Balancing the books to deliver fairness and prosperity

Fiscal discipline is the absolute precondition for all that we want to achieve.

This is a full transcript of Rachel Reeves's speech to the IPPR today.

Let me start by thanking IPPR for giving me this opportunity to speak today. In the 1990s, the IPPR was a driving force behind the development of a new economic agenda that married economic efficiency with social justice.

And today again we are fortunate to have people like Nick, Tony, Graeme and Will helping develop policy for the new economic era.

The work of the IPPR and others is showing that it's the centre left that is best placed to answer the big challenges of the twenty-first century:

- the challenges of financial regulation and building a stronger economy, bringing to Britain new industries and new jobs
- the challenge of reforming public services and the welfare state to better serve families and communities
- the challenge of finding new ways to offer people security and opportunity amid accelerating economic and social change.

But a challenge that is just as important and pressing, facing governments around the world, is the challenge of managing our public finances.

And as Ed Miliband and Ed Balls have said, it is a challenge that we cannot afford to flunk or flinch from.

Compared to the issues that fire us up as politicians and campaigners, like reducing poverty and expanding economic opportunities, deficit reduction is perhaps a dry subject.

But it's precisely because we on the centre left believe that active government along with good schools, hospitals and other public services can transform lives, and make our country fairer and more prosperous, that we must ensure we pass the test of fiscal credibility.

If we don't get this right, it doesn't matter what we say about anything else. Earning people's trust that we will be responsible custodians of public money is the precondition for gaining the right to be heard on any other issue.

Sound public finances will always be the indispensable platform for delivering better jobs, better services and a strong, growing economy.

What I want to demonstrate this morning is that being trusted with the nation's finances, and building a stronger, fairer Britain, are imperatives that are not only compatible; they are also inseparable.

But first I want to say something about the current Government's failure to get to grips with the economic and budgetary realities. Because it's by understanding their failure that we can build a more effective response.

When the Conservatives and their Liberal Democrat partners took office, no one could be in any doubt about what they regarded as their central purpose.

"This new coalition is founded", Osborne said, "on an agreement to significantly accelerate the reduction in the deficit". It was "the very first item on the first page of the Coalition agreement".

In autumn 2010, George Osborne was boasting that his tax rises and spending cuts had "put us on a path to eliminate the deficit in a period of four years".

Now you would expect me to criticise the Government for the choices it has made:
- the choice to reduce the tax burden on the banking sector - at the same time as asking more from families with children.
- the choice to prioritise pet projects, such as free schools, elected police commissioners, and David Cameron's disastrous top down NHS reorganisation - even as school repairs are cancelled, police officers lose their jobs, and patients wait longer.

But let's be honest: being fair on working families, standing up to vested interests, or protecting and improving our schools and hospitals, were never going to be this Government's strong suits.

So let's just judge them by their own standards - the goals they set themselves - the promises they made to the British people.

The Chancellor might claim today's borrowing figures show his plans are on track, but he is only on track for targets which have already been revised up by a staggering £158 billion. This is extra borrowing to pay for the costs of economic failure - slower growth and higher unemployment - rather than to support the economy through difficult times. And it's more borrowing than was required by Alistair Darling's more balanced plan.

George Osborne has had to abandon his promise to eliminate the structural deficit by the end of this parliament, with at least two years of additional austerity beyond 2015.

And last week Credit Ratings Agency Moody's switched its outlook on the UK from "stable" to "negative", citing concern about the impact of fiscal austerity on Britain's growth prospects.

Let me be clear: Labour has never said that said Britain's fiscal policy should be set according to the demands of ratings agencies. We all know what a poor guide they proved to be on the banks' creditworthiness in the run up to the crisis.

And on sovereign debt they have been inconsistent - calling for faster cuts one day, then decrying the slowing growth that result the next.

But this was the standard George Osborne wanted us to judge him by:
- when Standard and Poor's put the UK's credit rating on negative outlook in the midst of the financial crisis, George Osborne said Britain's "economic reputation" was "on the line"
- and when the rating was later restored to "stable", it was Osborne who proclaimed it "a vote of confidence in the coalition Government's economic policies".

The point is we have a Government failing on its own terms:
- they said they'd cut Government borrowing, but they're borrowing £158 billion more than they planned
- they said they'd balance the books by the end of this parliament, but they won't.
- they said they'd live or die by the verdict of the credit ratings agencies - but even now they are sounding the alarm bell.

So where did it all go wrong for George Osborne?
It went wrong because, as Ed Balls warned in his Bloomberg speech a year and a half ago, deficit reduction requires three pillars:

spending reductions, yes
tax increases, yes

But if you cut spending and raise taxes too far and too fast, and don't have people in work and businesses succeeding, you cannot get your deficit down, because your tax take falls and your benefit bill goes up.

And the fact is, when this Government took office, focusing exclusively on further and faster tax rises and spending cuts, business and consumer confidence collapsed, firms postponed investments and stopped taking on workers.

Britain's growth faltered.

First the Government blamed the snow. Then they blamed the Royal Wedding.
Now they're blaming the Eurozone, when in fact rising exports were the only reason why the economy didn't fall into recession last year.

It's time the Government took responsibility for their own actions and their choice to cut spending and put up taxes too far and too fast that choked off our recovery more than a year ago.

Not only are there huge social costs to this experiment:
- the failing businesses
- the closed libraries and children's centres
- the tragedy of another lost generation of young people out of work

But there are huge consequences for the public finances too.

Just look at what happened to the OBR's projections for the public finances over the 12 months between the chancellor's spending review in autumn 2010 and the autumn statement in November 2011:
- £17.8 billion wiped off VAT revenues
- £51.2 billion off income tax revenues
- £30.9 billion off corporation tax revenues
- an additional £34.7 billion in unplanned spending on tax credits and social security benefits.

Rising unemployment and a stagnant economy means spending is higher and tax revenues lower. So George Osborne is now on course to borrow £158 billion pounds more than he planned - a damning indictment of his failed experiment.

And the costs of George Osborne's failure go beyond even this. Because the longer we languish in low gear, the more permanent damage is done. Businesses that close, or miss opportunities to invest and grow market share, aren't just a cost to our economy now - they're a permanent setback to Britain's growth and our ability to pay our way in the world, and a massive cost that future taxpayers will always be paying for.

860,000 people have been out of work for more than a year now. Losing hope, motivation and skills - a huge waste in benefits today and in growth potential for the future.

And as David Miliband's commission on youth unemployment highlighted, the cost of today's unemployment must be counted not just in immediate benefit payments, but in a long term legacy of lower life chances, that will cost our economy and the Treasury billions more for decades to come.

So the course George Osborne has chosen isn't just making it harder to deal with the deficit - it's building up costs that will make it harder to achieve fiscal sustainability over the decades ahead.

The point is not just that you need jobs and growth as well as a credible deficit reduction plan.

The point is that a plan to reduce the deficit without a strategy for jobs and growth is not a credible plan at all.

The reason we know the Chancellor is off course is because the Office for Budget Responsibility is telling us so.

And if we look a bit closer at the rules Osborne has set, we can see that they look increasingly flimsy themselves.

The two rules are:
-to "achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period"
- and "for public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16".

The first rule amounts to saying that the Government promises to promise to eliminate the structural deficit five years forward from any given point.

But because that five year horizon moves forward with every year, the delivery on that promise can advance ever further into the future. Indeed this has happened already, with George Osborne pushing his target for deficit elimination back by two years.

As the Institute of Fiscal Studies has said, "a government that continually promised to tighten in future, but never delivered on those promises, would not technically be judged to be breaking the rule".

Or as another commentator has pointed out, it is rather like someone promising to give up smoking in five years' time - a promise which can always be kept, without ever stopping smoking, because its fulfilment is always five years in the future.

So as Robert Chote, Director of the OBR has agreed, this rule does not guarantee "long-term sustainability".

The second rule gives the Chancellor a target with a fixed date, but because it is not about the level or trajectory of public debt, but only about its immediate movement, it could be met in all kinds of ways, shifting borrowing from one year to another, far from relevant or sensible for ongoing fiscal stability.

The IFS, polite to the last, describes this rule as "curious".

As they point out, "if debt were to fall as a share of national income in 2015-16, but increase in every year up to then and in every year after, the supplementary target would still be satisfied."

The IFS view, then, is that the two rules in combination are insufficient "to ensure fiscal sustainability".

So, even with the Government's borrowing plans being thrown out of the window, the Chancellor continues to meet his rules, because it's so easy to fudge them.

With the Government's plan hurting but not working, for the rest of my time today, I will set out Labour's alternative - not just on fairness, protecting public services, and securing growth; but crucially on how we can get our public finances on a sustainable footing.

For Labour, unlike the Tories, deficit reduction is not an end in itself.

But fiscal discipline is the absolute precondition for all that we want to achieve, across every other area of policy.

There are three key elements to our approach that I will address:
- targeted action to get the recovery back on track
- tough decisions to control spending and fill the tax gap
- and reform to entrench fiscal sustainability.

First, on, jobs and growth.

It's because we want to see the deficit reduced that we are urging the Chancellor to adopt measures to support businesses and get people into work.

Specifically:
- a national insurance break for small firms taking on extra workers
- a temporary tax cut for hard-pressed families - with VAT being the fairest and quickest option available
- further cuts in VAT on home improvements
- accelerated investment in infrastructure
- and a serious programme to tackle the worsening youth jobs crisis, funded by a tax on bank bonuses.

Labour's five point plan for jobs and growth is a temporary and targeted stimulus to restore confidence, strengthen investment and raise employment - to get the growth we need to bring in the tax revenues and bring down the welfare bill.

Some people have asked: how can your solution to the deficit be to borrow more?
My answer is: it's George Osborne that's borrowing more - £158 billion more than he said he would borrow.

But not borrowing to give a boost to businesses and people looking for work. Instead borrowing to fill the gap left by falling tax revenues, and the rising numbers of people out of work.

Borrowing to pay for the cost of his reckless gamble that has failed.

When Labour left office, borrowing was coming in lower than planned, and unemployment was coming down too.

Labour's five point plan for jobs and growth is not an exception or postponement of our plan to reduce the deficit - it's an essential and integral part of it.

But the reality is, even with growth back on track, Labour's approach to deficit reduction would involve tough decisions on spending cuts and tax rises.

We faced these issues in Government. Alistair Darling's deficit reduction plan was based on decisions and commitments that allowed the recovery to take shape, but ensuring tax increases and spending cuts were fairly balanced, with, for example:

- real cuts to departmental budgets, but priority public services protected
- a tax on bank bonuses and a new 50p rate of tax on incomes above £150,000.

Since the last election, the economy has gone into reverse because of this Government's choices.

And because we can't know now what state the economy or the public finances will be in at the time of the next election:
-we've been clear that we can't make promises today about reversing cuts or tax rises
- and we've warned that further tough choices will be needed to clear up Osborne's mess and finish the job of deficit reduction in the next parliament.

That's why Ed Miliband and Ed Balls have written to the shadow cabinet, and asked me to work with them, on first: identifying where waste could be eliminated and substantial savings made; and second, how they would switch spending from lower to higher priority areas.

Different choices within tight fiscal constraints: choices based on our values and priorities, which I believe are also the values and priorities of the British people.

Labour's willingness to take decisions based on the right priorities has already been demonstrated in the position we've taken on public sector pay.

When workers in the private sector are facing pay restraint, a 1% average limit on annual increases is necessary to minimise public sector job losses.

But we would freeze pay at the top to fund higher increases for those earning below £21,000 - meaning teaching assistants, care workers, and hospital porters would be hundreds of pounds better off under Labour.

Another choice we've said we'd make differently is on taxation and tuition fees
- while under the Conservative-led government banks are benefiting from a 5 per cent cut in corporation tax,
- Labour thinks that money would be better used bringing down the cap on tuition fees, to help young people worried about the costs of going to university.

These are instructive examples of the care Labour would take, and the difference Labour could make, to ensure the heaviest burden of fiscal consolidation is borne by those with the broadest shoulders, not those already struggling to make ends meet.

And when resources are so constrained, we must also be absolutely ruthless in demanding maximum value for taxpayers' money - unlike the Conservative-led Government, which seems to care so little about public services that it is shockingly casual and complacent about wasting scarce resources.

We've uncovered extraordinary examples of questionable spending in Whitehall:
- from £900 spent on cosmetics at the Ministry of Justice
- to £69,000 spent on music and piano stores by the Ministry of Defence

While Luciana Berger, Shadow Minister for Energy and Climate Change, has exposed £72,000 spent on away days by the Department for Energy and Climate Change; and £192,000 spent on first class train tickets by the Department for the Environment.

Meanwhile my Shadow Cabinet colleague Jon Trickett has exposed the false economies of rushed redundancy programmes
- with £90 million paid out to departing civil servants in just the last three months
- at the same time as over £30 million is spent on temporary and agency staff to fill those gaps

We've seen a total failure to rein in excessive pay at the very top of the public sector
- with serious questions being raised about the level of bonuses and the extent of ministerially sanctioned tax avoidance in Whitehall, quangos and other public sector bodies.

And we've seen incredible sums ploughed into pet projects
- more than £100 million spent on installing elected police commissioners - money that could have paid for 3,000 new police constables
- £600 million added to the free schools budget in November - money that could pay for the extra 100,000 primary school places we so desperately need
- and £1.8 billion set aside for the costs of NHS reorganisation - half of which would keep 6,000 nurses in post for three years

And that is the approach we are taking across every department, every budget,
- as we challenge the Government's careless complacency
- and prepare for the tough choices we would face as an incoming Labour Government.

Subjecting every line of expenditure to the same tough tests:
- protecting the living standards of struggling families
- prioritising employment, productivity and growth
- a ruthless insistence on value for money
- and ensuring that, at a time when everyone is paying a tough price for the failings of a few, those who gained most in the good times cannot evade or avoid their responsibility to make a fair contribution.

And all these individual decisions need to be taken within a clear fiscal framework.
And so, as Ed Balls announced at the Labour Party Conference, we will be committing to new fiscal rules that will get our current budget back to balance.

Labour is ready to complete the job of deficit reduction in the next parliament.

I want to finish by saying something about the long term reform of our economy and how that relates to the fiscal challenge.

The financial crisis raised big questions about Britain's economic model - about inequality and irresponsibility; about stability and sustainability. And in response, Ed Miliband has kickstarted an important debate about the new economy this country needs to build.

And in fact, fiscal sustainability, and the reform and rebalancing of our economy, go hand in hand.

Because Britain should not be too reliant on forms of tax revenues - such as those arising from the housing market and the financial sector - that can be volatile and vulnerable to external shocks.

And when we think of some of the pressures on public spending -
- the money we spend on tax credits to top up low wages
- the money paid in housing benefit, some of it to irresponsible landlords
- the money paid to help older people manage expensive energy bills
- the money spent on pension credit to make up for low saving rates and inadequate pension provision.

It's clear that a more equitable and responsible capitalism would mean less need for the state to step in to correct or repair the outcomes of an unfair or failing market.

This is an exciting agenda that we have only just begun to explore. But it is clear that a fairer and more balanced economy would mean
- a more reliable and resilient tax base
- as well as fairer outcomes and more resilient families and communities
so as well as delivering a stronger economy and a fairer society, a more responsible capitalism will also help us deliver long term fiscal sustainability.

So in conclusion, let me reiterate and reemphasise my starting point:

First, fiscal discipline is fundamental to Labour's thinking and policy development, underpinning every proposal we make, every argument we advance
- not only because our wider message will not be heard if people see us only as spenders, and not also as reformers
-but also because we simply will not be able to deliver the changes we want to make in government if we do not have strong public finances.

This is not a matter of matching or mimicking the Conservative-led Government. Far from it. The Government's approach to deficit reduction has been increasingly exposed as empty without the jobs and growth that are essential to fiscal sustainability.

And Labour has a distinctive approach to deficit reduction and fiscal responsibility in which our values and priorities shine through:
- timely and targeted action to secure the jobs and growth we need to get the deficit falling
- different choices within tight fiscal constraints, that put fairness and prosperity first
- and reform of the British economy, with more reliable revenues and a redefined role for Government.

The debate about deficit reduction and fiscal sustainability is a debate that we on the centre-left can and must win.

Because sound public finances and a stronger, more stable economy will give us the solid foundations we need to build a fairer, better Britain.

Thank you.

Photo: Getty
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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.