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Introducing a healthy scepticism into spending

Ed Balls gave an uplifting speech at Labour conference, focusing the economic debate on the squeeze in living standards. Even before conference, Labour had been successful in shifting the debate on the economy to a more focused debate on what, if anything, the latest recovery means for most people. We need to continue to work to improve our economic credibility and that includes on spending too.

The UK economy is growing, finally, but we do not yet know if this will be sustained. In the short term, we can probably expect further good news on the economy. The Purchasing Manager Indices, which track business intentions, rose significantly again last month and point to the economy expanding further in the manufacturing, construction and services sectors. Growth forecasts continue to be revised upwards, most recently by the Bank of England. Growth in GDP of 0.7 per cent last quarter looks likely to be at least matched in the current quarter. Moreover, surveys suggest employers continue to hire workers in the private sector at increasing rates, though in some cases they are finding it hard to find workers to replace people who move jobs. These signs of growth, helped by an improvement in overseas markets, are occurring at a time when the inflation rate is stable and may fall, and when mortgage rates are at historic lows. The government is helping people feel wealthier by stimulating the housing market in the apparent belief that higher demand for homes will lead to more being built. Should the Bank of England raise interest rates some people could be vulnerable but the Bank has done its best recently to dampen such expectations. The overall picture is of recovery, but a recovery that is still vulnerable to a drop in confidence or external economic shock.

Balls pointed to the failure of the coalition’s economic policies. The coalition agreement was based upon the commitment to maintain the UK’s AAA credit rating. This has been lost. The recovery has been the slowest for a hundred years and we have experienced three years of little or no growth. This has had consequences, including a million young people out of work and higher borrowing than originally projected. Meanwhile, some government policies have been focused on helping the better-off. The beginnings of recovery should not mask three wasted years. What type of recovery we are experiencing matters and Balls, for example, argued that, without measures to boost housing supply, government policies to boost the housing market could ‘push house prices up and up’.

One of the key headlines of the speech was the commitment to submit Labour spending plans to the Office for Budget Responsibility for comment before the election, to provide an independent audit. The OBR has cautiously welcomed the principle but noted that a change in the law and more resources would be required. This is a shrewd move from Labour because the party still needs to build economic credibility, particularly on spending. However, some caution is required and more can be done.

We must be cautious about what economic worldview we would be buying in to by submitting plans to the unelected OBR. The OBR is independent of party politics but it takes a view of the world and of how the economy works. It gets its forecasts wrong (as do most forecasters) and it sometimes changes its methodology (as it seeks to improve its work). It has changed its view on how much of the deficit is structural, ie permanent unless action taken, and how much is cyclical. It would not be surprising if this autumn the OBR raised its GDP growth forecasts and lowered its deficit forecasts. At some point before the election it may even decide more of the deficit is cyclical than it thought, thereby giving George Osborne more room for manoeuvre.

One of the problems with Labour’s reputation on spending is not just that people think we spent too much last time (whatever the facts, it is the perception), many people also believe that we did not always spend wisely. The OBR is not qualified to say if our spending plans will be effective. To be able to make the case that we can spend more than Tory plans, we need not only to demonstrate that our spending is affordable but also that it will work. That’s why we need an Effective Spending Guarantee, with the National Audit Office passing judgement on extra spending a couple of years into government. We need an OBR plus NAO plan.

Balls’ speech ended by highlighting an impressive list of economic policies, including more investment spending, a national investment bank, and a jobs guarantee (all proposed two years ago in my Fabian pamphlet, The Credibility Deficit, as it happens). He also announced a proposed increase in the bank levy rate to fund an extension of free nursery childcare and highlighted plans to for a reintroduced 10p income tax rate, funded by a mansion tax aimed at foreign investors. To win a hearing from voters, and to make the case for any extra spending, shadow cabinet members now need to display a healthy scepticism about spending taxpayers’ money unless it will clearly achieve our progressive, One Nation, objectives.

This article was first published by Progress on 23 September 2013.
Progress, 23 September 2013, 27/09/2013

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