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Labour needs to go much further on fiscal responsibility

The party should publish a series of potential fiscal rules for discussion and replace the VAT cut with a stimulus based on growth-raising capital investment.

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

Labour has made a start on re-establishing its fiscal credibility but it now must go further than any opposition has done previously – and soon. Recent announcements on fiscal responsibility and welfare reform were pivotal. Having accepted that it can’t simply oppose, Labour is now free to advocate a political approach that is genuinely different to that of the Tories – placing the pursuit of social justice, greater employment, pay and growth at the heart of a fiscally responsible agenda.

When a paper called In the Black Labour was published by Policy Network at the end of December 2011, there was a storm in the Labour teacup. The party started to move towards a fiscally conservative stance but that was soon reversed under some political pressure. Many critics accused the paper of adopting George Osborne’s fiscal and economic stance. This was strange given that Osborne’s strategy of austerity before growth wasn’t fiscal conservatism, but fiscal-self harm which has led to a series of missed deficit targets.

Having resumed the path to a fiscally responsible policy 18 months later, Labour now needs to go further. To ensure fiscal responsibility, while preserving counter-cyclical flexibility, Labour should publish a series of potential fiscal rules for discussion in the expert community, identify preferred public expenditure pathways under different growth scenarios and have these tested independently. Any stimulus would need to be focused on growth-raising capital spend. Therefore, questions should be asked about a stimulus based on a VAT cut, even if temporary in nature. Labour should consider dropping this policy – and soon.

In government, these choices should be monitored by a strengthened Office for Budget Responsibility, or Fiscal Council, who would assess whether government is likely to deliver on its fiscal rules, and to make recommendations if the targets are missed. These proposals mean Labour opening its plans to greater scrutiny at an early stage than any opposition has done before, while still allowing room for manoeuvre should growth hasten or slow. Such scrutiny will make it clear how little money there is, so spare resources must be focused on generating growth through capital investment, helping the unemployed into work, encouraging business investment, and promoting science, education and skills.

Shifting from short-term expenditure to long-term investment and developing sound fiscal rules to ensure sustainable debt levels will be useful tools to help deliver a reduction in debt. However, these measures alone will not be enough to advance social justice in an era of limited budgets.

It also poses questions for welfare policy. Housing has attracted particular attention but the challenge of containing housing benefit budgets is far wider. Yes, more houses are needed but incomes for the most vulnerable, in-work support for those with disabilities and high impact job brokerage, like that seen in Newham, are also required. It is in providing all these supports and services that welfare spending should be focused. None of this will be revolutionary but it will make a measurable difference – the politics of austerity are harder. Spending elsewhere, for example on support for the better off and on above-inflation pension commitments, will have to be reduced.

This also raises the question of tax revenue. From a purely fiscally conservative perspective, the mixture of tax rises and spending cuts is broadly irrelevant (despite fervent academic debates about this issue), so long as deficits are reduced. From the point of view of social justice, however, trying to deliver 80 per cent of deficit reduction from cuts would involve an unacceptable breach of our national social fabric and would, in all likelihood, prove counter-productive. If people are therefore going to be asked to pay more tax it becomes even more important to be open about constraints and choices at an early stage – consent must be earned. The radical realisation among the more savvy on the centre-left is that spending is no longer the shortcut to social justice that it once seemed.

The state still has significant levers. For example, we live in an economy populated by almost 5 million businesses – a 40 per cent increase in only a decade and a six-fold increase since the 1970s. The vast majority of these businesses are sole traders or micro-enterprises. Many are challenging the way big businesses operate with innovative approaches; many bring benefits to their communities that many larger operations struggle to emulate,  not least keeping the wealth they generate local. Yet big business enjoys all sorts of advantages over smaller business, including access to legal action, patent restrictions, expensive regulatory constraints, access to prime space, favour by government procurement and planning law.

Challenging the bias in favour of big business would help release the spirit of entrepreneurial activity in communities across the UK that would not just drive growth and innovation but allow a fairer distribution of wealth.

Labour could place itself firmly on the side of these millions of worker-businesses committed to creating as level a playing field as possible through planning reform, tax changes, access to intellectual property, finance, international markets and marketing support.

If Labour aims to focus resources on supporting growth, putting the economy on a sustainable long term footing and fulfilling the left’s mission of being on the side of the many, not the few, then social justice, economic efficiency and, indeed, fiscal conservatism will go hand-in-hand. The choices are hard, the solutions tougher, but that is the nature of pursuing social justice in fiscally and economically constrained times. It’s better to start early. Labour has now done that but it’s only a start.

Hopi Sen and Anthony Painter have co-written Moving Labour into the Black published by Policy Network with Adam Lent