Five economic challenges for Labour leadership candidates

As the contenders for the Labour leadership begin to set out their stalls, what are the economic questions they should be answering?

The reasons behind the Labour party’s defeat the UK general election are varied. It is clear however that Labour did not convince the electorate that it would manage the economy better than the Conservative party. During five years in opposition, Labour fell further behind on questions of economic management and continued to be held responsible for over spending when in government. This perception dented Labour's defence against the declared ambition of the Scottish National party to undermine plans to control spending.

Labour must learn from the last leadership election, which took place in 2010 shortly after a major financial crisis and recession. In those circumstances, Labour needed a leader who could defend Labour's record and look ahead to the five years after the 2015 election to offer a convincing vision of the future.

Unfortunately, the leadership contenders in 2010 avoided talking about economic policy for most of the time. Ed Balls’s much remarked Bloomberg speech on the economy was noteworthy because it was practically the only speech any candidate gave on the subject. Ed Miliband pledged to cap executive pay and promote the living wage – worthy aims but not a comprehensive platform. Labour struggled from that point to make a coherent and consistent argument about economic policy.

This time, a candidate who is serious about leading the Labour party and becoming the next prime minister must have a clear understanding of the economic challenges facing the country with answers to match.

Here are some questions on the economy that candidates must be able to answer:

How will you show Labour is serious about controlling deficits and debt?
Labour's message on borrowing was confused for at least five years, so that by the time of the general election it was difficult to get a hearing on the issue. The party entered the short campaign period with an ambiguous stance on the deficit. The 'budget responsibility lock' in the manifesto was a belated attempt to show Labour would be fiscally prudent but, even though Labour's fiscal targets were economically justifiable, it was not clear when it aimed to cut current borrowing. Labour admitted reluctantly that it would borrow to invest, but wavered on whether or not that would be a good idea.

Should growth or productivity disappoint, government borrowing will be higher than expected. A future Labour leader must show that putting public finances onto a clearly sustainable path will be, after security and defence, the main priority. Without this, other policy aims are simply items on a wish list.

How will you significantly raise growth and productivity – and hence living standards – in the economy?
UK economic growth since 2013 has been creditable but looks less impressive compared to other countries when measured by GDP per person. Productivity has failed to recover. This puts a limit on attempts to raise living standards. It also means that inflationary pressures could arise sooner than expected, causing the Bank of England to raise interest rates. Conservative party plans rely on households borrowing more as a proportion of income than before the financial crisis, leaving families more vulnerable to rising mortgage costs.

Leadership contenders need to show how Labour can transform the economy. To win the next election requires an understanding of the economic challenges likely to be facing people in five years' time. These will probably include the need for improved education and training, better infrastructure, better financing for business, a reformed but cherished City of London, and a market economy in which everyone can participate.

Labour must move away from a statist approach and acknowledge the dynamic nature of a modern economy. A leader who proposes to improve living standards and reduce inequality but cannot say how Labour will promote sustainable growth and higher productivity cannot be regarded as credible.

How will you convince people we will spend their money effectively and when would you cut taxes?
Labour lost the case for spending while in government. The confusion continued in opposition, with spending cuts opposed while, with some exceptions such as the zero-based spending review, lip service was paid to the need to control spending. A credible leadership candidate will articulate how a Labour government will regard being a wise steward of citizens' money as its main concern and only spend where necessary.

This will not be easy. Public perceptions have to be transformed. In addition, the scale of spending cuts planned by the Conservatives is unnecessary and could harm growth. Nevertheless, cuts and limits to current spending are likely to be required and the scope for spending growth beyond 2020 may still be limited. A test of Labour’s stance will be whether it would ever consider cutting tax rather than raising it.

Leadership candidates need to show how Labour government spending can be effective and efficient. A serious leadership bid must show how, once again, Labour can shake off the image of a party that likes to tax, spend, and borrow.

How should our public sector adapt to spending constraints and a changing society?
Public services have to adapt to changing circumstances. In five years' time, they are likely to have faced further significant cuts to spending. Labour's strategy of opposing cuts did not work in the last parliament. As cuts go deeper there may be more campaign traction but ultimately the public will be suspicious of calls to turn back the clock, while at the same time demand for services will have increased. The challenge will be to encourage innovation in the public sector consistent with progressive values, with a clear focus on outcomes. A prospective leader will otherwise be avoiding reality and ultimately undermine the sustainability of the services he or she wants to save.

What do you really mean by aspiration?
Aspiration is something progressives believe they must acknowledge but struggle to define in plain terms. The meaning seems to be that people should not be regarded as stuck where they are but empowered to live fulfilled lives, with hard work rewarded. The great insight of Labour thinkers such as RH Tawney was that this requires a deep understanding of freedom. The challenge for a potential leader is to show how a Labour government will enable individuals, families and communities to fulfil their potential and experience an increasing quality of life.

Labour must embark on a fundamental project to reform its economic policy. The new leader must show he or she is capable of leading this effort. Without it, the next opportunity to apply progressive values to a dynamic market economy will be lost.

This article was first published by Policy Network on 22 Mayu 2015.