While Labour's "cost-of-living" offensive has allowed it to reframe the economic debate in its favour, senior figures in the party know that it will struggle to win a majority unless it can convince voters that it can be trusted to spend money wisely. As Ed Balls says in his interview in today's FT, "Unless we can show . . . that we’ve got a plan which will work, the public won’t think that we will solve the cost of living crisis".
To prove that Labour does have such a plan, Balls has launched the first phase of his "zero-based" spending review today. A zero-based review differs from others by requiring every item of spending to be approved, rather than merely changes to a pre-determined baseline. In other words, nothing is off the table. Labour plans to scrutinise spending in every area, including those protected by the coalition: the NHS, schools and international development. The document contains the most explicit statement yet that the party will cut departmental spending in 2015-16 and will not borrow to meet day-to-day spending:
We will be cutting departmental spending in 2015-16 and not raising it, with no more borrowing to cover day-to-day spending
The deficit forecasts might be slightly less dreadful than before (the OBR now expects the deficit to be £79bn in 2015-16 compared to £96bn in March; its 2010 forecast was £20bn), but the OBR's judgement that the improvement in the public finances is almost entirely cyclical means that the structural deficit (the part of the deficit that exists regardless of the level of economic output) is deemed to be no smaller than before; austerity cannot be avoided.
But while Labour is committed to matching Osborne's departmental spending plans, there are many different ways to spend £313bn (the spending limit set by the coalition for 2015-16). While remaining within the Chancellor's fiscal envelope, Labour plans to identify "savings" and "switches" that better reflect its "priorities" (what Nye Bevan called "the religion of socialism"). As Balls suggested in his speech
in June, this could include withdrawing funding for free schools in areas with surplus places, scrapping Police and Crime Commissioners, cutting the number of army officers and admirals, merging the four separate government motorist agencies, combining management functions in government departments, agencies, fire services and police forces, and requiring industries to contribute more to the cost of regulation. The party is also likely to vary the ratio of spending cuts to tax rises within Osborne's deficit reduction programme, for instance by reintroducing the 50p tax rate.
These switch-spends and tax decisions will be included in Labour's manifesto, with a full Spending Review to follow after the election. It is also in the manifesto that the party will announce which areas, if any, it intends to ring-fence. This will almost certainly include the NHS. Polls show that it is the most popular
spending area with voters and the above-average rate of inflation in the health service means it frequently requires real-terms rises just to stand still. With the Tories making it clear that they would continue to ring-fence the NHS after 2015, Labour has no intention of handing them an easy political victory.
Here's the timetable for the zero-based review:
Phase 1 of the Zero-Based Review will involve the Shadow Chief Secretary and the Treasury team working with individual departments on a detailed response to the questions raised in this initial document.
Phase 2 of the work will then identify initial savings and switches to reflect Labour's priorities and report before our manifesto.
Phase 3 covering our first year in Government, will see the implementation of any immediate switches/changes to inherited plans and work on a full spending review for 2016-17 onwards.
Two other points are worth noting. The first is that Balls has left himself room to borrow more than Osborne to fund investment in infrastructure, telling the FT
that "any decision about capital" will depend on "the state of the economy". While polls show
that voters are supportive of borrowing for areas such as housing, Labour will need to make the argument early enough to counter the inevitable charge from the Tories that it is planning more of the borrowing that "got us into this mess".
The second is that the big fiscal question is not whether Labour will match the coalition's spending limits in 2015-16 (most governments deviate little from the plans they inherit) but whether it will remain within Osborne's envelope for the entire parliament. But for both political and economic reasons, don't expect an answer to that until after 2015.