Why the falling deficit could be good news for Labour

The smaller the deficit becomes, the harder it will be for the Conservatives to make it the defining economic issue. Labour can continue to shift the debate to living standards.

So us Keynesians were right when we said that growth is the best antidote to debt. With output finally rising (by as much as 1% in the most recent quarter), the deficit is falling. The latest figures from the ONS show that the government borrowed £11.1bn last month, £1bn less than in September 2012. The total deficit for the year so far is £56.7bn, down from £62.6bn over the same period last year. 

At first glance, this looks like good news for George Osborne. The Chancellor's deficit reduction plan might still be off-track (with austerity extended by three years until 2018) but the fiscal position is better than expected a year ago. When Osborne delivers his Autumn Statement on 4 December, he is likely to announce significantly improved forecasts from the Office for Budget Responsibility. But there at least two reasons why it's Labour, not the Tories, that could benefit from a falling deficit. 

The first is that the smaller the deficit becomes, the harder it will be for the Conservatives to make it the defining economic issue (their strategy since 2009), allowing Labour to continue to shift the debate towards living standards. Despite Osborne continually missing his borrowing targets (with the government forecast to borrow billions more than Labour planned), the polls show that the Tories still enjoy a large lead in this area: voters believe that the Conservatives are the best party of deficit reduction and are unlikely to change their mind before 2015.

Rather than trying to explain how it would borrow more to borrow less (Keynes's paradox of thrift is ill-suited to a soundbite age), it makes sense for Labour to reframe the economic debate around prices and wages. While voters think that the Tories are more likely to maintain economic growth (42-33%) and to keep public spending under control (47-28%), they believe their own family would be better off under Labour (41-31%) and that Miliband's party is more likely to keep prices down than Cameron's (48-21%). As I revealed last week, Labour's strategy has been inspired by Barack Obama's successful 2012 campaign. A report on the election by the veteran Democrat Stan Greenberg for Miliband pointed to polls showing that while Mitt Romney had led on "handling the economy"(51-44%) and "reducing the federal budget deficit" (51-37%), Obama had led on understanding "the economic problems ordinary people in this country are having" (51-43%) and on "looking out for the middle class" (51-40%).

The second reason for Labour optimism is that accelerated deficit reduction means it will inherit a less dire fiscal position if it wins the election. The more borrowing shrinks now, the fewer cuts Labour will have to promise after 2015. With Osborne likely to use the extra revenue to offer tax cuts and other pre-election sweeteners, rather than return to his original deficit reduction timetable, the party will have the opportunity to offer an alternative centred around investment in its priority areas of employment, infrastructure, social care and childcare. 

Labour won three elections between 1997 and 2010 because voters preferred greater spending on public services to tax cuts. With the return of growth, this familiar battle is coming into view - and history is on Miliband's side.

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.

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.