The recovery position

Even before the financial crash, social democracy in Britain was becoming unaffordable. What the lef

The crisis
Social democracy, as we have come to understand it, has become unaffordable. The recession has merely brought forward the moment of truth. The election of Labour's new leader provides a rare and perfect chance to put matters right. A fresh mandate gives its holder great freedom, for a while. For a few weeks - a few months at most - he or she will be able to convert the party to a new political project. If it doesn't seize the moment, Labour is likely to retreat to the deceptive comforts of a model of centre-left politics that no longer works. This would be doubly dangerous. It would condemn Labour to opposition for longer than necessary and could also lead to the situation where social democracy itself becomes discredited.

By "social democracy" I mean the doctrine that a contented society is not merely a rich society, but that public purpose is as important as private profit and that the government has a duty to pass laws, levy taxes and provide money and services to protect people from the insecurities and depredations inherent in a market economy.

Unlike liberalism, social democracy believes that a strong state is needed to make life better for everyone, and that liberty and localism alone will not lead us to utopia. Unlike conventional socialism, it asserts that a properly functioning market economy is the best way to generate the money needed to finance our social ambitions.

Social democracy is a doctrine that should be more popular than ever. In the wake of the banking crisis, few now dispute that a market economy requires an active government. As the fervently social-democratic historian Tony Judt put it in one of his last articles before his untimely death: "We have entered an age of insecurity - economic insecurity, physical insecurity, political insecurity."

This ought, then, to be a great time for social democrats. Were a party's fortunes linked to the power of its philosophy, Labour would now dominate British politics. Instead its share of the vote this year was little more than in 1983. Why have things gone wrong?

Social democracy and political narrative
The first reason concerns the way New Labour promoted its view of the world or, more accurately, failed to do so. In its 13 years in office, from 1997, the party achieved some significant social-democratic advances, but failed to combine them into a passionate and compelling argument for voting Labour. The list of advances will be familiar: the minimum wage, tax credits, winter fuel payments, parental leave, shorter hospital waiting lists, smaller class sizes, less child poverty, more police on the streets, Sure Start, NHS Direct, free museum entry, and so on. Sadly, the impact of the whole was far less than the sum of the parts, because they were not successfully linked. In this country, the Labour Party has spent so long displaying its inclusive pragmatism and love of the mega-rich that its leaders seem to have forgotten that progressive politics is a moral crusade. It requires passion and anger and hope, not just the abilities to read opinion poll results and triangulate opponents.

This challenge requires more than clever phrases and slick slogans (though these should not be despised). It reflects the paradox that social democracy has become politically weaker precisely because most of its opponents have accepted its most basic precepts: the need for universal education, socialised health care and tax-funded welfare. One result has been an indifferent electoral record: only once in 13 general elections between 1950 and 1992 did Labour win a decisive victory.

Then, in 1997, Labour achieved its biggest triumph. Yes, the Conservatives were seen as sleazy, divided and incompetent, but Tony Blair also fought a campaign that contained some unmistakeably social-democratic messages - such as "Education, education, education" and "24 hours to save the NHS" on the eve of election day. Admittedly, Labour's specific promises were few and small: the big injections of cash into the public services came later. But voters thought that Labour believed in the NHS and that the Tories did not.

Not everyone, perhaps not many, would subscribe to the view that social-democratic fervour played a part in Labour's landslide. Yet the evidence suggests that millions of voters both wanted and expected a more moral, more principled and more progressive government. For example, Blair insisted that tax rates would not rise, but 61 per cent of voters expected taxes to go up under Labour. Just two years earlier, the party had adopted a new constitution with an explicitly social-democratic message: ". . . by the strength of our common endeavour we achieve more than we achieve alone".

One of the tragedies of the 13 years of Labour rule is that, in the strict sense of the term, the party lost the plot. It implemented many social-democratic policies, but failed to develop a complementary narrative. Thatcherism had a clear definition, to do with a particular view of freedom. Its emblematic policies - privatisation, council house sales, curbing union power - were connected. Blairism lacked any such clarity. The good news is that the failure to proclaim the virtues of social democracy can be rectified. The bad news is that tackling the second fundamental reason for Labour's unpopularity will be far tougher.

Social democracy: a business model past its shelf life
Though hard to solve, the problem is easy to describe. Like any political creed, social democracy involves both "diagnosis" (what is wrong) and "prescription" (how to put things right). What has triumphed during the recession has been the diagnostic bit: insecurity has grown and the unfettered market has failed. So there is the need for a social-democratic response - but what kind of response? In the attempt to answer this, social democracy has got itself into trouble. The strategy that worked in the second half of the 20th century will not work in the 21st.

Postwar social democracy rested on two pillars. The first was a broad political consensus that we should work together to build the peace, just as we had done to defeat Hitler. Clement Attlee's government of 1945 transformed education, health and welfare, and lost not a single by-election in the process. Winston Churchill's Tories returned to power in 1951 only when they accepted Attlee's reforms.

The second pillar was economic. The British had been taxed so heavily during the war that it was possible to transfer public spending from military to social purposes and still permit rationing to ease and taxes gradually to fall. Moreover, the founders of the welfare state believed that its costs could be contained. With free medical care and better diets, people would be healthier and the annual costs of the new National Health Service would soon start to fall. In any event, as Anthony Crosland observed in The Future of Socialism in 1956, economic growth would provide buoyant tax revenues: it would be possible to enjoy both "liberty and gaiety in private life" and more generous public services in the years ahead.

Today, both pillars have collapsed. The public services are seen as inefficient. Most people think Labour wasted most of the extra money it spent on the NHS. The contrast with public sentiment in the early postwar years could not be more marked. Most people think that the brunt of the task of cutting government borrowing should be borne by cuts in public spending rather than increases in taxation.

Figures compiled by the Institute for Fiscal Studies show that the cost, in cash terms, of the main components of "social democracy spending" - health, education and social security - has increased from £2bn in 1953 to £408bn today. Part of that reflects the impact of inflation: prices have increased twentyfold in the past 56 years. In today's prices we find that we spend almost ten times as much in real terms on these three big social-democratic causes as we did in the early 1950s. NHS spending is up elevenfold. So much for Crosland's hope that its cost would decline as we became a healthier nation.

How have we been able to afford such big increases in spending? National income is almost four times higher than in 1953-54. So we could afford to quadruple health, education and welfare spending without these services adding to the tax burden as a percentage of GDP. But spending has risen faster than that, so the burden has increased, from 11 per cent of GDP in 1953-54 to 28 per cent this year. And it is worth noting that, whatever we like to think about the Thatcher/Major years, "social democracy spending" grew by 75 per cent in real terms between 1979 and 1997, and rose from 20 per cent of GDP to 23 per cent.

Now, if "social democracy spending" could be contained over the next 20 to 30 years so that it rises no faster than GDP, there would be no great problem funding it. This is not the same as the kind of short-term savings that the coalition government is seeking in order to reduce government borrowing. Such savings will ease the financial pressures, but only for a while. The longer-term stresses will soon reappear. This is because most of the components of "social democracy spending" are what economists call "superior goods": the richer we grow, the more of them we demand. We stay in education longer and want our classes to be smaller and our schools better equipped; we seek the best and latest remedies for our ills; we live longer and want to live better during our longer retirements. For all these reasons, our demand for "social democracy spending" grows faster than national income.

In the short run, there is much legitimate mischief to be had at the coalition's expense as it proves unable to protect front-line services completely. But honesty should impel all serious social democrats to recognise the more fundamental crisis - that the usual means of finding extra cash to meet the rising costs of social democracy are no longer available. Defence no longer costs enough for further "peace dividend" savings to help much. Even scrapping nuclear weapons when Trident expires would help only fractionally.

We need to spend more, not less, on infrastructure, a popular target for urgent cuts. Most important of all, we are at or near the maximum level of taxation that the electorate, and Britain's status as an open economy, will bear. Even without the recent recession and sharp increase in government borrowing, social democracy in its familiar form was on the verge of becoming unaffordable. However much we may wish it otherwise, the conclusion is inescapable: social democracy needs a new business model.

Rethinking social democracy's business model and political narrative
How can social democracy continue to fight for the collective good, for social justice and for a view of human well-being that includes but goes beyond material wealth, in an era in which the spending train has hit the buffers?

Here are six proposals:

1. Reduce universalism. The case for universalism in the provision of services and welfare is strong. It aids social cohesion. It reflects theinsurance principle: that all contribute and all have the right to benefit. It embodies all that is best about social democracy. But it is also expensive. The time has come to confine universalism to those services that have specific merit. The biggest are health and education: to a social democrat, it is fundamental that children from different backgrounds should attend school together and everyone should have the right to decent health care when they need it.

Cash transfers fall into a different category. Much is spent providing people comfortably off (like me) with child benefit, state pensions and the winter fuel allowance. My Freedom Pass can be added to the list: I do not receive any cash, but I save money by travelling free on London's Tube and buses. The term "means test" has acquired unpleasant overtones, partly because of the humiliating process that too many people go through to secure the benefits to which they are entitled. One of the challenges for social democrats is to find ways that command respect to target cash and near-cash benefits at those who need them most.

2. Use co-payments to increase the cash available for public services. If tax revenues are not big enough, other sources of money must be found. An obvious example is road pricing. New technology allows us to use smart means to charge motorists for driving on our roads, with different rates for different types of road and different times of day. We should also examine how other countries whose health services work better than ours provide a universal service, but require better-off people to make a contribution, for example, for visits to their GP. Co-payments should be a social-democratic cause, because well-funded public services are a social-democratic cause.

3. Steer, don't row. The government can steer by deciding the law, but should leave delivery to others. We should learn from the "reinventing government" agenda first developed in the US 20 years ago. Its most important insight was that we should distinguish between objectives (what services and support should be provided and to whom) and methods (who should deliver those services). Take car insurance: the law says drivers must have adequate insurance, but the insurance itself is provided by private companies competing for our custom.

This principle could be applied over time to social insurance - unemployment, retirement, and so on. British society has changed vastly since the 1940s; the system of social insurance that was best for then may not be best for today. If transfer payments were restricted to the neediest, it would be possible both to save money and to reduce poverty (by increasing the amounts paid to the poorest households). Employed people would then be required to take out insurance against unemployment, and to save into a pension fund for which the government would set minimum standards. Like motorists, workers would be free to shop around and decide how much to pay, if anything, for higher levels of cover. One option would be for a publicly owned body, such as the Post Office, to compete commercially with the private sector.

The point is that workers would be able to choose and their premiums would not be taxes or compulsory National Insurance payments.

4. Restore fairness to housing policy. Homeowners, and especially well-off homeowners, are pampered to a ludicrous extent. They pay no capital gains tax on the profits they make and owners of the most expensive homes pay only three times as much council tax as the owners of the smallest, most run-down homes. We are encouraged to use our homes not just as places to live, but as tax-efficient savings vehicles. The result is house prices rising on average twice as fast as earnings over the past 40 years, first-time homebuyers finding it harder to get on the home-owning ladder, and now more restrictive, post-recession lending rules for banks, making the problem even worse.

Two simple reforms would help: first, double the council tax on Band H homes, halve the tax on Band A homes and alter the intermediate rates accordingly. This would make council tax broadly proportionate to the value of property: Band H homes are typically worth 12 times Band A properties and would attract 12 times the level of council tax. Second, levy capital gains tax on sales of homes and use the money to build more social housing. These measures should moderate the long-term rise in house prices and increase the supply of homes for rent. It is becoming easy to transfer income from one country, or tax jurisdiction, to another. Physical property is harder to shift. The sooner we start to make this change, the better.

5. Create a National Jobs Service. In some areas, however, government spending will have to increase. One such area is unemployment. For some of those out of work, joblessness has become a way of life. For millions in work, fears of unemployment are more intense than they used to be. A National Jobs Service could make a difference. Anyone out of work for more than six months would be offered local, community work for 20 hours a week at the minimum wage. Benefit payments would be additional, but conditional on this work being done.

The work could include a training element. Whatever the arrangements, the aim would be to meet three objectives: to retain (or instil) the habit of working, to retain (or enhance) levels of skill, and to do local jobs that need doing.

6. Rethink equality. The debate about equality has become far too narrow - generally, it is defined in terms of income. When people say Britain became more unequal during Labour's years in office, they point to figures that show the gap between high earners and low earners, or to those living on state benefits.

But equality and social justice are not adequately measured by calculations confined to the income scale. Social democrats should not fall into the trap set by pro-market enthusiasts of reducing all judgements to money.

The challenge for social democrats is to expand the notion of equality, to ensure that everyone has the opportunity to be involved, a secure and full citizen. This is not just about money. It is also about culture, health, clean air, attractive public spaces, decent housing, good schools, healthy eating, access to new skills and freedom from fear of crime.

This opens up a wider social-democratic agenda that is less to do with income distri­bution and more to do with the texture of the society we want to create: affordable fresh food for inner-city housing estates; extended school hours (providing breakfast in the morning and more clubs and homework support after school); tougher pollution controls; local, live performing arts; more neighbourhood policing; better public transport.

Some of these things will need more money, which adds to the imperative to develop a new and more sustainable business model for social democracy. But the pursuit of these objectives, along with the other proposals listed above, would help to rescue a doctrine that is mired in crisis and to fend off the alternative, right-wing prospectus: that the way out of the present crisis is for the state to do far less. It would also allow social-democratic politicians to speak once more with passion about the virtues of public purpose and collective action.

Above all, it will provide Labour's new leader with something that he or she badly needs - a compelling but also realistic story about how to build a better Britain.

Peter Kellner is president of YouGov. His pamphlet "The Crisis of Social Democracy" is newly published by Demos

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