Labour must make a fundamental choice; whether to broadly accept George Osborne’s fiscal plans or commit to spending more. Until that decision is made, the question of whether Labour is tacking to the left or hugging tight to the coalition will remain unanswered: 'follow the money', to use the old Watergate maxim.
A Fabian Society commission has spent the last year examining this choice by considering the impact of rolling forward the chancellor’s current plans, as well as asking how much more it might be possible for a future government to spend and what that money might do.
The inquiry concluded that the coalition’s existing plans for 2016 and 2017 would translate into an almost unthinkable decline in public provision. Councils would be able to deliver little more than their statutory social care and refuse collection duties. Some government departments would end up with less than half the budgets they started with in 2010. And a further round of deep social security cuts would be needed, with George Osborne’s proposal to remove benefits from young people only the start.
A future government should do everything it can to avoid making these choices, but it must also remain totally committed to deficit reduction, for both economic and political reasons. That leaves a tight-rope to walk, between fiscal denial and spending cuts which will cause huge harm. Exactly how much more money a future government will be able to spend will depend on how well the economy is doing, because rising GDP feeds through into extra tax revenue. But the Fabian commission concluded that any party wishing to offer a convincing alternative to the coalition should aim to spend £20bn more in 2017 than the government now intends.
This would be enough extra money to avoid the worst of the pain scheduled for after the next election. But an incoming government would still need to make some hard decisions, which could prove very uncomfortable for Labour activists. For example, it would probably be possible to avoid big new cuts, but most departments would see spending frozen or increased by inflation only. The government would also need to find money from social security, so some entitlements would need to be cut unless economic recovery creates unexpected savings. There will almost certainly need to be a debate about 'least bad' benefit cuts, with fresh attention to some of the more marginal pensioner benefits.
Labour won’t win the argument, however, if the fiscal debate is just about spending 'more' or 'less'. The left also needs to set out the positive case for spending, by arguing that the composition of public expenditure must change. Under the coalition, the spending priorities have been healthcare and pensions. Both are very important, but without enough money to go round, the result has been deep cuts to the sort of future-facing spending which brings long term prosperity: skills, childcare, infrastructure, innovation and job creation.
The Fabian commission proposes that in 2016 and 2017, spending on these areas should receive the same special protection as the NHS budget does today. It also argues for a permanent increase to capital spending. With these reforms a future government could show that higher expenditure is the only way to spend on the future without sacrificing the vulnerable, old and sick of today.
Labour will no doubt worry about the political attacks it will face if it is to promise more spending. And it is true that some of the extra money would probably need to come from tax rises, although these can be limited to high income groups. For example the Fabian commission heard that many billions could be saved through reform of pension tax relief, so that rich workers only receive the same public subsidy for each pound they save as everyone else.
But the improving economic outlook also offers some cover for the proponents of higher spending, since projections for tax revenue will soon be revised upwards. The coalition seems likely to commit the money to accelerating deficit reduction or pre-election tax cuts. Labour can promise an alternative; to recycle the 'proceeds of growth' into productive, pro-growth public expenditure. A promise to spend more after 2015 need not be seen just as a shift to the left. It is also a commitment to Britain’s long-term future.
2030 Vision: The final report of the Fabian Society Commission on Future Spending Choices is published today. Read it on the Fabian Society's website here