The rights and wrongs of Ed Balls

Ed Miliband’s choice of shadow chancellor is right. But to take the fight to George Osborne and stay

Ed Balls didn't have to wait long to get what was coming to him. As the chorus of waiters serenaded Carol Channing in the stage musical Hello, Dolly!: "It's so nice to have you back where you belong." At last, Britain will have a proper debate not only about its immediate economic future but on the longer-term issue of the sustainable scale of the welfare state.

On 21 January, the Times columnist Philip Collins wrote: "The only thing people recall about the Brown administration is that it ran out of money." They need some reminding.

It was Gordon Brown as chancellor, with Balls riding shotgun, who gave the Bank of England its independence, immunising it from the inflationary preferences of politicians. It was Balls whom Brown credited with doing "the studies" which convinced him that joining the euro would be disastrous for the UK economy, and who devised the entry tests that the Europhile Tony Blair could not meet. It was Balls who assisted Brown in developing the emergency measures that helped to prevent the banking crisis from bringing down the international financial system. Yes, Balls was as culpable as Brown in showering cash on an unreformed NHS and other public services. But when you tot up what he did during his years in government, the entries belong on the liability side of the ledger.

No alternative

The dividing line between George Osborne and Balls is similar to that between conservative Republicans and Barack Obama's Democrats in the US. Osborne believes that Britain must deal with its Budget deficit immediately if its economy is to return to the path of growth. He plans to accomplish this by cutting spending, raising taxes and reassuring markets that they can continue to lend to AAA-rated Britain at reasonable interest rates. He knows that the recovery - if indeed there is one - is fragile; that unemployment and social spending will rise; and that excessive new taxes could put a brake on growth. But he believes that he will win his bet and that, at worst, there will be a period of pain followed by decades of gain.

Balls disagrees. He thinks that reduced spending will produce what he now calls "a jobless recovery" but really believes will be the dreaded double dip by shrivelling consumer demand, discouraging business investment and raising the cost of benefits to the growing reserve army of the unemployed. (It is unclear whether his antipathy extends to the higher taxes favoured by his new benefactor, Ed Miliband.)

Balls has yet to go where Osborne has been. The Chancellor has laid out plans to cut the deficit. His shadow has responded that frugality is necessary, but not just yet. There is nothing unreasonable about this. But what is un­reasonable is for Balls to refuse to lay out an alternative plan to tackle the deficit, especially now that he says he wants to halve it in four years. He has not stated when his cuts would start, where the axe would be wielded and which taxes would go up.

No one, least of all Balls, believes that Britain can grow out of the deficit. And no one, least of all Balls, believes that the deficit can be reduced without some combination of tax increases and spending cuts. Osborne has thrown down the gauntlet: his plan is £3 of spending cuts for every £1 of tax increases, to be instituted now. His opponent has no endgame.

Balls's debating skills are formidable - I find them so, although he is always measured and polite, at least to me. But debating skills are no substitute for the sound positions that he must develop, if he is to be the thinking man's politician. Both Osborne's and Balls's positions are respectable. Neither can be proved or disproved empirically. And both are covers for the fundamental argument that, sooner or later, must be had.
Osborne and Balls know that the politician who succeeds will be the politician with policies that produce economic growth, with its fruits equitably (but not equally) distributed, as well as sufficient both to provide growing private incomes and to fund a sustainable welfare state that is acceptable to the electorate. Though the Tories may refuse to admit it, they are not letting the fiscal crisis go to waste. They are paring down the welfare state faster than they would dare to do in flush times. In my view, they are right - and right to guess that, if ever there was a time in which they could persuade an electorate brought up in a dependency culture to redraw the boundary between the private and public sectors, this is it.

Asymmetry

The many conversations I had with Balls when he was Brown's alter ego suggest he sees things differently. At least, he did when he was at the Treasury. Where Osborne and his party believe that patients should have a wider choice of doctors and treatments, Balls believes that "information asymmetry" would prevail in the market for medical services: doctors know so much more than patients that they might prescribe treatments that enhance their incomes with no benefit to patients: some central control of the doctor-patient relationship is necessary. He also believes that poorer parents' fears of debt make them reluctant to allow their children to take out student loans and that therefore loans are sometimes no substitute for subsidies.

That leaves one further area that would benefit from open debate: supply-side reforms. If the experience of euroland's Club Med countries teaches us anything, it is that union-sponsored barriers to entry into occupations, draconian restrictions on working hours, premature retirements, excessive regulation and badly conceived taxes can bring growth to a halt. We know where Osborne stands. What about Balls?

Irwin Stelzer is a senior fellow and director of economic policy studies for the Hudson Institute.