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Osborne rides to Labour’s rescue

He has forced Labour to acknowledge that if you cut less now, you have to cut for longer.

The deterioration of the public finances will guarantee George Osborne tough headlines for his mini-Budget Autumn Statement. Labour argues that it stands vindicated: the government's strategy has failed. But is anyone listening to the Labour case -- and even if they are, will it change how they vote?

Labour's first problem is that it is still blamed for the deficit. Whilst it was conducting a lengthy leadership election last year, the coalition partners successfully persuaded the public that gross profligacy during the Labour years was to blame for the ballooning deficit. In a neat piece of political framing, the Coalition said Labour had "maxed out on the country's credit card", thereby making a symbolic association between high household debt and government deficits. An electorate suffering a hangover from a consumption binge and the bursting of a housing market bubble was in receptive mood. Labour had presided over a splurge, and spending had to be cut.

Labour has never given a convincing answer to this charge. It hasn't consistently articulated an alternative account of why the deficit grew so large during the 2008/9 financial crisis, other than to blame the global economic meltdown and admit to the failure of its light-touch regulation of the City of London. Consequently, it remains vulnerable to the criticism that it is in denial about the deficit.

Yet it doesn't have to be boxed into this corner. In reality, Labour got the tax -- not spending -- side of the tax-spend equation wrong. Although it should have been running a small surplus in the run-up to the crisis, its big failure was consistently to over-estimate tax revenues. And ultimately, this was about the structure of the economy itself: the tax base was too reliant on revenue from the City, the housing market and wealthy individuals. A quarter of all corporation tax was being paid by City firms before the recession.

When the crisis struck, these sources of revenue collapsed, leaving a huge hole in the public finances. But whereas in Germany a loss of economic output in the recession of between 6 per cent and 7 per cent of GDP -- roughly the same magnitude as in the UK -- led to a deficit of 3.5 per cent of GDP, in the UK the deficit reached nearly 12 per cent of national output. As the chart from the Autumn Statement today below shows, lacking a resilient, broad tax base, the UK's public finances were far more exposed than many other countries on the Continent (conversely, the fact that the UK has its own currency and Central Bank gave it the flexibility and tools it needed to fight the economic downturn: had it joined the Euro, a fully-fledged sovereign debt crisis would have been on the cards immediately).

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Labour should acknowledge its responsibility for the deficit in these terms, rather than apologising for over-spending as its critics demand. Indeed, a reckoning with its fiscal record of this kind is precisely what would allow it to build a bridge to the kind of responsible, long-termist, rebalanced capitalism that Ed Miliband has made such a central part of his platform. A fairer, more robust political economy in the UK would produce more resilient public finances: prudence would be built on firmer foundations that self-declared fiscal rules. Without such an account, the deficit weighs like a drag anchor on Labour's economic credibility.

The party's second problem is a paradoxical one. It is this: the more it is right about the Coalition's "too far, too fast" fiscal strategy, the greater the task it sets itself to persuade the public to trust it again on the public finances at the next General Election. Labour has got it broadly right on fiscal strategy over the last year. The Keynesians are getting the better of the argument. But politically, all the talk of cuts simply reinforces the perception that Labour doesn't acknowledge the need for fiscal rectitude in the medium term. Labour spokespeople eschew being drawn too far into declaring which cuts they would make, for fear of confusing the electorate on their central argument about growth and jobs (indeed, there doesn't even appear to be a consistent script that Labour frontbenchers use when asked to describe what cuts or tax rises they would make to bring down the deficit). Instead, they talk up the impact of cuts in almost every department. The party has made no tough spending choices -- nothing at least that the electorate might recall.

It is on this score that Osborne has now ridden to Labour's rescue. By pushing back his structural deficit reduction plans into the next Parliament, he has forced Labour to acknowledge what its position would all along have entailed: that if you cut less now, you have to cut for longer. In his speech to the IPPR last week Ed Miliband made a virtue of this fact, saying to Osborne that if he failed to eradicate the structural deficit in this Parliament, Labour would have to finish the job. Commentators immediately pricked up their ears. Labour was on a path back to fiscal prudence.
Osborne has today set out further fiscal tightening of £8 billion in 2015/16 and £7 billion in 2016/17 on the cyclically-adjusted current budget. That means that we know the broad spending position for the first two years of the next Parliament, just as we did in 1997 when Labour said it would match Ken Clarke's plans. The same electoral arithmetic is clicking into place today.

Of course, had it been in power Labour would have arrived at the same place by a different route. It will also mercilessly attack the government for having failed meet its targets because of weak growth and high unemployment. But the central political fact remains that at the next election, Labour will now be in the business of fiscal rectitude in a way that it has previously not had to acknowledge.

It should now use the opportunity presented by this changed political landscape to develop new, politically compelling routes to social democracy that don't rely on spending increases. Instead, it should rest instead on the central pillars of deep economic reform, switches of spending into public services that support higher living standards, like childcare, and the reform of public services to secure greater efficiency and effectiveness for given levels of spending. If it completes these tasks, it may find it has much to thank Osborne for.

Nick Pearce is Director of IPPR