Labour must recognise the need for ruthless prioritisation

The party must seize control of the debate and show a bit of leg when it comes to economic policy.


There are three central arguments that will determine the outcome of the next election. One is over fairness, a second is over economic management, and a third over cultural affinity with the British – or more accurately the English – people.

Labour is winning the first of these hands down, but on the other two there is still a lot of spade work to do. Winning the cultural argument is perhaps the hardest. But it is on the economy that more progress must be made now if Labour is to make a genuine breakthrough.

Many observers wrongly believe that a weak economy and depressed living standards will hand Labour victory. There is nothing axiomatic about this. In fact, even if there is no economic recovery – and there may well be – this assumption is intoxicatingly complacent. No one should confuse the vicissitudes of government with the big questions that determine election outcomes.

If economic malaise continues, it is likely that in the general election campaign more questions will be asked of Labour than of the Conservatives because fear of change will dominate the psychology of the electorate. Credit downgrade, double, triple or even quadruple dip, it will not matter much. Elections are about choice.

And on the economy one question above all will define the debates – where is the money coming from? There is nothing new in this. It is an age old question, which has defined many elections. But this time, without better economic news, anxiety about debt – national and personal - will make it more potent.

To borrow from George Bernard Shaw, if Labour is unable to answer this question - we will neither find it easy to look at things as they are and ask why nor dream of things that never were and ask why not?

Ed Miliband knows this. Hence, his use of the phrase “ruthless prioritisation” in his Fabian lecture in January. It is time his party knew it.

There is a perfectly credible economic argument that the pace of cuts should be slower but whether you are a Keynesian, a Monetarist or just care about the price of a loaf of bread, it cannot be denied that there is now a need for some ruthless prioritisation.

Economics and politics sometimes pass in the night, but they rarely face in the same direction. The paradox is that the more you side with the view that cuts should be slower, the more you must reassure the electorate by demonstrating your determination to prioritise ruthlessly.

Taxing the rich more is not ruthless prioritisation, but the easy option; a habit that progressive parties should indulge in judiciously. Tax avoidance has to be tackled, but it is fiendishly difficult to raise more revenue consistently by doing so, particularly from global corporations. To deal with it effectively often requires international agreement.

Before Labour comes to a judgement on the spending envelope it needs to set out a coherent case to begin to answer the question that looms large on the horizon.

First, it must define, or rather redefine, the role of the state, and from this demonstrate how it will deliver value for money.

Old Labour believed that central government’s job was to deliver. New Labour wanted to steer not row the boat, but this too often became micro management from the centre, which stifled local initiative. One Nation Labour must let go. On housing benefit, employment programmes, and support for business, there are strong arguments for devolving certain powers to local government.

The IPPR has already made the case for some devolution of powers, but it has also articulated an excellent case for what it terms the ‘relational state.’ Fundamentally, opportunity derives from connections: who you know, not just what you know. By beginning to think about the problem in this way One Nation Labour can radically redefine the role of the state.

Here there are encouraging signs. In his recent contribution to the debate, Jon Cruddas, set out the case for both these changes in thinking.  But to make it fly Labour’s Treasury team must also sign up to this agenda.

One of Ed Miliband’s most effective themes is responsibility, from top to bottom. He should tie government into this theme, based on the responsibility of government to deliver good value for taxpayers. To make the case for this there are many reforms that should be advocated. Most of which don’t normally grab headlines, but demonstrate a real desire to be responsible with taxpayer’s money. An obvious example is the amalgamation of local government pensions, which has the potential to save billions.

Labour is beginning to think about ways to raise revenue which do not entail plucking the goose. It has to be careful not to show too much leg too soon but one idea that has far more mileage is social impact bonds, which reward investors only if certain agreed social outcomes are attained.

But even if Labour articulates these arguments well it cannot duck the need for ruthless prioritisation.  Universal provision of certain services and core universal benefits are vital to binding the nation together, but the boundaries of state provision have always fluctuated, and a debate about those boundaries, based on clear principles, should hold no fear. Certainly not for a mature party that is hungry for government.

For those who would protect everything and change nothing ask yourself how you would react if the Tories were to declare - as they are likely to do - that in the next parliament they would scrap certain pensioner benefits, such as free bus passes and the winter fuel allowance, and put the money instead into a better minimum pension, to protect the poorest?

It is far better for Labour to demonstrate strength and open up this debate now than to respond meekly when the question is put. Oppositions oppose, governments in waiting confront the challenges the nation faces.

Nick Pecorelli is associate director of The Campaign Company

Ed Miliband. Photograph: Getty Images

Nick Pecorelli is Associate Director of The Campaign Company

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.