The challenges facing Rachel Reeves are clear – and painful

Editorial: All the signs are that the reforms to the NHS, social security and the civil service are only the beginning of a longer, and inevitably more painful, process of change

As the chancellor makes her final preparations for the spring statement, a defining moment in the life of the Starmer administration, the sheer scale of the challenges facing her is laid out in graphic statistical detail by The Independent today.

Such is the state of the economy – and given Rachel Reeves’s own exacting fiscal rules – all the signs are that the reforms to the NHS, social security and the civil service are only the beginning of a longer, and inevitably more painful, process of change.

The Office for Budget Responsibility, in common with many other forecasters, is certain to reduce its projections for UK economic growth – not least to reflect the harsh reality of the tariffs on UK exports being imposed by Donald Trump, and the wider slowdown in global trade and economic confidence that his policies are engendering.

The US president’s dalliance with Vladimir Putin, alongside the downgrading of Nato, is also forcing every government in Europe to make radical changes to its defence posture. The effects of Brexit, meanwhile, continue to limit the UK’s access to its closest and largest market and its biggest source of industrial inputs, food and (previously) labour. All of these factors are continuing to depress Britain’s economic prospects.

The year 2025 will not signal the end of what can only be described as the second age of austerity, even though parts of the public services have never recovered from the deep cuts in departmental budgets that were made during the coalition government, which ended almost a decade ago. There’s more to come.

As Ms Reeves frequently pleads, hers is a baleful legacy, though she has made errors of her own that might have been avoided. Cutting the pensioners’ winter fuel allowance was the most questionable – as well as the most socially and politically damaging. Her task is obviously made even harder now that the “fiscal headroom” she created for herself at the October Budget is all but gone. Hence all the talk about cuts.

Certainly, it is difficult to conceive of the government achieving the kind of savings in public expenditure that will be needed in the coming years if it doesn’t widen its review of the welfare state. The green paper titled “Pathways to Work”, presented to parliament last week by Liz Kendall, the work and pensions secretary, was controversial, though it seems in the end to have been backed by a majority of public opinion and accepted with little resistance by Labour MPs.

That is not the last debate, however, in which Ms Kendall will be required to deploy her combative skills. More than one in five of the working population receives some form of working-age benefit: a salutary statistic. This is not in itself a reason to attack the level of welfare, or even the number in receipt of it. It does, however, stand as something of an indictment of governments of all parties – it is not an entirely novel phenomenon – that such a situation has arisen.

It is highly suggestive of an economy that is unable to generate high-wage jobs, and in which lower-paid work needs, in effect, to be subsidised; it also speaks to a society in which opportunities to move up the ladder of income and wealth are stymied. Such a dispiriting situation is mirrored in the number of people of working age who are economically inactive. At 9.3 million, they represent about a fifth of the working population.

A quarter of the “inactive” – an unfortunate phrase that unfairly suggests indolence – are in fact students, while some are lucky early retirees, but a further 30 per cent say their inactivity is due to long-term illness, and within that category there has been a substantial rise in mental illnesses.

As was apparent in the arguments that accompanied Ms Kendall’s green paper, it is not entirely clear whence this trend originated, and that needs to be settled before any action is taken. Is it, as health secretary Wes Streeting asserts, down to an “overdiagnosis” of mental illness? Or is it because more people are coming forward to seek help because of recent efforts to end the taboo surrounding it, including Theresa May’s laudable ambition as prime minister to give mental health parity of esteem with physical ailments?

What has been – and is – the continuing effect of Covid, both in the incidence of debilitating long Covid, and in the prevalence of mental illness among the young? Why, specifically, has there been such a rise in ADHD? How much of the increase in mental illness can be reversed as NHS waiting lists come down?

At the moment, there is no guarantee that Ms Kendall’s reforms will indeed improve “pathways to work”, notwithstanding the provision of more job coaches and the excellent “right to try” initiative. Even with training, if someone with long-term illness lives in an area with few jobs, it remains difficult – if not prohibitively costly – for them to move to a location where there is a shortage of workers, especially if the job is comparatively poorly paid and the housing costs are high. A newly qualified apprentice in Barnsley, say, will still find it near impossible to relocate to Cambridge.

The arguments about the effectiveness of the British social security system, in all its Byzantine detail, will continue into the summer and beyond. But there is, as in any economy, a limit to the resources available to the nation for consumption and investment – and there will always be acute choices to be made about allocation.

The plain fact is that the political will is certainly not there to sustain the welfare state in its current form. Because of Britain’s feeble growth prospects and the demands placed on the state by an ageing population, choices will have to be made – and that includes making room for defence.

Given the size of the bill for the state retirement pension – and its likely growth – the time has come to look again at the “triple lock” protections bestowed, with a brief interruption, uniquely on that welfare benefit for approaching two decades. Again, that’s not to advocate scrapping it, necessarily, but to add more context to the debate on the welfare system, because it comprises about half of the total spend.

The challenges facing ministers are clear; the outcomes less so. Halfway through the 2020s, the remainder of the decade promises to deliver one of two things: either the government will achieve some stabilisation of the public finances, and a consensus on the obligations that underpin them, or it will push a frustrated population towards more radical, and even less savoury, solutions. No pressure then, Ms Reeves.