No Labour Chancellor should contemplate adopting Osborne’s economic figures

In the new edition of the Fabian Review magazine, I make the case for Labour to ignore the temptation to adopt Conservative party spending plans at the next election. It’s a subject that regularly comes up at Labour party meetings and policy seminars, inspired by a similar pledge before the 1997 election. It is also an option which the Labour party has not ruled out.

The idea of accepting Conservative fiscal plans comes straight out of the 1997 playbook and is credited as a political masterstroke, which laid to rest the ghost of the 1992 shadow budget. But when we look back, with the hindsight of data that was not all available at the time, the economic wisdom of the policy is highly questionable.

In the late 1990s, by holding back spending as the economy boomed, Labour presided over the tail of the longest and deepest fiscal retrenchment in modern British history. A public sector deficit of 7.6% of GDP in 1993/94 turned into a surplus of 4.1% in 2000/01. All things considered, it was overkill, and there was little that could be done because the party was locked into plans which had been taken over by events. Labour were unable to respond to the changing economic circumstances because they had made a political commitment to stick to Tory spending plans.

The flexibility to adopt to changing circumstances is one of the main reasons to reject Osborne’s plans. Flexibility is one of the most important weapons in a chancellor’s armoury and should not be cast away lightly. It’s far too early to say what the economy will look like in 2015 and Labour must keep its options open.

But even given what we know (or rather suspect) about the likely economic circumstances post 2015, Osborne’s figures don’t make sense and no Labour chancellor should contemplate adopting them.

Under the coalition’s plans apart from the ‘protected’ areas of schools, the NHS and international development, public service current spending would fall by almost one fifth in the two years after 2015, amounting to a total cut of 35% since 2011/12. The idea of cuts on this scale is frankly unbelievable.

It is also preventable. Looking at government spending across the board, freezing department budgets in real terms is affordable, because the ‘unprotected’ areas suffering the deepest cuts make up quite a small proportion of public spending. Standstill budgets for public services equates to an annual 1% rise in overall public spending which is totally consistent with sound public finances: under this plan it would take just two years longer to reach George Osborne’s current spending target.

But our work also shows there are strict limits to what is possible. Higher annual spending increases would not bring the deficit under control, unless accompanied by major tax rises. Spending increases of 2% a year or more can therefore only be contemplated once deficit reduction is completed or economic growth is very strong.

So even though Labour should refuse to tie itself to Tory spending plans it still has a job to do to explain to its own supporters that the spending floodgates are not about to open. If Labour follows Osborne’s spending plans, we know what will happen to public services budgets and we can imagine the consequences for people who rely on services the most.So Labour can and should plan on the basis of modest increases to overall spending, which would in turn lead to roughly flat budgets for public services. But this should only be a starting point, not the party’s last word on spending, for in such uncertain times a future chancellor needs flexibility above all.

Andrew Harrop is the General Secretary of the Fabian Society