But the coalition has fought a good propaganda war. Opinion polls suggest, albeit by a narrow margin, that the public feels the government is right to focus on reducing the deficit. So Labour must tread carefully. Blanket opposition to every single spending cut is unwise – it leaves us open to the charge of being ‘deficit deniers’. Labour must be serious about the need to reduce the deficit. High government debt to GDP ratios and large budget deficits are economically unsustainable and lead to large debt repayments. We should know – this is what we inherited from the Tories in 1997. But Labour must demonstrate that the coalition’s cuts will not tackle these problems, but make them worse.

Labour’s response should be costed efficiency savings, a package of tax increases that are proportionate and target the wealthiest and, most importantly, a growth-centred economic programme since growth not cuts are the way to cut a deficit. This point has been completely ignored by the coalition.

In June, George Osborne outlined a package of £8 billion in tax increase – almost entirely from the VAT hike – alongside over £30 billion of annual spending cuts. Labour must outline an alternative position that increases the annual net tax increase, and drastically reduces spending cuts. We should be looking at keeping cuts to a minimum and a model of, at worst, a 40-60 split between tax rises and spending cuts.

Firstly, I’m not sure it is credible to completely oppose the VAT rise. Alistair Darling was looking at a slight increase in VAT had we been re-elected, and raising VAT is an effective method of raising revenue. But a hike to 20 per cent is unfair since it wipes out the benefits to society’s poorest created by increasing the personal allowance threshold. A small increase to 18 per cent or 18.5 per cent would raise around £2.5 billion or £5 billion respectively. However, a small increase in VAT would have to be balanced by tax rises specifically targeted at the wealthiest.

On this there are several options that we should certainly pursue. Firstly, the bank levy should be doubled, while the ‘supertax’ on bankers’ bonuses should be kept for this parliament.

Another option is to increase capital gains tax (CGT). The June budget increased CGT from 18 per cent to 28 per cent. However, since CGT will only hit second homes and shares, while the 10 per cent CGT tax rate for business activities was actually extended from the first £2 million to £5 million, the Treasury estimates that the net take from the CGT rise will be only £0.6 billion. Increasing CGT to the 40 per cent tax level – and resetting the CGT rate for business activities would raise an extra £2-3 billion and be both fair and proportionate.

Another possible tax rise would be a form of wealth tax, as used successfully in France and other European countries. The French model, in particular, is a good one to examine. Named the Solidarity Wealth Tax, it applies to those having assets in excess of €790,000, but is on a sliding scale, ranging from 0.55 per cent (on those with assets valued between €790,000-€1.24 million) to 1.8 per cent (on those whose assets are worth €16.04 million and over). Since the tax rates are low there is no evidence of it leading to emigration from France. However, it brings in around €4.5 billion per year – equivalent to £3.8 billion.

But the most obvious economic point is that the best and quickest way to balance the budget is to generate sustained economic growth. This cannot be done by the coalition’s policy of massive public spending cuts alongside tax rises that reduce domestic consumption. This is especially true given that most other European countries, to whom the bulk of our exports go to, are taking similar measures to slash spending and reduce demand.

To do this, we should emphasise that, in the short-term, some stimulus measures are still needed. We should propose a form of British Investment Bank or National Credit Union to ensure that commercially viable businesses and individuals get the credit they are currently being denied by the banks, and encourage greater employee share-ownership. On the latter point, Labour should follow the model introduced by the Swedish Social Democrats the mid-1980s, under which workers saw a portion of their income allocated to one of five regional investment funds. Employees’ representatives were guaranteed a majority on the investment boards to ensure that profits were actually used to benefit employees – either through reinvestment or improved job opportunities and conditions.

Such models, on a large scale, would mark a major shift in economic power. The result would be to redistribute wealth, and it would encourage higher productivity and growth since those most likely to further the interests of a business are its workers.

Indeed, German unions reported an absolute increase in productivity of 15 per cent following the introduction of greater employee participation, while the American Centre for Employee Ownership studied 360 companies and saw that firms with shared ownership grew between two and four times more than companies where employees owned no stock.

This idea ties in with the theme of mutualism and developing co-operatives which are rooted in the labour movement. But they are also a substantive counter to Cameron’s ‘Big Society’. A ‘Big Economy’, marked by diversity and de-centralisation of economic power is the perfect combination of Labour values – with an enabling state devolving power to individuals and communities.

Above all, Labour needs to get thinking, and to get real. If we allow the coalition to dictate the terms of economic debate, we, and the country, are in trouble. If we can reframe the debate to show that we are not ‘deficit deniers’ but that the coalition are ‘growth deniers’ then we will reclaim the economic debate.

Photo: altogetherfool 2009