Fabian Commission on Future Spending Choices

Political gamesmanship is trumping compassionate politics. Spending choices should be about how to minimise the pain and suffering families must endure as a result of today’s savage economic forces. Instead the Government is intent on targeting the least popular groups and protecting those who are most likely to vote.

The Labour Party can no longer duck all question of what it would do differently with power. It needs to start developing an alternative so that before the next election Labour has a clear direction on spending to show it is a credible and caring contender for government. And if the Liberal Democrats want to keep open the option of working with Labour after 2015 they too need to say what they would do differently without their Tory partners.

Labour in particular will have to find a formula that proves the party can be responsible with the public finances whilst avoiding being locked into Conservative spending limits. The Tory policy of closing the structural deficit by 2017/18 will come at a cost of perhaps £50 billion in further cuts or tax rises. By contrast Barack Obama’s re-election shows the political and economic dividends of an offer of intelligent spending in place of grinding austerity.

Much will depend on the state of the economy by 2015, but if growth returns there is scope for cautious optimism. For example a government can close the deficit over time if it is prepared to freeze public spending while the economy expands.

However the starting point for spending decisions should be the end-point: what do politicians on the left want the public finances to look like by 2020? Of course, the deficit needs to brought under control, but we also need to ask what proportion of the economy should be devoted to public spending. Today spending remains well above the post-war average of 42% of GDP but George Osborne has deliberately planned to overshoot this number in a bid to permanently shrink the size of the state.

Labour could offer a distinctive but mainstream alternative by simply pledging a return to trend. This would mean taking a little longer to close the deficit than the Conservatives plan and substituting tax rises for some of the planned cuts. The result would be more flexibility to address the huge social pressures the economic crisis has caused.

But the need for painful decisions will not disappear if a 2015 government signs up to spending limits which are less severe than Osborne’s. Even if spending remains fairly flat overall it will feel like another parliament of austerity, and some budgets will need to shrink to pay for others which should rightly grow. Embracing this mathematical inevitability should not be the preserve of the left’s self-styled fiscal hawks who wear a spending hair-shirt as a badge of honour. It’s time for an open, frank and respectful conversation, which draws in the full range of opinion on the centre left.

This week that process begins with the launch of the Commission on Future Spending Choices. It is a year-long inquiry hosted by the Fabian Society, whose associations with the British welfare state date back more than a century. For we think it is the cheerleaders not the adversaries of government who are best placed to consider how the state can live within its means.

The commission will look at where to spend and how to cut. We will explore whether economic reforms can reduce demand for social security or whether cuts to entitlements are needed. We will consider how public service budgets should be shared and question where provision will need to change in the face of perhaps ten years of flat or falling budgets. Lastly we will consider how public spending can do more to boost growth, employment and earnings.

The left faces hard choices if it is to earn economic credibility but stay true to its values. But the choices are not as bad as the Conservatives would have us believe. Labour can reject Osborne’s doom-laden plans and offer an optimistic alternative. But to return to power the alternative must be clearly specified, including the painful decisions. The UK will be far less wealthy in 2020 than anyone would have predicted in 2005 and public spending has to adjust to this reality. But as long as the economy returns to decent growth Britain can afford a strong and compassionate welfare state.