Labour MPs urge Miliband to make the case for borrowing to invest

Former cabinet ministers Peter Hain and John Healey argue that the party must make an explicit case for investment if it is to counter the Tories' attack lines before the election.

Ed Balls's recent confirmation that Labour will leave room to borrow to invest has led to a renewed assault from the right on the party's economic stance. A Times frontpage declaring "Labour’s spending spree to cost £25bn" and Danny Alexander’s subsequent claim that the party would add "another £166bn of borrowing" were a preview of the onslaught that the Conservatives and their proxies will mount in the run-up to the election. In 1992, it was the "tax bombshell" that sank Neil Kinnock and John Smith’s election hopes. The Tories believe that the "borrowing bombshell" will do the same to Miliband and Balls in 2015.

Faced with these attacks, as I write in this week's politics column, Labour's instinct remains to change the subject: to its pledge to achieve a current budget surplus, to the living standards crisis, to George Osborne’s failure to meet his deficit targets. Balls and his aides state both publicly and privately that no decision will be taken on whether to borrow for capital spending until closer to the election, when the state of the economy is clearer. But few in the party believe it will be possible for Labour to achieve its priorities – a mass housebuilding programme, universal childcare, the integration of health and social care – without doing so. As one shadow cabinet minister told me: "We all know that a Labour government would invest more." The question, rather, is a tactical one: when and how does Labour make the case for "good borrowing"?

In private, Miliband’s advisers argue that the voters are able to distinguish between borrowing to fund day-to-day spending and borrowing for investment, just as they distinguish between "borrowing to fund the weekly shop" and "borrowing for an asset like a house". But the Labour leader is not yet prepared to make this case in public. Since an ill-fated interview last year on Radio 4’s The World at One, in which he refused eight times to admit that Labour would borrow more than the Conservatives, Miliband has focused deliberately on market reforms that would not cost government money: freezing energy prices, expanding use of the living wage and restructuring the banking system. When he has made promises that would require new funding, such as the construction of 200,000 homes a year by 2020, the question of borrowing has been deferred.

But an increasing numbers of Labour MPs believe this ambiguity can no longer be maintained. As one told me, "if we wait until January 2015 before making the case, it will be too late to win the voters round." As all sides acknowledge, the party begins from a position of weakness. The Conservatives' framing of the crash as the result of overspending by the last government has succeeded in crowding out all alternative accounts. Having lost an argument about the past, the question now is whether Labour can win an argument about the future and the need for investment in those areas, such as housing and childcare, that support long-term prosperity. 

The former cabinet minister John Healey told me:

The terms of debate about borrowing are still dominated by the simple sloganeering from the coalition … I think we have to break that argument; there is clearly good borrowing and bad borrowing.

You don’t want to be borrowing as a government, or a household, or as a business in order to support day-to-day revenue spending. But there’s a strong principled argument for the value of borrowing to invest when you build up a long-term asset that will be paid for over the long-term, not least because those that pay for a road, a power station, a hospital, a new set of housing will also be those that benefit from it as they service the borrowing. That’s the basic principled case for intergenerational fairness and the rightness of borrowing for that purpose.

Governments, uniquely, have the position and the power to borrow at rates not available to anyone else. They can borrow at low rates for the long-term. And third, uniquely, it’s what governments do in order to pull their countries through bad times.

Another former cabinet minister, Peter Hain, similarly argued:

We ceded the territory in the months after May 2010 by being preoccupied with an overlong leadership election. We’ve got to win it back, basically. And the only way of winning it back is to be on the front foot.

He added: "Our big picture should be the capital investment in housing, with all the hundreds of thousands of jobs and apprenticeships that will create as well as meeting an essential demand. We've got to get that out. I think that argument can be won.

"The Tory-Lib Dems have successfully imprinted a big deceit on the public mind with the help of a largely compliant media, that the public expenditure crisis was all Labour's overspending, rather than the global banking crisis and managing the consequences of that. So we have ground to make up and it can be made up provided we're on the front foot." 

Healey urged Labour to turn the Tories’ household analogies against them:

Governments aren’t the same as families or households but you can make some of the same arguments in Thatcher-like terms. It makes sense to borrow to buy a house, especially if your mortgage payments are less than your rent. It makes sense to borrow money to buy a car if that allows you then to travel to take up a job that pays better and brings in more. Some of the same dynamics are there in good government investment for the long-term.

The case for borrowing to invest could be made more easily if Labour were to have what one MP calls a "fiscal Clause Four moment": an act that convinces voters it means what it says about "iron discipline". It is this ambition that explains Balls’s continued threat to withdraw support for High Speed 2 and the doubt over Labour’s commitment to Trident. But while the party continues its search for an emblem of fiscal responsibility, the Tories are remorselessly increasing their lead on this issue.

Rather than proselytising for borrowing, as Labour’s most ardent Keynesians propose, or entering an auction on austerity, as its most ardent fiscal conservatives suggest, Miliband’s ambition remains to shift the debate towards building "a different kind of economy", one beyond the traditional terms of exchange on tax and spend. In an era of depressed living standards, it is a gamble that may serve his party well. But if the next election proves more like its predecessors than many expect, he risks being left defenceless beneath the bombshell.

Ed Miliband looks on in his office at Portcullis House at the beginning of a meeting with German Foreign Minister Frank-Walter Steinmeier earlier this week. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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