In September 2024, chancellor Rachel Reeves promised “there would be no return to austerity” under the new Labour government,[1] echoing a promise made in the party’s election manifesto. Using data from the Office for Budget Responsibility (OBR),[2] this briefing note explores different definitions of austerity and calculates how much government spending would have to rise in the upcoming budget to fulfil Labour’s pledge to avoid austerity.
While politicians have been quick to blame austerity for the many challenges facing the public sector, there is a lack of clarity as to what the term means. When pressed as to what she meant by no return to austerity, Reeves answered that “there will be no real-terms cuts to government spending”.[3] However, this definition of austerity is problematic as overall real government spending did not fall under the previous Conservative government either, contradicting Labour’s past criticism of austerity.
It is important to understand what the chancellor means by avoiding austerity as it is a key manifesto commitment that will constrain her choices on spending, which in turn has a significant impact on the public finances. A diluted definition of austerity would allow the chancellor to cut spending while still adhering to her manifesto commitment, although this would undermine past criticism of Conservative spending choices. On the other hand, remaining consistent with that past criticism would require a large increase in spending that will have to be paid for through higher taxes or borrowing.
READ THE BRIEFING NOTE
Key findings
- If austerity is defined as real-terms cuts to government spending:
- The chancellor could cut planned spending in 2025-26 by £8.6 billion and still claim to have avoided austerity.[4]
- If austerity is defined as spending rising by less than under the previous Labour government:
- Planned spending would have to increase by £40 billion in 2025-26 to avoid austerity, this is 5.4 times greater than the tax rises set out in Labour’s manifesto.[5]
- Matching this rate of increase going forward would mean a total of £394 billion in additional spending by 2028-29.
- If austerity is defined as public spending falling as a share of GDP:
- Planned spending would have to increase by £13.1 billion in 2025-26 to avoid austerity, this is almost double the revenue from tax rises set out in Labour’s manifesto.[6]
- Maintaining public spending as a share of GDP going forward would mean a total of £118 billion in additional spending by 2028-29
READ THE BRIEFING NOTE
[1] Smout, A, Macaskill, A, and Piper, E., UK's Reeves says no return to austerity in more upbeat economic message, Reuters, 23 September 2024, www.reuters.com/world/uk/uk-finance-minister-reeves-vows-no-austerity-despite-tough-budget-2024-09-22/, (accessed 18 October 2024).
[2] Office for Budget Responsibility, Public finances databank – September 2024, 23 September 2024, obr.uk/download/public-finances-databank-september-2024/?tmstv=1729604024, (accessed 22 October 2024).
[3] Guru-Murty, K., Chancellor Rachel Reeves on UK economy, austerity and Labour gifts, Channel 4, 23 September 2024, www.channel4.com/news/chancellor-rachel-reeves-on-uk-economy-austerity-and-labour-gifts, (accessed 18 October 2024).
[4] All figures in this note are in 2023-24 prices unless otherwise stated.
[5] Forecast revenue in 2028-29, Labour Party, Change – Labour Party Manifesto, 13 June 2024, p.127.
[6] Ibid, p.127.