Back to the Future

Since the Labour leadership started to reposition the party last week on its policies over the economy and public spending - various commentators have thrown in their tuppence worth.

Here's an interesting contribution from Daniel Finkelstein whose contributions are often peppered with useful historical references - such as the one from James Callaghan about 'spending your way out of recession'.

Because no one in the UK - with the possible exception of Gordon Brown and a few anti-capitalist protesters - is now arguing that the country can spend its way out of trouble.

Everyone is now agreed that there has to be a day - or at least a period - of reckoning whereby the UK starts to live again within its means because otherwise we are just passing on a whole load of unsustainable debt to our children - and future generations.

The argument now is about how much debt should be repaid and how quickly - while at the same time encouraging economy to grow albeit without falling into yet another turbulent cycle of 'boom' followed by 'bust'.

So it appears that some things never change - Labour's old warhorse, Denis Healey was singing the same song almost forty years ago - and history is repeating itself again today.


Labour’s great surrender on public spending

By Daniel Finkelstein

By accepting Osborne’s spending plans it’s clear that all the main parties will have to make dramatic cuts

“Beautiful day, Sterling going down,” wrote the Chancellor of the Exchequer in his diary at the beginning of the week that changed everything. And on the next day: “Packed in morning. £ still falling heavily ... Out to airport. Decided to stay. Back to London. Series of meetings, 3 per cent loss.” The decline and fall of a nation as it might have been chronicled by Bridget Jones.

On September 28, 1976, Denis Healey had arrived at Heathrow ready to fly to Hong Kong. The economic situation was deteriorating so rapidly he decided that he could not risk being out of contact for 17 hours. So, famously, he returned to the Treasury and applied to the International Monetary Fund for a loan.

On the same day, in Blackpool the Prime Minister James Callaghan told the Labour conference: “We used to think that you could just spend your way out of recession. I tell you in all candour that that option no longer exists.”

Callaghan and Healey were announcing an intellectual surrender. Twenty years of economic policy, perhaps more, had failed. But at the time the implications of the collapse were not obvious to either of them.

Abandoning the chase for full employment changed the game. Governments had been overinflating the economy and then turning to the unions to agree pay restraint. This gave the union bosses great influence and allowed Labour to run for office as the only party able to deal with them. The new position thus broke the power of Labour’s coalition and removed one its central electoral offerings.

Last week something very similar happened. In speeches delivered days apart, the leader and Shadow Chancellor of the Labour Party announced that they accepted that in office they could not start spending again. They would have to start with the spending plans they inherited.

Or at least, that seems to be what they are saying. Mr Balls’s speech, in particular, was opaque and confusing. Probably deliberately to give him plausible deniability. The more one read it, the less it said. But one thing was obvious — the argument he once boldly made, that deficits don’t matter, has gone. And even if he didn’t want to actually say that he has accepted the Chancellor’s spending plans, he wished to be thought to have done so.

But just as with Callaghan and Healey, I wonder if Mr Miliband and Mr Balls appreciate quite what they have just done. Because abandoning a defence of high spending and high borrowing is an intellectual surrender of similar proportions to the one made in 1976. And with similarly deep implications.

The list of cuts Mr Balls proffered up were almost hilariously inadequate. In 2015, when Labour hopes to take office, it would inherit a tax base of 38 per cent of national income and a spending bill representing 43 per cent. This is a vast gap. You could take out all defence spending and all of the police and still not be half way there. Or you try closing all schools and still fall short. Britain wants a US level of taxation with European levels of spending and this is not sustainable.

Labour would also inherit the responsibility for the serious review of future public spending that the coalition has made impossible, the Liberal Democrats being unwilling to agree plans beyond the first year of the next Parliament.

If, therefore, the Labour leadership is serious in any way about agreeing to George Osborne’s spending path it has committed itself to a fundamental reshaping of the State. That is what the figures mean. It is what they will require. Abandoning the argument against the spending plans means abandoning much of the Left’s argument against the Centre Right’s view of the size and shape of government.

Consider for a moment what might have to be done (and of course the Tories would have to face this too). First, the Government will have to consider what is inside the State that might have to be taken out. In the same way that the Thatcher Government privatised water, perhaps Mr Miliband might need to privatise the roads or bin collection, as happened in Ireland. Some states in Australia have an insurance levy to pay for fire services, as does Finland. And do councils need to be in the business of providing leisure services?

If Labour’s new policy is genuine, it also requires looking at the scope of what the Government does. Perhaps it could start welfare provision at 21, reduce its involvement in higher education or raise the state pension age to 70.

Labour’s plan must surely involve revisiting Gordon Brown’s central policy — the subsidising of people in work and the businesses that employ them. A combination of policies means that a family with median income — median income — by 2015 will be getting a £200 cash subsidy every week. How realistic is this?

Labour would also have to sell, or force the sale, of public sector assets. If the IMF arrived in Britain again (and after all we are borrowing more than we were the last time) it would immediately notice that the Ministry of Defence is sitting on acres of land and that city councils are asking for bailouts while owning almost half the land in town.

So Labour will need to insist that its councillors sell their shopping centres and exhibition halls. Perhaps it will need to do the same for council houses. And it will have to contemplate granting itelf planning permission on government land and then selling it off.

All this before it reconsiders whether we can afford our international ambitions, whether it is really possible to maintain an effectively unlimited NHS entirely free at the point of use and whether new obligations in social care are affordable.

There are doubtless many other ideas, but something on this scale and with this sort of depth is what the path to eliminating the deficit and keeping it down looks like. The alternative is a huge rise in taxes or unsustainably large cuts in expenditure across the board on public services (which will have to be heavy, even with all this).

So if Mr Balls and Mr Miliband are serious, this is the path they have embarked upon. Something that changes what Labour means, what it can offer, what it is. As I say, if they are serious. And who knows that?