Does Reeves’s ‘efficiency savings’ plan signal a return to austerity?

As the chancellor exhorts Whitehall to cut down on waste, Sean O’Grady wonders if her ‘iron fist’ will stay the course – and whether her plan will work

As a sort of softening-up exercise in advance of next year’s comprehensive, first principles “zero-based” spending review, the chancellor of the Exchequer is taking her self-styled iron fist to government waste. Rachel Reeves, who’s had a busy few weeks, is demanding that her hard-pressed colleagues come up with “efficiency savings” in their annual budgets that will accumulate to an annual saving in public expenditure of 5 per cent by 2029. Whitehall is wondering if she can do it...

Has she hired some muscle?

Yes. Apart from having the prime minister firmly on her side – the most important relationship in government – Reeves has assembled a sort of star chamber of bankers, no doubt armed with the fiscal equivalent of knuckle dusters to rough up the spending departments. The “challenge panels” of private-sector experts will be drawn from the likes of Lloyds Banking Group, Barclays, and the Co-operative Group. Only the most defiant victims of the Treasury “treatment” might remind the bank executives that they didn’t exactly cover themselves in fiduciary glory during the global financial crisis.

Is this a return to austerity?

Well, Reeves has declared “no return to austerity”, picking up the soundbite used so liberally by Keir Starmer to reassure worried voters. Having been slapped, rather to their surprise, with one of the biggest tax hikes since the war, those same voters may wonder whether even the modest improvements in public services might survive the Treasury’s tender attention. And, therefore, what exactly the point of the Labour government is.

Why is she having to do this?

The tax hikes evidently aren’t enough. In Reeves’s defence, it is fair to acknowledge that the Conservatives did leave the public finances in a parlous state – and, to the extent that Rishi Sunak and Jeremy Hunt were able to make their plans even superficially credible, they could only do so by making the most heroic of assumptions about the “efficiency savings” that might be delivered elsewhere.

The various experts still derided the figures as phantasmagorical, but they were what Labour inherited and had to make the most of. Hence Reeves waving her iron fist around. She has accepted the considerable challenge of making Hunt’s public spending dreams come true. He placed great faith in the ability of artificial intelligence to rescue the public sector. Maybe that idea has some mileage, but it’s not going to be easy in any case.

How big is the task?

Strangely, the sheer scale of public spending helps the chancellor in her mission. It is around £1.2 trillion – that’s £1,200,000,000,000 – a year, and any reasonable person might conclude that trimming that dizzying sum by just one-twentieth without a calamitous impact on public services should not be beyond the wit of the civil service.

The problems in pulling that off are twofold, however. First, that the whole public sector has been through successive waves of cuts, most dramatically during the coalition government’s “age of austerity”, which trimmed a great deal of arguably superfluous cost from the system.

The second danger, as long and bitter experience proves, is that the brunt of the cuts will come from lower investment in infrastructure rather than from restraint in current expenditure and wages. That would certainly help Reeves to survive this parliament having met her targets for borrowing and her renewed pledge not to hike taxes again – but it would have a damaging impact on the country’s already anaemic prospects for growth.

Will it work?

Politically, the government will find it difficult to achieve much more in the public services than the very minimum indicated in the manifesto and the subsequent “reset” statement – cutting hospital waiting lists, building more homes, recruiting some police officers and so on. There will be depressingly little left over for defence, which has been neglected for too long, let alone the impending financial crisis in the university sector, the failure of Thames Water, and the collapse of more local authorities – multibillion-pound catastrophes that will wipe out any likely efficiency savings.

By this time next year, Reeves’s iron fist may well be developing metal fatigue.