Principled political resignations are rare at Westminster, so Anneliese Dodds’s departure on Friday, over Labour’s cuts in aid to fund defence spending, was a significant moment.
In her powerful resignation letter, Dodds rightly highlighted the heavy costs of the cuts for some of the world’s poorest people, compounding the damage caused by the Trump administration shutting US aid projects.
But she also shed light on the clash between neat fiscal rules and messy geopolitics that is likely to define the rest of Labour’s time in office.
Dodds was writing before Friday’s sinister show of petulance in the Oval Office. But it was already clear that the deepest cut in the UK aid budget in history would not mark the end of the matter.
Presumably referring to debates in Germany and across the EU, where a common defence fund is under consideration, Dodds told Starmer she “expected we would collectively discuss our fiscal rules and approach to taxation, as other nations are doing”.
Warning that defence spending may yet need to rise significantly further, Dodds added that this would be impossible through “tactical cuts to public spending”.
Instead, she said, “these are unprecedented times, when strategic decisions for the sake of our country’s security cannot be ducked.”
She is correct: Starmer may have won the warm welcome he sought from Donald Trump for boosting defence spending, with his shameless raid on the development budget – a policy previously advocated by Reform and the Tory party – but if the US withdrawal from the European sphere sticks, the prime minister is likely to have to come back for more in the months and years ahead, and there are few soft spending targets left.
Labour had boxed itself in tightly even before Trump began tearing up the transatlantic alliance. The narrow headroom Rachel Reeves left against her self-imposed fiscal rules, combined with a deteriorating economic outlook, meant the Treasury was already considering spending cuts in the 26 March statement.
And the prospect of tough trade-offs in June’s spending review are already threatening Labour’s hopes of transforming threadbare public services – surely at the heart of the “change” the party promised voters.
Now, with Trump’s intentions apparently clear – and little to show for Starmer’s smash-and-grab raid on the aid budget – it must be time for a radical rethink.
There is no doubt whatsoever that Labour has been dealt a historically bad hand. The Conservatives left it with legacy tax and spending plans that didn’t add up without heroic assumptions about future cuts to an already crumbling public sector.
The national debt is nudging 100% of GDP after the cost of the banking crisis and a decade of sluggish economic growth were compounded dramatically by the Covid pandemic.
Interest rates, which were at rock bottom through much of the post-global financial crisis period before rising to 16-year highs in summer 2023, are on their way down but remain high by recent historical standards, and subject to the whims of volatile financial markets. None of this can be wished away.
Yet if Starmer is right that we are in “a world where everything has changed”, as he put it in his speech explaining the aid cuts, some much more creative thinking will be called for.
There were early signs of the flexibility required thisweekend as Reeves announced she would expand the remit of Labour’s national wealth fund (though not its budget) to encompass defence spending.
But the historic nature of the situation must mean that, in a phrase Starmer once used in opposition to bludgeon his own party towards backing a second Brexit referendum, “all options should be on the table”.
Part of that may mean international discussions on seizing – rather than just freezing – Russian assets, as the foreign secretary, David Lammy, has suggested.
The UK’s new £2.26bn loan to Ukraine, announced by Reeves on Saturday, is part of a G7 initiative that involves earmarking the profits on these assets. Lammy’s proposal involves raiding the underlying capital, instead of leaving it intact.
But surely the rethink must also extend to considering alternative ways of raising the cash. That should include revisiting the pledge not to reverse Jeremy Hunt’s ill-advised cuts to national insurance contributions (NICs), as well as other options such as reforming the UK’s out-of-kilter council tax system, and looking afresh at wealth taxes.
No tax increases are likely to be popular – focus groups tell Labour strategists the public feel they’re paying quite enough already; and the vicious backlash from the farming inheritance tax changes, which raise just £500m or so, underlines how tough the politics can be.
Meanwhile, Reeves’s £25bn increase in employer NICs – designed not to hit voters’ payslips directly – is continuing to cascade through the jobs market. Anyone with a child at a nursery or a relative in a care home will be getting a letter about now explaining why their fees are going up sharply.
Against that backdrop, Labour will be reluctant to come back for more, and indeed Reeves has all but promised not to.
But the alternative, of four years of salami-slicing from public services and welfare budgets as the peace dividend evaporates, will have its own debilitating political impact.
And the task of tooling up to join the EU in resisting Vladimir Putin coincides with another urgent generational challenge that cannot be ducked: investing to fit the economy for the transition away from fossil fuels, and protecting the poorest from the consequences.
As the extraordinary gathering of European leaders in London on Sunday makes clear, Starmer is quite right that the world has changed. Tax and spending policy as conceived by Labour in opposition will not meet the moment. All options must be on the table.
