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The answer to Labour's woes? Tax cuts

Balls and Miliband should call for the basic rate of income tax to be slashed.

The bleak economic news of recent weeks seems to have created far more uncertainty within Labour ranks than on the government benches. For a start, this is because it has slowly dawned on the party that if it wins in 2015 it will become a government of austerity too. Hence all the talk of fiscal responsibility, from Ed Balls and Ed Miliband, as well as their 'critical friends' within the party.

The two Eds know, however, that political strategy must not be allowed to dictate economics. It would be disastrous if Labour were to decide that the only path to restoring its economic reputation is by hugging close to George Osborne's spending plans and fiscal rules. If the party follows that course it would be betraying a generation of British businesses and families.

For it's time to accept that the UK is in depression. Families with middle incomes will be poorer in 2015 than 2002, the country face at least seven years of austerity in the public finances, and it will take longer for GDP to return to pre-crash levels than in the 1930s. George Osborne's painful medicine was designed for a V-shaped recession not an L-shaped 'lost decade'.

The left should now feel duty-bound to argue that only a massive fiscal stimulus is proportionate to the scale of the crisis. For without government intervention a decade of low growth and soaring unemployment is inevitable. It is fine for Labour to promise a clear path to balanced budgets over the next decade, but only alongside a major fiscal intervention now.

To bring the politics into line with the economics, however, Labour needs a game-changer. For when the left argues for short-term Keynesian stimulus, neither the public nor the bond markets are convinced: they sense it is a ruse to defend every cherished corner of the welfare state, a strategy of permanent deficit not temporary stimulus. So to stimulate the economy now Labour should argue not for spending, but for tax cuts. If Labour sets out a plan to pump money into the economy through tax cuts, the party would undermine the charge of statism and no doubt cause some embarrassment for the tax-cutting right as well.

By contrast, there's little to gain from delaying spending cuts. The harder the party resists cuts today, the more will be left for it to do if it retakes power in 2015. So Labour's only spending commitments should be aimed at leveraging private investment or creating jobs for the unemployed; and even these must be fully-funded from new taxes on the wealthy to leave the long-term path of deficit reduction unchanged.

These should not be any tax cuts, however. They must be time-limited and only benefit the bottom 90 per cent of families. First, to ensure the package is progressive, Labour could propose a time-limited 'VAT cash-back' scheme, for low income households, to get the tills ringing. For a time-limited period the government would issue credits to offset VAT liability, paid to benefit and tax credit recipients who are the hardest hit and most likely to spend.

But to really defy political convention, Labour should go further and campaign for the most visible and symbolic tax cut possible. For two years only and with suitable claw-backs from higher-rate taxpayers, Balls and Miliband should call for the basic rate of income tax to be slashed. Only then would people sit up and take notice, perhaps reappraising Labour for the first time in years, and forcing the Tories onto the wrong side of the argument.

Some people on the left will recoil at the thought of tax cuts as the welfare state is threatened, and it's true that none of the options are pretty. But if the left really wants to argue for economic stimulus as a counter to the self-defeating vortex of austerity, it must side-step the statist trap that has been set for us.

Time-limited tax cuts are the middle way between economic despair and the charge of deficit denial.

Andrew Harrop is the general secretary of the Fabian Society

Tags:Labour