Miliband must be bolder than Cameron on welfare reform

The Labour leader should look to reinvent the financing of all of the major pillars of the welfare state.

Ed Miliband’s self-identification with Margaret Thatcher has caught the imagination of many.  “She was a conviction politician and I think conviction really matters”, he has said.  Specifically she was able to rise “to the scale of challenge that the country faces” and “create a project that is genuinely going to make our economy work, not just for a few people but much more widely”.

The question is which challenge he would like to solve.  It’s not industrial relations this time.  In common with other developed nations, it is first the deficit and then the debt, and at the same time keeping the welfare state working effectively.    

The difficulty for all future political leaders of the UK is that the current structure of the welfare state will inexorably sweep away any reform efforts currently on the table.  The Office for Budget Responsibility predicts that net debt will bottom out at 60 per cent in 15 years’ time, which is still very high.  It will then reach 70 per cent in 2040, over 80 per cent in 2050 and over 100 per cent in 2060.  The big drivers of that increase will be health and pensions spending.  The net debt numbers of around 35 per cent in the 1990s and 2000s seem like a different world.

Other countries are better placed.  The Australian national debt will rise to only 20 per cent of GDP by 2050.  Like the UK, Australia guarantees all citizens health cover and a secure income in retirement.  Unlike the UK, the cost of paying for the welfare state is more evenly shared between Australian citizens and the government.  Australian citizens pay for nearly a third of health care themselves.  They contribute nearly 10 per cent of their income towards private pensions.   Four in five Australian pensioners receive a targeted state pension because of their other savings.  They also work longer: Australians retire at 65 against the UK norm of 63.

Some may see such a comparison as ideological.  Others will judge that “what counts is what works”.  The “project” is how to deliver security for households within a reasonable national budget constraint.  Speaking at the Labour Party conference, Liam Byrne said given the growth in the national debt, “savings are going to have to be made and I think there will be savings that are needed on welfare spending too”.

Others may say that it is politically impossible, or at the least so difficult that it should be left to future governments.  The trouble is that it will be even harder for those future governments: two in five voters today are aged over 55, rising to 45 per cent in 2020 and further after that.  The political window of opportunity is already narrowing.

Others will say that taxation should rise to meet the fiscal gap, and certainly some extra tax increases will be needed.  But this has to be kept in proportion because taxes on workers will already rise in future years as the tax base narrows (due to an ageing population).

As Thatcher drew up her industrial relations campaign, she was able to learn from the unsuccessful efforts of both the Wilson and Heath governments. Miliband can learn from the coalition’s fiscal policies. David Cameron has sought to limit the debate on the welfare state to changes to benefits for working-age people.  As a result his reforms will not rise “to the scale of the challenge that the country faces”, as measured by the fiscal position.  Miliband’s convictions should lead him to look wider and reinvent the financing of all of the major pillars of the welfare state.

Andrew Haldenby is director of the independent think-tank Reform.  Its new research report Entitlement Reform (#entitlementreform) is available at http://www.reform.co.uk/

Labour leader Ed Miliband speaks at the CBI's annual conference on 19 November 2012. Photograph: Getty Images.
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.