Labour choices on the deficit

One of the first tasks of the new leader will be to shape a strategic response to George Osborne's comprehensive spending review, on October 20th. Setting out the alternative approach which Labour will take to deficit reduction will be one of the new leader's first big choices, which will do much to define their broader approach to opposition during the Parliament. This has been a relatively muted issue in the leadership contest itself - it would not have been sensible to have five different detailed packages of tax and spending plans - though the broader strategic direction was addressed in significant public speeches from deputy business secretary Pat McFadden, arguing that Labour needs to go beyond an "oppose the cuts" agenda in his 'neither Thatcherism nor denial' speech to the Fabians, and leadership contender Ed Balls' influential attempt in his Bloomberg speech to reframe public debate on growth and the deficit.

Fabian Review's preview of the year ahead includes Gavin Kelly and Nick Pearce setting out how they believe the new Labour leader can meet "the credibility test" on the budget deficit in their response to the Comprehensive Spending Review in October. Pearce is the new director of ippr - and so a new think-tank blogger - having headed the Downing Street policy unit from 2008-10, while Gavin Kelly is chief executive of the Resolution Foundation, having been deputy chief of staff at number 10.

Elsewhere, Will Straw of Left Foot Forward has also presented the contours of his own alternative deficit strategy - keeping the Darling timescale, but with a 50:50 tax and cuts balance, with less impact on growth. On broader questions of economic strategy, Jonathan Rutherford's new political economy network have published a new e-book on developing an alternative political economy.

Here, from Fabian Review, is where Pearce and Kelly would choose to spend less. You can read the full piece on the Fabian website.

There are two big choices at stake for Labour: should it stick to its deficit reduction trajectory at broadly the pace set out in 2009/10? And what blend of tax rises, cuts to departmental budgets and reductions in benefit expenditure is right to fulfil that path, given that very few people on the centre-left believe that taxes should bear all the strain of deficit reduction.

Kelly and Pearce favour maintaining the broad goal of halving the deficit over four years, "emphatically not" because the fiscal circumstances are as perilous as alarmists on the right claim.

but because it is essential over the medium-term that the public finances return to a prudent level which puts debt payments on a stable footing, enables another Keynesian response should we be hit by more macreconomic stability later in the decade and, crucially, strengthens our longer term fiscal position before growth is firmly rooted - the strategic error of the Coalition's economic policy.

Nor, handled well, should it require cuts to public spending that damage life chances, although some measure of pain is unavoidable. But the structural pressures on state spending generated by an ageing society, together with the fact that relatively low-growth, high-deficit politics will prevail for most of the decade ahead in advanced Western countries, means that any party wanting to win a mandate to govern must engage in a hard-headed and open way about broadening the tax base and redrawing the boundaries of the state, rather than simply storing up demands for public expenditure on the assumption that the good times will soon come round again.

Some of these difficult strategic choices can already be made, ahead of the Coalition's spending review, even if a full prospectus should await more detailed work. The centre-left should support faster rises in the state penson age, wealth taxes on the baby boomer generation, and moves to a new and broad-based carbon tax. Whilst vigorously defending the huge improvement in public services after 1997, it should also be prepared to acknowledge that not all the increases in public sector staffing have contributed to better services (there is not evidence to suggest, for example, that we need ever more teaching assistants to raise educational standards). It should give its backing to cuts on spending on prison places, even if these are made explicitly for deficit reduction purposes. And - even though it is contentious - it should support reforms to poorly targeted benefits that are not meeting the needs for which they were originally designed, like Disability Living Allowance or the Winter Fuel Allowance.

Kelly and Pearce say clarity about where some of the cuts should fall must be combined with a focus on the services which progressives will prioritise and fight for, particularly a new generation of care services: "In the decade ahead, the extension of universal services like childcare and care of the elderly will help uphold family living standards and support the achievement of full employment". These should take precedence over further increases in school and NHS spending, or tax credit increases, which were "major winners of the last decade", they argue.

Read the full Fabian Review feature.