David Cameron believes the biggest economic challenge facing the country is government debt. He's wrong. The real challenge is delivering strong and sustainable growth.
This year the government deficit will amount to roughly 12.5 per cent of GDP. But this is the right approach in a recession. Government spending is compensating for a lack of private spending - as households repay debt and businesses either can't or won't invest (because banks won't lend). But the debt ratio is not unique and, indeed, is in line with the other G8 economies. Yes, we need to bring the debt and deficit down - but it is not the immediate or biggest challenge we face, and to reduce the deficit now would prolong the recession and pain to businesses and families.
The surest way out of the debt problem is economic growth - growth will boost tax revenues, reduce unemployment and hence government spending. A strategy for growth should be the focus of Alistair Darling's pre-Budget report (PBR).
Foremost in this strategy must be investment in the jobs and industries of the future. The UK has the potential to generate 400,000 jobs in green industries in the next few years. But there is no guarantee that hi-tech, high-skilled jobs will come to the UK. It is hard in the current economic environment for businesses and entrepreneurs with innovative and exciting ideas to secure funding for long-term investment. A national infrastructure, or investment bank, would enable government and business to act in partnership to build the future jobs the economy needs.
Second, to get growth back on track we must ensure that businesses and families can access bank finance at affordable rates. And, as we rebuild the economy, we must restructure the financial sector so that it cannot bring the economy to its knees again but instead fulfil the role it should provide - to channel savings to sensible investment.
The PBR should address these challenges directly, with legally enforceable lending targets for banks - focusing on money out of the bank door, not offers of loans at rates so extortionate that businesses can't afford to take them up. The lack of bank lending reflects a desire on the part of banks to rebuild their balance sheets, but without a strong business sector the banks will certainly incur further losses. Better instead for banks to improve their balance sheets through reduced bonus payouts. So, the PBR should also include a windfall tax on the excessive profits of banks or a 60 per cent rate of tax on bonuses of over £10,000. This would discourage payouts which are eroding bank capital, improve the public finances - which in large part have deteriorated because of support to the bailed-out banks - and begin to tackle the reckless bonus culture that got us in to this predicament.
Looking forward, there must be no return to "business as usual" in the banking sector - the "socially useless" functions of banks must be addressed. The PBR should include a review of the size and ownership model of our banks, including proposals to support the growth of building societies, and a commitment to look seriously at the remutualisation of Northern Rock.
But while it is essential that government does not withdraw the stimulus yet, it would be irresponsible not to commit to reducing the deficit as the economy recovers. Sound public finances are important for economic growth. Labour knows this, which it is why, between 1997 and 2006, the debt burden was cut from 42.5 to 36 per cent of GDP, reducing debt interest payments and freeing up money for investment in public services. Large budget deficits are needed during the recession to pump-prime the economy, but not when growth is back on track.
Through a combination of strong growth, tax increases and spending cuts, halving the budget deficit in four years is achievable but a credible plan for doing so is needed. At the moment, the right is winning the argument on how to achieve this, emphasising the burden that public spending will bear. Yet research by the think tank Compass shows that 78 per cent of people think the richest 10 per cent should pay at least the same percentage of their incomes in tax as the poorest. Moreover, the support for the new 50 per cent tax rate, and the growing discomfort around Tory proposals to reduce taxes for 3,000 millionaires by £200,000, shows that the country is more progressive than government gives them credit for. Deficit reduction must be shared between tax increases and spending cuts; and, again, growth will reduce the burden of the debt.
Contrast this growth approach with the rhetoric of George Osborne, the shadow chancellor. Osborne wants to cut spending right now, against all the historical evidence and against the international consensus. As Dominique Strauss-Kahn, managing director of the International Monetary Fund, said on 23 November: "We recommend erring on the side of caution, as exiting [from stimulus plans] too early is costlier than exiting too late."
But Osborne is not listening to the evidence. His approach threatens the recovery by taking money out of the economy at precisely the time it is doing most good. The risks of a double-dip recession have not gone away, and would be higher if government withdraws - you need only look at Japan in the 1990s or the US in the 1930s to see that.
In reality, Cameron and Osborne's desire for cuts are motivated by an ideological zeal to reduce the size of the state, rather than an economically literate strategy to build a strong economy.
The PBR is an opportunity for Darling to put down a challenge to Osborne. Will the Tories invest in the jobs and technologies of the future? Will they have the courage to take on those in the City who still argue for light-touch regulation? Or will they stick with their siren call - "cut spending now"? The economy remains in recession and the global recovery is fragile. With an election fast approaching, Darling must set out Labour's strategy for growth and deficit reduction with an ambitious pre-Budget report.
Rachel Reeves is the Labour parliamentary candidate for Leeds West