This is an audio transcript of the Political Fix podcast episode: ‘Austerity redux? Spring Statement lookahead’
Lucy Fisher
Hello and welcome to Political Fix from the Financial Times with me, Lucy Fisher. Coming up, a big moment for austerity. We’re looking ahead to next week’s Spring Statement. And how to keep the UK and Europe safe if we can no longer depend on the US.
Joining me to talk about it all are Political Fix regulars Miranda Green. Hi, Miranda.
Miranda Green
Hello, Lucy.
Lucy Fisher
And Jim Pickard. Hi, Jim.
Jim Pickard
Hi, Lucy.
Lucy Fisher
Also joining this week is Sam Fleming, the FT’s economics editor. Hi, Sam.
Sam Fleming
Hello, Lucy.
[MUSIC PLAYING]
Lucy Fisher
Before we kick off, a quick message from me and the Political Fix team. We’ve had a steady stream of requests for a while now for semi-regular Q&A bonus episodes, so I can announce your wish is our command. If you’d like me to put a question to our panellists, please drop me a line at politicalfix@ft.com. Or even better, record a voice note with your name and your question and send it to the same inbox and then we’ll play it on the show. We’ll launch this new semi-regular bonus format in a few weeks’ time, so watch this space and you can find more details in the show notes.
Well, next Wednesday is a big moment for the Labour Government, unveiling the latest growth forecasts and updating the country on adjustments to Rachel Reeves’ plan for the economy with the Spring Statement. So, Sam, there’s been a bit of confusion in Westminster, to say the least, possibly more widely about what next Wednesday will be. It’s not a full fiscal statement as we understand it. We won’t see Rachel Reeves with her red box standing outside Number 11 on the morning. What can we expect in economic terms?
Sam Fleming
Yeah, I think that’s right. I think the government has been fairly clear. They only want to have one big fiscal event a year. Are you on big budget? We have one in October and their plan was to wait for another year before announcing a new one.
What we do get next week is a full set of forecasts from the Office for Budget Responsibility, which is the fiscal watchdog. They have to do that. The legislation requires them to do two forecasts a year. And the problem for the government is, is if that forecast shows them off in terms of their fiscal rules, they’ll need to respond to that. And so the way the economy and borrowing costs have evolved since October means that they are likely to have to respond to that forecast with some changes to their spending and growth plans.
Lucy Fisher
Great. And, Jim, we know if Rachel Reeves’ £10bn-odd headroom that she left in the Budget last October evaporates because of growth downgradings in the forecasts, if because high interest rates have led to higher costs in servicing public debt. She essentially has three choices: raise taxes, change our fiscal rules or cut spending. We’re pretty clear what we’re gonna see next week, aren’t we?
Jim Pickard
Yeah, absolutely. And of the things that have changed since the Budget, the biggest one does seem to be interest rate expectations. All the experts think interest rates are gonna stay higher for longer, and that alone seems to wipe out about £10bn from the previous position. And what the Treasury, Rachel Reeves have said is that they aren’t gonna put up any more taxes.
I think they were totally stung by the Budget in which they had that huge package of tax rises, most of which landed on businesses, and I don’t see that again. They don’t wanna change the fiscal rules because the stability of the fiscal rules is part of that big selling point. I said, where does that leave spending? And we already know about package of welfare cuts. What we’re gonna hear more about potentially is departmental spending squeezed further to what we already knew about.
Lucy Fisher
Now, Miranda, before we get into the details of what we think we’re gonna hear in terms of the spending envelope, let’s just interrogate the other alternatives just briefly first, and in particular, changes to the fiscal rules. I’ve been really interested that some Labour MPs have been pushing for her to fiddle with those. Some Labour peers in the House of Lords this week also suggested that she should look to increase defence spending with a sort of war bond outside of the current fiscal targets that she set herself. Do you think there was any wiggle room there politically, or would that not have washed with the markets?
Miranda Green
I think there probably was a little bit, but not in the way, as Jim has said, that the government has decided to sort of make its pitch. So, you know, right when the international crisis worsened, there was talk about almost like a war era borrowing plan.
So you would, in a sense, say, the fiscal rules, as they are, sort of stay untouched for the rest of the economy. But the defence needs of the country have become, you know, so pressing and so immediate because of the clear and present danger from Russia and Trump’s stance on Nato. That will create some sort of borrowing vehicle that would be clearly, rhetorically, outside the expectation of the fiscal rules. And I think they would have quieted a lot of voices actually calling for that.
And the background, of course, is what’s happening in the rest of Europe. You’ve seen Germany radically change its fiscal stance in terms of borrowing, specifically for defence. And across Europe, you know, these sorts of new EBRD-type vehicles for defence spending.
Lucy Fisher
And just explain: you mean the European Bank for Reconstruction and Development?
Miranda Green
Yeah. So creating a new sort of institution that as the EBRD paid for reconstruction of eastern Europe when the Berlin Wall came down, when the Iron Curtain came down, that you would actually acknowledge that this is a new era with new spending demands, a new pool of resources, a new pool borrowing in some way. I think for the UK government to just completely dismiss that out of hand may have wasted a little bit of political cover that all that European activity might have given them. I think on the fiscal rules themselves, it’s way more difficult, even though, as you’ve said, Labour backbenchers are quite vocal about it.
And also, you know, Mervyn King said — former governor of the Bank of England — that they should revisit the fiscal rules in terms of tax rises. I think politically they just feel this would be death to the project. You know, when their whole pitch is stability, before you even talk about any other abstract noun that Rachel Reeves might have been offering the electorate, you know, you move your fiscal rules at your peril. I don’t know, though, because, you know, clearly, fiscal rules are introduced by each government and set by them. You know, it’s completely discretionary. And so not even having a conversation about it, I don’t know what you feel, Sam. I feel that it’s a little bit too categorical.
Sam Fleming
I mean, you use the example of Germany. The UK is not in the fiscal position that Germany is.
Miranda Green
No, indeed.
Sam Fleming
And so we’re not seeing, for example, France or Italy announcing big new massive borrowing programs to fund higher defence spending. And there’s a reason for that. It’s because the bond markets aren’t really willing, as far as the bond markets are concerned, debt is debt. You can say this is all for defence build-up. Fine. But the bond markets will take a pretty cold, hard look at it and we saw after the October Budget that they aren’t gonna give this government enough of a wiggle room.
We saw an increase in yields after the October Budget, which was quite concerning actually, although then it settled down again before then spiking up in January as well. So I don’t think they have an enormous amount of space for new structures for borrowing for defence.
Jim Pickard
And just for clarity, Sam, you’re saying that it is a lot of cheaper for Germany to borrow in the international bond markets than the UK at the moment, right?
Sam Fleming
Well, I mean, German national debt is far, far lower as a share of GDP than the UK, or for that matter, France or Italy. So there it is in a completely different category when it comes to sovereign borrowers at the moment. You know, I can understand the cause for this. I think there does need to be a very significant reset for fiscal policy when it comes to defence spending in the longer term. But I think in the short term, to suddenly say we’re actually gonna blast through our fiscal rules would not be credible with the markets, even if it’s for a, quote, good cause.
Lucy Fisher
Yeah. Jim, I mean, it looks like it’s going to be quite severe for unprotected departments. A back-of-the-fag-packet calculation by the Institute for Fiscal Studies suggests potentially up to 7 per cent cuts for unprotected departments, if reports that the overall spending envelope of an average rise of 1.3 per cent in spending across Whitehall is revised down to 1.1 per cent. That is huge, isn’t it?
Jim Pickard
Exactly. And I think we need to rewind the clock to what happened in the Budget and what Rachel Reeves announced in her very first major fiscal event as chancellor, which was that there’d be a huge slug of money coming into government for a year or two, but then that would fall off a cliff, and then there would be a tight spending envelope for departments for the latter half of the parliament or the last three years of the parliament. And that is still the case. But as you say, it’s going to be accentuated.
So instead of an overall 1.3 per cent real terms increase for all departmental spending, that’s . . . We think it’s going to be more like 1 or 1.1 per cent. And of course, what that means when you have huge protected departments like defence and health, it means the usual suspects — justice post, the Home Office, transport, local government — they get hit and squeezed really hard. And, you know, we revealed a week ago the names of some of those cabinet ministers who spoke out at a cabinet meeting. Quite unusual.
Lucy Fisher
Jim, that was your great scoop.
Jim Pickard
In a show of modesty, I didn’t use the word ‘I’ve’. But yes. (Laughter)
Sam Fleming
We revealed.
Miranda Green
It’s a safe space. (Overlapping speech)
Sam Fleming
One revealed.
Jim Pickard
One was impressively revealed. Angela Rayner, Yvette Cooper, Shabana Mahmood; respectively, Home Office, local government, justice — possibly the wrong way around. Ed Miliband, energy, also spoke up; just concerns about what this means in reality when you have services being affected, parts of government that were already taking the brunt during the Conservative administration because they had the same defended departments, they had the same priorities and therefore the same areas that were undefended are once again facing this very tight squeeze.
Lucy Fisher
Miranda, we know that Labour promised no return to austerity ahead of the election. People are obviously going to call this austerity. I think we can imagine Rachel Reeves will say, look, this is only half the pace of cuts that we saw under the austerity era during the coalition years, led by George Osborne in the Treasury.
But nonetheless, this is gonna be really tricky, not just for those departments that are worst affected, but for Labour generally coming off the back of cutting the winter fuel allowance, cuts to welfare, cuts to the aid budget. Cuts across the public sector is going to be really difficult for Labour to weather, isn’t it?
Miranda Green
I think it is potentially really politically painful for them, definitely. And we know from the winter fuel cuts that actually the electorate as a whole remember it even now as something that was a very negative development. They didn’t really buy the government’s explanations. The lack of impact assessments for some of the cuts so far, including the welfare reforms, gives people a queasy feeling. Who’s really gonna be hurting? Why are the government not being very transparent about where the axe is falling and who will suffer most? I think it’s very difficult.
I don’t know if our listeners have read it, but I would recommend I thought Stephen Bush’s column this week. It was really excellent on the political problem for Labour in this, which is that ministers like Liz Kendall are labelled Blairite because they come from that year. You know, they did that sort of political training as spads during that era.
But this isn’t really Blairite. This is much more like a kind of much more unpopular wing of the Labour party, the Labour right. And if the electorate starts to think it’s kind of Toryism-lite — L-I-T-E — what are you actually selling? What is your political prospectus? When you were brought in with a one-word manifesto, ‘change’, it was partly about repairing the public realm. And your austerity point, Lucy — the problem is these are cuts on top of all of the ones cumulatively since the financial crisis and the austerity era from 2010. So there isn’t that much fat . . .
Miranda Green
You know? So when ministers talk about where they’re gonna see the axe fall, we all know from the departments that we cover in detail that the axe is already falling in painful places. And I think that’s gonna throw up some really difficult stories and individual backbenchers will find their constituency surgeries full of people who are hurting and the political pain grows.
Sam Fleming
I mean, I think they’ve been quite clear in their minds since October as they watched the fiscal position worsen, that they wanted to do this via spending, not by a new round of tax hikes. And so that’s what we’re gonna see. I think it’ll be dialled back probably real spending growth for day-to-day spending in departments to around 1.1 per cent that, I guess the defence of this from Labour might be well, that’s slightly faster than the spending growth that Jeremy Hunt was pencilling in at around 1 per cent.
But I mean, I think the reality is, as you say, that the unprotected departments are going to see very tough hits and there’s going to be, news-wise, more pain to come this June because that’s when we get actually how, where the axe will fall and how these plans will then be allocated between the departments. Because right now we’re just talking about next week, the overall envelope. We’ve had departmental spending set for ‘25, ‘26. But what we’re talking about now is how . . . what’s the growth in departmental spending beyond that towards the end of the parliament, but not the final year of the parliament. And that’s what we then get later this year.
And so on spending, public spending, it’s just gonna be a torrent to really bad news coming all the way through into June, which is when the spending review gets announced. It’s a really tough period.
Lucy Fisher
It’s a really, really good point. And Sam, do you think we might hear from Rachel Reeves next week some signal about potential tax rises in the autumn? I mean, Downing Street has been forced to come out and clarify there won’t be tax changes next week after the Tories were calling this an emergency Budget, suggesting she might sort of announce more stealth tax rises in the form of freezing thresholds. So they’re not gonna do that next week. But might there be signalling for that?
Sam Fleming
I mean, I don’t know is the honest answer whether she wants to signal that. My personal prediction would be yes, we are going to get more tax rises in this Parliament, especially given the demands for higher defence spending. I know that the 3 per cent of GDP target that they’re talking about is supposed to fall in the next parliament. I don’t think that’s gonna look credible given the way the news flow is running in terms of the pressure from the US and so on, that they can wait that long.
And so eventually you’re gonna have to show how you’re gonna pay for that. That can’t be done through borrowing, the way Germany in the short term is gonna be doing a large increase in defence spending. It’s gonna have to be done, I think, through higher revenue. If that is indeed where they’re headed, you’re gonna need to start building that argument over time. And so will they do that next week? It might be a bit soon would be my instinct, but I don’t know.
Miranda Green
It’s really tricky though, isn’t it? Because the . . . So, all the messaging coming from the government is not much to see here next week, you know, not a big deal. We won’t be raising taxes. Calm down everyone. It’s not an emergency Budget. But actually, politically, the stakes are really high for the reasons we’ve discussed because the implications of not doing anything and the impact that those cuts will have when they form.
So it is quite strange. She’s gonna have a set piece event that they really want to sort of play down any economic significance to, other than steady as she goes, more stability. I mean, how are they gonna actually work that on the day in terms of, you know, people not noticing the implications in terms of spending cuts? I really wonder.
Lucy Fisher
Well, good luck to them.
Miranda Green
Yeah.
Lucy Fisher
Jim, what do you expect in terms of any good news or at least positive gloss next week? I mean, could we hear some sort of investment wins or new infrastructure projects to try and sugar the pill?
Jim Pickard
I mean, there was a fascinating report in the Guardian suggesting that this squeeze on departments could see some recent announcements, such as the Oxford-Cambridge Arc actually being cut back, which I think the government’s tried to deny. But you could see the logic of that, that there could be stuff that the government has said, we’re going ahead with this in recent months and then suddenly they aren’t.
So your question is what positivity can they find out of the aether? And it’s not quite obvious where it’s gonna come from. But yes, they may come up with some new schemes that are getting the go-ahead or whatever it may be.
Lucy Fisher
There’s talk of this big new Universal theme park in Bedfordshire, for example. That might be a kind of talking point they tried to pass.
Jim Pickard
Yeah, I don’t think . . .
Lucy Fisher Things like that. The regeneration of Old Trafford, which they’ve already talked about, maybe some more details . . .
Jim Pickard
You would need hundreds of these things to convince the markets that this adds up to a sort of coherent economic package. But what I suspect she will emphasise is stuff that they’re already doing in terms of planning reforms, the planning infrastructure bill that’s currently going through parliament is meant to accelerate infrastructure delivery, talking about other supply-side reforms, talking about their commitment to deregulating and putting pressure on regulators to allow more economic growth — they’re gonna basically grapple these levers that they’ve been going on about in recent months and try and make out that that is enough to pull Britain out of the very flat. We haven’t even talked about growth, I don’t think so, which was meant to be around 2 per cent, but it’s gonna be close to 1 per cent.
Sam Fleming
This is a problem, right? So they can talk about the supply side, the levers they’re pulling, the strategy planning, deregulation, all this stuff. But this is going to be accompanied by such a big book from the Office for Budget Responsibility, which shows downgrades, almost certainly downgrades, in the near term at least, to economic growth. And we’ve written that it doesn’t feel like these policies are really gonna get much credit from the Office for Budget Responsibility, partly because they may not be specific enough.
The Office, the OBR, has been reluctant in the past to score a lot in terms of planning reforms when it comes to growth effects. We’ll have to see how they respond to the welfare reforms of earlier this week. Overall, I think the growth, the reality of the forecast, the extent of the forecasts, our reality, which of course they’re not, they’re just forecasts, but that reality will be pretty cold and will definitely run in the opposite direction to all the rhetoric about growth.
Lucy Fisher
Let’s just pause a bit on these welfare reforms. Miranda, just take us through briefly the top lines that have sparked this massive row the past few weeks. But we finally got the detail on Tuesday.
Miranda Green
So essentially, Liz Kendall, we understood before her big announcement, which takes the form of a green paper — so it’s not final plans, but it’s outlining a policy prospectus, which will then turn into a white paper and then legislation. So there’s room for rebellion to force a bit of a backtrack on some of this.
But so far, what they’ve decided to do is look at the benefits that go to people who are considered to be unable to work because of illness and disability, rather than other parts of the welfare bill, and quite severe cuts to those personal independent payments as they are known. And I think the reason that it’s caused a lot of disquiet and unhappiness, not just from disability rights groups and opposition parties, but on the Labour backbenches themselves, is because these . . . Some of these benefits are not actually related to whether you’re working or not. They’re literally to enable you to function as a disabled or very sick person. And I think there’s queasiness would be my word for it really, as to whether that’s an appropriate place to focus your cuts.
Liz Kendall has wanted to keep some of the savings back for her own department to ensure that ways to help people back into employment are much better than they are at the moment. But she’s only won a little bit of that argument with the Treasury, so there’s a sense of her department needing to focus — quite rightly, by the way — on to trying to get as many people as possible into the workforce, into good jobs so they can sustain themselves economically as well as help the economy. But that actually, if the real agenda is the spending cuts that we’ve been discussing, that positive part of the refashioning her department hasn’t got the resources to do its job.
And, you know, welfare reform, we’ve been around this circle before, right, Lucy? Successive sets of ministers have tried to refashion the welfare system to something that enables people into the workforce, rather than keeping people parked on benefits. And it’s much harder to do if you don’t have any money to spend upfront on restructuring it.
Lucy Fisher
I think that’s absolutely right. So she’s clawed back, Liz Kendall, the work and pensions secretary. We think about £1bn to pull back into the system, more work coaches, more medical assessors to help with these reforms. But £5bn of cuts to the personal independence payment, Pip, and Jim, I was struck that George Osborne, former Tory chancellor, the architect of austerity, in a rival podcast, sort of had great fun going on . . .
Jim Pickard
There are some?
Lucy Fisher
And saying, that you know, he had looked at this but decided this would not be a fair option to cut the Pip payments. So even when you’ve got sort of Tories who embraced austerity saying that, it’s not a great look for Labour, is it?
Jim Pickard
Yeah. And I think there’s quite a sort of tonal dichotomy listening to Liz Kendall. Labour benches gathered to hear the work and pensions secretary and she had a very kind of positive energy about her. She sounded quite jolly, hockey sticks, like she was taking everyone on a trip to Alton Towers or something. This was all gonna be wonderful, and this was gonna kind of end worklessness and would bring everyone back to amazing, well-paid jobs.
It was almost a kind of exaggerated sense of how positive this would all be. And you could see the MPs thinking, well, what does this actually mean in practice? What’s the fine detail in the maths of these welfare changes? And when they actually looked at the detail, the Pip changes you were talking about for up to 1.2mn people, for a lot of them, they’re gonna lose between £4,000 and £6,000 a year.
And if you look at the changes to the Universal Credit incapacity support, which currently gives you £416 a month top up to your UC, if that’s gonna be slashed . . . So, yes, at the same time that you’re sort of basic UC is being lifted a little bit to encourage more people to go to work, but just to do the maths on that, the basic rate for new and existing claimants of UC goes up £7 a week, and the people who were getting the health-related element will see it cut. New people getting it will see it cut by £47 to £50 a week. So it’s a massive discrepancy there.
So MPs who joined the centre left Labour party to make the world a fair place, a lot of them have worked at charities involved with aid and we’ve seen the aid budget cut. A lot of them have worked in charities or NGOs and fought with helping poor and disadvantaged people. They are finding it quite stomach-churning having to do this and anticipating this vote is gonna come later this year, and even a lot of normally very loyal Starmer-ite MPs privately really quite unhappy about it.
Lucy Fisher
And I’ve been very struck that the scale and depth of the alarm is huge. Labour MPs warning that we will see disabled people left destitute by this change and even an uptick in suicides is worrying.
Jim, just a word about where it’s left it at present then, you know. What is the sort of reaction? It feels like there’s an uneasy truce among Labour MPs, but you’ve written this week about how they’re going to potentially go back to their constituencies and face a big backlash. Some suggestion there could even be a mass exodus of Labour councillors quitting the party ahead of the May the 1st local elections.
Jim Pickard
Yeah, we’re already seeing signs of councillors quitting. I’m hearing persistent rumours that some ministers might quit. No one seems to know who they are, but it’s kind of a logical thing you might expect a couple of junior ministers to just find it all too distasteful.
And if you think of the weekly cycle of an MP’s life — Friday, they go back to their constituencies, they have the surgeries where people come to them with problems, they’re gonna have an awful lot of people worried about themselves or their relatives or their friends or that dependents, seeing their benefits cut — and then, separately from that, they have their constituency Labour parties, which is the hundreds or thousands of local members who are often fiercely left-wing local supporters of the Labour party.
And they’re gonna get it in the neck from them for political reasons. You know, how could you possibly do this? And they will be urged to vote against this when it comes to a vote. I think the specific thing that’ll be voted on at the eligibility changes to Pip. We don’t know precisely when the vote is gonna be. It may be a tiny rebellion, it could be scores of MPs rebelling.
Whatever that rebellion numerically is, it’s going to really understate the depth of unhappiness among Labour’s 400-plus MPs, because I would say most of them really don’t like this at all.
[MUSIC PLAYING]
Lucy Fisher
Well, let’s move on to the other big topic this week regarding defence: the fast-moving developments on Ukraine, from Trump and Putin discussing a first phase of ceasefire to Trump proposing that the US take control of Ukraine’s power plants to Starmer convening, first, political leaders via a call at the weekend, then military planners on Thursday.
We have Henry Foy, the FT’s Brussels bureau chief, joining us now, one of the best connected men in the EU. Hi, Henry.
Henry Foy
Hi, Lucy.
Lucy Fisher
So, Henry, we wanna talk about some of the specifics, but just first to get some colour from you. You’re obviously speaking to people in EU institutions, at Nato HQ. Nobody seems to want to have the conversation publicly about how committed the US remains to Nato and Article 5. Give us a bit of colour about the kind of conversations and the sense of panic, if it is panic behind the scenes.
Henry Foy
Yeah, that’s a great question. I mean, you’re totally right. Nobody wants to have this conversation out in the open. And one of the main reasons, of course, is if you do it at Nato, America is around the table, so they need to do it informally. And I understand that these conversations have begun.
It’s the coalition of the willing countries that we’ve seen convened by Sir Keir Starmer, as you mentioned, and France’s Emmanuel Macron, 12 to 15 big European military players with the military capabilities and political will to use them. They are starting a conversation about, look, maybe Trump doesn’t pull out of Nato, but he’s certainly gonna try and walk back some of the US contributions to it, and we’re gonna have to pay more.
What does that mean? What’s the timeline here? What’s the quantity of extra money, kit, troops that European Nato allies are going to have to put on the table in the next five to 10 years? And is there some kind of deal that we can do with Trump to make this an orderly transition, if you like, from the US dominating security in Europe, as it has done for the best part of 80 years, to one where the Europeans in the main are taking care of the continent’s defence.
It’s a massive topic. It’s a really scary topic. And what I understand is that quite a lot of countries aren’t really prepared to start that conversation, mainly for fear of becoming a self-fulfilling prophecy and the Americans saying, great, if you guys are keen to do this, we’ll speed up our retreat. So it’s a delicate one and it is happening informally.
And I think these discussions around the coalition of the willing in Ukraine are really helpful in that process, because it’s getting these leaders around a table or around a video conference. They’re getting to know each other better. They’re being open about their defence capabilities and they’re working out just exactly where the holes will be if the Americans decide that they’re done with Europe.
Lucy Fisher
And on this coalition of the willing, I mean, obviously, its primary task in the short term is potentially to form this UK-French-led reassurance force that would put European personnel on the ground in Ukraine. Do you see that ever actually taking place if the US doesn’t come forward with a security guarantee, which doesn’t look that likely from Donald Trump’s public signalling?
Henry Foy
Yeah. That’s right. I mean, it was put to me by a senior official from, let’s say, a more reticent European country that everyone’s saying the same thing: there’s two different orders.
Macron and Starmer say we will put troops on the ground if the Americans give us the backstop. The other countries say if the Americans give us a backstop, we’re very happy to put troops on the ground. And those two things in different orders sound a little different. I don’t see European troops going into Ukraine without any kind of US backstop or involvement, whether that’s US radar systems, it’s US protection systems, it’s US intelligence.
It’s a promise from Donald Trump that the US military might well essentially look after those troops on the ground. I don’t see them going in there. However, there are ways in which Europe can contribute to security guarantees into Ukraine in real terms, whether that’s air policing, naval policing, equipment being deployed rather than troops themselves.
Lucy Fisher
And I’m keen to get your sense on how this security crisis engulfing Europe is affecting the reset between the UK and the EU.
You had the scoop this week on the EU drawing up rules for this big new €150bn pot of spending for defence and that it would lock the UK and admittedly other non-EU countries out of being part of that, or allowing their national arms companies to be the beneficiaries of that fund unless they sign new pacts with the bloc. So I just wonder, it feels to me on the one hand, the UK and France are working well together as a sort of potential joint leaders of this coalition of the willing.
On the other hand, the old Anglo-French rivalry and competitiveness when it comes to defence manufacturing industries, that looms large. And you know, it’s France, it’s one of the leading nations that doesn’t want to agree defence and security, a pact between the UK and the EU, until all the other matters around the historic Brexit wrangling like fishing rights are also sewn up.
Henry Foy
That’s right. I mean, it’s been amazing in the last few months how the sort of UK Starmer reset with Europe, which, let’s face it, didn’t go down very well with the Europeans initially over the summer, has become very positive thanks to Donald Trump and the crisis of defence and Ukraine. As you mentioned, that was all going so well. You know, Starmer, Macron, brothers in arms leading Europe again, Friedrich Merz coming to power or at least heading towards power, certainly in Germany, sort of being part of this triangulation of powers in Europe.
And then we have this announcement this week that the EU was not going to let the Brits or British defence companies, we should say, take part in this rearmament fund unless they sign an act with the EU. That came as a surprise. As you know, from speaking to officials in London, it came as a bit of a surprise to the Brits who are saying, well, you’re calling us an indispensable European security partner, but you don’t want us to help arm the continent in the future.
It’s been remarkable how in the last 24 hours since that announcement, EU officials are scrambling to say no, no, no, no, we definitely want the Brits in. They’re really important. We always considered them really important. You just need to sign this little tiny agreement, which means that the Brits will take on some of our rules on defence procurement and defence industrial strategy, etc.
And of course, as you’re right, there is a big problem with France. French officials say, look, bilaterally, no problem with the Brits. It’s never been better. Strategic alignment, Macron and Starmer, great friends. It’s wonderful. When it comes to EU money, however, they’ve got a long list of other things they want to get sorted.
And so essentially, while you have close to 20, 22 members of the EU of the 27 saying, let’s do a defence deal with the Brits as soon as possible, because this is a moment where we have to work together as a continent, you have the French saying no, no defence deal without agreements on fishing, migration, chemical rules, SPS, you name it — all of the post-Brexit headaches.
And so there is a real danger here that essentially, the ability of BAE Systems to take part in the rearmament of the EU’s armies, if you like, could be held up because the French think that they should be able to fish more fish in British waters. It’s kind of a ridiculous situation.
EU officials here reckon there’ll be more momentum behind a deal that will force the French into some form of compromise ahead of a summit between Keir Starmer and the EU leadership in May. But I’m not totally sure that Paris will be backing down that easily.
Lucy Fisher
Well, Henry, thank you. I know we’ve got to let you bounce as you’re in and out of briefings on a big story as we’re recording, but please come back and join the panel soon to update us. That was Henry Foy.
So to bring in the rest of the panel then, Jim, it’s been another really big week, quite a good week again for Starmer, I’d say in convening this call with leaders on Saturday. On Thursday, heading to Northwood, the British Armed Forces HQ in Hertfordshire as 30 military planners from countries involved in this coalition of the willing sort of descended to talk military ops. It’s still looking like Britain’s kind of at the forefront of a lot of this planning.
Jim Pickard
Yeah. And I think politically, the way this is panning out is that this has been good for Sir Keir Starmer’s polling ratings. They appear to have gone up. Nigel Farage is perhaps not doing so well as the British public are very much on the side of Ukraine and seems to be supporting Keir Starmer’s efforts to provide succour to Ukraine in this very difficult geopolitical time.
And I think what Keir Starmer is obviously trying to do is trying to be a bridge between America. He sort of has Trump’s ear to some extent and the Europeans. The only problem with bridges, of course, is that they end up getting walked over sometimes. (Laughter)
And I think it’s all very well gathering this coalition. And at the moment, he looks like he’s at the pivotal moment by facilitating all these talks and, you know, not leading on his own. Macron’s obviously got a major role, but I think the British public can see that Starmer’s there, doing the right thing and making some progress.
I think the political danger for him is that if this coalition of the willing ends up unable to provide troops as a sort of buffer for Ukraine to maintain the peace there, because Russia doesn’t agree to any peace or because the Americans don’t provide air cover or both, then does Keir Starmer perhaps looking back at this in a few months’ time or a few years’ time, look as if in the end he couldn’t achieve much? I mean, who knows? The jury is out.
Lucy Fisher
Miranda.
Miranda Green
I also, just listening to Henry there, did think there’s another potential real political problem for Keir Starmer. If these collective rearmament plans do exclude the UK in the way that, surprisingly, we’ve heard they might, because one of the only things that the international crisis and his new stance and his new states on the world stage, when we’ve got cuts domestically, as discussed, might work for some politically, as if there’s a whole influx of jobs in the defence industry, right?
So I think in some Labour constituencies, and also in terms of some voices within the Labour movement, that actually was quite a large prize potentially. And I think it’s been really significant when you’ve seen people like Sharon Graham, the head of the Unite Union, being very vocal and saying, bring these jobs home, bring these defence jobs home. And I think if that doesn’t materialise, it’s another set of issues.
Lucy Fisher
Yeah, I . . . I do think it’s actually useful for the UK at this time that US defence manufacturing is at capacity. So they’re not looking to kind of argue for any of this extra spending. But I also think we should be realistic about what Keir Starmer has announced, which is £6bn extra for defence in two years’ time.
And I’ve spoken to people in industry who say, sorry, that’s a signal to the market, but without the orders, you know, we aren’t able to scale up capacity and that takes time and could take years for the skills pipeline to train often very skilled engineers, welders and so forth.
Miranda Green
Yeah, the skills problem is real.
Lucy Fisher
And to . . . And to build the factories. So people who follow defence closely will know that £6bn extra is possibly just enough to fill the black hole in the existing plan. It’s not very much to buy much more.
Miranda Green
Right, so the European initiative is potentially really important.
Lucy Fisher
Yeah.
Sam Fleming
I think all I say, I mean, I agree and that’s why I said, I think that ultimately the UK defence ramp up is going to be a lot more costly than the extra £6bn. The €150bn proposal from the fund from the Commission’s obviously only one part of the massive increase in defence spending that we’re going to be seeing in the European Union across Europe in the coming years.
So I don’t, I mean, it’s obviously a blow that the UK is, for the time being, excluded from that. Parallel to that, there are efforts among a number of countries, UK included, to come up with other ideas for raising more funding for defence. So there’s actually quite a lot of initiatives going along, multinational, going along at the moment to find ways of better funding defence spending.
We interviewed the Polish finance minister this week, who was just in London talking to Rachel Reeves, about ways of driving down costs of defence procurement and working better together with other partners on the massive rearmament programme that lies ahead. So there are a lot of different aspects to this.
However, it’s . . . It is clearly a blow that the first big announcement is one which the UK, as Henry says, the UK is excluded from for the time being.
Jim Pickard
I thought there was a really good Janan Ganesh column in the FT this week, plug, where he pointed out something that probably should have been obvious to me, but I hadn’t realised before, which is that if you look at across Europe, the amount that countries are spending on defence, the further you get from Moscow, the lower the figure.
So you have the Iberian peninsula, where it’s incredibly low. Obviously the Baltic states spend a lot. It just seemed really interesting that you’ve got a geographical north-south split.
Lucy Fisher
Sam, can I ask you if you feel that there are several proposals floating around to how to finance this defence expansion in Europe? Are there any that particularly catch your eye because it seems that Brits are leading on this?
General Sir Nick Carter, the former head of the UK military, is backing one proposal for sort of a European-wide rearmament bank. Rob Murray, a former Nato staffer who founded the Nato Innovation Fund, has come up with this more global idea for a defence, security and resilience bank that might involve the US, could involve other democratic partners . . .
Sam Fleming
Canada.
Lucy Fisher
Canada, Japan, South Korea, maybe. Do you have any thoughts on which feels more plausible? Which has more benefits?
Sam Fleming
I mean, I think there’s two sides to this. There’s first of all, better procurement. So the idea of buyers clubs of countries who need the same kit, trying to use their leverage to get better deals for their taxpayers from the defence companies, because this could be an extraordinary bonanza for the defence companies if they don’t play their cards well. And that is not in obviously taxpayers’ interest. That’s one side. So can you procure together in a better way?
And then there’s the other side, which is the funding side, which is what, Lucy, you were referring to. In terms of where the funding side lands, I don’t have the sense that it’s really clear yet. Could it be some sort of bank creating a new institution? It is quite laborious, although the EBRD in its defence was actually created quite quickly after the fall of the Iron Curtain.
So could it be some special purpose vehicle which marshals government guarantees to get cheaper funding for defence projects? Quite possibly. I think there’s a lot going on behind the scenes right now, both at the EU level but also on an intergovernmental level.
The EU level is slightly hamstrung by the fact that there are obviously neutral countries in the EU which find it difficult to talk, to sign up to big defence projects. There’s also Hungary, which is much more sympathetic to Putin, which is not going to be a co-operative actor in this whole effort. So we shouldn’t underestimate the complications on the EU level that are faced, as well as in terms of non-EU countries like the UK.
Miranda Green
Should we perhaps learn the lessons from the EBRD in a negative sense, as well as the positive sense? Because although it was very effective, which of us can forget the scandal of the marble HQ?
Sam Fleming
The glistening bank.
Miranda Green
The glistening bank. Yeah. You know, that is of course, one of the dangers with inventing new institutions is that they also can end up quite expensive and possibly in the current political climate, not that popular with electorates of the member nations who sign up to the scheme. So let’s hope the Javier Milei chainsaw is in their minds when they create such an institution.
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Lucy Fisher
We’ve just got time left for Political Fix stock picks. Jim, who are you buying or selling this week?
Jim Pickard
So I’m gonna sell Dominic Cummings, the former co-architect of Brexit. Now, Brexit doesn’t seem to have gone brilliantly. It gave us great headlines for five years, but I don’t think anyone’s calling it a triumph. He gave us that wonderful trip to Barnard Castle to test his eyesight during a deadly pandemic. I think he might have given us Partygate.
But I think of late he seems to be slipping a bit. He was gonna set up a political party; he’s given up on that. And whenever I see an interview with him, whenever I see his blog, he seems very repetitive. It’s all kind of Bismarck making the civil service smaller, hating the kind of Westminster bubble. I don’t know if you guys know video games, but they have this thing called non-performing characters that people just do the same thing every time. He feels to me a bit like that.
Lucy Fisher
And that’s his word, isn’t it? NPC. Non-player characters. I see what you did there Jim. (Laughter) Miranda, how about you?
Miranda Green
I don’t know, I’m a bit stung by the idea that, you know, people who bang on about Bismarck aren’t popular. We quite like it when we get to put Bismarck in a headline upstairs at the FT. Anyway, I’m going to . . .
Lucy Fisher
Most FT comment ever.
Miranda Green
Yeah. Literally, I have had a conversation in recent weeks saying, let’s put Bismarck in there. They’ll love that. So there we are. I’m going to buy members of the House of Lords above the age of 90 as a class. As an asset class.
Jim Pickard
Why is that Miranda?
Miranda Green
Because . . . Well, because the Labour party manifesto promised to introduce an age ceiling on membership of the House of Lords, and it hasn’t really got anywhere yet, but they are gonna consult on it. There was some talk of 80. They do now allow peers to retire and the Lord’s Spiritual ie. members of the church, they actually all go at 70.
But I, in recent weeks, have had a lot of dealings with two nonagenarian peers, both of whom are incredibly involved, up with all the latest policy, producing papers, writing op-eds for us, and making a great contribution. They are Richard Layard, the economist, and Kenneth Baker, who remained unbelievably active in the education world and very interesting.
And I think we shouldn’t do away . . . much as we should do away with the whole thing, while we have the House of Lords, let’s not kick out the people who actually make a contribution, because it seems to me that age is irrelevant.
Lucy Fisher
Sam, how about you?
Sam Fleming
I’m going to stick with the education theme. My pick is Laura Trott, the shadow education secretary, because I think she’s on a real winner with her hardline on smartphone use in schools. The Tories of this week, unsuccessful in a bid to legislate for a full smartphone ban via an amendment to the schools bill, which wasn’t surprising. And it’s worth remembering that the Tories introduced guidance, which is widely seen in this area, as being entirely ineffectual. But this is just a bigger and bigger story, I think, of Keir Starmer talking about watching adolescents with his kids in the Commons this week, obviously all about the dangers of social media.
So I think that this is an area where the Tories clearly see Labour as a bit on the back foot when it comes to how to handle the issue of smartphones and smartphone bans in schools. And it’s an opening, they know it’s gonna play well with a lot of parents, so it seems like a pretty smart strategy.
Jim Pickard
I think they could go even harder and recommend banning all smartphones for teenagers, but that’s (inaudible).
Miranda Green
I think you should ban them for adults. (Laughter)
Jim Pickard
Let’s ban them and turn off the internet.
Miranda Green
Certainly at meal time.
Sam Fleming
Lucy.
Miranda Green
Lucy, sorry.
Sam Fleming
Who are you buying or selling?
Lucy Fisher
I’m going to sell Kemi Badenoch. Can you believe I still have some of her in my portfolio? But I just thought her intervention this week on the 2050 net zero target, calling it impossible to meet, but not quite confirming that she’s ditching it was classic Johnsonian cakeism of trying to, on one side of her mouth, say we are, you know, Conservatives, the custodians of the environment and on the other say this is a nonsense target that should never have been implemented.
But at the same time, we have to wait for our policy commissions to report before we decide what we’re going to do was a little bit weak. And of course, they’ve launched their local election campaign, the Tories, with this huge expectation management exercise in trying to warn of hundreds of seat losses in order to make the damage appear not so bad on the night, so it doesn’t feel like it’s been a great week for the Tories.
Well, that’s all we have time for. Miranda Green, Jim Pickard, Sam Fleming, thanks for joining.
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Jim Pickard
Thanks very much.
Miranda Green
Thank you!
Sam Fleming
Thank you.
Lucy Fisher
And that’s it for this episode of the FT’s Political Fix. I’ve put links to subjects discussed in this episode in the show notes. Do check them out. They’re articles we’ve made free for Political Fix listeners.
There’s also a link there to Stephen’s award-winning Inside Politics newsletter. You’ll get 30 days free. And don’t forget to subscribe to the show. Plus, please do leave a review or a star rating if you have time. It really helps spread the word.
Political Fix was presented by me, Lucy Fisher, and produced by Lulu Smyth. Manuela Saragosa is the executive producer. Original music and sound engineering by Breen Turner. Andrew Georgiades and Petros Gioumpasis were the broadcast engineers. Cheryl Brumley is the FT’s global head of audio. We’ll meet again here next week.
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