A fiercely political chancellor, George Osborne has long been a better reader of the opinion polls than steward of the nation’s economy. Unsurprisingly, he has homed in on public perceptions that Labour cannot be trusted to run the economy in general, and control spending on welfare in particular, and has used his time at the Treasury to lay a series of not particularly subtle traps into which he hopes the party will fall.

This week, Labour has taken the advice of Nick Pearce and Graeme Cooke in the latest issue of Progress, and got its counter-argument in first to the chancellor’s latest well-telegraphed trap: this month’s spending review.

Both Ed Miliband’s speech on welfare and Ed Balls’ on the economy were careful balancing acts. The shadow chancellor’s warning to Osborne in 2010 that you don’t ‘rip out the foundations of the house just as the hurricane is about to hit’ was both prescient and correct. But, as Balls recognises, the next election will not simply turn on whether the coalition’s austerity programme went ‘too far, too fast’. As in all elections, the voters will not simply be casting a judgement on past performance, they will also be making a call about who can be trusted to grow the economy, maintain fiscal discipline and safeguard public services.

For three years, Labour has doggedly made the argument that a stimulus needs to be applied if the economy is to be woken from its austerity-induced stupor. But this argument has largely fallen on deaf ears: polls show that most voters continue to place more trust in Osborne and David Cameron to run the economy than Balls and Miliband and believe that while cuts to public spending are unfair, they are both necessary and the fault  of the last government more than the current one.

Balls’ task, therefore, was to grapple with the challenge that Labour has lost the political argument while winning the economic case, while also recognising that, after five years of Osbornomics, an incoming Labour government will inherit rising public debt, a stubbornly high deficit of £108bn on current Office for Budget Responsibility forecasts, and an economy which, at best, is likely to be enjoying only tepid growth.

He is right, therefore, to continue to call for capital investment planned for after 2015 to be brought forward and to push his five-point growth plan, even at the risk of higher borrowing. But by marrying his case for a short-term fiscal stimulus to a promise of ‘iron discipline’ in the medium-term, the shadow chancellor has, at last, put Labour into a position from which it can restore its credibility in the minds of the voters, while doing the right thing by the economy. By acknowledging that the last Labour government was able to plan its 1997 manifesto on the basis of rising departmental spending in the first years after the election, but that ‘the next Labour government will have to plan on the basis of falling departmental spending’, Balls has begun to prepare the party for the fact that it will not only not be able reverse the coalition’s cuts, it is going to have to make some of its own. Together  with a reaffirmation of his pledge of a zero-based spending review and a recognition that Labour will need to stick to Osborne’s spending limits in 2015-6, this places some weight behind Balls’ talk of ‘iron discipline’.

Although only accounting for 0.1 per cent of spending, the shadow chancellor’s decision to cut winter fuel allowance for the wealthiest five per cent of pensioners was politically important, too. By showing his willingness to take on a politically powerful group of voters – who have been largely shielded from the coalition’s cuts – Balls has taken aim at perhaps Labour’s greatest achilles heel: the perception on the part of large numbers of voters that the party is incapable of taking tough but unpopular decisions.

Balls’ decision is not just politically sound. Together with the later acknowledgment that Labour will not reverse the government’s removal of child benefit from higher-rate taxpayers, it hints at a redefinition of the principle of universalism, one that will place a greater emphasis on maintaining, and indeed expanding, access to universal services. As Pearce and Cooke argued in their Progress article, in contrast to cash transfers, ‘spending on public services is more productive, in supporting employment over consumption. It is more resilient, with popular support for schools and hospitals infinitely greater and deeper than for benefits. And it is more solidaristic, underpinning real relationships rather than bureaucratic transactions.’

Shadow care minister Liz Kendall, one of Labour’s most forward-looking thinkers, pointed the way with her call in The Purple Book two years ago for the party to champion ‘high-quality from cradle to grave, transforming childcare and elderly care into universal public services that are as integral to our country and the social fabric of our communities as schools and the NHS’. Amidall the talk this week of controlling spending, Miliband was careful to make clear in his speech the importance of investing in childcare. We should expect more from the party on this front in due course.

The Labour leader’s speech was as carefully calibrated as that of his shadow chancellor. He captured his challenge in one of its opening lines: ‘There is an extra responsibility on those who believe in the role of social security to show real determination to reform it.’

Time will tell whether the voters believe his determination is real, but this was a speech with plenty of reformist meat. Some of it was familiar: the emphasis on tackling some of the long-term causes of higher welfare spending, in particular low pay, the use of agency workers and zero hours contracts and worklessness. Here, the balance between rights and responsibilities – encapsulated by the job guarantee – is the right one.

But to tackle these long-term causes of higher spending, there were also some radical long-term plans. Miliband is right to want to arrest the growth in housing benefit, caused by a decades-old shift in expenditure. Thirty years ago four-fifths of public expenditure on housing was capital investment, with just one-fifth cash allowances. Today while £4.5bn of public money is spent on supporting the construction of new affordable homes, £94bn goes on housing benefit. This will continue to grow – while doing nothing to expand the supply of new homes – if this trend is allowed to continue. Hence Miliband’s desire to ‘move from benefits to building’.

Perhaps even more important is the way in which Labour’s leader wants to achieve his goal: by placing local authorities at the heart of that effort. There are legitimate questions about whether councils can, as Miliband suggests, drive down the benefits bill by bulk-purchasing private-sector rents, and the Labour leader appears to have shied away at this point from the IPPR’s proposal to give local authorities control over housing benefit budgets, but an important principle has been established nonetheless: Labour trusts town halls to play a central role in its welfare reform plans.

This radical devolution of power to local councils should be a model that Labour applies in other areas.

Alongside this commitment to devolving power, Miliband also fleshed out the much-promised return to the contributory principle. As one commentator noted, it is not simply the perception that some people are getting ‘something for nothing’ which is undermining public support for welfare, equally damaging is the view of many others that they get ‘nothing for something’. Miliband’s proposal to begin to tackle this – to raise the level of contributory Jobseeker’s Allowance while stretching from two years to five the period people will have to work in order to receive it – is precisely the kind of imaginative thinking the party needs if it is to square the circle of controlling spending while placing the values of fairness and reciprocity once again at the heart of the welfare state.

Naturally, there are still questions that Labour will face on both welfare and spending. First, Miliband’s three-year cap on welfare spending is sound in principle. However, as we move towards the election, he will need to show how this might be implemented, especially in the early years of a Labour government before a number of the longer-term cost-controlling measures he has outlined begin to work. The overall health of the economy is, of course, the major determinant of welfare spending. But, as Paul Johnson of the Institute for Fiscal Studies has suggested, to meet its cap Labour will have to face up to the unpalatable choice of either cutting benefit levels or tightening eligibility criteria.

Second, while its agenda for reforming welfare is coming into greater focus, its plans for reforming public services still appear less clearly defined. In health, for instance, the focus on ‘whole person care’ and the desire to break down the barriers between health and social care are the right ones. But quite how the party will honour its pledge to repeal the coalition’s NHS reforms without another disruptive ‘top-down reorganisation’ remains unanswered.

Finally, Labour was vocal in its opposition to the government’s plans to restrict child benefit to higher-rate taxpayers and, until very recently, clear that it opposed any cuts in winter fuel allowance for wealthy pensioners. The principle of universalism was apparently sacrosanct. Now, however, the implication of Balls’ previous warnings that he would not be able to reverse every coalition cut has been spelt out explicitly with relation to child benefit. There are more hostages to fortune in the thicket of coalition policies that Labour has passionately opposed. As these become apparent, the party must hope that the voters regard them less as u-turns and more as indications of Labour’s realism and readiness to govern. This dilemma is one that afflicts all opposition parties, but, as the election approaches, Labour needs to consider more carefully the tone and language with which it opposes coalition policies which, in the short-term at least, a Labour government may not be able to reverse.

But these are all questions for another day. If Miliband crosses the threshold of No 10 in two years’ time, he would be right to reflect that this week marked a critical staging post in that tortuous journey.

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Robert Philpot is director of Progress. Follow Rob on Twitter @Robert_Philpot