“There is another way”: Alan Johnson’s speech ahead of the CSR

By Mark Ferguson / @markfergusonuk

This morning Alan Johnson is giving his first major speech as shadow chancellor at KPMG in central London, in which he sets out “a clear alternative to what we regard as a reckless gamble with the economy”, ahead of the Comprehensive Spending Review on Wednesday. The full text of the speech is below.

“Alistair Darling took this country through the most devastating global economic crisis since the Great Depression. He did it with skill and integrity and I am proud to succeed him as Shadow Chancellor.

Her Majesty’s Loyal Opposition is under new management with a leader younger than the Prime Minister and a Shadow Chancellor who, sadly, is not.

Gordon and Alistair have seats in Scotland – Ed and I in Yorkshire. Both locations have a well deserved reputation for being “careful” with money – a reputation I intend to reinforce.

In two days time we will see the outcome of the spending review. Being in opposition does not mean pretending to be in government. Like our Tory predecessors in opposition we will not be producing a shadow spending review.

But we will set out a clear alternative to what we regard as a reckless gamble with the economy.

The government suggests that the deficit was avoidable and the emergency budget unavoidable.

The truth is actually the reverse. The deficit was unavoidable and the budget was not only avoidable, but wrong.

Instead we need a balanced approach that gets the deficit down without endangering the recovery.

An approach that is fair. That recognises that growth and jobs are central to our economic strategy – not a side issue.

An approach that values our public services, rather than relishing the opportunity to curtail them.

That treats the public as intelligent enough to understand that bringing the world economy back from the brink of catastrophe is not the same as paying off a credit card bill.

And we need a tough approach to tackling the deficit, but one that is flexible enough to react to changing economic circumstances.

The biggest difference between us and the government is the recognition of the need for growth.

Yes – there must be cuts. Tough choices do have to be made – a point I will return to. But without growth, attempts to cut the deficit will be self defeating. A rising dole queue means a bigger welfare bill. And less tax coming in.

The Tory plan is a huge gamble with growth and jobs.

As Vince Cable said prior to one of his increasingly frequent Damascene conversions, “Cuts without economic growth will not deal with the deficit.”

Even the Government’s newest quango – the Office for Budget Responsibility – says that the coalition’s approach will cost jobs. And it tells us that those job losses will cost the taxpayer £700m in Jobseekers Allowance claims alone.

PWC are forecasting that a million jobs will go as austerity takes its toll – half of them in the private sector. And we don’t have to look very far to see what happens when you get this wrong.

Less than a month ago, we saw Ireland slide back into recession. They went through deep cuts and substantial tax rises – applauded by most of those who are endorsing the approach of our government.

But it hasn’t worked.

This government is going down the same road, which risks reduced confidence, stunted growth and fewer jobs.

That is why I am clear – there is an alternative.

If I can touch briefly on the economic context in which decisions on the deficit are being made.

The world economy, having pulled back from the brink of disaster, remains vulnerable. Momentum in the Japanese recovery stalled badly in quarter two. We see a mixed picture in Europe.

Growth and unemployment figures may look superficially encouraging – but they mask a varied performance.

Germany may be powering ahead with falling unemployment, but the situation in countries like Spain and Ireland -on which we rely as export markets, is very different.

Sentiment has turned in the US. The latest payroll figures there clearly show that in the current climate there’s nothing inevitable about the private sector picking up the slack, when the public sector starts laying people off.

Confidence here in the UK remains subdued, for both business and consumers. Last week saw feeble retail sales growth for September, adversely affected by the Government’s austerity rhetoric.

And all indicators are now pointing to the recovery in the housing market having lost momentum.

The prospect of the return of quantative easing provides a further indication of how difficult the situation remains four months after the Emergency Budget.

To make matters worse, the Government has no plan B.

Vince Cable used to tell us that “the timing and speed of cuts must reflect the state of the economy, not political dogma.” But he’s changed his tune since joining the orchestra.

By contrast Chris Huhne has warned, in a memorable phrase, that the Government “has lashed itself to the mast” of a deficit reduction plan that has more to do with the date of the next general election than the economic cycle.

In the current circumstances the government should at the very least be re-profiling their deficit reduction plan.

Before turning to the growth friendly alternative to George Osborne’s austerity plan, I want to mention three myths that the current Government seek to perpetuate to justify their gamble with the livelihoods of families across the country.

First they claim that the deficit was avoidable – it is Labour’s fault. And second, they tell us that there is no alternative to fast and deep cuts. They had a third myth – that their measures were progressive.

But that claim was effectively blown to pieces by an IFS report showing that the government’s plans placed a burden on the poorest that is two and a half times that of the richest in our society. The first myth rests on the assertion that borrowing is high now because of government spending before the global financial crisis hit.

This is nonsense.

Before the financial crisis hit UK debt had been paid down from the 42.5% we inherited in 1997 to 36.5% of GDP – the second lowest in the G7. Almost every penny of borrowing before the crisis was used for investment, not day to day spending.

High borrowing didn’t cause the problem. It was an essential global response to the biggest economic crisis for 80 years.

Tax receipts fell as families spent less money in the shops and company profits fell.

And yes spending rose, because we chose to support the economy while the private sector was weak. But that’s why people stayed in their jobs. It’s why people stayed in their homes.

The Conservatives argue that they called for lower spending. Well they did – they opposed the fiscal stimulus that protected people in the recession.

But far from saying we were spending too much before the credit crunch, the Conservatives were supporting Labour’s spending plans lock, stock and barrel. David Cameron described them as “a tough approach”.

At the last CSR in 2007 George Osborne’s complaint was not that we were overspending, but that we were slowing the growth in health and education spending.

Only in November 2008 did the Tories change their mind.

You may remember, even if they do not – that was long after Northern Rock had floundered and Lehman Brothers had collapsed. Since the election we have seen the second myth emerge.

Having been in semi-retirement since the 1980s TINA has reappeared. THERE IS NO ALTERNATIVE say Cameron and Clegg.

TINA is the justification for the U-turn on VAT, on rocketing tuition fees, on means testing child benefit and £6bn of in-years cuts.

Nick Clegg tells us there was no choice. He claims that a sovereign debt crisis was about to spread from the fringes of Europe to the UK just as he accepted his seals of office.

He claims that the Governor of the Bank of England made him change his mind on spending cuts in a telephone call after the election, only for the Governor to state emphatically that he had told Mr Clegg nothing new.

It may have been all Greek to the new Deputy Prime Minister but Britain is not Greece, and never could be.

There was an alternative and a choice.

The coalition has spurned the alternative that the Lib Dems argued for forcefully during the election campaign.

As a consequence it has made the wrong choice. A choice to cut the deficit further and faster – risking growth and jobs.

Ed Miliband and I are clear, in the current economic circumstances, halving borrowing over four years is right.

It is the balanced approach.

Seeing the deficit fall, whilst keeping the recovery on track.

So this week we will call on the Government to think again and take a more measured, less dogmatic approach. Speed does matter.

The private sector recovery can’t be taken for granted. Especially in the current economic climate.

Next year the Government are proposing to cut spending by over £20bn. That will have a big impact on demand in our economy.

And it will happen at the same time as the public’s spending power faces a £12bn hit from the VAT rise.

So our policy remains to halve the deficit by 2013/14.

But I have looked again at the way in which we deliver that reduction. At the balance of tax and spending.

My view is that specific, targeted tax changes need to do more of the work. And I’ll tell you why.

Firstly, and most importantly, because growth has to come first.

And we know from the Office for Budget Responsibility’s own figures that a spending cut hits growth twice as hard as a tax change – three times as hard when it’s capital spending.

Secondly, because public services matter. Yes lower spending, but not services cut on such a scale that the impact on our communities is irreparable. And thirdly, because it is important that the burden of deficit reduction is shared fairly.

From Wednesday onwards these decisions won’t be numbers on spreadsheets – they will be people’s jobs.

We will work with the Government where it brings forward targeted tax rises that do not affect low and middle income families. If they follow our advice and stick to halving the deficit by 2013/14, such tax changes would allow greater protection for public services.

We will support the rise in Capital Gains Tax in the emergency Budget. There is also a case for freezing the basic rate limit in 2013/14 as proposed. And let me be clear – we are not proposing to halve the deficit with increases in personal taxation beyond those already announced. And it is of course right that a levy on the banks, upon which the Government has just consulted, should play a part in deficit reduction. That’s why we proposed it in the first place.

If the country is to support the tough choices that are necessary, they must see those that bear the greatest responsibility for the crisis pulling their weight.

But the scale of the bank levy proposed by the Government is inadequate. The Government, which claims “fairness”, has put itself in the absurd position of saying that children should play a bigger role in getting the deficit down than the banks.

The banking sector is contributing £2.4bn, while child benefit freezes and cuts will raise substantially more.

So families take the strain while bankers grab the bonuses. There is no justification for such an unfair sharing of the burden.

So we will ask the Government to think again, and come forward with proposals for the banks to make a greater contribution. We are open minded about the mechanism by which this is done.

In terms of scale the £3.5bn bill from Alistair Darling’s bonus tax was absorbed with ease last year. In a time of rising profits they should be asked to maintain that scale of contribution alongside the existing levy proposal. The combination of these existing tax plans, and the call for banks to pay their fair share, could contribute £7.5bn by the end of the Parliament.

That is the balanced, fair, and most importantly pro-growth choice the Government should make.

These further tax revenues should be used as an additional fund within the capital budget – a fund to prioritise growth.

The Government’s plans imply a 33% real cut in capital spending. If they adopted the approach I am outlining today the cut would be almost half that figure.

The additional cash means that vital infrastructure projects could go ahead – keeping people in work now, and creating the environment for growth in the years to come.

It means that the building of affordable housing can be targeted – recognising the irreplaceable role for the state in construction when private demand dries up.

And we call again on the government to change their perverse decision on Sheffield Forgemasters which prevented an £80m loan from providing an important breakthrough – helping a British company compete in the manufacturing supply chain for civil nuclear energy.

On Wednesday the Government will tell us where the 14% cut in overall departmental spending they have planned is to fall.

As I said, we’re not in the business of doing a shadow spending review. But we will be clear on the scale of cuts we think is necessary. And it is significantly less than the Government believes is right. Our March Budget detailed how £20bn of savings should be delivered – including greater efficiency and tough choices on pay and pensions.

And we will look carefully at the choices the coalition makes. Where it is right to do so, we will support them. Where they spend money poorly we will highlight it – as with the billions that will be wasted on the NHS reorganisation. And where they make the wrong calls we will oppose them.

Wednesday will also bring another round of cuts to benefits. We already know what the Government plans for Child Benefit. But there will be more to come. And just as with tax, a responsible opposition needs to face some tough choices here as well.

We can’t oppose every cut.

Indeed welfare reform and savings must be part of any serious deficit reduction plan. And we agree that those who cheat the system should not be allowed to continue to benefit from it.

As Douglas Alexander has made clear, where changes are fair, proportionate and encourage work we will support them. There is a strong case for looking at Disability Living Allowance and introducing a reformed gateway. Of course it needs to be done properly – and the Government should be working closely with the sector to make sure it gets this right.

On the reforms to Incapacity Benefit we welcome continued progress. Not least because the Government is sticking precisely to our reforms – ensuring those that can work receive the help they need to re-enter the workplace and that the focus is on what people can do rather than what they cannot.

And we will not stand in the way of technical changes to tax credits where they do not endanger the good progress that has been made in reducing overpayments.

But there is nothing fair about Child Benefit changes that leave a single earner on £45,000 losing thousands of pounds, while a family on £80,000 gets to keep every penny.

And, while we accept that Housing Benefit should be reformed, we oppose arbitrary measures that will cause real hardship. In particular the intention to reduce awards by 10% after someone has been on Jobseekers Allowance for a year is plain wrong and should be reversed.

So there are some changes we support, and others that are clearly flawed.

But there are other changes that we will have to look at in the context of overall spending decisions. For example, the Government has also brought forward proposals for a permanent change in the way in which benefits are uprated.

Making a permanent change, with its impact being felt even after the deficit is long gone, is an ideologically driven move that we will oppose. If the Government were to propose a time-limited change, ensuring that benefits did not fall behind earnings in the next few years, we would consider whether that was a fairer alternative to deep cuts in departmental expenditure.

If the Government listens. If it changes its approach. We will give fair proposals the attention they deserve. What is absolutely clear, taking a sensible set of tax proposals and just those benefit savings we have accepted, is that the cuts required by departments would fall to at most an average of 8%.

That is about half the 14% that the Emergency Budget set out – a £27bn difference in cuts to public services.

It means we can still fund initiatives that are crucial to growth – like the Future Jobs Fund.

That way we can avoid the long term scars from this recession resembling those of the 80s and 90s.

So we can be clear – the coalition’s attempt to argue that their cuts are no deeper than Labour’s is just wrong.

We argue for a slower pace of deficit reduction – to support growth and jobs. We support specific tax rises – protecting crucial investment that will deliver growth for the future.

And we recognise that welfare must play its part in bringing spending down – protecting public services.

Clearly there is an alternative.

The coalition’s austerity strategy amounts to a huge risk with growth and jobs. By going hell for leather on cuts, at a time when the private sector cannot be expected to pick up the slack, they run the risk of leaving us with higher unemployment, deprived communities and a diminished society.

And it will make getting the deficit down harder. Taking a slower, less damaging route as we propose provides a credible plan, securing growth and protecting public services.

Requiring a greater contribution from the banks. And tough choices on spending and welfare.

So there is another way. The Government must think again.”