growth, even as they improved the exchequer’s bottom line.

Are Reeves’s troubles of her own making?

She cannot be blamed for the US president’s enthusiasm for tariffs. Nor can she be blamed for the likely rising costs of help for Ukraine or defence spending. Both reflect sharp changes of policy in Washington, following the election of Donald Trump. On the other hand, she approved generous settlements for junior doctors, civil servants and some transport workers in the apparent hope of improving the functioning of these sectors.

Any hoped-for productivity gains, however, have been little in evidence, with higher pay for rail drivers apparently having the reverse effect and doctors’ pay not necessarily the key to reducing waiting lists in the NHS. The employers’ NI rises may also turn out to have costs in terms of jobs.

Will new spending cuts mean broken manifesto promises?

Probably not. Reeves is not expected to touch the tax rates she pledged not to raise – although the freezing of thresholds does part of that job for her. Unconfirmed reports also suggest that most of the cuts could come from Whitehall departments, so the cost could be felt, initially, more in deteriorating services than in any effect on the average person’s cost of living.

Aren’t there political dangers if the A-word makes a comeback?

Indeed there are. Austerity is primarily associated with the coalition government of 2010-15 and the Conservative chancellor, George Osborne. As such, it has been a stick used by Labour to beat the Conservatives with and blamed for every possible social ill. If it bounces back into the political language, it could become a weapon for the Labour left to use against the Starmer government, and quite effective it could be, too.

Couldn’t Reeves simply rip up her fiscal rules?

Maybe, but there are several downsides, including the damage that could be done to Labour’s claim to be a government committed to sound money, and Reeves’s own promise to observe the rules she set on borrowing. Breaking those rules – even if US policy and the international situation were to be blamed – could call into question her own competence and/or good faith.

Add this to the apparent failure of her growth strategy and her days as chancellor could be numbered. On the other hand, Germany this week offered a spectacular example of a new parliament and a new leader-in-waiting throwing long-standing and super-stringent debt rules out of the window. Could Reeves do something similar? The answer might be A) If you want to change the rules, change them big, and B) It would probably take at least a change of chancellor and probably a change of government.