Public spending reform could make Labour radical in power

Perhaps they will succeed where Mrs Thatcher failed, given that the alternative - more public squalor and more private provision of key services - is so unappealing

The aspect of the shadow Chancellor Gordon Brown's speech earlier this week that got the least attention in the headlines could turn out to be the most important and distinctive contribution of New Labour to the management of the economy - namely its ambitious plans to restructure public spending.

Tax pledges make the best tinder to feed the fires of the election campaign, so Mr Brown's promises not to increase the basic or top rate of income tax and not to extend the VAT base - and whether these pledges meant taxes would have to rise in other ways - were the natural focus of interest in his speech. But Labour's tax policy is dictated by two things: the unsatisfactory state of the public finances, and the fact that the Conservatives have successfully turned income tax rates into a political totem. Between the too-high government borrowing requirement and the painful memories of the "tax bombshell" in the last election campaign, there is not much room for manoeuvre on taxation.

On the other hand, there were signs of strategic rather than tactical thinking in Mr Brown's comments on public spending. He committed a Labour government to the existing departmental spending plans in the current financial year and to the existing grand total in 1998/99. At one level this was simply another signal that Labour has definitively abandoned its foolish old idea that the answer to every problem is for the government to spend more money on it. And at this level some of the party's supporters are miffed - what is the point of a Labour government if it is not going to spend more on things that matter?

This reaction is understandable. To many people on the left of the political spectrum it seems obvious that Britain is suffering from what the eminent economist John Kenneth Galbraith diagnosed as private affluence and public squalour. Public services are straining at the seams because of a shortage of cash. This is especially obvious in areas such as education, for any parent of children in the state sector knows at first hand about crumbling buildings, shortages of books and the brain drain of good teachers because of inadequate pay.

The trouble is that other demands on the public purse have siphoned off resources. The biggest of these has been welfare - the growth of the pension and social security budget. As the chart shows, the welfare share of total public spending has climbed steadily. For government expenditure to have grown as we would have liked on health and education too, tax revenues would have had to increase by far more than they have. As it is, even with the squeeze on frontline services, excessive government borrowing has doubled the national debt, made debt interest payments the fourth biggest item of expenditure and left macroeconomic management at the mercy of financial market reactions.

Addressing public spending is therefore an imperative for whoever wins the election. Now, this all sounds very much like the Conservatives' message, but the present Government's approach to expenditure cuts has been to tell every department to shave a certain proportion off its budget. Exceptions have depended on short-run political pressures. As Pam Meadows, director of the Policy Studies Institute, argued in a recent paper, no householder or business would try to cut costs across the board like that. Rather, they would axe certain areas of spending altogether - cut out holidays, say, or pull out of one particular unprofitable market.

Mr Brown signalled this week that Labour will try this approach in the public sector. It will try to switch money from low- to high-priority areas. A "Comprehensive Spending Review" would start immediately after the election to implement a switch of resources away from welfare and towards education. "Central to Labour's medium-term approach to public spending must be a radical reform of the welfare state," the shadow Chancellor announced.

The traditional annual spending round will not take place this year if Labour does win the election. Instead, Mr Brown said, the Cabinet's public expenditure committee, known as EDX, and senior Treasury officials would work on the strategic review which it would start to implement the following year.

There is plentiful academic support for a radical review of priorities. According to Pam Meadows: "The principle is a sound one. Where I'm sceptical is whether you can do it sufficiently quickly to do everything else you want as well."

The Institute for Fiscal Studies also backs the idea in principle. In its Green Budget with investment bank Goldman Sachs last October, it noted that control of public spending had seen social security grow at the expense of health and education. As "superior" goods, demand for health and education services will grow faster the more prosperous we become. The IFS concluded that the only alternative to radical reform was the creeping privatisation of health and education, with people spending their own money to top up increasingly inadequate state provision.

The International Monetary Fund has been weighing into the debate about the future role of government with a series of working papers. One of the most recent assesses the radical public sector reforms in New Zealand. These have included the introduction of commercial-style accounts into the public sector. New Zealand has replaced numerical fiscal targets with a set of five principles of sound finance (see box). A key institutional element of the reforms has been the creation of a cabinet committee which makes the trade-offs between competing priorities.

According to the IMF, this experiment has been a resounding success. The deficit and debt have fallen. Departments have greater freedom to manage, and attention has switched from what government spends to what it gets for the money.

Mr Brown gave the Labour Party's plans a left-wing gloss in his speech, citing Aneurin Bevan's observation that "the religion of socialism is the language of priorities". But his underlying message about the need to go back to the drawing board on public expenditure is one that probably commands wider agreement, from academic experts and even from Conservatives.

The difficulty, of course, is that to get there, you wouldn't want to start from here. No economist really believes the current spending plans are realistic, and any government is likely to overshoot them. Going beyond meeting tough plans to restructure spending will then involve slashing and axeing entire social security spending programmes. Perhaps New Labour will succeed where Mrs Thatcher failed, given that the alternative - more public squalor and more private provision of key services - is so unappealing. If it does, a Labour government will be far more radical than its fiscal orthodoxy suggests.

German supporters (left) and Argentina fans
world cup 2014Final gives England fans a choice between to old enemies
Arts and Entertainment
Armando Iannucci, the creator of 'The Thick of It' says he has
tvArmando Iannucci to concentrate on US show Veep
Life and Style
Pepper, the 3ft 11in shiny box of circuits who can tell jokes and respond to human emotions
techDavid McNeill tests the mettle of one of the new generation of androids being developed in Tokyo
Arts and Entertainment
A still from the worldwide Dawn of the Planet of the Apes trailer debut
ebookA unique anthology of reporting and analysis of a crucial period of history
Four ski officials in Slovenia have been suspended following allegations of results rigging
sportFour Slovenian officials suspended after allegations they helped violinist get slalom place
14 March 2011: George Clooney testifies before the Senate Foreign Relations Committee during a hearing titled 'Sudan and South Sudan: Independence and Insecurity.' Clooney is co-founder of the Satellite Sentinel Project which uses private satellites to collect evidence of crimes against civilian populations in Sudan
Arts and Entertainment
Balaban is indirectly responsible for the existence of Downton Abbey, having first discovered Julian Fellowes' talents as a screenwriter
tvCast members told to lose weight after snacking on set
Life and Style
More than half of young adults have engaged in 'unwanted but consensual sexting with a committed partner,' according to research
Life and Style
A binge is classed as four or more alcoholic drinks for women and five or more for men, consumed over a roughly two-hour period
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Programme Support, Coms, Bristol, £300-350p/d

£300 - £350 per day + competitive: Orgtel: My client, a leading bank, is curre...

(Junior) IT Systems Administrator / Infrastructure Analyst

£28000 - £32000 per annum + pension, 25 days holiday: Ashdown Group: A highly ...

Finance Officer

Negotiable: Randstad Education Birmingham: Randstad Education are seeking a Fi...

Accounts Payable

£12 - £15 per hour: Cameron Kennedy Recruitment: Excellent opportunity to join...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice