As one of the authors of ‘In the black’ Labour,  I approached the publication of ‘White Flag’ Labour by Compass with an enjoyable sense of anticipation. There is something exhilarating about being excoriated, especially when the critic is someone as highly regarded as Howard Reed.

Sadly, I was disappointed by the paper. Far from being a fiscal critique of In the Black, the Compass paper is an extensive polling, rhetorical and political critique of our paper, but shies away from attacking us on the question of fiscal balance. We are savaged on the ephemera, but quietly embraced on the essential.

The closest Reed’s paper comes to attacking the need to adopt a cautious, careful and risk-averse approach to the public finances is to say that he would rather a new ‘Golden Rule’ was applied by the OBR than a rule on structural deficits. The paper then swiftly moves to demand that OBR models are open to scrutiny, which is fair enough, but it leaves a gaping hole at the heart of the paper.

What ‘New Golden Rule’ could possibly be adopted which would not lead to a fiscal consolidation in the medium term? If Compass accepts this, then ultimately what objection are they making to our economic case?

Effectively, Reed’s position is that fiscal conservatism is fine, as long as it is a high-spending, high-tax type of fiscal conservatism, done a bit later on. He wants a Labour government to embrace fiscal conservatism (or, shying away from the phrase, ‘fiscal responsibility’) but he wants to adjust the revenue side, not the spending side.

As the ‘White Flag’ paper says ‘there are two ways to close a fiscal deficit when the economy is operating at full potential – one is to cut spending, the other is to raise taxes.’ Since the paper then goes on to discuss revenue raising in the context of ‘avoiding New Labour’s under taxation problem and achieving Fiscal Responsibility’. I can only assume this represents an acceptance that the fiscal deficit should be closed.

If this is the case, it is a major point, and a useful start for a debate about the next Labour government’s mission, yet it lies buried within a welter of rather excitable attacks on positions none of the authors of ‘In the Black Labour’ hold.

This apparent quiet acceptance of the need for ‘Fiscal Responsibility’ aside, Reed’s critique of our paper rests on three foundations.

First, that we misdiagnose the political situation. ‘White Flag’ argues that while voters distrust Labour, they do so because we got them into this mess, and haven’t really explained how we’ll get them out.

The Compass paper is rather confusing on this latter point, since it argues on the one hand that the Labour leadership have been clear, saying ‘There is no real evidence that Labour has been vague about over its plans for the pace of deficit reduction’ but on the same page arguing that ‘Labour has given them (voters) hardly any information about the economic strategy a future Labour government would pursue’.

I cannot see how this point differs from our remark that:

‘Labour remains committed to Alistair Darling’s plan to halve public sector net borrowing by 2013/14… however what is unclear is how or when Labour proposes to eliminate the remainder of the deficit (structural or otherwise) or indeed whether it would.’

‘White Flag’ goes on to argue that all that is really required is clarity on economic policy, ‘rather than any failure to commit to closing the structural deficit’. Granted, such clarity is vital, but since a major part of economic policy will be how, or whether to close the structural deficit, this feels rather circular.

Any ‘clarity’ in economic policy will surely have to address the issues we identify, even if it is to reject any attempt to reduce the deficit as wrongheaded.

Next, ‘White Flag’ argues we are insufficiently Keynesian, and that we ignore the nature of the current crisis of demand. He argues:

‘in making the case for “small c” fiscal conservatism, the authors appear to have unquestioningly accepted the current Government’s “Big C” Conservative interpretation of current macroeconomic trends’

And later defines our core suggestion as being:

‘Labour accepts in full and seemingly without question, the economic fallacies of “Osbornomics”’.

This is easily dealt with. It is simply not true.

The very first paragraph the Guardian article Anthony Painter and I wrote on ‘In the Black’ reads:

‘The chancellor’s autumn statement showed conclusively that George Osborne has messed up. His model of recovery – that export-led growth and private investment would step in as the state withdrew – was wrong. And he failed to allow enough flexibility should things not go as planned. The result is a faint but worrying reflection of the European periphery, where new austerity is piled on existing austerity in a desperate scrabble to hold on to fiscal targets.’

If that is unquestioning acceptance, I am Neal Lawson. Further, the second paragraph of our paper reads:

‘Nor does fiscal conservatism mean failing to respond to an economic crisis.. …the state will, on occasion, be required to step in to prevent collapse. While there is a major absence of private sector demand, the government must fill the gap; not just to keep the economy growing but to protect long term fiscal sustainability’

The ‘White Flag’ paper footnotes this, but alleges we then proceed to ignore our own insight.

Rather, our argument is a Keynesian one, but we believe it is worth devoting effort today to considering how to achieve the surplus the UK will require in future.

At the most generous, the Compass paper’s position seems to be that if you write a paper in winter about preparing for spring, you must keep reminding people it is snowing. At the least generous, it misrepresents our argument in favour of a position it finds easier to attack.

So, just to belabour the point, fiscal conservatism does not entail short-term fiscal stupidity. To imagine it does is to construct the most tedious of straw men and devote yourself attacking it. Sadly, great chunks of ‘White Flag’ are devoted to railing against political or rhetorical positions we do not hold, rather than critiquing the economic proposals we do embrace .

It is in considering this fiscally conservative future (or fiscally responsible, to soothe outraged manners) that we find the third, and most interesting critique.

The spending choices of the last government were correct, it is argued, but there was a shortfall in the tax take. It is this that must be rectified  ‘White Flag’ argues that the problem for any medium term consolidation is primarily a question of taxation, it argues strongly for what you might call a ‘once more, with taxes’ strategy.

From this flow two points. First, that any fiscally conservative position that does not embrace sufficient tax-raising will retard social justice (by, for example, reducing social expenditure harmfully). Second, that this leads us to embrace a narrow prioritisation on ‘jobs and growth’, which ignores a whole series of other concerns.

It is at the very least worth debating these two propositions.

On the first, while there is indeed room for a discussion on the level and breadth of taxation (and worth noting that Labour was committed to tax increases at the last election) I find it hard to accept that all the spending commitments of the past are entirely justified, and suspect the electorate feel the same way.

Compass suggests that its Plan B (for Bombshell, as a Tory wag might suggest) would involve only painless and popular tax increases. I am sceptical, I confess, but it is a debate worth having.

Next, if we are to embrace tax increases, there will be a point at which these will retard growth by sucking demand out of the economy. Where that point is, and what room there might be for incremental taxation in an atmosphere of low wage growth, is no simple political challenge (though, to be fair, neither is embracing significant spending restraint in social spending).

On the second, while there are other priorities than jobs and growth, these surely have to represent the first priority of any future Labour government.

Yes, there may be those whose issues are not resolved by greater prosperity, or who will gain by an increase in employment, but the very prosperity growth delivers will make it easier to resolve the issues of non-working families.

Yes, some families can never enter the labour market, but surely the old rallying cry of full employment still has some relevance to the left?

I find myself both disappointed and heartened by ‘White Flag’ Labour. Disappointed at its flailing attacks on straw men erected as stand-ins for our actual argument*, and surprisingly heartened that buried within the paper appear to be a hidden embrace of fiscal conservatism (Beg your pardon, ‘responsibility’), albeit one delivered through a massive extension of taxation, rather than any desire to focus on spending.

In this, there are areas for productive discussion, including the correct definition of a ‘New Golden Rule’, or structural fiscal limits. The role of the OBR as adjudicator, and the possibility of other watchdogs being created (I am instinctively keen on the creation of a UK version of the Congressional Budget Office), the precise arguments for spending restraint and tax revenue, the role of public service reform in limiting public costs and how to encourage wage growth and the distributional questions raised by Gavin Kelly. All of these are important, but they rely on the fundamental agreement that fiscal balance matters. If I am right in seeing this ‘White Flag’ as raising the flag of truce on an embrace of a careful, cautious, risk-avoiding approach to the public finances, then perhaps we can turn from ‘White Flag’s’ titular, tedious and distorting accusation of surrender to its far more interesting debate about the future?

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* To take just one example, I don’t know how the ‘White Flag’ paper jumps from our observation that ‘welfare mechanisms are never preferable to a genuinely productive and balanced economy that raise(s) the living standards of those on low and middle incomes’ to the conclusion we are ‘disingenuous’ in arguing ‘the need for ‘welfare’ will disappear’. I can only think there is some other meaning to ‘never preferable’ which escapes me.

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Hopi Sen is a Labour blogger. He blogs here and tweets @HopiSen

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