A Labour government with a tight fiscal mandate can still be a platform for radicalism as opposed to surrender
Eighteen months ago, we published ‘In the Black Labour
’ - a call for the UK Labour Party to put fiscal responsibility at the heart of its policy. As centre-left fiscal conservatives we argued that while the UK Government’s strategy of immediate austerity posed serious risks for the economy, any future Labour government would need to take a ‘careful, risk averse, and cautious’ path with Britain’s public finances. We argued it was better to embrace that position early and set out how Labour would deliver such an agenda.
The recent announcements on fiscal policy
and welfare reform
were a pivotal moment for Labour – even if they were later than they might have been. The leadership has now demonstrated that Labour understands a real need for fiscal responsibility in the coming decade. The Party now has an opportunity to move the political argument to the long-term changes a reforming government can make in tight fiscal circumstances.
That said, the detailed policy choices this involves will be harder than the recent speeches may have implied. The consequences of Labour’s strategic choices – especially the limit to current spending from 2015 – will soon begin to bite.
Labour must not shrink from these decisions, reverse to previous patterns of oppositionalism and, indeed, must go further in being honest with the electorate and its own supporters about further difficult choices ahead. But, as we argued at the end of 2011, a Labour government with a tight fiscal mandate can still be a platform for radicalism as opposed to surrender. Here we lay out further thoughts on how and what more is required.
Fiscal choices with a growth bias
Having begun to confront Labour’s perceived weaknesses recently, the leadership can focus on precisely how a Labour government would practically apply its values.
At the heart of this must be a political approach that is very different to that of the Tories – placing the pursuit of social justice, greater employment, pay and growth at the heart of a fiscally responsible Labour agenda.
It is essential that Labour now turns theory into practise, knowing that it is in the party’s priorities for investment that a real choice between the parties will be found.
Three significant strategic changes were announced in the recent announcements: a cap on structural welfare expenditure, an acceptance that a Labour budget in 2015-16 would stick to the current spending envelope of the Coalition, while departmental budgets would fall throughout the next parliament.
These strategic choices underpin the headline announcements on housing benefit, winter fuel payments and child benefit.
All this means there will be little money to spare, so the resources the state does have must be focused. That focus should be on generating growth, whether by helping the long term unemployed into work, encouraging investment, promoting science, education and relevant skills or supporting those who have paid into the system and now need a helping hand.
As we said in 2011, “Labour’s criteria for spending choices should be based on a simple question: will a spending option directly boost short and long-term growth and create jobs?”
In this light, bearing down on current expenditures like housing benefit, winter fuel payments or child benefit is intended to create further freedom for manoeuvre on growth-friendly capital expenditure such as investment in homes, transport, energy, and public infrastructure.
A rather different course has been pursued by George Osborne – an approach to austerity that sacrifices medium-term fiscal responsibility for the short-term. It undermines itself. This has led to deficit targets continually being missed and now desperate measures such as the proposed Help to Buy scheme
. Not only is George Osborne failing but he's now also sowing the seeds for the next crisis.
As a result of these failures, while Labour is right to fundamentally accept the current spending framework it will inherit in 2015, it is also true that if the economy is weak and borrowing rates are still low there may well be an argument for short term extra borrowing in 2015-16 to fund capital expenditures. Having said this, early progress on current deficit reduction will be necessary – assuming that the UK economy is delivering some growth in the next Parliament.
While it is right to preserve this flexibility when times are uncertain, Labour will need to demonstrate to the electorate that its fiscal rules, intended to prevent a short term boost becoming a dangerous long term obligation, are better formed, more openly evaluated and less easily evaded than those of either the current or previous government.
Any stimulus should, therefore, be discretionary and time-bound in nature. Further, it should focus only on capital spending – with the exception of automatic stabilisers. Questions should be asked about a stimulus based on a VAT cut, even if temporary in nature, on this basis. Labour should consider dropping this policy soon.
To support fiscal responsibility, we proposed a strengthened Office for Budget Responsibility, or Fiscal Council, able to assess whether government plans are likely to deliver on their fiscal rules, and to make recommendations if the targets are missed.
Given the way the current government has used a loophole in their fiscal rules (turning what was thought to be a fixed five year period by which the structural deficit would be eliminated into a nonsensical rolling 5 year target), it will be essential that the next Government's fiscal rules are clearly set out, debated and entirely independently monitored, so HM Treasury cannot change the rules of the game when it is politically convenient.
Some have argued that Labour should keep it vague and not reveal any policy positions on the economy (or indeed on much else) until we are much closer to the next general election in 2015. Not getting boxed in or scrutinised while keeping the Coalition parties guessing is good opposition strategy, it is claimed – especially when the economic situation is unpredictable.
This ignores the fact that Labour’s biggest obstacle is its lack of economic trust. The importance of the fact that the Party had been in Government for eleven years when the biggest financial and economic crisis in eighty years emerged can never be over-estimated.
Under this over-riding condition, Labour needs to take some risks to show the media and the wider electorate that it is taking its fiscal responsibilities very seriously. Besides, openness about choices and constraints is critical to re-establishing trust in the political process more widely. Labour should show that it has a different more open, more honest style than has been the norm, and positively welcomes outside scrutiny.
That does not mean laying out detailed budgets but it does mean showing some more substance. Indeed, the value of a weightier approach was shown recently when two heavyweight and detailed speeches on fiscal responsibility gave Labour its best media coverage for a very long time.
Further action is still required. Good fiscal behaviour starts early. So why not publish a series of potential rules for discussion in the expert community now? Moreover, why not run some public expenditure pathways under different growth scenarios and have these tested independently? Labour could subject its plans to greater scrutiny than any opposition has done before – and still have room for manoeuvre should growth either hasten or slow over the next two years.
As we said in 2011, short-term flexibility in the face of economic weakness and improved operation of fiscal rules are both useful tools to help deliver a progressive fiscal conservatism.
They are not enough though if social justice is to be advanced in an age of austerity. On the left, we need something more.
Social policy choices
After 2015 Britain should be set firmly back on a fundamental path to structural fiscal sustainability. To achieve this in a socially just way will require sustained political will and practical action. It is here that the decisions taken last week must be followed through across a broad policy front.
On social policy, it is clear that simply financing whatever driver of welfare spending happens to emerge undermines the welfare state's legitimacy. To re-coin an old phrase, when it comes to welfare, Labour must be prudent, but with a purpose rooted in our values.
Bearing down on emerging drivers of structural welfare spend are more tricky than many would be willing to admit. Pushing down on one area of expenditure can lead to expenditure elsewhere. For example, a policy of holding down housing benefit appears straightforward, until one realises that the main driver of structural additional expenditure on housing benefit prior to the recession was the expansion of the social rented sector rather than simply growth in the private rented sector
Driving down rents through local negotiation will create some extra resources, but it is unlikely to reverse overall rent trends in high demand areas.
A real structural expenditure cap will therefore force us to understand exactly how to drive down the cost of housing, especially given the strong relationship between increased numbers on long term sickness and higher housing benefit claims. Labour also has to consider how changes in the nature of households may drive benefit spend and have policy responses to these changes.
RT Housing benefit expenditure 1991-2007/08, chart 3B from medium term benefit expenditure spreadsheet found here: http://statistics.dwp.gov.uk/asd/asd4/index.php?page=expenditure
It means building more houses, yes, but it also means exploring the deeper causes of increased welfare spending, seeking to boost incomes for the most vulnerable such as better quality work opportunities, welfare to work support, in-work support for those with disabilities or moving to the later years of their working lives, for those who have young children, and investment in real work skills and high impact job brokerage. Living wages are one part of the package of measures to give people greater power in the labour market as many have argued but the wider package of housing, support, childcare and skills is critical.
It is in providing all these supports and services
that any new contributory principle in welfare should be focused.
Tax increases and spending cuts?
The overall tight fiscal environment and the need to focus any borrowing on capital expenditure means Labour will not be able to borrow first and reform public services and welfare (or social security) later to make this process more politically palatable.
From a purely fiscally conservative perspective, the mixture of taxation and cuts is broadly irrelevant (despite fervent and unresolved academic debates about this issue), so long as deficits are reduced over time.
From the point of view of social justice, however, it seems clear that trying to deliver eighty per cent of deficit reduction from spending cuts would involve an unacceptable breach of our national social fabric, and would in all likelihood prove counter-productive over the long term.
If people are therefore going to be asked to pay more tax then it becomes even more important to be open about constraints and choices at an early stage – consent must be earned.
This implies Labour will need to be mindful of both means and ends – there is no other affordable way out, and the electorate would be unlikely to look favourably upon Labour if it did not weigh every fiscal commitment extremely carefully.
Confronting power and privilege
The pursuit of greater social justice cannot rely on fiscal policy alone – especially in constrained times. A reforming Government also has to consider how it can confront concentrations of power that limit the freedom of consumers, creators, innovators, and investors. These concentrations are to be found both in the public and private sectors.
The goal must not be to see the state as a force that simply intervenes to protect the poor and vulnerable but one which actively dismantles the monopolies and oligopolies that prevent working people taking action for their own benefit. Instead of simply transferring wealth from the rich to the less well-off, we need to create the conditions within which the less well-off can generate wealth for themselves.
For example, we live in an economy populated by almost 5 million businesses – a 40% increase in only a decade and a six-fold increase since the 1970s. This is a trend that has accelerated even since the Crash.
The vast majority of these businesses are sole traders or micro-enterprises with fewer than ten employees. Many are challenging the way big businesses operate with innovative approaches; many bring benefits to their communities that many larger operations struggle to emulate – not least keeping the wealth they generate local. Research from the New Economic Foundation shows that £1 spent in a local supplier puts twice as much back into local economies as the same £1 spent in a supermarket chain.
And yet big business enjoys all sorts of advantages over smaller business including access to legal action, patent restrictions, expensive regulatory constraints, access to prime space, favour by government procurement and planning law.
Challenging the bias in favour of big business would help release the spirit of entrepreneurial activity in communities across the UK that would not just drive growth and innovation but allow a fairer distribution of wealth.
Sole trading and micro-businesses will become as important a mode of working as direct employment. Labour needs to place itself just as firmly on the side of these millions as it does now for employees. The Party could commit itself to creating as level a playing field as possible for small business to challenge the big players whether through planning reform, tax changes, access to intellectual property, finance, international markets and/or marketing support.
A flourishing of innovative new businesses could also be a means to re-balance the economic geography of the UK economy – or at least give the country outside of the south-east more of a fighting chance.
It will also mean the Party thinking hard about its innate preference for regulation as a solution to every irresponsible practice in business. Before proposing such changes, Labour policymakers should ask themselves whether new regulation will make it harder for smaller companies to thrive.
Banking, for example, is crying out for a wide range of new locally based, innovative and diverse entrants. But the measures imposed on the sector to prevent giant banks from failing at huge cost risk making it more difficult for new banking ventures to get of the ground. It would be a disaster to find ourselves accidentally protecting big banks that are too big to fail, while putting barriers before potential local, regional or community entrants to the banking sector in areas desperate for extra lending.
Favouring the small and innovative also means challenging public sector monopolies as well as private sector ones. Is there any greater concentration of power than Whitehall?
The technocratic justifications for centralisation of power miss an unmeasurable variable – the innovation gap. While centralised programmes appear rational, they put power in the hands of the few at the expense of the many. Just look at the success Newham Council’s Workplace programme in getting the long-term unemployed into work and keeping them there compared to the Work Programme and Job Centre Plus. Small, nimble and local beats big, central and administrative more often than not – if it is given a fighting chance.
Labour made no serious attempt in office to break up this concentration of resource and power other than through Scottish, London and Welsh devolution. The Coalition has done a little better, notwithstanding City Deals. It is now time to provoke a disruptive local energy and that means being prepared for things to fail in pursuit of a higher purpose. It works in the market economy and can do where the state meets the market too. There are also local concentrations of power and stifling bureaucracy which must be similarly confronted – an activist state would confront such inertia wherever it found it.
It is not a case of private good, public bad. It is more that small is beautiful. However, multi-million pound contracts should not simply be passed to the same handful of publicly listed firms and outsourcing operations in the name of value for money while neglecting the value of innovation and disruption.
It is in this sort of socially just, fiscally responsible, pro-growth, pro-social agenda, that Labour can find a social democratic politics that is not reliant on ever expanding budgets to deliver social change.
Some call for a 'choice' between the parties meaning Labour should pursue fiscal largesse and public sector conservatism. But following the two recent speeches, Labour now has an opportunity to present a real
choice as opposed to a Hobson's choice.
By accepting the reality of the fiscal limitations any British government will face, the choice stops being a deadening battle between ‘profligacy’ v ‘austerity’, two caricatures which equally lead to risk of ruin.
Instead, we can see a choice between the practical application of Labour values versus a Conservative accommodation of narrow interests.
The choice at the next election then becomes Labour supporting the ordinary taxpayer and the ordinary businessperson or worker against the Conservative strategy of leaving them on their own.
We have been here before, however. Last year, Labour started down the same path then did an about turn under pressure. This time it must continue on this journey. In fact, to reiterate, Labour will need to go even further in identifying the policy programme that will support this strategy and further emphasise and detail a fiscally responsible approach.
Those who think all is plain sailing from here to the election because the “party has been proven right on the economy” need to explain what the position will be should the very initial signs of economic improvement turn into something more sustained over the next two years. Commentary is as cyclical as the economy and politics and the loudest voices can soon be reduced to a hushed whisper.
With Labour's more realistic perspective becoming clear, there is now an obligation on all of us on the left to demonstrate how alternative routes to social justice can be nurtured beyond the role of a high spending state.
Some of this we have discussed above:
Stronger, more transparent fiscal rules, open to scrutiny on both formation and evaluation.
Being honest about the scale of spending cuts or tax increases needed to return to fiscal balance over a reasonable period; it’s better for the public to understand the context of unpleasant political decisions.
Reducing departmental budgets over time in order to create space for industrial and infrastructure policy.
Over time, switching resources from current to capital spend and dropping the temporary VAT-cut policy.
Supporting growth in wages through living wage, skills and vocational education, accepting that these steps will be partial, complex and no panacea.
Confronting reservoirs of power and wealth where they swell too much.
Promoting flourishing and creative local market economies and the innovative state.
If we use this opportunity to focus resources on supporting growth, on putting the economy on a sustainable long term footing and on delivering on the left’s traditional mission of being on the side of the many, not the few, the struggle and short-term pain will however, be more than worthwhile.
Social justice, economic efficiency and, indeed, fiscal conservatism will go hand-in-hand.
Adam Lent, Hopi Sen and Anthony Painter were co-authors of In the black Labour: why fiscal conservatism and social justice go hand-in-hand published by Policy Network. Their twitter feeds are @adamjlent, @hopisen and @anthonypainter. Follow the debate #itbl.