Labour’s Big Worry Is No One Will Feel Record Spending Surge

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“Not every department will get everything they want,” Reeves admitted on Wednesday. “I had to say ‘no’ to things I want to do.” Anti-austerity protesters took to the streets of London on Saturday.

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Hollowed out

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Convincing people the government can turn things around won’t be easy. Public services have been hollowed out since 2010, when the Conservative-led coalition took power with a mandate for austerity to repair the public finances — a plan supported by the International Monetary Fund and much of the developed world, including the US and the eurozone, which did the same.

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Spending per person has fallen in every department except for health and the Home Office since 2010, Resolution analysis shows. The real picture is even worse as Home Office figures are flattered by the cost of hotel accommodation for asylum seekers – a £6.5 billion bill that is inflaming anti-migrant sentiment.

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Spending cuts have resulted in worse outcomes. “All services apart from schools were performing worse on the eve of the pandemic than they were in 2010,” said Stuart Hoddinott, associate director at the Institute for Government. Since then, performance has deteriorated further. All services apart from children’s social care perform more poorly today than at the onset of Covid, he added.

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In hospitals, wait times for cancer, accident and emergency, and elective surgery are all historically elevated. Access to local, general practice doctors is down. The maintenance backlog for the hospital estate has more than doubled to £14 billion, larger than the NHS’s entire annual capital budget. Prison overcrowding has seen assaults, on prison staff and between inmates, soar. The list goes on.

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The Spending Review will not fix all the problems. Health accounts for £1 in every £3.50 spent and is swallowing other budgets. Departments on average will get 1.2% inflation-adjusted annual increases but the NHS has historically needed 3.4%. If that is maintained, and defense is put on course to rise to 3% from 2.5%, the rest face severe cuts, Bloomberg Economics said.

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Unproductive workers

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Aggravating the problem has been the collapse in productivity since Covid. Public sector workers today are 4.6% less productive than in 2019, according to the Office for National Statistics. That means for the same taxpayer contribution, the public gets a service that is almost 5% worse.

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That would be bad enough if taxes had stood still but they have risen by £90 billion since 2008 in today’s money – equivalent to increasing the basic rate of income tax from 20% to 33%. To show taxpayers their money is not being wasted and “every penny counts,” Labour will cull thousands of civil service jobs. 

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Meanwhile, since 2008, the UK debt pile has more than doubled to 100% of GDP and now costs about £50 billion a year more to service than before both the 2008 crash and the pandemic in 2020, almost as much as Britain spends on defense. 

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Weak economic growth has compounded the problem, costing tens of billions of pounds in foregone tax revenue. On an output per person basis, GDP per head — a proxy for living standards — has grown just 5.5% since the pre-financial crisis peak in 2008, an average of 0.4% a year. In the preceding 17 years, GDP per head grew eight times faster – by more than 45%, or 2.2% a year.

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Some of that can be directly linked to policy decisions. According to the Bank of England, austerity between 2010 and 2015 cost 2% in lost output and Brexit another 3.25%. But the bulk has been down to a structural collapse in the engine of growth: productivity. “Weak productivity has been the defining problem for the last 20 years — even before the financial crisis,” Angus Armstrong, director of Rebuilding Macroeconomics at University College London, said. 

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Before coming to power, Labour promised to rebuild Britain’s public services with the dividends of growth. Reeves will try to push that forward by investing £113 billion over the parliament in roads, homes, energy and defense, a commitment the IMF last month described as growth enhancing. Last week she earmarked £15 billion for the neglected north of England. 

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“She needs to get the basics right,” Armstrong said. “Building homes, roads and rail help. But we need to ensure they connect everyone — then growth and productivity will follow.” 

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—With assistance from Andrew Atkinson.

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