We need to debate spending priorities, not just the size of the state

Since the general election of 2010, debate has raged about the appropriate size and scope of the UK state. The most ideologically driven chancellor in modern British economic history has chosen to make Labour’s alleged fiscal profligacy the centrepiece of the Conservatives’ 2015 general election strategy. Conversely, many in Labour’s ranks want to expose the harshness of ‘Tory cuts’ by defending the public sector status quo, even if the party has all but accepted the coalition’s deficit reduction plans up to 2017-18.

What no party in British politics has been prepared to countenance is an informed debate with citizens about future spending priorities. Public expenditure choices are being imposed which will have major implications for Britain’s society and economy three decades from now. Labour should spell them out, welcoming a more considered, open national conversation.

This is an opportunity to address what the state does, not only how much it spends. As the Institute for Fiscal Studies emphasises, public spending as a proportion of national income will be at the same level in 2017-18 (the end of the current spending review period) as it was in 2003-4, halfway through the Labour government’s second term. However, what is striking is the continuity in levels of spending since 1945, which has remained around 40 per cent of national income.

In fact, far more radical changes over the last 30 years concern the composition of expenditure. Since the early 2000s, spending on pensioner benefits in Britain has risen by 37 per cent; investment in the NHS has increased at a similar rate: 36 per cent. Along with rising spending on debt interest payments, this amounts to a significant shift in the relative priorities of government – the implications of which are rarely considered in mainstream political discourse.

Rather than focusing on the cumulative size of the state, there is a compelling case for a far-reaching reprioritisation of UK public spending. This relates to the strategic purpose of government. For a social democratic party, an activating ‘social investment’ state is an imperative, ensuring high-quality services, especially for families and children. This is advantageous for the whole of society, not least older people and the more affluent. Universal, high-quality care services raise the employment rate, increasing the economically active population, as well as the long-term sustainability of the pension system. Moreover, flexible, ‘round the clock’ childcare ensures talented parents – women in particular – can accept jobs that accord with their qualifications and labour market potential. Labour-intensive care services are a vital source of future employment in the UK economy.

The ‘care crunch’ – the impact of unmet child care and adult social care needs on families – is moving up the political agenda. The rising costs of care services mean that families in Britain spend an average of 28 per cent of household income on childcare; universal provision will address the impact of the living standards ‘squeeze’ on families.

None of this can be done cheaply. A universal, Nordic-style early years service will cost around £7bn a year. The UK economy is increasingly flexible, service-led and knowledge-orientated: resource-intensive, ‘dawn till dusk’ services are required, tailored to the working lives of modern families. High-quality provision is essential to improve outcomes for children, with lower child-adult ratios a necessity.

The logic of this approach is that the welfare state has to be restructured, addressing not only the ‘traditional’ social risks outlined in William Beveridge’s groundbreaking 1942 report – unemployment, sickness, old age – but the ‘modern’ social risks of poor skills, inadequate care services, and long-term economic exclusion.

The crucial question relates to funding. Labour cannot rely on economic growth to render strategic prioritisation irrelevant. The short- and long-term pressures on the state will continue. In all likelihood, growth will remain anaemic, given uncertainty in the global economy. The modern social settlement will have to be renegotiated, including the inter-generational contract that underpins the welfare system.

This is not simply a matter of redistribution from ‘old’ to young, but of more refined targeting. A significant section of the elderly population remain vulnerable to poverty: inequality can be as stark within generational cohorts as it can between them. On average, women in their 60s have an income that is 48 per cent of male income. A more sophisticated approach to targeting is needed.

Means-testing older-age benefits such as free bus travel, TV licences, and the winter fuel allowance for affluent pensioners would raise at least £2bn per annum, according to the IFS. Requiring higher-income pensioners to continue paying national insurance would provide nearly £1bn in additional receipts to the exchequer. Property and mansion taxes would help to further equalise the distribution of wealth and assets. The most far-reaching reform, however, would be removal of pension tax relief for higher-rate taxpayers, raising up to £7bn per annum for investment in an empowering state.

Nonetheless, the politics of a ‘social investment’ strategy are far from easy. Older people are, of course, more likely to vote: for three decades, governments have protected pensioner interests. Moreover, spending on traditional pillars of the social contract like health and the state pension is generally popular with voters. Labour has to make its case by reframing popular expectations.

Here a generational perspective may have political appeal. Today’s middle classes fear their children will be worse off than they were; a viable future depends on concerted investment in the young. That means cultivating an ethos of intergenerational solidarity and shared sacrifice: tough choices will be needed to forge the social settlement modern Britain needs.

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