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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want for the fitness tech, or the style
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
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

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own