The party still lags on the economy but an honest conversation with the public about the future could help it win trust
Labour is right to take no pleasure in the fact that the government has been proved wrong on the central macroeconomic question of the day: how to restore economic growth while cutting the deficit.
The two decisions taken by the coalition after it came to office – to suggest the economy was veering towards a Greek-style meltdown and to present speedy and swingeing cuts as the only solution – have, together with the eurozone crisis, destroyed confidence and tipped the economy back into recession.
Nonetheless, the vindication of Alistair Darling’s assessment that the recovery could only be sustained, and the government’s finances restored, by halving the deficit over a period of four years still leaves Labour with two big challenges.
First, there is the political challenge of restoring the party’s reputation for economic competence, the cornerstone upon which a return to government must be built. It is true that public confidence in the coalition’s management of the economy has collapsed; the number of voters wanting it to forge ahead with its deficit reduction plans even at the expense of growth is down to just one in three; and the government’s hitherto-successful strategy of shifting the blame for its failures onto its predecessor shows signs of faltering.
However, while opinion polls indicate that Labour is reaping the political rewards of this fall in confidence in the coalition, voters do not yet trust the party to run the economy. The chancellor and prime minister remain ahead of Ed Miliband and Ed Balls when voters are asked in whose hands the economy is safer. This discrepancy is perhaps best explained by the fact that those same polls show that people believe Labour will make the country fairer, but they do not yet accept that it will make the economy stronger, and – by a margin of two to one – the later remains the public’s clear priority. As it did in the 1990s when Tony Blair and Gordon Brown made the case for ‘economic efficiency and social justice’, Labour urgently needs to convince the voters that this is a false Tory choice and that it is not only possible to achieve both, but also impossible to achieve one without the other.
There is another false choice – between fiscal discipline and growth – that the party should avoid. The shadow chancellor has been correct to suggest that it is near-impossible to rebuild the public finances without restoring growth. But Labour must also be honest that growth alone will not achieve this end. Indeed, during his campaign, the new French president recognised this fact: promising both action to get the European economy moving again, while also committing to balance the budget by 2017 and cut the deficit to three per cent next year.
Second, the failure of the coalition’s economic policies does not alter the principal challenges which will be faced by any government after the next general election. The coalition now concedes it will not have closed the deficit by 2015 – itself the consequence of its attempt to undertake this task at a speed the economy could not bear. Labour’s leader was right in his conference speech last September to commit a future Labour government to finishing the job the coalition has failed to complete. This will require difficult decisions and the choosing of clear priorities as the party begins to prepare its manifesto.
The chancellor has already signalled his intention to slash a further £10bn from the welfare budget by 2016, with David Cameron’s outgoing director of strategy, Steve Hilton, suggesting cuts of £25bn. But cuts to tax credits are already reducing the incentives and support needed to help those on welfare back into work. Labour should instead turn its attention to ‘welfare for the wealthy’: halving higher-rate tax relief on pension contributions could save £6.7bn annually, while cutting winter fuel payments and free TV licences for wealthy pensioners could save £1.1bn per year.
More fundamentally, as The Purple Book argued last year, the fact that the public finances will remain constrained in the next parliament will require Labour to undertake a far-reaching reassessment of its political economy. An incoming Labour government will not be able to realise its aspirations by using the proceeds of economic growth to redistribute wealth through increased benefits and tax credits. Instead, the party will have to think much harder about what has been termed ‘predistribution’: working with businesses to try and ensure a fairer distribution of rewards so that the state does not have to work quite so hard to correct the free market’s excesses and inadequacies.
A future Labour government will thus need a comprehensive plan to tackle barriers to participation in the workforce, while ending the state’s subsidising of low-pay employers. What might that look like? Three examples. First, an expansion of free, high-quality universal childcare, which will help cut child poverty, increase social mobility, and open the door to the labour market for more women. Second, the use of the government’s vast public procurement powers to require contractors to take on apprentices. Finally, rewarding employers who pay the living wage. We will return to this final theme in the next edition of Progress.
The coalition may well have lost the argument on the economy. If it is bold and honest, Labour now has the opportunity to win it.