This article is from the April issue of Total Politics

As Britain struggles through the cold comfort we’ve had on our journey to recovery, it’s tempting for the left to think that we need the engine of the state to pump out as much heat as it can. In the short term, that’s the right economic strategy, but Labour has no control over the UK’s short-term economic policy. No matter how brilliantly Labour spokespeople set out our plan ‘furjubsungrth’, it will never come to pass.

George Osborne might decide that a stimulus by any other name will smell as sweet to voters. A higher tax allowance, corporation tax cuts and tax breaks for entrepreneurs could be applied to the economy, in the hope that growth will be summoned, if not from the vast deep, then from deeper pockets.

Alternatively, he’ll press on, fearing debt crisis, hoping world hunger for British cars and accountancy will make up for depressed domestic demand for goods. Either way, we’ll face a stubbornly tough fiscal situation come 2015. After the next election, the Office for Budget Responsibility (OBR) forecasts two years of spending squeezes before structural balance is reached. It could get worse, and even if it improves, the fiscal choke collar will be on for a long time after, as we reduce debt as a share of GDP. What’s more, whether Osborne stimulates or squeezes now, a trap is being set for Labour.

If growth, however weak, has returned by the next election – or by external good fortune – the government will pat itself on the back and tell voters this is no time to spend, spend, spend. If we’re still marooned in a miasma of mediocre macro, it will declare that Labour’s only solution is to spend money the country doesn’t have, and, sighing in mock concern, say, in the words of a former Conservative electoral genius, “Ah, there you go again.” Heads they win, tails we lose.

How can Labour escape without betraying our principles? By being the party of fiscal conservatism and national ambition. First, we need to re-establish our position as sound guardians of the public’s money. To this end, we should adopt a tough new ‘Golden Rule’. The current government is committed to achieving structural balance at the end of a rolling five-year period. It’s already rolled that over to 2016–17, and may have to roll it further.  

We should embrace a different but equally tight straitjacket. We could commit ourselves to a version of the Chilean left’s rule of running a structural budget surplus so we are repaying debt by the end of our first term. Or we might commit to running a current spending surplus if growth is projected to be above a certain level. Next, we should agree to let others be the jury on our targets, most likely through the OBR. If the OBR concludes that we will not meet our targets, we commit to shifting our tax and spend policies to reach balance.

We might even propose a parliamentary watchdog, so that other parties can test the impact of their fiscal policies. In advance, we announce that we will undertake a fundamental savings review of all government spending, to prioritise spending vital for long-term economic growth while reducing the immediate costs of failure.

Yet all this is mechanistic, alert readers will cry. It doesn’t save a single penny of actual cash. Indeed not. We’re three years away from the next election. We don’t know what the public finances will be like, or where savings will be appropriate. We don’t even know if flagship government policies, like the universal credit or a reshaped NHS, will be in place or how much they’ll cost taxpayers.

For now, all we can do is set our limits and our priorities. Soon, we should identify some early, precise cuts and tax changes we’d make: for example, by reducing housing benefit spending or reducing tax benefits for high earners. But embracing restraint in principle is a vital first step, because as soon as an unequivocal, unshakeable commitment to fiscal conservatism is made, the political debate stops being only about debt and the risk of fiscal crisis.  

Here the second part of Labour’s agenda will come into play. If we embrace fiscal restraint, we can win on national ambition. If we embrace limits to state spending, we can focus on where the state can help businesses create jobs and wage growth. We might focus on industrial banks for long-term investment, encourage small business in deprived areas, or reduce research and development costs for British-based business. The left knows we need a smart state to help businesses grow. We just don’t need structural deficits to do it. The left-of-centre ambition of supporting private-sector jobs and wages growth through a reformed public sector that will provide the skills, infrastructure and support businesses need is a more attractive agenda than warmed-over laissez-faire.

We can work to lift wages for those on low and middle incomes too, through the tax system and by encouraging equitable sharing of success in businesses that seek state support. Labour can even gain from the pain that results from public service saving and tax increases, because it will want to share the burden of national recovery more evenly than the Tories. Would you trust Lansley or Cameron to protect the values of the NHS under a tight spending limit?

Jobs growth, wage growth and social growth are the keys to national recovery. Only the centre left can deliver all three, within the limits of essential, sensible fiscal restraint. I believe intelligent fiscal conservatism and a national ambition for recovery will be the keystones of the left’s success in the tough decade ahead.

Labour can, and must, be the party of both.

Hopi Sen is a co-author of In the Black Labour. He blogs at www.hopisen.com

Tags: Hopi Sen, In The Black Labour, Issue 46, Labour Party, The idea