Fiscal responsibility and Labour’s modernisation

This article is a continuation of an essay published on Fabian Review by the same authors two weeks ago (Labour’s Future: a Tale of Two Political Economies). It expands on the conclusions, arguing that Labour’s revival requires a modernisation that uses fiscal responsibility as a catalyst for both economic radicalism and state reform. Within the Labour Party, until now, these two ideas have been advanced – and opposed – separately, but they must now be combined. This debate should be at the heart of the leadership contest, to avoid a fundamental collapse in public support for social democratic ideas.

After the financial crisis, Labour had the chance to change its economic approach to adapt to a new reality. We failed, and so we lost in 2015. The scale of our recent defeat demands an even bigger rethink.

Political modernisations follow a simple process: neutralising historic weaknesses in order to deliver on strengths.

For Labour pre-1997, this meant accepting the basic policy framework of a market economy, while showing that an enabling state can harness the prosperity the market generates to deliver social justice. For the Conservatives pre-2010, this meant demonstrating that it was more ‘compassionate’ than ‘nasty’, while arguing that only a Tory Government could get Britain’s debts under control. For Labour post-2010, it meant addressing public concerns over our ability to get the deficit down, while convincing that only Labour could raise living standards and protect the NHS.

However, we failed to engage properly with the tough choices that deficit reduction demanded. We chose tactical positioning in an attempt to switch the conversation away from our weaknesses rather than address them. As a result, we never earned voters’ permission to be heard on our strengths. Even though millions of people went into polling booths wanting a government which raised their living standards and protected the NHS, they did not vote Labour because they did not trust us to deliver. Responsible capitalism without responsible spending was a non-starter.

Looking to 2020, it will be insufficient to attempt to neutralise our weakness on public spending. A more fundamental modernisation is required: not neutralising our weakness, but making it our strength. For Labour to win again, a commitment to fiscal responsibility must be defining, not an added extra. Labour should be economically radical because of, rather than in spite of, its commitment to fiscal responsibility. This is the only way social democratic objectives are realised in 21^st Century.

Two weeks ago, we argued that, following the crash, there are two strands of centre-Left thought on political economy, both of which alone are insufficient to initiate our renewal.

One, at times characterised as Ed Miliband’s predominant view, perceives that markets must be reformed, but does not recognise that the state must reform too. Consequently, its boldness on economic reform is undermined by a rejection of tough spending decisions. The other, often associated with New Labour figures, perceives that in straitened times the state must be reformed, but does not fully accept the failures of markets during the New Labour years. Without a view on economic reform in an age of spending constraint, it offers little to raise living standards.

Throughout the last Parliament these respective strands argued for reform of either the market or the state, while internal forces of conservatism sought to prevent both. Labour’s new political programme must now marry both strands of thought and propose reform to both market and state, with reform in each instance driven by our commitment to fiscal responsibility.

If we believe that increased public spending should stabilise the economy during recessions, this also demands a robust acceptance of surpluses in recoveries, subject to the state of investment and public services, which in turn requires reform of the state.

This means a structural transformation of public services so that they tackle problems at their root while also raising standards; a welfare state which tackles worklessness and curbs the drivers of higher spending; and an immigration system which limits pull factors and abuses which drive down wages.

Equally, if the centre-left is to raise living standards in an age in which it can no longer rely on public spending, it must be more readily prepared to tackle concentrations of power, not just in the state but also in the market. This could be, for example, in cases where workers’ wages do not rise with their productivity or where prices are anti-competitive. It means partnering with responsible businesses and embracing clear principles for intervention.

Trust on public spending is the political pre-condition for any programme for government. Without modernisation with fiscal responsibility at its heart social democracy could be in the wilderness for a generation, as a Conservative consensus erases support for the state. Tory spending plans clearly threaten our social fabric. But at the last election, there was not a credible and moderate alternative against which to judge their extremity. For too many voters, they became by default the only credible option.

Labour needs a leadership contest which does not tell the party what it wants to hear, but what it needs to hear. It is not enough to give speeches paying lip service to straightened times without being honest about the economic and political choices before us. We hope candidates begin to embrace the notion that fiscal responsibility that the drives reform to both market and state is the only way we can realise our social democratic objectives.

The writers worked as advisers to Labour politicians in the last parliament. They are anonymous and write in a personal capacity.