Labour, cuts and growth

Labour’s position on the public finances needs to do several things:

• show that the big deficit isn’t due to irresponsible spending
• show that the party is serious about getting borrowing down again
• argue that the government’s position is unnecessary: the scale and speed of cuts is their choice
• argue that the government’s position is positively dangerous to the economy
• avoid getting stuck in the bog of detailed shadow spending reviews that are quickly rendered irrelevant by events
• be reasonably easy to grasp in outline.

I’m sure that’s not an exhaustive list, and I’m sure I’ve not wholly succeeded on these counts, but I’ve had a stab anyway.

In brief
During the recession, the government had to offer what support it could to the economy. This meant more borrowing, but it was the right thing to do. And now we need to reduce borrowing, so there will have to be spending cuts – but not at the expense of economic growth. Public services are part of the economy too, so the responsible way to cut public spending is when the private sector is strong enough, not in a dogmatic rush to cut savagely no matter what.

In depth
The credit crunch hit the economy hard. Households had to cut back their spending, so the businesses they bought things from had to cut back theirs and lay people off or go bust, which just meant more households cutting back their spending and so on and so on. If the government had joined in with this spiral of cuts, that would have sent the whole economy into complete meltdown. But we didn’t. We knew that the government had to stand firm and limit the scale of the recession with temporary tax cuts and more spending.

And it worked. Even though it’s been tough going, there were fewer job losses and fewer repossessions than in past recessions. But this did mean that government borrowing went up. And now it has to come down. In fact, it already is: it’s been falling since the start of the year, as the economy’s started growing again.

And growth is crucial to getting the deficit down. A stronger economy with more jobs means more people paying tax and fewer people claiming benefits. But higher taxes for those who can afford to pay, as well as cutting public spending, are important too.

The big political question is how quickly to cut spending.

Once upon a time, it was written that the timing of spending cuts should be based on an “assessment of economic conditions, not political dogma”. That was the Lib Dem manifesto. The story didn’t have a happy ending, and now the Tory plan is to cut as savagely and hastily as possible, come what may.

Never mind what harm the cuts will cause to people who use public services – although of course that matters – just think about the effect on the economy.

The money we spend on public services doesn’t just disappear. It flows through the rest of the economy, because public-sector workers spend their pay just like the rest of us. So if you work for a business that sells things to ordinary people, then big cuts that make a lot of your customers worse off could hit you too.

The economy is still fragile and big cuts are risky until the recovery is secured. If the economy falters then more and more cuts will just make things worse.

We set out a bold but sensible timetable to get borrowing back down – not the Tories’ mad rush to cut. The government’s own Office for Budget Responsibility confirmed that our approach would have eliminated two-thirds of the deficit by 2015. But, crucially, we want to look to economic conditions, not political dogma.

We think public spending should be cut when the rest of the economy is strong enough to take the strain. There are many people out of work today because of the recession, and the speed of cuts should take into account whether businesses are hiring them again. As the private sector steps up, the public sector can step down.

But now, of course, we’re in opposition. The Tories are running the show, with a little help from their friends. So whatever detailed numbers we might come up with, events will quickly move on. But we will do all we can to push the government in the right direction. If they do propose responsible cuts, we’ll support them. When they propose over-hasty cuts driven by ideology, we’ll oppose them.

So that’s the choice we face over the next few years: faster cuts and slower growth and fewer jobs, or slower cuts and faster growth and more jobs.

This is a development of some earlier thoughts of mine, and has been shaped along the way by blogging by Duncan Weldon, Hopi Sen, Sunny Hundal and others.

I think this sort of approach could more or less be adopted by any of the leadership candidates, although Diane Abbott would want to steer leftwards. David Miliband is the only one to stick by Alistair Darling’s timetable, so the others would need to change that bit, but the broad thrust, particularly the contrast with the government, would basically be the same.

Update: a MORI poll out today finds that 23% of voters think that “It is important to cut spending quickly even if this means immediate job losses, because it will be better for the economy in the long term”, while 75% think that “It is better to cut spending more slowly, to reduce the impact on public services and the economy”. It strongly suggest that if Labour can communicate this position clearly and credibly, there are votes to be won.