To have a clear line on the economy, Miliband needs a line on the unions

Labour policy formation is one long seminar that skirts around an obvious obstacle to reform.

It is good news that unemployment has fallen again. The government will be pleased; Labour will counsel caution. It is too early to identify a trend in employment growth. Inflation was up yesterday, so the decline in real wages and the squeeze on low-income households continues. The Bank of England has downgraded its growth forecast for 2013. Only around 20 per cent of the cuts originally envisaged in George Osborne’s "Plan A" have been implemented so far and a whole new set of cuts will be announced in the Autumn Statement on 5 December. There are always reasons not to be cheerful.

But that is a substantial part of Labour’s problem when it comes to the economy. It has become tactically reliant on gloom, even when Ed Miliband insists his strategic vision – the "One Nation" proposition – is inspiring and optimistic.

A hazard for the Tories, as I’ve noted before, is that the economy will appear to recover a bit on paper, in a way that emboldens ministers to tell people they are better off and that the plan is working, but without the public experiencing a tangible improvement in their circumstances. Wage stagnation makes it quite likely many people will feel poorer in 2015 than they did when the coalition came to power. The Chancellor or Prime Minister insisting voters are better off than they know – because, for example, the long-term prospects for fiscal sustainability are mildly improved - will just reinforce the sense that Conservatives dwell on a different, more expensively furnished planet.   

For Labour to capitalise on that weakness they need to meet certain tests. They need to demonstrate that they understand that public money doesn’t grow on Treasury trees; that it comes from real people’s pockets. Even if the pooling of that resource for good social ends is a desirable political project, consent for that harvest can’t be taken for granted. Crucially, the mechanism for allocating those funds cannot be seen as wasteful or self-serving.

In other words, Labour needs to sound assertive in its ambitions to reform the state. (That isn’t the same thing as shrinking the state, but it probably requires some recognition that the urge to expand the state as the default answer to social problems looks implausible in the current climate.)

There has been a whole lot of discussion in this area recently. See this from earlier in the week, via the IPPR, and screeds on Labour List, guest edited this week by Jon Cruddas.  Reinforcing the urgency of the whole conversation is this report from the RSA and the SMF.

An essential, albeit quite technical observation from that analysis is that falling unemployment suggests that the "output gap" – the gulf between the economy’s current performance and its potential – is smaller than the Treasury has estimated. Crudely speaking, that suggests the portion of the deficit that won’t be simply burnt off by a return to growth is higher – it is structurally baked in harder than previously thought. On top of that are all sorts of bleak accounts of the mounting demographic pressures on society – the hard, upward pressure on health spending and pensions in particular.

One political conclusion from all this is that Labour should speak more openly and frankly about the scale of the fiscal challenge ahead and the requirement that public service delivery change in response. That has to be the safer option than the current trajectory, which is to concede in the vaguest possible terms that budget discipline is a recognised yet distasteful obligation without really engaging in the conversation about how it will be enacted.

In a perverse way, the difficulties presented by the long-term outlook give cover to Labour to move on from the necessarily short-term and abstract macroeconomic argument it has been engaged in for the past two years. It is entirely possible that Ed Balls has been right about the need for fiscal stimulus and also that no-one cares. The non-existent growth we might have had if different policies had been pursued in 2010 can’t be presented on the doorstep as a reason to vote Labour in 2015.

The Tories have a very different problem. No-one doubts their determination to make cuts, but their underlying motive and, increasingly, their competence in administering austerity are in doubt. The Conservatives have to tread carefully when it comes to advertising their intention to reform the state, because for many people that sounds like a euphemism for indiscriminate privatisation and public sector redundancies. That suspicion, expressed in opinion polls and focus groups, was a significant factor in decisions last year to scale down ambitious plans to reconfigure vast swathes of the public sector – with much more outsourcing to private companies – under a "Big Society" rubric. Such caution was a source of frustration to Steve Hilton, David Cameron’s strategic advisor, and a factor leading to his departure from Downing Street. Without Hilton the impetus for dramatic, visionary reform of the state has largely gone. The Tories' difficulties in persuading people they are reliable stewards of services will be exacerbated as budget pressure and a disorderly restructuring wreak havoc in the NHS.

There is an opportunity there for Labour, presuming Ed Miliband has the courage to seize it. Voters know that Labour cares about the public sector. Of course it does. Miliband could use that confidence as a cudgel to beat the coalition, accusing them of senseless vandalism. He could also use it as a platform to win support for what would be advertised as a fairer, more compassionate approach to reform  - one that is conducted with deference to the ethos of public service, without a fetishistic faith in private enterprise but in recognition of the fiscal challenge ahead.

In so doing he could kill the Tory charge that Labour are in denial about the deficit and national debt. Instead of saying, in abstract terms, that a Miliband government would take tough decisions, the opposition leader should talk up exciting ideas for innovation in the way services are delivered. He needs to find dynamic charities and social enterprises and go on about how their creativity shows the way forward. The very fact of advertising an interest in better, more efficient, more effective ways to get the kinds of outcomes Labour has traditionally relied on Whitehall to deliver contains in it the recognition of the need to get more for less out of public services. It swallows up the deficit denial charge whole without even having to rebut it directly.

There is an obvious obstacle to this path: trade union leaders won’t like it. Once you start talking about alternative mechanisms for delivering services, there will be people in the labour movement who smell Blairite conspiracy and crypto-Toryism under the bed. That will be the case even if Miliband goes out of his way to emphasise that reform will be conducted wholly in keeping with the traditional values of fairness and equality that have historically animated the left.

Senior figures around Miliband privately concede that this is a problem. They know that moving the party’s economic story beyond outraged rejection of the decisions George Osborne is making will require some account of public sector reform. They also know that the broad "One Nation" vision is hard to turn into a practical agenda for changing the way the state and the economy are organised without also having an agenda for the way labour is organised. As one shadow cabinet friend of Miliband puts it: "Before the election we’ll need a positive story about the role of unions in responsible capitalism." The Labour leader knows that story needs writing, but there never seems to be a good time to sit down and write it.   

Miliband’s cheerleaders on Labour blogs and in think tanks and seminars are the same – long on paradigms and re-imaginings of the role of government, short on specific reference to the unions. That will have to change before the party can draft a manifesto. Ideally, the unions themselves could start talking seriously and practically about imaginative ways to innovate in the provision of public services. They should do. They probably won’t. 

Ed Miliband addresses TUC members in Hyde Park last month after an anti-austerity march. Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

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The continuity between Ed Miliband and Jeremy Corbyn

The left say that the former leader created crucial intellectual and political space for them.

One of the errors in the leaked list ranking Labour MPs by favourability to Jeremy Corbyn was the inclusion of Ed Miliband in the "negative" category. Most in the party believe the former leader is better described as sympathetic to his successor. In recent interviews he has defended his leadership more robustly than many shadow cabinet members and has offered him private advice.

Last year I reported on speculation that Miliband could return to the shadow cabinet (a rumour heard again this week). Those close to the former leader continue to dismiss the possibility but he will appear with Corbyn today at a pro-EU climate change rally in Doncaster - the first time the pair have shared a platform. "Ed's more engaged than he's been for a long time," a friend told me.

Though Miliband did not vote for Corbyn in last year's leadership election (sources say he backed Andy Burnham), there is notable continuity between their political projects. In interviews with me, shadow chancellor John McDonnell and Momentum chair Jon Lansman have spoken of how the former leader created crucial intellectual and political space for the left. Those on the party's right make the same point - if rather less positively. A former shadow cabinet member told me that "the left of the party was indulged for five years and wasn't challenged".

It was under Miliband that Labour first identified as an "anti-austerity" party, with the then leader addressing a 2011 anti-cuts march. Though this stance was later abandoned, as emphasis was put on the need for public spending reductions (with room left to borrow for investment), it provided Corbyn with an opening to exploit.

It was also Miliband who denounced the Iraq war and promised a new approach to foreign policy, declaring in his 2010 conference speech: "Our alliance with America is incredibly important to us but we must always remember that our values must shape the alliances that we form and any military action that we take." His refusal to support the government's proposed intervention in Syria in 2013 was hailed by him as preventing a "rush to war". By promising "a different kind of foreign policy - based on a new and more independent relationship with the rest of the world", and opposing all recent military actions, Corbyn has travelled further down a road taken by Miliband. 

The Labour leader's promise to give greater power to party members similarly follows Miliband's decision to give them the ultimate say over the leadership (the system that enabled Corbyn's victory). Rail renationalisation, limits on media ownership and opposition to privatisation were also stances either fully or partly embraced between 2010 and 2015. 

Many of those who voted for Corbyn backed Miliband in 2010 or joined after being attracted by his radical moments. For them, Corbyn, the only candidate to position himself to Miliband's left from the outset of the contest, was his natural successor. It was these left-leaning members, not Trotskyist entryists, who enabled his landslide victory. 

The continuity extends to personnel as well as policy. Simon Fletcher, Corbyn's director of campaigns and planning (formerly chief of staff), was Miliband's trade union liaison officer, while Jon Trickett, the shadow communities secretary (and key Corbyn ally), was a senior adviser. If Miliband is more open to the Labour leader's project than many other MPs, it may be because he recognises how much it has in common with his own.

George Eaton is political editor of the New Statesman.