A credible and costed alternative

By Nick Pearce

The spending review is nearly on us. It presents an obvious opportunity for the new Labour leadership – the cuts are not going to be popular and opposing them will win easy support. But that also represents a danger: Labour needs a coherent, strategic response to the review, not one designed to court short-term popularity.

So how Labour responds is a critical test. What is needed is a credible and costed alternative for deficit reduction and economic growth that exposes the faults of the government’s plan. Ippr has published just such a plan.

The ideas it contains would allow Labour to reclaim the mantle of being pro-business and pro-wealth creation, as well as being broadly progressive. But it contains some tough decisions on benefits, tax rises and spending cuts in order to pay for the investment the country needs to get growth going again.

At the heart of our recommendations is that capital expenditure should be better protected. Labour in government made a fateful decision to halve infrastructure spending – and the coalition has taken it on. We think that net investment should be protected at around £30 billion, or 1.8% of GDP – the level it was at in 2005/6, before the financial crisis – rather than being cut to £20 billion. Investment in major infrastructure projects such as high speed rail, in increased housing and low carbon energy are needed anyway – but will also help to create badly needed jobs.

However, increased spending is the easy bit – at least for Labour supporters. To pay for it, we propose cuts elsewhere. We think the Labour manifesto commitment to ring fence schools, police numbers and above all the NHS is unsustainable. International Development is the only department we would protect. All the rest should face cuts. This would spreads the pain around more sensibly and fairly, as we calculate no one department would need to bear a real cut of more than 10% over the next four years if our plan was pursued.

Other sacred cows need slaughtering too. History tells us that once a VAT rise has been made, it stays. Labour would do better to accept that now – as regrettable as it may be. There is also no good economic or social argument for paying Winter Fuel allowance or giving free bus passes to every pensioner. Many in this generation are increasingly prosperous. Universalism remains an important principle – but that doesn’t mean protecting every universal benefit. The ippr preference, as we have argued on Child Benefit, is to tax not axe.

The overall goal of halving the deficit over four years is still broadly correct but Labour must now go further by setting out a transparent plan that links the pace of fiscal consolidation to the rate of economic growth. We would argue that rather than reducing the cyclically adjusted deficit to zero over a four-year period, by 2014-15, it should instead be eliminated over six years, by 2016-17. This would help to ensure that recovery is protected while global growth prospects remain so weak and uncertain. Britain is not struggling to finance its deficit and the bond markets are not clamouring for hasty cuts: they want credibility not speed. There is no need to sacrifice vital investments in the country’s infrastructure and public services at their altar.

Wednesday will be a big day for Alan Johnson as Shadow Chancellor – and also for Ed Miliband. They have a chance to put Labour back in play as a serious alternative government. But to do that they need a credible alternative plan for tackling the central political issue of our time.

Nick Pearce is Director of the ippr and was Head of No.10 Policy Unit under Gordon Brown.