The left should show that it too, can be thrifty in straitened times. But that doesn't mean timidly accepting the smaller-state proposals of the Tories

Nine months ago, Gordon Brown won plaudits for intervening boldly to prevent the financial crisis spiralling out of control with a plan to recapitalise the banks. The Nobel Prize-winning economist Paul Krugman declared in the New York Times, under the headline “Gordon does good”, that Mr Brown had “saved the world financial system”.

Today, the Prime Minister stands accused of wrecking the public finances and bankrupting Britain. Critics left and right point to soaring budget deficits, record levels of government borrowing and a mounting national debt (without acknowleding that saving the world costs money: the latest estimates suggest the final bill for the British banking bailout could reach more than £1.4trn – and that doesn’t include the £20bn cost of the Treasury’s fiscal stimulus, without which recession would have turned into depression).

It is time for some candour about public expenditure. The Prime Minister has to admit what even the Treasury’s own figures now seem to suggest: that the growth in spending since 1997 (proudly trumpeted by Labour) will soon grind to a halt as the next government – Labour or Conservative – rebalances the public finances and reduces public debt. As Steve Richards writes on page 16, “There is not a commentator in the land . . . who believes that Labour would be in a position to ‘spend, spend, spend’ after the next election.”

Mr Brown, and leading allies of his such as the Schools Secretary, Ed Balls, may be gearing up to fight the next election on the familiar territory of “investment v cuts”, but the opposition has a potent counter-narrative: honesty v dishonesty. David Cameron is intent on portraying the Prime Minister as a liar. Yet the Tories have not come clean on their fiscal plans, either. The shadow schools secretary Michael Gove, for example, says “front-line spending” would be protected under a future Conservative government, while the shadow chancellor, George Osborne, says only health and international development budgets will enjoy guarantees of protection. Both cannot be true – so which is it?

Moreover, the Tories have confirmed that they are ideologically, rather than pragmatically, disposed towards slashing spending and reducing the size of the state. Why else would Mr Cameron and Mr Osborne be so convinced that public expenditure must be reduced, immediately and drastically, while remaining committed to scrapping inheritance tax on estates worth less than £1m – a measure that would cost more than £3bn a year and benefit only the 3,000 richest families in Britain?

In any case, the debate over whether we should spend, spend, spend or cut, cut, cut is, in fact, a distraction. There are some public spending cuts that most social democrats, as well as many free-market conservatives, would live with. Abolishing identity cards is an obvious option – and the Home Secretary, Alan Johnson, now appears to agree. There are also compelling arguments for renegotiating GPs’ salaries, cutting back on the prison-building programme and cancelling plans to replace Trident – a view endorsed in a new IPPR report co-authored by Lord Robertson, the former secretary general of Nato, and the former chief of defence staff Lord Guthrie (it also called for a review of £24bn of existing defence equipment projects).

Then there is tax. There is no reason why Britain, a low-taxed country by European standards, cannot use taxation to help close the fiscal gap. Indeed, our political correspondent James Macintyre points out on page 12, that there is an appetite among the public for a mixture of spending cuts and tax rises.

Who, for example, would object to a tax on bank bonuses (apart from the greedy bankers themselves)? In the US, Congress passed a 90 per cent tax on bonuses paid out by the failed insurer AIG to its executives. Why not do the same here with the state-owned RBS and Lloyds? Unearned income is ripe for progressive taxation. How about cracking down on tax avoidance, too? The TUC and the Tax Justice Network argue that tightening tax loopholes and abolishing tax havens could raise roughly £25bn.

There’s no ignoring the hole in the public finances, and the left should show that it, too, can be thrifty in straitened times. But that doesn’t mean timidly accepting the slash-and-burn, smaller-state proposals of the Tories. There is another way. One that combines sensible spending cuts with obvious, even popular, tax rises. Once, you might have called it the Third Way.

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