Tackling the issue of economic credibility head on
Labour’s manifesto tackles head on the issue of economic credibility, in terms of fiscal prudence and household finances. In contrast, the Conservatives seem to be undermining their own economic arguments.
When Labour lost the 2010 general election, its economic credibility was severely damaged. For the most part, this was unfair. The scale of the financial crisis was so large that it subsumed any attempts countries may have made to be fiscally prudent. The United Kingdom under Labour was in a relatively strong position compared to other developed countries in terms of overall public sector debt and annual borrowing. Nevertheless, Labour had allowed the perception to grow that it was committed to increasing spending and postponing reducing borrowing through the cycle.
Economic credibility was also reduced in another way. Across developed economies, inequality had risen, with wages eroded by inflation, but this trend was for many years obscured by an increase in household borrowing. The crisis exposed the reality of the situation and further reinforced peoples sense that they had not really benefitted from the good times and were now paying for the mistakes of others.
Labour therefore had to rebuild economic credibility both in terms of managing public finances and ensuring everyone had a stake in our economic future. This was the theme of my Fabian pamphlet, The Credibility Deficit – how to rebuild Labour’s economic reputation, published in 2011. Labour’s manifesto takes on directly the need for economic credibility. The economic policy is fiscally prudent but it also contains a message and policies to promote an economy based on progressive values.
The fiscal stance is vital. Labour pledges to cut the deficit every year. It ‘will get national debt falling and a surplus on the current budget as soon as possible in the next parliament.’ This is a firmer pledge than the coalition’s fiscal target. The coalition target was to be on track to balance the current budget, adjusted for the economic cycle, in three years’ time on a rolling basis. This was a target that could be met … but without ever being met in practice; all that mattered was convincing the Office for Budget Responsibility that the government intended to hit the target. This is how George Osborne was able to claim he was on track over the past five years even though he never actually eliminated the structural deficit. In contrast, Labour’s pledge is to hit its target within a set five-year period.
Labour’s pledge is also more credible than the Conservative equivalent. The Conservatives say they will balance the entire budget (current and investment spending) over the next parliament. Not only does this require £40bn of departmental spending cuts, according to the Institute for Fiscal Studies, but it is highly dependent on the OBR’s growth forecasts. Should the economy disappoint, the pledge would be in jeopardy. Now, a series of unfunded spending pledges from the Conservatives has further undermined their economic credibility. Labour’s plans, however, give some degree of flexibility to allow for economic circumstances. That works both ways – an improved economy would see Labour reach its target earlier, needing to borrow less to fund investment.
Labour could meet its target within three years in line with coalition policy by finding up to £6bn of spending cuts per year from next year. The figure of £18bn cuts much quoted assumes Labour started from the last fiscal year. Should Labour use the full parliamentary term, it could meet its target without spending cuts beyond 2015-16. However Labour has added an extra layer of prudence by stating it will cut unprotected areas each year, to give confidence it will achieve a current budget surplus.
Economic credibility is about more than fiscal targets. They exist for a purpose and ultimately credibility has to be about the day-to-day economic experience we all have. That has to start with values. It is therefore good to see echoes of The Credibility Deficit in the manifesto’s statement that ‘we achieve more when we work together to challenge inequalities of power and build a common good’, with policies designed to bring that about.
Labour has also shown it means business on growth. The commitment to breaking logjams that slow infrastructure investment and a pledge to establish a national investment bank are two essential steps. The only sustainable way we can improve living standards is to raise productivity and that requires better infrastructure to give businesses the confidence to invest themselves. A national investment bank has long been needed in this country to help small businesses.
Labour’s manifesto shows the party understands the need for economic credibility and has made commitments to match it. The Conservative party on the other hand seems to be widening its own credibility gap with the electorate.
This article was first published by Progress on 14 April 2015.