The phoney war

The spending cuts will be dramatic but they have yet to kick in. Meanwhile, Labour has work to do.

After much anticipation, it finally happened. The spending review outlined £81 billion of spending cuts over the next four years. Tory MPs cheered the statement triumphantly, but outside the Commons chamber it received a muted reception despite the media attention.

In part this was because the review was nothing to be happy about. Furthermore, the impact of the cuts announced will not be felt for some time. That puts us in a sort of ‘phoney war' with the main battles still ahead. It means too that Labour needs to get on and renew its economic policy platform.

The spending review was little changed from the June budget as far as the headline numbers were concerned. Spending will be cut by £81 billion to 2014/15. The key difference is that welfare will take more of the burden. A welfare bill cut of £11 billion now rises to £18 billion (Labour in its March budget had projected the bill to remain constant). This still means spending by departments falls by £36 billion. Some departments will see spending fall by 25 per cent or more. While defence spending is ‘only' falling by 7 per cent, our role in the world is being diminished. Development aid and health (to a lesser extent) will have rises after inflation. Education will be hit. An economic disaster which began in a few financial institutions is now translating into savage cuts which will hurt the poorest the most. The government's claims for a progressive policy rely on Labour's tax plans, which it is implementing.

How should Labour respond? Alan Johnson, the shadow chancellor, has done well to put across the message that there is an alternative. He will need to repeat this like a mantra so that Labour's message is heard when the cuts start to kick in. His proposals, to refocus on investment and increase bank taxation demonstrate that the coalition is being driven by a combination of ideology and belief in an economic worldview that means it is taking huge risks with peoples' livelihoods.

The next step is to renew Labour's overall approach to economic policy. That will mean some soul-searching about our record and our approach. We need to think again about how to develop a progressive vision of a dynamic economy. We need to move beyond general suggestions (eg a proactive industrial policy; a rebalanced economy) to a more comprehensive approach. In the October edition of Progress magazine, I stressed that Labour must regain fiscal credibility, however unfairly it was lost. In a short series on this website, I have stressed that a new Labour economic policy should focus on investment (with a clear economic framework to encourage business investment), jobs (with government as employer of last resort), and bank reform. These are some of the essential building blocks.

The spending review drives home how economic policy is an integral part of our vision of how our society should grow. That is not to say we can indulge in fantasy economics divorced from the real world. It does emphasise how political and economic priorities are inextricably linked. A Labour economic policy should be focused on promoting a vibrant economy in which all can contribute and all benefit from. It should promote enterprise and creativity. It should have at its heart the principle that all are of equal worth coupled with an active concern for the poor.

An event such as the spending review reminds us how frustrating it is to be out of government as we watch good work undone. Our challenge is to continue to focus outwards, to think, debate, and renew, and be ready when the time comes with a new Labour economic vision.

This article was first published on the Progress website, on 22 October 2010.