A DISCUSSION PAPER

In the black Labour

policy network paper

Why fiscal conservatism and social justice go hand-in-hand

Graeme Cooke, Adam Lent, Anthony Painter & Hopi Sen

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Introduction

There is nothing right wing about fiscal conservatism. It simply means that those from whom the state borrows can have absolute confidence that it will meet its obligations to repay, come what may. This means adopting an approach which is careful, risk averse, and cautious. More importantly, Labours ability to advance social justice can go hand-in-hand with a clear, fiscally conservative stance. Nor does fiscal conservatism mean failing to respond to an economic crisis. As we on the centre-left are not nave enough to think markets are perfectly stable phenomena, we recognise the state will, on occasion, be required to step in to prevent collapse. While there is a major absence of private sector demand, the government must fill the gap; not just to keep the economy growing but to protect long term fiscal sustainability. But being in a position to respond to a crisis requires preparation, usually by avoiding deficits in the good times. As Ed Balls said left-of-centre governments need to favour tough fiscal policy because from time to time, if economic crises occur, you may have to relax that. But you have to build up the credibility and the means to do so. In other words, effective Keynesianism requires fiscal conservatism. Yet the challenge the centre-left faces is not just the immediate crisis in demand, but about our longer term approach to public finances. The debate about this governments current fiscal policy may be raging but far less attention has been paid to what comes next. The Office for Budget Responsibility (OBR) has made clear that even if the structural deficit is closed, Britain faces a major fiscal challenge over the coming decades as a consequence of demographic pressures and falling tax revenues. All the parties need to calibrate their plans to this reality, including Labour. In this context, it is important to recognise that fiscal conservatism need not imply an absolute limit on the size of the state nor the level of spending but it does recognise that these are constrained by the wealth of the nation and the productivity of the economy. This insight has three very significant consequences. First, extra resources spent by the government must be backed by tax revenues and the fruits of economic growth. If we want to collectively fund something, weve got to collectively pay for it. Second, spending is not the only way to secure improvements in our country and the lives of its people. In fact it is often the least good way to do so. Structural or institutional reforms, which affect the causes of inequality and injustice, are often better and invariably more enduring. And third, confronting the reality of limited resources reveals priorities as the true currency of politics. In the coming years, the central distinctions will be about what the political parties choose to spend scarce funds on as much as the total they plan to spend. So, Labours principal political task is to demonstrate to people, as well as to convince itself, that it can be trusted to govern in this era of fiscal constraint and that it has a compelling project for economic

Confronting the reality of limited resources reveals priorities as the true currency of politics

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future Labour government must look to reforms rather than spending to advance centre-left goals. We recognise that some will see an endorsement of fiscal conservatism as an acceptance that the journey towards greater social justice will have to wait. We disagree. It does mean there are not unlimited resources but then that is always the case. But it also compels us to be much clearer about what is most important (and what less so) and much more ambitious in advancing our political goals on a far broader canvass. There are two major imperatives to a centre-left fiscal conservatism: to lock in fiscal sustainability in the long term; and to advance centre-left goals in the context of limited resources through clear priorities and bold reforms.

Ensuring long term sustainability: clear goals and tough accountability

As governments across the world come to terms with the impact of the financial crisis, a picture is emerging of how fiscal sustainability can be guaranteed for the future. This is based on three elements: a clear short term goal to address the current fiscal crisis; a new settlement to maintain sustainable public finances over the longer term; and a strong institutional framework to ensure governments stick to their fiscal goals. The Coalition Governments immediate goal is to clear the structural deficit entirely by 2016/17, following revisions in the Autumn Statement, and to have net debt falling by the end of the current Parliament. As for Labour, it remains committed to Alistair Darlings plan to halve public sector net borrowing by 2013/14 from its projected peak in 2009/10 (and have net debt falling as a proportion of GDP by 2015/16). However what is unclear is how or when Labour proposes to eliminate the remainder of the deficit (structural or otherwise) or, indeed, whether it would. Taxpayers, voters and lenders to the British state feel they have a right to know what the main opposition party would do about high levels of borrowings and when they would do it by. Satisfying this demand is fundamental to being regarded as a credible alternative government. But this is not simply a matter of electoral calculation: certainty and stability are genuinely prized economic possessions which HM Opposition should uphold as much as the Government. Some may feel that opposition parties should avoid being pinned down on their plans too early in the electoral cycle. While this may be good political advice under normal circumstances, in the current case it is highly questionable. It is precisely the vagueness of Labours position over its short to medium term plans for the deficit that confirms the voters worst suspicions about the Partys lack of commitment to addressing the fiscal crisis. Beyond these concerns with the current fiscal crisis, there will be a strong imperative once the deficit is cleared to adopt new targets to control public spending and ensure fiscal sustainability an imperative Ed Balls himself has acknowledged. It is now widely accepted that while the rules
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It is precisely the vagueness of Labours position over its short to medium term plans for the deficit that confirms the voters worst suspicions

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and social reform within that demanding context. The reality of our fiscal situation means that any

practice. In particular, linking borrowing and spending directly to the economic cycle then making the timing of that cycle open to interpretation was a mistake. Instead a future Labour government should commit itself to very clear fiscal targets. The precise nature of such targets is a matter for more detailed debate but one option might be a commitment to deliver a surplus on the public finances towards the end of a concrete timescale such as the lifetime of a single parliament. Other equally credible possibilities clearly exist. In addition, what Labour achieved in terms of the stability and transparency of monetary policy in its last period in office it should also seek to achieve on fiscal policy in its next. The establishment of the Office for Budget Responsibility is a major advance in this regard and Labour should now lead arguments for further entrenching its power. For example, a Labour government should commit itself to firm goals on the levels of tax, spending and borrowing that will be required to meet its medium term fiscal target. However, the OBR should have the power to give very clear traffic light warnings to Parliament and the public about whether a Labour government is on track to meet these commitments or not. It could also have the freedom to consider alternative proposals for securing fiscal targets and to make recommendations based on these. In short, Labour should be the first to propose that the OBR develops far more beyond its current role of dispassionate surveyor of fiscal and economic matters and instead becomes a proactive watchdog holding the Treasury and Chancellor to account. Steps such as these are essential for Labour to demonstrate it is serious about fiscal conservatism.

Social democracy with less money: an enterprising state not a welfare state
Beyond locking in sustainability in the public finances, a commitment to fiscal conservatism implies a different governing agenda from that pursued by the previous Labour government. Rather than relying heavily on extra public spending, social justice will have to be advanced through prioritisation, institutional innovation and reform. That, in turn, implies a different method for pursuing goals and a different conception of the state. Even after the deficit is reduced, the state will still be spending some 700bn a year. Thats less in real terms than before the Crash but still a very significant proportion of the UKs GDP. It means the state can still do much to promote equality and social justice but it will also mean facing up to big strategic choices about how to use existing expenditure. As such, given the flat-lining economy, the hit to living standards and the need to identify new sources of potential growth, Labours criteria for spending choices should be based on a simple question: will a spending option directly boost short and long-term growth and create jobs? This may mean very constrained funding for healthcare, pensions and welfare for the foreseeable future. Its tough, but the alternative is ducking the genuine decisions nearly every government of an advanced economy currently faces. Indeed Labour would do well to go deeper than the Coalition Government on this. The Chancellor has opted for a method of cutting spending based on salami slicing across departments with the depth of the cut determined as much by political considerations as logic. By contrast, Labour should commit to a process of zero-budgeting across the whole of Whitehall, questioning

Labour should commit to a process of zerobudgeting across the whole of Whitehall

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adopted by Gordon Brown were sensible in principle, they were too vague and too easily evaded in

towards jobs and growth. In addition to tough prioritisation, the other consequence of fiscal conservatism is to acknowledge that social justice is advanced far better by bold reform and well-targeted investment than public spending: this applies to the public sector as well as the private. Ultimately, this will force the left to articulate a different conception of the state. Even in times of fiscal restraint there is a central role for the state as a generator of greater wealth, equity, and security. But these benefits will have to arise through a policy framework designed to deliver a regionally and sectorally balanced economy. Labour should be shaping this debate by developing detailed policies on how ideas such as a state investment bank, innovation-focused public procurement, reformed taxation, stronger consumer rights, and greater competition can be used to give the UKs most innovative entrepreneurs real support while also improving pay and social mobility. In short, Labour needs to take a forensic and honest look at how a pro-active growth and innovation policy can coincide with the goal of a fairer economy. Underlying this is the recognition that welfare mechanisms are never preferable to a genuinely productive and balanced economy that raise the living standards of those on low and middle incomes. In the coming decade, the extra resources New Labour found to compensate for marketbased inequality wont be available. So deeper and more ambitious reforms must be confronted to ensure the economy works for working people. The path outlined here is different from much of the current polarised debate. It accepts the need for both fiscal conservatism and economic activism. It combines certainty and sustainability in the public finances with the construction of a balanced, innovative economy with equity and security as key goals. Unlike many of the policy options now on offer, it aims to combine a long term vision of a decent society while being honest about the very challenging fiscal and economic context within which that vision must be achieved. Labour, we believe, must now make that vision and that honesty its own.

Ultimately, this will force the left to articulate a different conception of the state

Graeme Cooke is visiting fellow at the ippr. He writes here in a personal capacity Adam Lent was formerly head of economics at the TUC and is an associate fellow of the ippr. He writes here in a personal capacity Anthony Painter is a writer and commentator. He is author of the forthcoming report: This human business: why the new bottom line is social Hopi Sen is a former head of communications for the Parliamentary Labour Party. He is now a consultant, writer and commentator whose work has appeared in The Guardian, Independent, Policy Network and Renewal. He also blogs at hopisen.com Policy Network

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every line of public spending, with nothing off the table but based on a clear focus on shifting funds