There are two timescales for the economic decisions facing Labour. One is short term: whether there should be a further fiscal stimulus.
The other, much bigger task is how to close the fiscal gap which by summer 2010 could be nudging £180 billion.
That will require constructing a political offer that chimes with a changed public mood and will be affordable in a constrained financial climate. A flatter, one-dimensional state provides one such model.
The short term decision is a no-brainer. The £700 billion supply side measures won’t work to the timescale needed for the 600,000 young people coming onto the jobs market this summer, or the 75,000 families expected to lose their homes this year.
Pulling up the drawbridge on public spending and leaving the most vulnerable victims of the recession outside cannot be acceptable. Unemployed young people and homeless families are not a price that a Labour Government can pay. Besides, the additional cost would be small scale compared with the total deficit.
A cut in employers’ tax and national insurance contributions for under-24s would provide an immediate stimulus for the employment of young people. Linking support for mortgage interest to the tax credit system could provide a more flexible tool for supporting families threatened with homelessness.
Bridging the macro gap is the real task and will involve redefining the role of the state in time for the next general election – which is likely to coincide with the best guess for the start of the economic upturn.
For the right the solution is very simple. The economic crisis provides the opportunity to dismantle the welfare state – and Phillip Blond and David Cameron’s recent expositions of new Conservatism propose just that.
For the centre left a more complex model is of a one-dimensional welfare state that puts the purchasing power in the hands of the individual and where the state has a strong role in regulating both the public and private sector.
The banking crisis has been a turning point in the public’s expectations of the state, as well as of the public finances. There has been a clear message that the state must guarantee the well-being of the public, even in their private transactions. It is not acceptable that the state uses public money to stand behind institutions while individuals bear the brunt of the recession.
Without a radical redrawing of the role of the state, the policy prospects for the next parliament are bleak. A conventional cuts agenda to close the gap is not remotely tenable. PWC has estimated that the scale of the cuts package needed would have to be about four times as severe as the last Tory cuts – 1.4 per cent compared with 0.3 per cent for three years. This would completely reverse the huge gains that Labour has delivered in front line service delivery, the dramatic improvements in hospital waiting times, the network of children’s centres, the thousands of classroom assistants and extra policing.
The area where the New Labour rhetoric has not been realised is in empowerment of the individual. We have seen a proliferation of multi-tiered commissioning and purchasing agencies which too often talk to each other, excluding the public which remains the passive recipient of the institutional decisions.
Putting the purchasing power into the hands of the public would mean changes in the structures in particular of the health service, housing, education and training and local government. A PWC study found that some very modest steps down this road would produce savings of £37 billion.
Meanwhile the state’s role as guarantor would need to run across both private and public sector. The Conservatives argue that regulation has not worked: the reality is that it has unevenly applied to the public sector, and barely applied at all to private sector services such as schools or hospitals.
The Conservatives struggle with notions of collectivism or an interventionist state, and this has been shown in their inability to respond politically to the recession. But Labour urgently needs to develop a strong political rationale for managing the recovery, combining economic pragmatism with social progress.