Elections have consequences. Today we see an awful lot of briefing on the Budget, the most interesting of which is “Treasury insiders” briefing that their own budget will result in higher unemployment and lower growth.
“Treasury ministers accept that the new and independent Office for Budget Responsibility will mark down the growth and jobs forecasts as government spending falls and taxes rise.
But insiders who have seen the forecasts said that because the OBR will assume this is just a temporary shortfall of growth, the effect will be to increase spare capacity in the economy (!!!!!!! – HS), creating room for a faster growth forecast just before the next election.
Conservative aides expect that the OBR’s assumption that deficit reduction has only a temporary effect on the economy will take the edge off Labour attacks that rapid deficit reduction will undermine the recovery.
Treasury insiders also pointed out on Sunday that a simple Budget day comparison of the forecasts before and after the spending cuts would not be fair because the OBR’s pre-Budget forecast last week was artificially too high. “
The FT misses a story on that last line, not least because it establishes a new world record time for briefing against an independent body you created. The “artificially too high” line is just left hanging there. Does Osborne really believe that the OBR projected growth rates are too high? If so, does that suggest to many people that a good strategy is to deliberately reduce them further?
So what should Labour do in response?
1. There is an alternative The Conservatives and Cleggite Lib Dems will be desperate to estabish that this is unavoidable, harsh medicine.
To rebut that attack we have to suggest the outlines of an alternative. That choice needs to be built on creating growth, so we therefore need to be talking about measures to support private sector job creation and these can’t be simply extensions of State Aid. I’d be looking at capital and R&D tax allowances, the creation of special enterprise zones in high unemployment areas, increased support for high skill employers for training, and infrastructure investment in transport, research and housing provision.
4. We need to get to Jobs, Jobs, Jobs. Here’s the big political divide for the next year: We need to create jobs to grow vs. We need to slash spending to grow.
But we only get to that argument if we can show that fiscal plans are sustainable. The OBR gave us a huge hand with that, with its projections for future interest rates, debt spending and employment. We should sieze on that opportunity to produce alternative economic models that show lower unemployment and higher growth within a sustainable fiscal framework.
That means we have to be responsible on spending commitments in the public sector, which leads me to suggest
3. Hold fire on Pensions and Pay – The right question for Labour isn’t whether public sector pensions and pay should be restrained, it’s whose public sector pensions and pay should be cut.
There is a huge difference between protecting the interests of part time care workers and junior police officers and that of senior management. In my limited experience, there is very little gold plating of pensions at the lower end of public sector employment.
4. Doing Welfare reform right costs We should also be strongly in favour of Welfare reform to reduce long run costs, while opposing blind short term cost savings. The Treasury is already eyeing Transfer payments as a way to reduce expenditure fast. After all, if you’re going to create an extra couple of hundred thousand unemployed, DWP budgets will rocket.
At the same time, all IDS’s work at the centre for Social Justice involves an implicit recognition that short term higher costs for familiy and social intervention pays off in the long run in lower costs. There will be a huge battle to come between DWP and the Treasury here. We should be on the side of the DWP. There is no point in artificially embracing short term pain, when the correct way to reduce long term costs is to support families in the short term.
If I were to advise a medium term Labour strategy it would be along the lines of – We can’t take growth for granted, so we need jobs, jobs, jobs, so boost the private sector (especially outside London) to create them, to pay for which requires public sector restraint, but focus should be on reducing long term costs, not cutting to get an accounting saving, which causes real pain without saving real money.
Ironically, the OBR could provide the right hook to implement this strategy while showing fiscal responsibility. We should consider demanding that the OBR be moved to the Commons with a broader remit, so that political parties can develop costed spending plans while seeing their impact on unemployment, costs and growth against the central projection. Indeed, we should argue that MPs should be allowed a chance to road test confidential fiscal projections on various scenarios.
I’m sure various Lib Dem MPs would welcome this opportunity to develop their understanding of the economic consequences of short term cuts.