Is Rachel Reeves’ spending review a veiled return to austerity?

Today’s clash between ministers and trade unions over public sector pay – after the government recommended a 2.8 per cent rise for teachers, NHS workers and civil servants – was always going to happen.

Unions viewed this summer’s generous increases as merely the start of “catching up” after restraint since 2010 which saw public sector workers fall behind those in the private sector. In contrast, Labour ministers regarded the rises of 5-6 per cent as a one-off to end a wave of strikes that began under the Conservatives, but now face the damaging prospect of stoppages on their watch.

The Treasury insists a 2.8 per cent increase would be higher than the 2.6 per cent inflation forecast, though private sector pay rises are likely to average 3 per cent. Unions supportive of Keir Starmer’s leadership as well as those on the left reject warnings that bigger increases would harm frontline services, pointing out that higher pay is needed to boost recruitment and retention.

Ministers are in a bind. They do not want to look “soft” in voters’ eyes after the summer’s inflation-busting rises, but strikes would be messy after they trumpeted their end under Labour – and stoppages in the NHS would harm efforts to reduce waiting lists.

The headache over pay, which eats up about a quarter of the public spending cake, illustrates how difficult it will be for Rachel Reeves to make her government-wide review add up. It is only one of many pressures. The peace dividend from lower defence spending after the Cold War was in effect switched to the demands of an ageing population.

But now the government needs to boost the defence budget by more than £10bn to meet a promise that it will hit 2.5 per cent of GDP and pump £22.6bn into the NHS over the next two years (which health bosses fear will go largely on pay).

Other pressures include incapacity benefits, on which spending is set to double from £17bn to £35.5bn by 2029; the related cash crises in social care and local authorities; meeting the proposed assisted dying law and boosting palliative care. Public servants are already queuing up to lobby the chancellor for more money – led by the police, who are warning they face big cuts.

Ministers and civil servants will try to game the system by arguing their spending plans are vital to the six targets Starmer announced last week. These will be prioritised in the review, while other spending will be cut. But the government is already in a pickle about its priorities.

Wes Streeting, whose official target as health secretary is to ensure 92 per cent of patients start elective treatment within 18 weeks, has told NHS leaders to put patient safety first this winter and to “put patients ahead of targets”. It seems Starmer’s “milestones” are less set in stone than they appeared.

Reeves will be locked in battle with her cabinet colleagues before the spending review concludes next June. Civil servants are sceptical they can find the 5 per cent efficiency savings she demanded in her opening bid, an old trick Whitehall has already performed several times. “We’ve done the salami slicing,” one complained. Reeves insists savings can be switched to priority areas and so are not a repeat of Tory austerity.

She hopes recruiting experts from finance, business and think tanks to challenge departments over their budgets “line-by-line” will give her cover to make savings.

Some ministers privately accuse the Treasury of being reluctant to meet the upfront cost of reforms that would save money in the long term and being wary of measures to boost economic growth, even though that is the government’s number one goal.

These ministers fear the Treasury will hold all the cards in a top-down process as it negotiates separately with them. They want Starmer to play a bigger role in the process, saying that delegating economic policy to Reeves led to the political disaster of means-testing the pensioners’ winter fuel allowance.

“Too much economics, not enough politics”, is the criticism of Reeves from some fellow ministers who fear the chancellor is not doing enough to challenge Treasury orthodoxy. Starmer allies insist he now has more economic backup in Downing Street.

The review will be a huge test for the chancellor. Her biggest challenge, after day-to-day spending will rise in real terms by 4.8 per cent and 3.1 per cent respectively in the first two years, will be to juggle a £9bn squeeze in later years, when it will increase by only 1.3 per cent a year.

So “non-protected” areas including the Home Office (responsible for the police); the Ministry of Justice (courts and prisons); and the Department for Transport and councils will be vulnerable. Ben Zaranko, associate director at the Institute for Fiscal Studies, said “non-priority budgets” will face “not just ‘efficiency savings’ but also bog-standard cuts”.

Reeves can credibly deny a return to austerity now but, unless economic growth is higher than forecast, she might struggle to avoid the label in two years’ time.

Her Budget pushed borrowing to the limit that the financial markets will tolerate, so it won’t be easy to escape an invidious choice between cuts which feel like austerity and another tax hike. Reeves’s problem is that she has promised to avoid both.