The government is asking ministers to cut billions of pounds from infrastructure projects in the next 18-months, despite Rachel Reeves promising to invest more for the growth of the economy. Sources in the government said that members of cabinet were asked to reduce their capital expenditure plans by up to 10% as part of this months’s review of spending.
These demands will mean that large projects like hospital improvements, road construction and defence projects are slowed or even stopped as the government searches for ways to fix what it calls a black hole of £22bn in the public finances.
Economists warn such cuts in capital spending could damage the economy and Britain’s crumbling public infrastructure. Reeves said to the Labour conference last week that it was time for the Treasury to stop counting only the costs and start recognising also the benefits of investments in our economy. Growth is a challenge, and investment is a solution.
Treasury officials say that the only way to close the deficit quickly is by cutting infrastructure spending in the short-term. One Whitehall source stated: “We are told that the Treasury wants more borrowing to invest long-term, but this does not cover the reality that we are being asked to make significant capital spending reductions this year and next.”
Reeves is expected to announce her first budget in her role as chancellor at the end of October. The budget is expected to include tax increases to fund public services. She will also outline how much money each department must spend in the remainder of the current financial year as well as the following one, to close the gap between government revenues and expenditures.
The gap was partly due to the fact that the Conservative government spent more than they had planned on hotels for asylum seekers. To counter this narrative, senior Tories claim that Labour spent more money than they would have to settle pay disputes in the public sector, which accounts for up to £9bn.
According to economists, the main problem is the fact that the last time departmental spending caps were set was three years ago. This was before inflation skyrocketed and the number of asylum seekers increased significantly.
Treasury officials say that to close the gap they are asking ministers for capital cuts in areas like hospital construction, defence infrastructure, road and rail networks, and other similar projects. Treasury officials claim that delaying or stopping projects which have not yet started is easier than changing existing welfare schemes or making large-scale cuts. Labour has said that it will review plans by the previous government to build 40 hospitals. The Prime Minister, Keir starmer, described this as an unfunded promise.
Darren Jones is the Treasury chief secretariat. He recently sent departments “indicative” budgets to let them know the size of the cuts that the government plans to make this year and the next. He began face-toface discussions with ministers last week to determine the exact amount and method of saving that each department will be required to make.
Some ministers are angry about these indicative budgets. They believe that the Treasury is prioritising the short-term control of finances over the long-term interests of the country. Reeves & Jones are also urged by many economists to look for other immediate savings even if it is more difficult.
Whitehall officials argue that it will be difficult to convince the public to accept the cuts in capital expenditures, given Reeves’s call for increased government investment to boost long-term growth. The chancellor has been working on plans that will allow her to borrow more money to fund capital projects, while still sticking to her promise to reduce debt in five years.
Officials say this will not ease the immediate pressures to tackle in this year’s review of spending. Ministers hope to reduce demands before the budget day.
Ben Zaranko is a senior economist with the Institute for Fiscal Studies. He said that governments often look to capital budgets first when they are looking for quick savings. It is easier to cancel an unfinished building project than to lay off employees.
“But over time these cuts add up, and they are one of the reasons why our public services have become less efficient and large portions of the public domain are in such a bad state.”
Tom Railton, the director of the Invest in Britain Campaign, stated: “The only solution to the UK’s stagnant economy, to fix our crumbling services, and to ensure that climate targets are met, is to increase investment in the public sector.” Leading economists and the public agree.
“We need to increase public investment, and not decrease it. We also need a fiscal structure that encourages long-term planning rather than short-term accounting.”
Mel Stride, the shadow work and pensions secretary, said: “If the government comes forward with plans to cut vital productivity-boosting investment then that is a cause for real concern.
The fiscal rules have been designed to be based on a 5-year time frame in order to avoid sudden cuts. Instead of reducing capital funding, we should find ways to increase it.
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