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).


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

Nick Pearce is the director of the Institute for Public Policy Research.

Photo: Getty Images
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I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.