Welfare versus warfare: Sir Keir Starmer's unresolved question - and why the PM's pinned his hopes on economic growth

Sky News

5 days ago

Welfare versus warfare: for decades, it's a question to which successive prime ministers have responded with one answer.
After the end of the Cold War, leaders across the West banked the so-called "peace dividend" that came with the end of this conflict between Washington and Moscow.
Instead of funding their armies, they invested in the welfare state and public services instead.
But now the tussle over this question is something that the current prime minister is grappling with, and it is shaping up to be one of the biggest challenges for Sir Keir Starmer since he got the job last year.
As Clement Attlee became the Labour prime minister credited with creating the welfare state after the end of the Second World War, so it now falls on the shoulders of the current Labour leader to create the warfare state as Europe re-arms.
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Be it Donald Tusk, the Polish prime minister, arguing last year that Europe had moved from the post-war era to the pre-war era; or European Commission chief Ursula von der Leyen calling on the EU to urgently re-arm Ukraine so it is a "steel porcupine" against Russian invaders; there is a consensus that the UK and Europe are on - to quote Sir Keir - a "war footing" and must spend more on defence.
To that end the prime minister has committed to increase UK defence spending to 2.5 per cent of GDP by 2027, raiding the overseas development aid budget to do so, and has also committed, alongside other NATO allies, to spend 5 per cent of GDP on defence by 2035.
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That is a huge leap in funding and a profound shift from what have been the priorities for government spending - the NHS, welfare, education - in recent decades.
The Institute for Fiscal Studies' Carl Emmerson said the increase, in today's terms, would be like adding approximately £30bn to the 2027 target of spending around £75bn on core defence.
Sir Keir has been clear-eyed about the decision, arguing that the first duty of any prime minister is to keep his people safe.
But the pledge has raised the obvious questions about how those choices are funded, and whether other public services will face cuts at a time when the UK's economic growth is sluggish and public finances are under pressure.
This, then, is one of his biggest challenges: can he make sure Britain looks after itself in a fragile world, while also sticking to his promises to deliver for the country?
It is on this that the prime minister has come unstuck over the summer, as he was forced to back down over proposed welfare cuts to the tune of £5bn at the end of this term, in the face of a huge backbench rebellion. Many of his MPs want warfare and welfare.
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"There's been a real collision in recent weeks between those two policy worlds," explains Jim Murphy, who served both as a welfare minister under Tony Blair and shadow defence secretary under Ed Miliband.
"In welfare, how do you provide for the people who genuinely need support and who, without the state's support, couldn't survive? What's the interplay between that and the unconditional strategic need to invest more in defence?
"For the government, they either get economic growth or they have a series of eye-watering choices in which there can be no compromise with the defence of the state and everything else faces very serious financial pressures."
He added: "No Labour politician comes into politics to cut welfare schools or other budgets. But on the basis that defence is non-negotiable, everything else, unfortunately, may face those cuts."
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While the PM sees this clearly, ask around the cabinet table and ministers will admit that the tough choices society will need to take if they genuinely want to respond to the growing threat from Russia, compounded by the unpredictability of Donald Trump, is yet to fully sink in.
There are generations of British citizens that have only ever lived in peace, that do not, like I do, remember the Cold War or the Troubles.
There are also millions of Britons struggling with the cost of living and and public satisfaction with key public services is at historic lows. That is why Labour campaigned in the election on the promise of change, to raise living standards and cut NHS waiting lists.
Ask the public, and 49 per cent of people recognise defence spending needs to increase. But 53 per cent don't want it to come from other areas of public spending, while 55 per cent are opposed to paying more tax to fund that defence increase.
There is also significant political resistance from the Labour Party.
Sir Keir's attempts to make savings in the welfare budget have been roundly rejected by his MPs. Instead, his backbenchers are talking about more tax rises to fund public services, or even a broader rethink of Rachel Reeves' fiscal rules.
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Anneliese Dodds, who quit as development minister over cuts to the overseas aid budget, wrote in her resignation letter that she had "expected [cabinet] would collectively discuss our fiscal rules and approach to taxation, as other nations are doing", as part of a wider discussion about the changing threats.
In an interview for our Electoral Dysfunction podcast, which will be released later this summer, she expanded on this idea.
She said: "I think it's really important to take a step back and think about what's going to be necessary, looking ten, twenty years ahead. It looks like the world is not going to become safer, unfortunately, during that period. It's really important that we increase defence spending.
"I think that does mean we've got to really carefully consider those issues about our fiscal rules and about taxation. That isn't easy…nonetheless, I think we will have to face up to some really big issues.
"Now is the time when we need to look at what other countries are doing. We need to consider whether we have the right system in place."
For the Labour MP, that means potentially re-assessing the fiscal rules and how the fiscal watchdog assesses government spending to perhaps give the government more leeway. She also believes that the government should look again at tax rises.
She added: "We do, I believe, need to think about taxation.
"Now again, there's no magic wand. There will be implications from any change that would be made. As I said before, we are quite highly taxing working people now, but I think there are ways in which we can look at taxation, not without implications.
"But in a world of difficult trade-offs, we've got to take the least worst trade-off for the long term. And that's what I think is gonna be really important."
Those trade-offs are going to be discussed more and more into the autumn, ahead of what is looking like an extremely difficult budget for the PM and Ms Reeves.
Not only is the chancellor now dealing with a £5bn shortfall in her accounts from the welfare reform reversal, but she is also dealing with higher-than-expected borrowing costs, fuelled by surging debt costs.
Plus, the government borrowing £3.5bn more than forecast last month, with June's borrowing coming in at £20.7bn - the second-highest figure since records began in 1993.
Some economists are now predicting that the chancellor will have to raise taxes or cut spending by around £20bn in the budget to fill the growing black hole.
Jeremy Hunt, former Conservative chancellor and now backbencher, tells me he was "massively disappointed" that Labour blinked on welfare reform.
He said: "First of all, it's terrible for people who are currently trapped on welfare, but secondly, because the risk is that the consequence of that, is that we get trapped in a doom loop of every higher taxes and lower growth."
'This group of politicians have everything harder '
Mr Murphy says he has sympathy for the predicament of this Labour government and the task they face.
He explained: "We were fortunate [back in the early 2000s] in that the economy was still relatively OK, and we were able to reform welfare and do really difficult reforms. This is another world.
"This group of politicians have everything harder than we had. They've got an economy that has been contracting, public services post-Covid in trouble, a restless public, a digital media, an American president who is at best unreliable, a Russian president.
"Back then [in the 2000s] it was inconceivable that we would fight a war with Russia. On every measure, this group of politicians have everything harder than we ever had."
Over the summer and into the autumn, the drumbeat of tax rises will only get louder, particularly amongst a parliamentary party seemingly unwilling to back spending cuts.
But that just delays a problem unresolved, which is how a government begins to spend billions more on defence whilst also trying to maintain a welfare state and rebuild public services.
This is why the government is pinning so much hope onto economic growth as it's escape route out of its intractable problem. Because without real economic growth to help pay for public services, the government will have to make a choice - and warfare will win out.
What is still very unclear is how Sir Keir manages to take his party and the people with him.