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Why Labour has not "surrendered" on public spending

Contrary to what conservatives suggest, Balls hasn't capitulated to Osborne. He supports stimulus now and investment after 2015.

George Osborne and Ed Balls attend the State Opening of Parliament on 8 May, 2013 in London. Photograph: Getty Images.

Daniel Finkelstein is the latest fiscal conservative to hail Labour's apparent Damascene conversion to austerity. In today's Times he writes of Ed Balls's alleged "intellectual surrender", "the argument he once boldly made, that deficits don’t matter, has gone". 

Balls's speech last week was a significant moment. Not only did he reaffirm that Labour would have to keep most or all of the coalition's spending cuts, he stated that it would have to make its own (and suggested some too). But Finkelstein is wrong to present this as an epoch-defining capitulation to compare with 1976. 

To begin with, Balls's support for stimulus now remains unwavering. Under the political cover of the IMF, he called for the coalition to bring forward capital spending increases from 2015, "financed by a temporary rise in borrowing", in order to promote growth. Contrary to what Finkelstein suggests (recalling Jim Callaghan's famous words), he still believes that you can "spend your way out of recession". More borrowing, more spending remains the Keynesian remedy  prescribed by Balls. The consistent error of the right has been to equate support for stimulus with support for a larger state. As Balls has always acknowledged, a stimulus is, by definition, temporary. In the words of his hero Keynes, "The boom, not the slump, is the right time for austerity at the Treasury." The true intellectual surrender would be for Labour to endorse Osborne's strategy of piling cuts on cuts, a path it has rightly rejected. 

But Finkelstein also overstates the extent to which Labour has committed itself to austerity after 2015. For Balls, Osborne's spending limits are a "starting point", not a blueprint. With growth of just 1.1 per cent since 2010 (compared to 2.9 per cent in Germany and 4.9 per cent in the US), he has adopted the prudent stance of preparing for the worst. But should growth surprise on the upside, he will be able to raise the baseline.

Nothing in Balls's speech precluded the possibility of Labour spending significantly more once a genuine recovery is underway. After all, the surge in expenditure under the last government (an average annual increase of 3.4 per cent) only came after Gordon Brown had stuck to the Tories' "eye-wateringly tight" spending limits. In the case of capital spending, Balls has already hinted that Labour will pledge to invest more than Osborne. As he said, "And for the future, we need to invest in the homes, transport and infrastructure Britain needs and ensure a recovery made by the many. Of course, here too we will only set our plans for investing in Britain’s future in the light of the economic circumstances at the time, and the needs of economic growth". 

Last week was not an "intellectual surrender"; it was an attempt to give Labour the political cover to be radical.