The Treasury has ordered cabinet ministers to be “ruthless” in identifying public spending cuts as Labour battles to prove its economic plan is working.
An internal letter from Number 11 about Rachel Reeves’s spending review, seen by The Telegraph, admits that “difficult” decisions on budgets will be needed.
It comes after a tumultuous week in financial markets, which saw the interest rate on 30-year government bonds hit its highest level since 1998.
Ministers will be braced for more market movements this week. The Chancellor is now under added pressure to find extra savings after the surge in the cost of government debt put her own borrowing rules at risk of being broken.
Sir Keir Starmer will attempt to seize back the economic initiative on Monday with a speech embracing artificial intelligence, vowing to build a new supercomputer in the UK.
The letter from Darren Jones, the Chief Secretary to the Treasury, was sent to cabinet colleagues on Dec 12 and detailed the approach that would be taken in the spending review, which is due to conclude in June.
Mr Jones wrote: “Growth is the only way that we can deliver better outcomes in public services, without raising taxes on working people and is our primary mission for this Parliament.
“Spending Review 2025 cannot be a business-as-usual spending review. Building on our missions, the Plan for Change set out ambitious milestones that must be delivered within the challenging fiscal context we inherited. Success will require ruthless prioritisation.”
Mr Jones also referred to the spending review as “phase two”, coming after the Budget in October, which raised tax by £40 billion and is dubbed “phase one” in the Treasury.
He said: “It is crucial that in phase two we maximise the value of every pound spent to set the Government on course to deliver the Plan for Change, within the spending envelope set at the Autumn Budget. Phase two will, therefore, be zero-based.
“Together, we will conduct a full review of every line of government spending to assess whether it is a priority for this Government and represents value for money. Some of these decisions will be difficult, but the public expects us to root out government waste and ensure their taxes are being spent on their priorities.”
The revealing language shows how firmly the Treasury is pushing other government departments to find savings in their budgets, with a “ruthless” focus on priorities.
The spending review was already expected to require departments to make efficiency savings worth five per cent of their budgets.
Areas directly related to the Plan for Change, the document outlined by Sir Keir Starmer last month spelling out tangible targets for his premiership, are expected to be best funded.
That means efforts to reduce NHS waiting lists, boost early years education, put more police officers on the street, raise household income, build 1.5 million homes and decarbonise the electricity supply will be well financed.
But other areas, such as unprotected government departments that fund the courts, local councils, and welfare support, are more at risk of cuts.
Signs of grumbling in Labour
Ms Reeves in her Budget raised the increase in day-to-day public spending from one per cent a year in real terms inherited from the Tories to 1.5 per cent a year.
However, she spent much of the £40bn raised in her Budget on the NHS and education, as well as front-loading the money over the next two years, meaning much tighter budgets after that.
Economics warned at the time that the budget cuts needed for unprotected departments in the years ahead will feel like Tory chancellor George Osborne’s austerity programme.
Signs of grumbling among Labour colleagues towards Ms Reeves’s economic decisions have been emerging in recent days after a string of discouraging developments.
Business confidence has dropped since Labour took office, while growth forecasts are down and inflation is showing signs of dropping less quickly than hoped.
As well as rising borrowing costs last week, the pound has weakened against other currencies in a sign that international investors are avoiding the UK.
Ms Reeves will give a speech on boosting growth later this month that will see her urge regulators to be more pro-enterprise and champion the major loosening of planning rules.
Mr Jones will also give a public address about his approach to the spending review, which will include a push to drive down government waste.
Writing in The Telegraph, he said that officials will work with the private sector to “embrace their ideas, expertise and innovation to further our public services” as part of the drive to clamp down on unnecessary spending.
Yet Mel Stride, the Tory shadow chancellor, singled out the rise in employers’ National Insurance Contributions as damaging the economy, during an interview on BBC One’s Sunday with Laura Kuenssberg.
Mr Stride said: “We should have had a different approach to the economy that didn’t tax the daylights out of businesses.
“We should have had something from this Government that was far more about productivity.”
