Labour can no longer duck tough choices on spending

If it is to reject Osborne's doom-laden plans, Labour needs to start developing an alternative now.

Within weeks, George Osborne will use the Autumn Statement to announce his spending plans for the early years of the next parliament. He is expected to set out further cuts and in doing so hopes to lay political traps for the opposition, especially on welfare cuts.

Political gamesmanship is trumping compassionate politics. Spending choices should be about how to minimise the pain and suffering families must endure as a result of today's savage economic forces. Instead, the government is intent on targeting the least popular groups and protecting those who are most likely to vote.

The Labour Party can no longer duck questions about what it would do differently with power. It needs to start developing an alternative so that before the next election it has a clear direction on spending to show it is a credible and caring contender for government. And if the Liberal Democrats want to keep open the option of working with Labour after 2015, they too need to say what they would do differently without their Tory partners.

Labour, in particular, will have to find a formula that proves the party can be responsible with the public finances, whilst avoiding being locked into Conservative spending limits. The Tory policy of eliminating the structural deficit by 2017-18 will come at a cost of perhaps £50bn in further cuts or tax rises. By contrast, Barack Obama's re-election shows the political and economic dividends of an offer of intelligent spending in place of grinding austerity.

Much will depend on the state of the economy by 2015, but if growth returns there is scope for cautious optimism. For example, a government can close the deficit over time if it is prepared to freeze public spending while the economy expands. However, the starting point for spending decisions should be the end-point: what do politicians on the left want the public finances to look like by 2020? Of course, the deficit needs to brought under control, but we also need to ask what proportion of the economy should be devoted to public spending. Today, spending remains well above the post-war average of 42 per cent of GDP but Osborne has deliberately planned to overshoot this number in a bid to permanently shrink the size of the state.

Labour could offer a distinctive but mainstream alternative by simply pledging a return to trend. This would mean taking a little longer to close the deficit than the Conservatives plan and substituting tax rises for some of the planned cuts. The result would be more flexibility to address the huge social pressures the economic crisis has caused.

But the need for painful decisions will not disappear if a 2015 government signs up to spending limits which are less severe than Osborne's. Even if spending remains flat overall it will feel like another parliament of austerity, and some budgets will need to shrink to pay for others to grow. Embracing this mathematical inevitability should not be the preserve of the left's self-styled fiscal hawks, who wear a spending hair-shirt as a badge of honour. It's time for an open, frank and respectful conversation, which draws in the full range of opinion on the centre-left.

This week, that process begins with the launch of the Commission on Future Spending Choices. It is a year-long inquiry hosted by the Fabian Society, whose associations with the British welfare state date back more than a century. For we think it is the cheerleaders, not the adversaries of government, who are best placed to consider how the state can live within its means.

The commission will look at where to spend and how to cut. We will explore whether economic reforms can reduce demand for social security or whether cuts to entitlements are needed. We will consider how public service budgets should be shared and question where provision will need to change in the face of perhaps ten years of flat or falling budgets. Lastly, we will consider how public spending can do more to boost growth, employment and earnings.

The left faces hard choices if it is to earn economic credibility but stay true to its values. But the choices are not as bad as the Conservatives would have us believe. Labour can reject Osborne's doom-laden plans and offer an optimistic alternative. But to return to power the alternative must be clearly specified, including the painful decisions. The UK will be far less wealthy in 2020 than anyone would have predicted in 2005 and public spending has to adjust to this reality. But as long as the economy returns to decent growth, Britain can afford a strong and compassionate welfare state.

John McFall is a Labour peer and the former chair of the House of Commons Treasury select committee

Andrew Harrop is the general secretary of the Fabian Society

Ed Miliband speaks at the CBI's annual conference on 19 November 2012. Photograph: Getty Images.

John McFall is a Labour peer and the former chair of the House of Commons Treasury select committee

Andrew Harrop is the general secretary of the Fabian Society

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What type of Brexit did we vote for? 150,000 Conservative members will decide

As Michael Gove launches his leadership bid, what Leave looks like will be decided by Conservative activists.

Why did 17 million people vote to the leave the European Union, and what did they want? That’s the question that will shape the direction of British politics and economics for the next half-century, perhaps longer.

Vote Leave triumphed in part because they fought a campaign that combined ruthless precision about what the European Union would do – the illusory £350m a week that could be clawed back with a Brexit vote, the imagined 75 million Turks who would rock up to Britain in the days after a Remain vote – with calculated ambiguity about what exit would look like.

Now that ambiguity will be clarified – by just 150,000 people.

 That’s part of why the initial Brexit losses on the stock market have been clawed back – there is still some expectation that we may end up with a more diluted version of a Leave vote than the version offered by Vote Leave. Within the Treasury, the expectation is that the initial “Brexit shock” has been pushed back until the last quarter of the year, when the election of a new Conservative leader will give markets an idea of what to expect.  

Michael Gove, who kicked off his surprise bid today, is running as the “full-fat” version offered by Vote Leave: exit from not just the European Union but from the single market, a cash bounty for Britain’s public services, more investment in science and education. Make Britain great again!

Although my reading of the Conservative parliamentary party is that Gove’s chances of getting to the top two are receding, with Andrea Leadsom the likely beneficiary. She, too, will offer something close to the unadulterated version of exit that Gove is running on. That is the version that is making officials in Whitehall and the Bank of England most nervous, as they expect it means exit on World Trade Organisation terms, followed by lengthy and severe recession.

Elsewhere, both Stephen Crabb and Theresa May, who supported a Remain vote, have kicked off their campaigns with a promise that “Brexit means Brexit” in the words of May, while Crabb has conceded that, in his view, the Leave vote means that Britain will have to take more control of its borders as part of any exit deal. May has made retaining Britain’s single market access a priority, Crabb has not.

On the Labour side, John McDonnell has set out his red lines in a Brexit negotiation, and again remaining in the single market is a red line, alongside access to the European Investment Bank, and the maintenance of “social Europe”. But he, too, has stated that Brexit means the “end of free movement”.

My reading – and indeed the reading within McDonnell’s circle – is that it is the loyalists who are likely to emerge victorious in Labour’s power struggle, although it could yet be under a different leader. (Serious figures in that camp are thinking about whether Clive Lewis might be the solution to the party’s woes.) Even if they don’t, the rebels’ alternate is likely either to be drawn from the party’s Brownite tendency or to have that faction acting as its guarantors, making an end to free movement a near-certainty on the Labour side.

Why does that matter? Well, the emerging consensus on Whitehall is that, provided you were willing to sacrifice the bulk of Britain’s financial services to Frankfurt and Paris, there is a deal to be struck in which Britain remains subject to only three of the four freedoms – free movement of goods, services, capital and people – but retains access to the single market. 

That means that what Brexit actually looks like remains a matter of conjecture, a subject of considerable consternation for British officials. For staff at the Bank of England,  who have to make a judgement call in their August inflation report as to what the impact of an out vote will be. The Office of Budget Responsibility expects that it will be heavily led by the Bank. Britain's short-term economic future will be driven not by elected politicians but by polls of the Conservative membership. A tense few months await. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.