Top five lessons from 2013: The future of government

1. We’re all fiscal hawks now

2013 confirmed that all the political parties are fiscal hawks now. The choice is which shade of austerity. Ed Balls first hinted at the pain to come if Labour returns to office at the 2012 Fabian New Year Conference, when he said the starting point for Labour would be to accept coalition cuts. In June he went further and pledged to follow the coalition’s current spending plans for 2015. He will be providing a major update on 25 January at the 2014 Fabian conference. Hopefully, he will be putting public investment at the heart of his vision for spending after the next election.

The Autumn revealed a lot more about the rival versions of post-2015 austerity. George Osborne pledged to overshoot on deficit reduction by achieving a fiscal surplus and beginning to permanently shrink the size of the state (see my commentary). This would do untold damage to public services, social security and long-term investment.  2030 Vision, the final report of the Fabian Commission on Future Spending Choices set out a different fiscal path. It showed that spending restraint and gradual deficit reduction is compatible with increased investment and a real freeze in public service spending, rather than further savage cuts.

The position the Liberal Democrats take on austerity is now critical. If the party maintains a united front with George Osborne it will remain hard for Labour to expose his post-election plans as extreme, hugely damaging and unneeded. It would also call into question whether they could ever be part of a centre left political alliance. But if the coalition’s fiscal consensus begins to crumble, the prospects for both Labour and the Liberal Democrats could transform.

2. It’s a lot easier to promise new things than find cuts to pay for them

Labour now has a growing list of spending pledges for 2015. The party is signed up for pricey job guarantees and new childcare entitlements. Most important of all, there is the potential price tag of the party’s commitment to see 200,000 homes built each year. The Lyons Review, which the Fabians are supporting, is looking at what it will take to realise this promise.

There won’t be money to promise much more, but two other items jump out. First the party will need a clear offer on older people’s care to best the coalition’s incomprehensible new package, inspired by the Dilnot Commission. Second, to meet decarbonisation targets it seems inevitable that more public money will need to be spent, on house-by-house energy efficiency programmes as well as on energy supply. Energy bills can’t take the strain any longer.

But how to pay for even this pared down list of priorities? So far Labour has linked each policy announcement to individual tax rises targeting the rich. This is fine for signalling direction of travel for now, but when it comes to a post-election spending review the overall total for public service spending will be flat at best – even after such tax rises. So there will need to be cuts to pay for new entitlements. Within public services there is a lot of excitement about the principle of switching money to early intervention. But to save money (or even be cost neutral) prevention means cutting ‘downstream’ services (think a lot more local hospital campaigns). We need to see a lot more concrete promises.

So far Labour has announced only one memorable cut: the removal of the Winter Fuel Allowance from top-rate tax payers. This is a symbolic pledge that would save a few million pounds a year. But it does point to the one group who have been spared the worst of austerity: middle income and rich pensioners. If more social security cuts are needed, this is the group that should pay first. The Fabian spending commission and our July report A Presumption of Equality both looked at the case for asking this group to contribute more.

3. No one will talk about tax

Throughout 2013 the IFS continued to predict a significant post-election tax rise, something all the parties have studiously ignored. The Fabian spending commission also assumed tax would probably need to increase. But apart from Labour’s specific promises regarding taxes for the very rich, there has been no engagement with where more money will come from.

Our report A Presumption of Equality exposed a surprising disparity in the tax system, with retired households paying far less tax than working-age households with the same incomes. On top of that, this group tends to have far more housing wealth, and wealth and housing is far more lightly taxed than earnings or consumption. This was our contribution to the intensifying debate on intergenerational fairness: but too often this heated argument has focused on spending rather than tax and associated wealth disparities. Our research found that households of different ages with the same incomes receive broadly the same level of public services.

What’s really needed is a whole-system review of the tax system, looking at how to raise an agreed amount of revenue in a way that advances fairness within and between generations; economic efficiency; and environmental sustainability. There should be a shift in taxation towards wealth, housing, finance, harmful consumption and non-earned incomes, but with compensating tax cuts elsewhere. The IFS has already laid some of the foundations, with its 2010 Mirrlees Review, but this needs to be translated into practical politics. In particular an independent process would be needed to oversee ministerial decisions, to provide public reassurance that promises of tax cuts to offset rises elsewhere would actually materialise.

4. Labour’s response to the coalition’s social security agenda is still half-formed

2013 saw the unravelling of the coalition’s plans for universal credit and growing evidence of the harm to families the government’s welfare reforms have brought. But the coalition continues to maintain the momentum on social security (the left can’t even get its preferred term for ‘welfare’ into mainstream media debate). In June Ed Miliband made his first major speech on social security, but there has been little follow-through since then. Labour needs to do a lot more to spell out a positive agenda for social security, rather than continue with cautious if compassionate reaction to the increasingly nasty coalition agenda.

In 2013 the Fabian Society published three important reports in this area. Home Truths confirmed public mistrust regarding the place of housing benefit. However it also showed that rising housing costs have the potential to change the narrative on social security, by persuading more people that poverty has structural rather than personal causes.

Then in September, Liam Byrne published The Road to Full Employment his first comprehensive account of a Labour agenda for social security and employment. It came just weeks before he was sacked as Shadow Secretary of State for work and pensions but it is essential reading for his successors in this critical brief.

Finally, the Fabian spending commission showed how public concerns regarding the cost of working-age social security hide a different reality: spending in this area is actually set to decline as a share of national income. The commission found that if current policies are continued, the challenge for Labour will not be to restrain uncontrollable costs but find ways of preventing inequality and poverty from rising.

This is the significance of the ‘pre-distribution’ debate. The left is hopeful that labour market and housing market reforms might be sufficient to stabilise or even reduce inequality without new social security spending. The Fabian commission found that in the short term these hopes are misplaced: during a single parliament policy changes would only have limited effects on inequality or social security spending. Over one to two decades a reshaping of markets could have a more profound impact. Nevertheless our work in 2013 convinced us that the fight against inequality will demand not ‘either’ pre-distribution ‘or’ social security reform: it is a question of ‘both’.

Social security remains the toughest policy area for Labour, but also the field most closely linked to the party’s historic Fabian goal of tackling inequality and poverty. Surrender in this area is unthinkable. The challenge for Labour, if it returns to office, will be to design social security reforms which command public confidence, support structural change to the market and hold out the long-term promise of adequate incomes for all.

5. The party needs a new story for public services

Finally, 2013 proved that Labour is still struggling to come up with an adequate response to the coalition’s Maoist programme of public service upheaval. The party knows it is against the excesses of marketisation and centralisation. But what is it for?

The clearest answer came from Andy Burnham, with his proposals for the integration of health and social care. In the summer he edited Together, a Fabian collection setting out the thinking behind ‘whole person care’. But even these plans have led to tensions within the party. They imply more spending, if social care is to be funded more along the lines of the NHS, so have found little favour with the shadow Treasury team. It is hard to see how Burnham’s vision can be implemented without further structural change, but Labour is trying to avoid promising any more ‘top-down reorganisation’. And the plans for greater local government involvement in health commissioning have met strong resistance.

This may be the first example of Labour struggling to practice what it preaches on localism. Since the party lost power Labour has become comfortable with the idea of local devolution and many stirring words have been written (Jon Wilson’s 2012 Fabian pamphlet Letting Go is a fine example). But will this translate into action? In 2014 we should learn the answer. The fate of the Burnham health reforms will be a key marker, but we will also see how much new autonomy councils are promised after the dust has settled on David Blunkett’s review of Local Education Authorities, Michael Lyon’s housing review and Andrew Adonis’ growth review.

The even tougher question is: if not marketisation, then what? Labour so far lacks a self-confident account of what should stand in the place of 20 years of fragmentation and outsourcing. In principle the party believes in better coordination, prevention, mutualism, co-production, and professional autonomy. But can this all be combined in a way that also delivers innovation and productivity savings while shielding public services from private competition?  In 2014 the Fabians hope to be able to provide some of the answers.