Is This an Austerity Government?
No.
Rachel Reeves will deliver her Spring Statement today. While not a full budget, this statement will outline the framework for the government’s spending review. Government departments will find out if they have more or less to spend—most will find the answer is less.
This follows a Green Paper consultation proposing significant savings on Personal Independence Payments (PIP).
Many journalists, social media commentators, and even Labour backbenchers are calling this austerity, comparing Rachel Reeves to George Osborne. But is this fair?
George Osborne and Austerity: Part One
George Osborne became Chancellor of the Exchequer in 2010 under the coalition government. He introduced a comprehensive austerity programme, which had three key objectives:
- Reduce government day-to-day spending to achieve a budget surplus.
- Cut government spending as a percentage of GDP.
- Reassure bond markets that the UK had its spending under control.
The idea was that this would free up cash for tax cuts.
Osborne’s plan combined spending cuts and tax increases amounting to £110 billion. The coalition claimed that in its first three years, public spending was reduced by £14.3 billion compared to 2009–10. By 2015, they claimed the deficit as a percentage of GDP had been halved.
But austerity failed. Cuts shrank GDP, debt rose, and bond markets remained indifferent—they were already eager to lend to governments after the credit crunch.
Additionally, fractional reserve banking worsened the situation. Banks must hold reserves of cash and liquid assets like government bonds to lend money. Osborne’s debt reduction strategy decreased the supply of government bonds, restricting banks’ ability to rebuild reserves. This, in turn, choked off lending to businesses and consumers, prolonging the credit crunch.
Rachel Reeves and the 2024 Budget
The 2024 Budget made several key announcements:
- £70bn in immediate extra public service funding.
- Up to £180bn in additional spending over the next Parliament.
- £40bn in tax rises.
- Increased borrowing to fill the gap.
This is the opposite of Osborne’s austerity programme. Looking at the numbers, it’s baffling that anyone would describe the current government’s plans as austerity. This is a high-spending government—one of the highest on record.
In fact, Starmer is spending more than Jeremy Corbyn proposed in his so-called “anti-austerity” manifestos of 2017 and 2019.*
However, there is one similarity between Osborne and Reeves: concern over financial market confidence.
Bond Markets and Fiscal Rules
Osborne argued that without austerity, markets would lose confidence in the UK government. This was nonsense—post-credit crunch, markets were desperate to lend to governments.
Today, things are different. Liz Truss spooked markets so much that UK borrowing costs surged. Similarly, Donald Trump’s erratic policies (such as tariffs and threats to annex Canada) are also rattling markets, driving up government borrowing costs globally.
Under Osborne, the UK paid £30bn annually in debt interest. After 14 years of Conservative rule, that figure now exceeds £100bn.
To reassure markets, Reeves revised the UK’s fiscal stability rules, which have changed ten times in the last 14 years:
- Balance the current budget by 2029/30 (the “stability rule”).
- Reduce net financial debt as a share of GDP by 2029/30 (the “investment rule”).
- Cap some welfare spending at a pre-determined level (the “welfare cap”).
The Office for Budget Responsibility (OBR) monitors these targets. The 2024 budget left a £10bn buffer, allowing some flexibility for investment.
However, rising borrowing costs due to global market uncertainty mean Reeves is now forced to cut spending now to stay within fiscal targets—even though these targets apply years into the future.
Welfare Spending: Reeves vs. Osborne
Both Osborne and Reeves proposed cuts to disability benefits, but the scale and context are vastly different.
- Under Osborne, disability benefits were £17bn and falling due to NHS investment. He planned an initial £5bn cut, later reduced to £1.5bn.
- Under Reeves, disability benefits are £40bn and rising. Her proposal reduces projected future growth—not current spending. Even after changes, spending will still increase to £60bn over this Parliament.
In contrast, Osborne’s policies failed spectacularly, causing disability benefit costs to rise by 240%.
The real issue is how fiscal rules force short-term cuts without considering long-term impacts. Under Blair and Brown, increased NHS investment reduced disability claims. Under the Conservatives, underfunding the NHS led to rising disability claims, especially for mental health.
A smarter approach would allow the NHS to invest and reduce claims before cutting benefits—but fiscal rules don’t account for this kind of long-term thinking.
Civil Service Cuts
Osborne relished civil service cutbacks. Initially, numbers had fallen under Labour, but after the financial crisis, Gordon Brown allowed civil service hiring to absorb displaced banking sector workers.
Under Osborne, civil service numbers declined further, but Brexit and Universal Credit later reversed this trend. However, senior civil service quality deteriorated.
Labour plans to cut £2bn from the civil service budget. This is easily achievable while keeping numbers well above pre-Brexit levels.
This Is Not Austerity
This government is doing the opposite of Osborne and Cameron—it is spending more, not cutting. However, it faces tighter constraints from bond markets than they ever did.
This is not an austerity government. However, fiscal rules and market pressures inherited from Liz Truss are still limiting how much it can achieve.
*The 2019 Labour manifesto was so chaotic that calculating total spending plans is nearly impossible, as new commitments were added mid-campaign without costings.
https://www.instituteforgovernment.org.uk/explainer/current-fiscal-rules