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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Theresa May's big thinker - an interview with George Freeman

The Conservative policy board chair on the meaning of Brexit, state intervention and whether "Mayism" exists.

Theresa May’s three months as Prime Minister have been marked by ruthless changes of both personnel and policy, from grammar schools to fiscal targets. The man tasked with overseeing the latter is George Freeman, a newly bearded 49-year-old who jokingly describes himself as “a designated thinker”.

“It’s a huge privilege,” Freeman told me when we met recently in Westminster. “As [May] has indicated, she’s determined to open up the policymaking process to good ideas from a much wider pool.”

After entering parliament as the MP for Mid Norfolk in 2010, Freeman distinguished himself as one of the most intellectually energetic Tory MPs. He founded the 2020 group of Conservative modernisers and became the first ever life sciences minister in 2014. Before this, he had worked for 15 years as a biotech entrepreneur.

Politics is in his blood. The Liberal prime minister William Gladstone was his great-great-great-uncle and Mabel Philipson, the first female Conservative MP, his great-aunt. Yet Freeman attributes his reformist zeal to the belief that “with privilege comes responsibility”. He boarded at Radley College after his parents, both alcoholics, divorced and has spoken of his “emotionally damaged” childhood.

It is unsurprising that May, confronted by the greatest policy challenge since 1945 – EU withdrawal – has called on his services. The chair of the Prime Minister’s policy board, to give Freeman his official title, was a passionate Remainer but told me “we are now all Brexiteers”. The “Brexit roar”, he explained, was “a mixture of very deeply felt concerns and complaints about globalisation, powerlessness and the growing gap between London and [other] places . . .

“There’s an understanding that if we simply delivered Brexit, and didn’t tackle the rest, we would only have dealt with some of the problem.”

His ambition was “to do for our generation what Disraeli did in the 19th century, in understanding that the extraordinarily challenging pace of franchise extension was also a huge opportunity to harness and fashion a New Model Conservative Party”.

Besides abandoning the surplus target (“to boost growth and investment in infrastructure”), Freeman cited welfare policy as a point of departure. The government would “better differentiate” between changes in the welfare budget and systemic reform – a division that May believes was eroded by George Osborne.

The Prime Minister underlined her commitment to industrial strategy by naming a new department after it. But what does it mean? “I think there is a recognition that we are embracing something unrecognisable from the failed ‘beer and sandwiches’ interventionism of the Sixties and Seventies,” Freeman said. “Twenty-first-century Conservative industrial strategy is about backing our science, innovation and knowledge economy, and other sectors where we have serious global leadership.” He spoke of “stepping in where only the state can”, citing the publicly funded Diamond Light Source synchrotron facility, which he recently visited with the astronaut Tim Peake. The government must be not merely “pro-enterprise”, but “more enterprising”.

May has endured her heaviest dissent over education, and Freeman was notably lukewarm about the idea of new grammar schools. “As well as her position” on the latter, he emphasised, “the Prime Minister set out a much broader vision”. Asked whether he understood MPs’ objections to academic selection, he said “there will be all the usual consultation and discussions through parliament about specific measures”.

The Prime Minister has entered office with greater ideological definition to her thinking than David Cameron, who struggled to reconcile his early vision with austerity. Can we speak of “Mayism”? “I’m not sure the ‘ism’ is helpful or appropriate at this stage. The Prime Minister is very strongly driven by her conservative values, and converting those values into effective policies to tackle the challenges we face. I think we have to wait for the judgement of history to define the ism.”

Freeman is close to “DC” (as he calls Cameron) and praised his premiership. “I was very sorry to see him go. But in the end, given the way the referendum turned out, it was inevitable. I thought he handled that whole last week in the most exemplary way: typical of the man. In time, I think he will come to be recognised as a transformational leader who brought the Conservative Party to terms with modern Britain.”

He rejected the former education secretary Nicky Morgan’s suggestion that May would struggle to “reach into” the marginal seats that the Tories won under Cameron. “Theresa May is appealing widely across whole swaths of the country as a One-Nation leader,” he declared.

With the re-election of Jeremy Corbyn, Freeman said, “the centre ground of British politics, once dominated by Blair and New Labour, has been vacated . . . That is a huge opportunity for a One-Nation Conservative Party to demonstrate our relevance beyond our core vote to those around the country who have clearly felt so marginalised.”

Corbyn’s triumph “illustrates the extraordinary challenge for mainstream political parties in this age of asymmetric, post-Brexit politics . . . We now have to use the opportunity of incumbency in government to tackle the root causes of the insurgency that has taken out the Labour Party.”

Freeman acknowledged the risk that Labour’s divisions would produce an internal Tory opposition.

“It also creates a question for the Conservative Party. Will we turn in on ourselves and generate our own arguments, or unite and reach out into the space that Corbyn has vacated?” 

George Eaton is political editor of the New Statesman.

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories