Next Labour must be radical re-engineers

Social democrats have to think about economic room for manoeuvre in terms of levers and the radical reshaping of markets

‘In the black Labour’ is not a raft of policy proposals or anywhere near a manifesto. Instead it is a way of thinking, a state of mind, a first foot planted firmly on a path that has the potential to go somewhere useful.  As that, it is a necessary first step, if nowhere near a sufficient one.

The insight it gives is that it doesn’t matter whether the economists say there is room for more fiscal expansion or not, the tax and spend argument has been so robustly lost by Labour in the eyes of the public that we need to start our conversation from somewhere completely different to even begin to be heard.  As one of the authors, Graeme Cook, explained in the seminar to launch the paper, the only way Labour can now debate the details of an interesting policy is if it comes tied up in a shiny red bow of fiscal conservatism.

This is hard, for two main reasons. First, it is an objective fact that there is little about Labour’s record that caused the financial crisis. Most of the bad debt originated in the US, even after adjusting for population differences. Britain would have been swept up in it even if there had been no structural deficit in the run up to 2008; our debt levels will peak at a similar level to the US, France and Germany and way below that of Greece. We must never concede this point, but going on about it won’t help us win the next election. The second reason a fiscal conservatism line is hard is that a bit of fiscal laxitude is probably still a good idea in economic terms, even though the room for manoeuvre is now far tighter than it was. We can point out that the government cut too far too fast in 2010-11, and certainly that they spooked the British public in the process, but every time we say it, it begs the question of whether Labour would have had the guts to cut anything at all and plays to fears we’d be irresponsible (again) if given half a chance.

So, what’s to be done?  We need to start by wholeheartedly embracing the advice of this paper. The first task is to find a credible way of doing so. No more self-policing fiscal rules, let’s go the whole hog and legislate to make it illegal not to save surpluses when the economy is growing, following the example of Switzerland. The debate as to whether to have a type of balanced budget legislation in Britain should be one that is started by Labour.

Second, while it is true that aggregate demand needs to rise, we can no longer argue that this can happen by government spending more. Instead we need to find tangible ways to get hundreds of billions of pounds spent in the UK by the private sector, of whatever origin. Now’s the time to lead the world in greening the whole economy, for example, and fast, with clearly defined payback periods and rates of return that nobody can get out of later.

Third, adopt the same approach for everything important: across the whole gamut of policy our aim should be to devise a market that achieves the social and progressive goals we want to see. Regulations don’t cost anything. Use them to create new markets to achieve what we want. For example, force landlords to raise all properties to decent homes standard, boosting the order books of local builders, and raise the life expectancy of the poorest in the process. Save money by adopting the early action agenda across government: combining the budgets of those trying to prevent problems (education and sport, primary health) with those dealing with the costs of failure (criminal justice, acute health) to ensure the allocation of resources between the two is optimal. If old Labour was wary of markets, and new Labour in awe of them, then next Labour needs to shape them to achieve the outcomes that we want. There are no other policy levers left. Taxes, insofar as we can raise them, need to be on capital and assets, not income.  Building on the example of the child trust fund, the state should work with the insurance industry to make it far easier for people to save for all the crunch-points in their lives.

The fact that the Tory economic forecasts have had to be revised gives Labour a tiny voice on economic issues for the first time since the general election. Perhaps our pace of cuts might actually have been more sensible - even if we couldn’t actually say what it was we would cut. The question is, how do we widen that space to be heard. We must start by owning the problem: the next government will still have to cut. The difference between the Conservatives and us is that where they are salami slicing we should seek to radically reshape. In business, the key to success is the ability to re-engineer to make a better product for less. That’s now our task too.

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

Kitty Ussher is a former Labour Treasury minister