Former cabinet secretary Lord Gus O’Donnell has described the government’s current spending plans as “totally unsustainable” and suggested that the Labour Party will struggle to get credibility by pledging to stick within those plans in the run-up to the next general election.
O’Donnell made the claims at an Institute for Government event looking at the UK’s underinvestment in infrastructure this week – against the backdrop of the school buildings crisis, anticipated cuts to HS2 plans and last week’s rollback of net-zero milestones.
O’Donnell was cabinet secretary under prime ministers Tony Blair, Gordon Brown and David Cameron. He also served as HM Treasury permanent secretary from 2002-05.
He told the IfG event there was a need to emphasise why long-term investment in the nation’s economy was a good thing, not only for GDP growth but also for health and education.
But he suggested that such arguments would be tough in the run-up to the next general election – which must take place by January 2025. He also warned that Sir Keir Starmer’s Labour Party would struggle to employ some of the reassurance tactics that Tony Blair and Gordon Brown used in 1997’s general election.
O’Donnell said that then-shadow chancellor Brown’s “prudence for purpose” commitment that signed New Labour up to the Conservatives’ spending plans had secured market credibility for the party’s taxation plans, paving the way for it to spend more. However, he said 2023’s funding landscape was beyond compare.
“Labour may or may not sign up to the spending plans. It’s completely different,” he said. “These spending plans are totally unsustainable. We know that. They are nothing like the spending plans inherited in 1997, so the ‘prudence for a purpose’ thing doesn’t quite work.
“They will have to think about doing something more dramatic if they do want to increase investment straight away.”
Elsewhere in the session O’Donnell was disparaging about the current government’s handling of the latest offshore wind Contracts for Difference auction, which failed to attract any takers.
The former cab sec is now an affiliated director of global private equity investor Brookfield, which counts renewable energy investments among its US$850m (£700m) portfolio.
“There’s a wall of money out there to invest in green stuff. I’m on the board of Brookfield – we’ve just raised billions and billions to invest in green infrastructure globally. We’d love to do it,” he said. “But if you’ve got a government that’s so incompetent that you end up with a wind auction set too low for anyone to bid. I mean… words fail me on that.”
O’Donnell also told the IfG event that five or 10-year spending review periods could be one way to embed a long-term approach to capital investment. And he called for a recognition on the part of government that it would have to pay commercial specialists the going rate for their skills if the civil service was to hire and retain top talent.
“On the civil service, I do think we are lacking,” he said. “Basically the problem is if you’re really interested in negotiating contracts and you’re really good at it and you’re really commercial, you get paid vastly more in the private sector and you end up doing that.
“We need to have much more freedom on paying people a lot more in the civil service for those sorts of things.”
Civil Service World offered HM Treasury the opportunity to respond to O’Donnell’s observations on the government’s spending plans.
A Treasury spokesperson said: “The government is committed to taking the difficult, but necessary decisions to balance the books and halve inflation this year. We are on track to get debt falling – with the OBR forecasting we will get the deficit down to the lowest level in more than 25 years.
“We were right to protect families and businesses from the pandemic and Putin’s energy shock, but we must now stick firmly to our plan to reduce debt.”
The Treasury added that the Office for Budget Responsibility had forecast the government would meet its debt-to-GDP fiscal rule in 2027-28 with headroom of £6.5bn.
This story was updated at 17:45 on 28 September 2023 to include a Treasury response