Economics, politics and the reality of the 'squeezed middle'

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Too fast, too slow – how the passing of time is shaping politics for Cameron and Miliband

Labour needs to move at pace if it’s not going to get timed-out.

New Statesman
The clock is ticking loud and clear for Labour. Photograph: Getty Images.

Two years into the life of the coalition and all the sudden the passing of time seems like Ed Miliband’s best friend and David Cameron’s worst foe. For a government that has lost its footing, facing an opposition learning how to benefit from the stumbling and fumbling, the long expanse of time left in this parliament will be starting to feel less like an opportunity to develop and deliver an agenda and more like an ordeal to be survived.

It’s not just the slow motion horror of the six weeks since the budget or the likelihood that the next few weeks, dominated as they will be by the Leveson inquiry, will feel like a very long stretch indeed for Jeremy Hunt and David Cameron. It’s the six budgets and autumn statements the coalition parties have to negotiate before the next election; the thirty seven months of enervating governing grind to get through; and the fact that come the next election it will have been a full 23 years since the Conservatives won outright, an observation that is weighing increasingly heavily on the Tory ranks who sense their prospects of doing so next time aren’t brightening. A lot of politics is still to happen even before the parliament reaches half-time – and the second half is littered with all manner of political, economic and legal icebergs.

 And yet, for an upbeat Labour, the clock is ticking loud and clear. Over recent months this point has often been made in relation to the risk that the electorate forms a settled and negative view of the leadership or the legacy of the previous Labour government. But just as pressing an issue is how Labour gets itself into a position to respond to the single biggest challenge it faces between now and the next election: the spending review that George Osborne has pencilled in for autumn 2013, which will span the years 2015-17.

Let’s start by recognising the obvious: it will be a political and policy horror story for all sides.  The numbers released at the budget imply continued cuts of over 2.3 per cent per year across public services – and that’s if we assume another £8bn is cut from welfare spending, on top of this parliament’s £18bn; alternatively, if welfare is not cut further, the hit to public services rises to 3.8 per cent per year (read this excellent blog by Nick Pearce for an overview). All this is driven by the fact that the OBR now estimates that the structural deficit won’t reach a balance until the middle of the next parliament (indeed the path of deficit reduction now looks very reminiscent of the Darling plan which Osborne used to lambast). Prior to the last Budget, Conservative strategists would have been rubbing their hands in anticipation at the political mayhem the spending review could create for Labour, as it is forced to pick between backing further cuts that hit the bone, tax hikes, or what be presented as another round of deficit-denial. Six weeks on the politics for the Conservatives look less straightforward.

Every new cut is likely to be more painful to make than those already agreed and the public mood at the time of the next spending review will be far darker than it was in 2010, or even now, given continued falls to living standards. Moreover, the budget demonstrated that even minor fiscal tinkering, never mind yet deeper reductions in spending, can now wreak political havoc for the coalition. Choosing where to cut will be painful. The lead target will be welfare spending, which is why it’s noteworthy that IDS has put down such a clear marker that he won’t tolerate further hits to his budget. The future NHS budget presents a monumental challenge: failing to protect it is unlikely to be an option, not least given the recent Lansley debacle and the fact that public concern over waiting lists is likely to be escalating by 2013; but ring-fence it, as Cameron will surely want to, and the cuts elsewhere are even more terrifying.

Yet all of this may be something of a picnic compared to the political challenge faced by the Lib Dems. Since the Budget senior advisors have admitted - in private at least - they are in a wilful state of denial about how they navigate the treacherous terrain between the spending review and their 2015 manifesto. Come the election they will, of course, tweak the coalition’s choices on tax and spending to give Lid Dem policies more of a yellow hue. But having spent 18 months drafting, presenting and defending Osborne’s choices the public may not be open to this belated change in direction.   

For Labour, though, the stakes are perhaps highest. Recall it hasn’t seriously engaged with a spending review and the trade-offs involved in them for six years – and back in 2007 the government thought it was getting tough by bringing down the annual growth rate of public spending from 4 per cent to 2 per cent. In early 2010 it chose not to undertake its own pre-election spending review, and no-one much cared what it had to say in response to the coalition’s defining statement that came that autumn.

Again, it will be very different next time. There will be searing scrutiny of Labour – understandably so given the period covered would span the first half of the next parliament - a period during which Labour has already conceded that it would be making cuts.

If Labour is to stick with the playbook of modern politics – and very few leaders depart from it - it will opt to match pretty much whatever the coalition comes up with in 2013.  Neutralise your political weaknesses is the rule. Brown did this in the mid 1990s when committing to stick to Tory spending plans, just as Osborne did pre-crash when pledging to match Labour spending totals, and then post-crash in protecting the NHS budget. And in the eyes of the public, Labour’s major weakness is, and is likely to remain, spending and the deficit. Given this, it will be argued forcefully that the very last thing it should do is distinguish itself by backing a bigger deficit that lasts for longer – or indeed hiking up taxes. Whatever the macroeconomic merits of adopting a looser fiscal stance during 2010-2012, so the argument will run, both the politics and economics point a different way for 2015-17.  

If this orthodox strategy prevails it will, of course, be contested. Some will highlight that predicating Labour’s political future – and forcing it into what many on the left will view as a kamikaze position on cuts in key areas - on the shifting sands of OBR estimates (and their inevitably sketchy views of the potential output of the economy) is a gamble too far. More generally, it will be argued that to stand shoulder to shoulder with the coalition on another bout of cuts at a time when austerity economics is at its most vulnerable would be a truly perverse act of political masochism. Just as the coalition succeeded in laying responsibility for the cuts announced in 2010 at Labour’s door, the next round of retrenchment can be pinned directly on Cameron and Osborne for stalling the economy - or so it will be claimed.  

If Labour is to be the answer to the central questions of our times it needs to demonstrate both an iron fiscal resolve over the medium term and show that, even in an era of sustained austerity, progressive choices can be made. To do this convincingly it will have to make its reckoning with some fundamental questions about the role of the state over the next decade – where it should advance, retreat and act differently - as well as on future sources and levels of taxation. And you don’t do this overnight.

Just as a currently beleaguered coalition is grasping quite how long it still has to govern for, a newly self-confident Labour needs to move at pace if it’s not going to get timed-out. Tick-tock.