Without a rebalanced economy we will never have sustainable public finances

The pressing need to rebalance the economy and raise household incomes could well be higher up voters’ priority lists than fiscal discipline come the 2015 election

Since the Autumn Statement it has been increasingly clear that, even on its own terms, the UK Chancellor George Osborne’s economic strategy has failed. The structural deficit will not have been eliminated by 2015 and public sector net debt will be around 80% of GDP.  But the authors of ‘In the black Labour’ are right to argue that his opponents will not reap the political benefits of this failure unless they can win public trust for their own economic plans – although there is likely to be disagreement between unions and the pamphlet’s authors on precisely how this could be achieved.

The paper starts an important discussion of how progressives should respond to the new reality of a much more constrained fiscal environment – slower growth and the necessity of debt repayments will inevitably mean that any future government has less new money to invest than has been the case in relatively recent history, although the speed and means by which deficit reduction is achieved will remain a political choice. The authors are also surely correct to argue that ‘fiscal conservatism’ does ‘not imply an absolute limit on the size of the state nor the level of spending’, instead it just reiterates a very old principle – that if the left wants to argue for a certain level of services it should make sure it has the money to pay for them. As Nye Bevan argued at a time of similar fiscal restraint, “the language of priorities is the religion of Socialism”.

Perhaps due to the constraints of space the paper does not engage with the question of what caused the UK’s deficit. This is a shame, as understanding this is crucial to delivering sustainable public finances in the future. Simply put, the reason why the UK ended up with a deficit of over 10% of GDP despite a relatively small stimulus was a collapse in tax revenues. As the OBR noted in its July Fiscal Sustainability Report, the fall in revenue from the finance and housing sectors “was one of the primary drivers of the severe deterioration in the UK public finances in recent years, exposing the risks to sustainability of reliance on revenue from these sectors”.

So for ‘fiscal conservatism’ to work in the future, governments will not only have to closely monitor their spending levels but also ensure a diverse and dependable tax base not overly reliant on a few key sectors. Some might argue that running a deficit after a 15 year economic boom was not sensible economic policymaking in 2007, but the bigger failure, and more important to our current deficit, was the lack of attention paid to how unbalanced the economy, and tax receipts, had become.

In this regard the authors’ focus on the role of the state in delivering a “regionally and sectorally balanced economy” is absolutely correct. Without a rebalanced economy we will never have truly sustainable public finances, a point that cannot be made forcibly enough especially as the Coalition continues to put its faith in lacklustre ‘growth strategies’ based on the old Thatcherite recipe of corporate tax cuts and deregulation.

Where the paper is weakest, perhaps understandably so given its brevity, is on the details of what the authors’ vision of ‘fiscal conservatism’ actually means in practice. They argue for priority to be given to areas that will lead to short and long-term growth and hence a “very constrained funding” settlement for “healthcare, pensions and welfare”. Does this mean that they back the current Government’s decision to fund its infrastructure and youth unemployment schemes by freezing work tax credits?  This seems to meet their proposed criteria for spending decisions but would hardly be a strategy consistent with social justice or with boosting living standards.  

Arguing for ‘fiscal conservatism’ is all well and good in the abstract but without details on how much current spending the authors’ would reroute to the capital budget and where they would find the money to plug the estimated structural deficit of £30bn in 2015 (their proposed target date)  it risks not being especially meaningful. Whilst it would be unfair to demand that Messrs Cooke, Lent, Painter and Sen go back to their spreadsheets and produce a full Comprehensive Spending Review, some more detail on this front would make the proposals easier to assess.

Unions will also challenge the close to singular focus of the paper on deficit reduction. This dominated the election of 2010 but the battleground in 2015, after years of falling living standards and higher unemployment, may very well be different. Tackling the deficit may no longer be at the forefront of voters’ minds and whilst a credible plan to deal with it is vital it is not the be-all and end-all of economic policy. Unions argue that the wider issues raised by the paper, including the pressing need to rebalance the economy and to raise household incomes, are likely to be higher on voters’ priority lists. While this does not negate the need to address the deficit, it does suggest that there may be more flexibility over how to do so and over the speed at which this is achieved than the pamphlet’s authors accept.  It is arguably just as big a mistake to allow the coalition to frame the country’s problems as all flowing from the deficit, as it is to think that the deficit can be ignored.

The fundamental problem faced by the Government’s opponents, given the economy’s chronic shortage of demand, is that it is right to be arguing for a temporary, timely and targeted economic stimulus now but by 2015 conditions may be very different. The real value of the paper is in helping progressives to think seriously about the economy in 2015 and the challenge of ensuring social justice in an era of constrained public spending.  

This article is a response to Policy Network's discussion paper In the black Labour: Why fiscal conservatism and social justice go hand-in-hand

Duncan Weldon is a senior policy officer at the TUC