A better society and lower public spending

It can be done. A left-leaning Labour government could compete with the Tories in the small government stakes, and still be true to its values

Nobody now seems to love the state. John Major has just committed the Tories to cutting state spending as a proportion of national income from 42 per cent to 40 per cent, with further cuts in store. Tony Blair promises that New Labour will not be a tax-and-spend government and repeatedly attacks the Tories for failing to delivery on their promised tax cuts. So two experienced politicians know where to pitch their competitive tenders for our votes: we do not, they judge, go a bundle on big government.

It's an interesting switch from the rhetoric of the last three elections. Then the Tories focused on tax cuts but Labour stressed the quality of services from higher public spending. But it's a switch which carries dangers for both leaders. For Mr Major the charge is that he talks about smaller government but does not deliver, that he is all mouth and no trousers. For Mr Blair it is that, sure, Labour won't be a rabid taxer and spender, but it will be more taxer and spender than the other lot.

"Small government" is a clear message even if the delivery mechanism is suspect; it's certainly clearer than "not quite such big government as you expected from what we said last time." The Labour leadership knows it is in a bind over tax, but in reality it's in a bind over something even more fundamental. Labour needs to find ways of achieving its social and economic ends which do not involve a higher proportion of GDP going through the state.

We've become so accustomed to the idea that parties of the right favour small government and parties of the left want big that the idea that it may be possible to achieve the goals of the left any other way seems ridiculous. Yet there's no necessary reason why a left-leaning government should not work towards a decent, reasonably egalitarian and humane society at a much lower level of public spending than now.

The responsibility of the government is to protect the disadvantaged. But to see that they receive decent services does not mean that the government has to manufacture those services itself. That surely is the gigantic opportunity for Labour: create a new welfare state which does not rely on high public spending, something designed for the world as it is now, rather than the world as it was 50 years ago. How might that be done?

There are two broad paths forward and Labour must take both. One is to cut the size of the problem by encouraging people who are able to look after themselves not to require other taxpayers to do so for them. The other is to find the most efficient way of providing a service, which may or may not involve the government doing it itself.

You can see Labour tip-toeing down the first path: the idea of some kind of compulsory saving scheme for boosting retirement pensions, or the proposal to trim benefit for families with 16-to-18-year-olds in full- time education. But a government really anxious to redistribute wealth could go much further. It might, for example, require families with high incomes to contribute something towards their children's schooling costs. Universities could charge the well-off students for tuition. While most health care would remain free at point of use, patients who could afford it would be expected to make some contribution towards treatment, perhaps through a compulsory insurance scheme. This would be a very different welfare state, but there's no reason why it should not be just as effective - preferably more effective - at helping those most at need.

The second path is the drive to efficiency. Large companies all over the world are relentlessly trying both to contain costs and drive up the quality of their service. As a result these companies are continually reorganising the way they work. They out-source and they cut their own labour force, but they also start new divisions and buy new businesses. Often such reorganisations are unsuccessful, but the overall effect is to drive up productivity, the building block of higher living standards.

All this is done as a result of practical, apolitical decisions. Companies reorganise not because their ideology tells them to, but because they hope that it will result in a better service at a lower cost. Public sector reorganisation, by contrast, has been driven by politics. The great opportunity for Labour is that they can start here with some element of trust.

All this may seem very foreign, very different from the platform of left- leaning governments, which have tended to think of public spending as the cure for social problems. But suppose you could cut public spending not just to the 40 per cent of the GDP cited by Mr Major, but say to the 33 per cent of Japan. Then you could, for example, abolish income tax for everyone below average earnings. Gordon Brown quite rightly has identified the need to cut taxes on the low paid and has promised a new lower tax rate for them. But why bother with the admin cost and complication of taking 10 per cent of the income of relatively poor people? Far better that they should pay no income tax at all. The black economy and the poverty trap would largely disappear.

If this sort of programme seems too radical for Labour, let the leaders ponder this. If only they could cut back public spending, the left could be tax-cutters too - except that they would cut taxes for the poor, not for the rich.