Rachel Reeves

Member of Parliament for Leeds West

Progress Online: Credibility and the fiscal challenge

Credibility and the fiscal challenge

http://www.progressonline.org.uk/2012/02/06/credibility-and-the-fiscal-challenge/

As shadow chief secretary to the Treasury, Labour’s credibility on deficit reduction and fiscal discipline is my central concern. It’s a tough brief – but one that now, even more than ever, is pivotal to the party’s future success.

Credibility matters because it is the precondition for everything we in the Labour party want to achieve. Of course, what fires us up as campaigners are the changes we want to make in all those areas of policy that my shadow cabinet colleagues are working on: improving health and education, tackling poverty and unemployment, and building an economy that offers better jobs and rising prosperity for all.

Credibility and the fiscal challenge

Pound coins

As shadow chief secretary to the Treasury, Labour’s credibility on deficit reduction and fiscal discipline is my central concern. It’s a tough brief – but one that now, even more than ever, is pivotal to the party’s future success.

Credibility matters because it is the precondition for everything we in the Labour party want to achieve. Of course, what fires us up as campaigners are the changes we want to make in all those areas of policy that my shadow cabinet colleagues are working on: improving health and education, tackling poverty and unemployment, and building an economy that offers better jobs and rising prosperity for all.

- See more at: http://www.progressonline.org.uk/2012/02/06/credibility-and-the-fiscal-challenge/#sthash.eZesuW85.dpuf

But in every case, credibility comes first. It’s how we earn our right to be heard, and it has to underpin every proposal we make. Because if we believe in the power of active government and public services to transform lives and make Britain fairer and more prosperous, people need to trust us as custodians of public money – and we need to understand that sound public finances are the essential platform for delivering our programme.

This was a lesson we learned the hard way in 1992. But following that defeat, Tony Blair, Gordon Brown, and Ed Balls ensured the party observed strict discipline on future spending commitments while in opposition, and in government made bold but correct decisions to devolve monetary policy to the Bank of England, stick to tight expenditure plans so debt could be paid down, and commit to a clear framework of fiscal rules and long-term financial planning.

These were tough positions to take at the time. But they didn’t prevent Labour seeing through radical economic, social and political reforms in its first two years – including the national minimum wage, and devolution for Scotland and Wales. And we now know that the credibility Labour earned was critical to enabling the subsequent historic investments in public services and poverty reduction – investments that, contrary to the simplistic denigrations of some, mean that today Britain’s economic and social resilience, even in the face of the austerity and stagnation the Conservative-led government is now inflicting, is considerably greater than it would otherwise be.

We can and should remain proud of that record. But we must also recognise the fact that today, understandably, the public have questions about how Labour would face up to the fiscal challenges of the future. The global financial crisis, and consequent recession, sent a seismic shock through the public finances of economies around the world. Here in the UK, that predicament has been seriously exacerbated by the stalling of our economy’s recovery since the Conservative-led government took office.

Against this background, we have to be clear that our argument with the government is not about the importance of deficit reduction and fiscal discipline. Our argument is that this is precisely what they are failing to deliver.

After all their talk about ‘Whitehall waste’ prior to the election, we have found extraordinary examples of questionable expenditure across a number of departments – from £1,700 for a ride on the London Eye for the Home Office, to the £6,000 cosmetics bill at the Ministry of Defence – at the same time as they are cutting deep into frontline services. And while experienced public servants are lost in rushed redundancy programmes, as much as £10 million a month is being paid out to recruitment agencies for temporary staff.

More money is being wasted on ideological gimmicks and pet policy projects, such as elected police commissioners – the cost of which could have kept 2,000 police officers in post – and NHS reorganisation, with a staggering price tag of £1.7 billion – less than half of which would fund 6,000 full time nursing posts for three years.

But the biggest bill of all is for the cost of the government’s economic failure. Figures from the Office for Budget Responsibility accompanying last year’s autumn statement laid this bare in stark terms. In just the six months between the March budget and November’s revised forecasts, the Treasury had been forced to write off £18.7 billion in VAT receipts, £38.5 billion in income tax, £40 billon in corporation tax, and plan for an additional £17 billion in social security spending. In total the government is now on course to borrow £158 billion more over five years than it said it would in 2010. £158 billion added to Britain’s debt – not to support jobs or businesses – but to cover the costs of failure.

And the costs of Osborne’s failure go even deeper, and will last even longer, than this. Today’s report from David Miliband’s Commission on Youth Unemployment highlights the scarring effects of youth joblessness – and the price paid in later life chances – that will cost the Treasury dearly for decades to come. So in addition to the immediate benefit costs, the long-term legacy of today’s youth unemployment rate will be £689 million a year in additional future benefit payments, £2.2 billion a year in lost potential tax revenues, and £6.3 billion a year in lost economic output. As the report rightly warns, this is ‘a time-bomb under the nation’s finances’.

Ed Balls warned a year and a half ago that raising taxes and cutting spending too far and too fast would backfire – because if you destroy business confidence, suck demand out of the economy, and throw people out of work faster than new jobs can be created, you end up with lower tax revenues and higher unemployment costs. It means that a plan to reduce the deficit that sacrifices jobs and growth is not a credible plan.

It’s a lesson being learned around the world as over-ambitious austerity plans founder – with Standard and Poor’s downgrading nine of the eurozone’s member states with the warning that ‘fiscal austerity alone risks becoming self-defeating’, and the IMF’s sharp downward revision of its global growth forecasts for 2012 accompanied by a call for countries with low interest rates to ‘reconsider the pace’ of spending cuts and tax rises.

Here in the UK, the government’s refusal to change course is becoming harder to justify, with the Institute for Fiscal Studies and the National Institute for Social and Economic Research both last week adding weight to the case for urgent action to stop an accelerating downward spiral.

Labour’s five point plan for jobs and growth does exactly that. Its purpose is not to delay or distract from the task of deficit reduction – quite the opposite. The carefully costed and targeted measures we are pressing for – a national insurance break for small firms, a temporary cut in VAT, further cuts in VAT on home improvements, accelerated investment in infrastructure and support for youth jobs – are designed precisely to stem the rise in unemployment, stop further damage being done to our economy’s productive capacity and growth potential, and get us back on track to reduce the deficit in a steady, stable and sustainable way.

Support for struggling businesses, families and young people goes hand in hand with a plan for deficit reduction that is deliverable and sustainable. But if we’re going to be honest with the public, we have to be clear that even with Labour’s jobs plan there would still need to be tough decisions on cuts and tax rises to get the deficit down. We cannot duck that reality.

So we’ve said we won’t oppose every cut, and we’ve identified cuts we would make across the departments, including policing, transport, welfare and defence. We’ve said that, on public sector pay, a consequence of Osborne’s failure is that continued restraint for the rest of the parliament is now both necessary and, in the current context, fair.

And we’ve had to warn people that because of Osborne’s failure, and the setback his policies have meant for this country’s prosperity and fiscal position, we cannot make promises now to reverse cuts in 2015 – because the economic and fiscal price to be paid for the government’s failure are only just becoming clear, and because we simply cannot know now how bad the economy will be in three years’ time – and what we will have to do in order to clear up Osborne’s mess.

The challenge that sets Labour is to show that, even in the face of that difficult inheritance, we can still govern in a way that is guided by our values and make a difference to ordinary families. It’s our job to demonstrate that, even under hard fiscal constraints, we’d be making different choices, and we can make different choices in the future.

So Ed Balls has set out how, even within a tight cap on total public sector pay increases, we should freeze pay at the top of the public sector so the lower paid can be guaranteed a minimal annual increase of £250 – so nurses, teaching assistants, care workers and dinner ladies would be significantly better off under our policy compared to the current government’s.

And Ed Miliband has been setting out ways in which we could ease the pressure on household budgets by ensuring energy companies or bus and train operators offer a fairer deal – again, delivering fairness in tough times by asking more from those who can afford it so we can put more pounds into the pockets of those individuals and families who are most feeling the squeeze.

The new fiscal reality for our country is daunting and in many ways unprecedented. But in the conversations I am now having with fellow shadow ministers and MPs, as well as Labour councillors and party activists around the country, I am increasingly confident that we can respond in innovative, imaginative and radical ways – and that the challenge of delivering fairness in tough times is forcing us to rethink our agenda in way that can renew and reinforce our values and priorities, and reenergise us as a party and a movement.

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