George Osborne has indeed set a fiscal trap. To accept his cuts is economic madness. To reject them is electoral suicide.

If Labour accepts the ‘spending envelope’, Labour undermines its ‘too far, too fast’ argument, the IMF’s belated agreement with our stance and, as it goes, the evidence. Reject it and the electorate’s worst suspicions of Labour and our ‘reckless’ borrowing, taxing and spending will see us punished at the polls. No one doubts that the Labour party can deliver social justice, but enough voters still have a deep suspicion that we won’t balance the books.

Fiscally, this leaves Labour with very few options. I am going to assume that we cannot increase sovereign debt, even if in the short term it might make economic sense to do so.

Politically speaking, leading up to the next election the only additional areas that can be taxed are those that run contrary to values of responsibility, accountability and fairness. That leaves us with, unearned wealth, utility companies, the financial transaction tax, bankers’ bonuses and pension relief. Closing tax loopholes is complex but possible.

If we invest this additional tax revenue anywhere, we should invest it in green technology, infrastructure, housing, and education with the aim of getting people off welfare and back to work. No matter what the short-term business cycle, over the longer term you will never regret those investments.

The money we spend on a citizen in the first eighteen years of their life will give us the best long-term returns. In its 2010 report The High Cost of Low Educational Performance, the OECD found that if the UK brought its PISA rating up to that of the highest ranking country, Finland, then it would add over $7tn to its GDP over the lifetime of a child born today. That represents a 300 per cent improvement in value on current GDP projections. Now, we wouldn’t need to spend anywhere near that to meet Finland’s performance. The returns, simply in economic terms, for investing in human capital are exceptional – to say nothing of the social value. The current youth unemployment rate is a high price we will be paying for many years.

Industrial activism too has potential from a predistribution point of view. It has the virtue of being geographically specific, allowing a Labour government to direct investment to parts of the country where it is needed most. It might not be fiscally neutral in the short term but it would be closer than most options.

Tax breaks and national insurance holidays for start-ups are one way of incentivising private sector investment in infrastructure and green technologies in our economically depressed regions. Building contracts could be awarded to those companies that invest in apprenticeships. The last time I checked we owned most of RBS. We could sell that off at a huge loss now or, alternatively, devise a long-term strategy to support the building of affordable housing.

Britain is globally recognised for design innovation, engineering and quality manufacturing. We need to build on our reputation as a world leader in these areas and take the opportunities presented by the unsustainable cost of non-renewable energy. With increasing volatility in world’s energy markets, we need to be ahead of the curve.

And, finally, a sobering thought. Vox has estimated that even if Osborne’s utterly discredited economic plan is kept in place, and he doesn’t follow the advice of the IMF and the relatively successful example of the Obama administration, then the economy will be back on track by 2019 at the latest anyway. The Tories would take the credit for the success of the ‘tough medicine’ and Labour would be out of office for a very long time. Under no circumstances can we let that happen; we must get over the line first.

Never mind that David Cameron stood outside RBS in October 2008 and supported Gordon Brown and Alistair Darling’s bailout package. The Tories blew the dog whistle to the deep-seated suspicions that made Labour unelectable for 17 years and so far we haven’t countered that sufficiently. If we convince voters of nothing else, we must convince them we can be trusted with the economy. Everything else flows from that.

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Ben Cox is a member of Progress.  He tweets @_BenjaminCox_

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Opportunities cost: What price predistribution and industrial activism?

11am, Tuesday 23 April 2013, Wilson Room

  Andrew Adonis shadow infrastructure minister
Toby Perkins MP shadow small business minister
Nicola Smith head of economic and social affairs, TUC
Hopi Sen joint author, ‘In the Black’ Labour
Chair Seema Malhotra MP chair, parliamentary Labour party business group

With the launch of a new Progress pamphlet, The Purple Papers: Real Change for Britain, Real Choices for Labour, Progress is holding a series of events across the country to discuss the main themes it raises. This seminar will focus on economy, and the real choices Labour would have to make in order to make predistribution and an active industrial policy possible. The pamphlet, in the form of a series of green papers, takes forward some of the ideas and proposals that were made in The Purple Book last year, looking at the policy choices and priorites that would face an incoming Labour government in 2015: public services, the care crunch, the new economy and welfare. The papers have been written by Patrick Diamond, research fellow at Policy Network; Graeme Cooke, associate director of IPPR and Steve Van Riel, former director of policy and research at the Labour party.

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Photo: 16202297@N00