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Winning the economic argument: how to fight on Labour's own terms

There could not be a more appropriate theme for this year’s Fabian New Year conference than the economy. Opinion polls tell us that Labour is still not trusted on economic policy, yet the Coalition has already had to rewrite its budget plans. The government plans even more spending cuts lasting beyond this parliament. In such circumstances, can Labour retain compassion for the worse off while regaining economic credibility?

That is the theme of a seminar I’m taking part in at the Fabian conference on Saturday. When faced with the severe cuts to spending, including on the welfare budget, compassion surely compels us to campaign against such measures vociferously. Yet we run the risk that people won’t believe we are serious about managing the public finances properly. In that case, at the least they will suspect we will put up taxes to pay for higher spending.

I argue in The Credibility Deficit, a Fabian pamphlet published last year, that Labour has to take significant steps to improve its economic credibility. These include a clear plan to reduce deficits and a clear plan for growth. Since the pamphlet was published, some on the Left have taken up the same theme and argued that Labour should be more focused on reducing government borrowing levels. The problem is that we can end up fighting the next election on the basis of Tory arguments about deficits, with Labour even promising to match Tory spending plans as we did before the 1997 election. Not only does that tactic concede ground to the Tories before we have even started, it is not likely to be enough to win the election. Instead, we need to convince the electorate that our spending will be effective and that their money will be spent in a way which will produce results and avoid waste or inefficiency. Furthermore, the Office for Budget Responsibility could limit Labour’s room for manoeuvre by declaring what it believed is and is not an acceptable budget. That is why Labour should announce an ‘Effective Spending Guarantee’ ahead of the next election, with independent verification of the effectiveness of any new spending plans we have.

There are two types of economic credibility. The first is with financial markets. Taking hard decisions on spending is one way to convince investors a government means business getting debt down.. However if they doubt those decisions will actually take effect (because, for example, public protests will force u-turns) they will stop believing budget plans are credible. They will also quickly become concerned if they believe growth will be too slow to deliver tax revenues and profits that were expected. The second type of economic credibility is with our fellow citizens; not simply on whether we have the right policies here and there but whether we have the right approach and will deliver. The right approach for Labour means holding fast to our values, emphasising that we are the same Labour Party, believing that everyone should have an equal start in life, that power (including economic power) should be dispersed and accountable, and that virtue has a place in markets. Broadly, that translates as building an economy not simply so that everyone benefits from the proceeds of growth (one way or the other) but in which everyone who can contributes to growth and has the opportunity to lead a fulfilling life. And in practice that will mean for example that we guarantee employment and do all we can to invest for our nation’s future prosperity.

This article was first published on the Fabian Society blog, Next Left, on 13 January 2012.
Next Left (Fabian Society), 13 January 2012, 13/01/2012

Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
The IMF's Fiscal Monitor is actually quite radical.
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Responding to Brian Griffiths' article in The Article on the risks of inflation.