Fiscally conservative Labour: once more, with meaning

Eighteen months ago, a small group of us woroe a short paper called ‘In the Black Labour’. It was a call for Labour to understand that fiscal conservatism, or a ‘careful, risk averse, and cautious’ approach to the public finances, was not only compatible with the left’s commitment to social justice, it was the only way to deliver on that commitment.

I learned two things from the reaction to that paper. The first was that nobody got that ‘Black Labour’ was intended to be a wry joke about the tendency to attach colours to every political idea.

The second was that if you claim to be on the left and in favour of fiscal conservatism, you’re accused, variously, of disloyalty, of not really meaning it, or of being a closet Tory. I think it’s the word ‘conservative’, which personally, I rather like the cautious, careful aspects of, and want to reclaim from the idiots in the Tory party.

So it’s something of a relief that we have been able revisit the case for a left of centre fiscal conservatism in a new essay for Policy Network, safe in the knowledge eighteen months on we are now loyally lodged in the mainstream of Labour thinking.

That’s because the Labour leaderships’ recent announcements on fiscal responsibility and welfare reform were a huge moment for our agenda in government.

Having accepted a tight medium term fiscal envelope is both needed and important, Labour can now advocate 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 agenda.

(Because the focus is on the future now, I hope we don’t have to go over all the ground about why Osborne was wrong to cut when and how he did. But in case anyone needs reassurance, Osborne’s mistake was to cut both too early and to cut the wrong things. His austerity wasn’t fiscal conservatism, but fiscal masochism, judging poicies by the level of pain inflicted, not the long term result.)

The negative results of Osborne’s strategy are clear today.  However, even in a pessimistic forecast, it’s probable we will see some growth by 2015. That means Labour will need to be prepared to make progress on deficit reduction early in the next parliament.

(Footnote: That said, Labour is right to retain the option of stimulus in 2015-16 in case the economy is weaker than expected. Any stimulus should, however, focus on capital spending and be time limited. Questions should be asked about a stimulus based on a VAT cut, even if temporary in nature. Labour should drop this policy.)

In the longer term, to ensure fiscal responsibility while preserving counter-cyclical flexibility, Labour should publish a series of potential fiscal rules for discussion in the expert community, identify prefered public expenditure pathways under different growth scenarios and have these tested independently.

In government, these choices should be monitored by a strengthened Office for Budget Responsibility, or Fiscal Council, who would assess whether government is likely to deliver on its fiscal rules, and to make recommendations if the targets are missed.

This would mean Labour opening its plans to greater scrutiny than any opposition or government has before – while still giving room for manoeuvre should growth hasten or slow.

Such scrutiny will make it clear how little money there is to spare, so as we argued in 2011, resources must be focused on generating growth, through capital investment, helping the unemployed into work, encouraging business investment, and promoting science, education and skills.

Shifting from short term expenditure to long term investment and developing sound fiscal rules to ensure sustainable debt levels will be useful tools to help deliver a long term decline in debt.

However, these measures alone will not be enough to advance social justice in an era of limited budgets.

For example, bearing down on structural welfare spend such as 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 spending on social landlords rather than growth in the private rented sector and that there is a strong relationship between increased numbers on long term sickness and higher housing benefit claims.

A real structural expenditure cap will force us to grapple with how to drive down the cost of housing.

This means building more houses, but it also means boosting incomes for the most vulnerable, in-work support for those with disabilities and high impact job brokerage like that seen in Newham.  The overall tight fiscal environment and the need to focus resources on capital expenditure means Labour will not be able to borrow first and reform later to make this shift in spending more politically palatable.

Providing such supports and services is where welfare spending should be focused. Spending elsewhere, for example on support for the better off and on above inflation pension commitments, will have to be reduced to deliver this.

Speaking of the scale of needed cuts, raises the question of tax revenue. From a purely fiscally conservative perspective, the mixture of taxation and cuts is broadly irrelevant, so long as deficits are reduced over time.

From the point of view of social justice, however, trying to deliver 80% of deficit reduction from spending cuts would involve an unacceptable breach of our national social fabric, and would in all likelihood prove counter-productive. So taxes will likely have to go up.

If people are therefore going to be asked to pay more tax it becomes even more important to be open about constraints and choices at an early stage – consent must be earned.

But lets not pretend it’ll be easy to simply jack up taxes on the rich. Whatever mix of tax increases and spending cuts we choose will be painful for many, many people, even as we try to hep people into work and create more jobs.

So we will have to look beyond spending as a tool for social justice.  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.

The vast majority of these businesses are sole traders or micro-enterprises. 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.

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.

Labour should place itself firmly on the side of these millions of worker-businesses through planning reform, tax changes, access to intellectual property, finance, international markets and marketing support.

Now Labour has accepted the reality of the fiscal limitations any British government would face, the political choice stops being a deadening battle between ‘profligacy’ v ‘austerity’, two caricatures which both lead to risk of ruin.

If we focus scarce resources on supporting growth, putting the economy on a sustainable long term footing and delivering on the left’s mission of being on the side of the many, not the few, then social justice, economic efficiency and, indeed, fiscal conservatism will go hand-in-hand.

Hopi Sen is one of the authors of “In the Black Labour” and “Moving Labour into the Black”