Osborne's Spending Review is a test for Labour too - how will it respond?

Balls and Miliband will come under ever greater pressure to say whether Labour will match the coalition's post-election spending plans.

So fractious have the negotiations over the 2015-16 Spending Review been that, at various points, some ministers have urged George Osborne not to hold one at all. But Osborne, who has scheduled the review for 26 June, was never likely to take their advice. For the Chancellor, the event is critical to the Conservatives' strategy for the 2015 general election. By setting spending limits for the first year after the election in advance, he will establish "the baseline" and challenge Labour to match it. Should it fail to do so, punishment will be swift. In a rerun of the Conservatives' 1992 campaign, Osborne will accuse Labour of planning to hit Middle England with a "tax bombshell" to fund higher spending. 

Whether or not pledge to match the coalition's spending plans, as Labour did with the Tories' in 1997, is the biggest political decision Ed Miliband and Ed Balls will take before the general election. If they accept Osborne’s baseline, the left and the trade unions will accuse them of embracing "Tory cuts" (something that, in the words of one Labour MP, “would make the row over the public-sector pay freeze look like a tea party"). If they reject it, the Chancellor will accuse them of planning billions in additional borrowing or tax rises. 

Having abandoned hope of meeting their original deficit-reduction targets, the Tories believe another election fought over austerity could yet favour them. In 2015, their pitch will be, “Yes, it’s taking longer than we thought. But who do you trust to finish the job – the government, or the ones who got us into this mess?”

A pledge by Balls to match Osborne’s spending plans would be an efficient means of closing down this line of attack. For this reason, it is an option that the shadow chancellor’s team notably refuses to rule out. As chief economic adviser to Gordon Brown, Balls helped mastermind the original 1997 pledge and has already declared that his "starting point" is that Labour will "have to keep all these cuts", a step towards accepting Osborne’s baseline. When Harriet Harman told the Spectator last September that Labour would not match the Tories’ spending plans and abandon its “fundamental economic critique” of the coalition, she was forced to issue a retraction

A promise to stick to the Tories’ baseline would not entail supporting all of the cuts proposed by Osborne; rather, Labour will need to replace any cuts that it rejects with tax rises or cuts of equivalent value. While acknowledging that it cannot avoid austerity, Labour would vow to distribute the pain more fairly, ensuring that the richest bear a greater burden. The party will likely pledge to reintroduce the 50p top rate of income tax and adopt some version of a "mansion tax" (a proposal but not yet a manifesto commitment). 

Against this, however, is the fact that signing up to the Conservatives' plans, a trick straight out of the New Labour playbook, would run entirely counter to the post-Blairite spirit of Miliband's leadership. Embracing Tory levels of austerity would also deny the economy the stimulus it so desperately needs. For these reasons, senior MPs, most notably Peter Hain, and groups such as the Fabian Society have already urged Labour to reject this course of action. 

Whichever path Balls and Miliband choose, don't expect an answer this year - or next. As today's Guardian reports, the party is likely to wait until just a few months before the general election before announcing its decision (as Blair and Brown did in 1997). This is smart policy as well as smart politics. With the economy and the public finances so volatile (borrowing has been revised up by £245bn since 2010 and growth has been around 6 per cent lower than forecast), Labour can reasonably argue that it is in no position to make a decision more than two years out from the election. Balls and Miliband have learned from the mistakes of the Tories, who pledged to match Labour's spending plans in 2007 only to abandon this pledge after the crash in 2008.

The Conservatives would like nothing more than for attention to be diverted away from their economic failure and onto Labour's plans. It is an opportunity that Balls and Miliband will rightly deny them. But as political pressure (from right and left) grows on Labour to declare its intentions, the next few months will provide the greatest test of party discipline yet. 

Ed Miliband and Ed Balls at the Labour conference in Manchester last year. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.