Progress | Centre-left Labour politics

Cutting through

Public spending decisions will be painful for Labour but could also improve the party’s credibility

Unless you have more faith in George Osborne’s ability to run the economy than the official forecasts, you have to assume that whoever wins office in 2015 will inherit grim public finances. By then, Britain’s public debts will be so large that we will be spending more on our annual debt interest bill than we spend on our whole school system. Unemployment is forecast to still be above pre-crisis levels, child poverty will have increased and demographic change will demand ever more spending on health and pensions.

Ed Miliband has, so far, suggested three tax rises on the unloved wealthy. There may be more to be found, though legally and economically credible plans are as rare as demands to ‘tax the rich’ are commonplace. That does not exhaust the sphere of tax: after Osborne successfully raised over £12bn in extra VAT without much outcry, whoever wins in 2015 may also use their first budget for a similarly sweeping, but incremental, tax hike.

But, even with some significant tax increases, it will take some serious further spending cuts before Britain’s debt interest bill starts to fall. Is there a uniquely Labour way to cut spending and, if so, what is it? Labour has been able to avoid this question for some time. At the start of the parliament, all cuts were deemed ‘too fast’ because the economy was still below its capacity for growth. By 2015, ‘too fast’ will be out of date and saying the government has gone ‘too far’ in one area will mean going even further in finding cuts elsewhere.

If you accept there will have to be some cuts, the money going to the wealthiest starts to look, as in the tax system, like an attractive place to start. No other part of the welfare state has recipients setting up campaigns to give their benefits to charity. Free TV licences and free bus travel for pensioners cost a little under a billion pounds apiece each year, while winter fuel allowances cost around £2bn. That is dwarfed by the £12bn of basic state pension payments that go to the richest fifth of the retired population which is set to rise much faster than, for example, child tax credits. As for benefits that have now been cut, it would cost about £2bn to make child benefit universal again and fully reverse this year’s changes.

Individually, none of these are the public policy equivalent of winning the lottery jackpot. Then again, trying to find a few billion pounds in public services or from other benefits can start to look quite daunting when you get into the detail: for example, the government’s radical set of cuts to housing benefit will, in total, only save around £2bn a year.

The problem with getting to this money is that it can be complex and create perverse incentives. Osborne’s changes to child benefit are so badly designed they provide an extreme example: official estimates predict they will cost an extra £20m to administer each year. Spend money on pension credit instead of the basic state pension and people have less of an incentive to save for their retirement. In wealthier times, these might be good enough reasons to leave well alone. But if the choice is between this or making cuts that affect much poorer families we might think instead about ways of mitigating the problem: for example, if a government were forced to slow rises in the basic state pension, it might have to make it harder for people to opt out of private pension saving.

In the 2012 US presidential election, Mitt Romney said he could never win over 47 per cent of American voters because they were dependent on government. Former work and pensions secretary Peter Hain last month made a similar argument as a positive reason for retaining universal benefits, saying that ‘the middle class support welfare in the main because they benefit from it … If they were stopped from receiving benefits like the winter fuel allowance, they would no longer have a stake in the welfare state.’ So, the logic runs, you protect the benefits of the poorest by making sure the wealthy also receive them.

This argument seems more plausible the wider its application: it suits international comparisons and century-long studies. Up close, there are more questions. Support for welfare spending has fluctuated over the last 30 years while entitlement to benefits for the better-off has remained the same. Older voters, who receive more in social security payments and NHS treatment than younger ones, are the bedrock of Conservative party support. Prescription charges in the NHS do not seem to have created pressure for ever-greater cuts to free expenditure on drugs while the introduction of university tuition fees has not led to a middle-class clamour for reduced spending on universities.

In what other area of public policy would we advocate spending, not for its intrinsic benefits, but because it might change the political views of those who receive it? Once you link policy to electoral outcomes you create some strange implications: if people become more conservative once they own their home, is Labour obliged to try and reduce home-ownership?

That is not to say that the move would necessarily help Labour’s electoral chances. A recent study by a Princeton academic had a nice example of how people react differently to losing something they already have: few respond when you offer a five cent reward for taking a reuseable bag to supermarket but put a five cent tax on using carrier bags and suddenly people change their behaviour.

It is a commentator’s vice to say that your preferred policies are also a guaranteed route to electoral success; actually, if Labour proposed some cuts to universal pensioner entitlements, which I think will be the minimum necessary, then it would almost certainly lose some current supporters. If Labour promised to retain coalition cuts for the poorest but reintroduce benefits for the voters most likely to turn out its poll lead might increase further.

At the same time, though, about a third of Labour’s current supporters refuse to say that they think Labour is ‘willing to take tough decisions for the long term’. Pledging to cut some entitlements for the wealthy – and sticking it out through the consequent outcry – is one of the very few ways Labour could, from opposition, prove them wrong. Cutting elsewhere while protecting the benefits of the wealthiest – as David Cameron and Nick Clegg have done in this parliament – would prove something very different.

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Steve Van Riel was the Labour party’s director of policy and research at the 2010 general election

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Photo: AJ Cann

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Steve Van Riel

was the Labour party's director of policy and research at the 2010 general election

1 comment

  • I agree that the next government will probably face a large deficit and difficult decisions will be needed. However, we have also learnt since 2010 that trying to cut the deficit too quickly is counter-productive. The economy stops growing and the deficit is increased. My preference would be for fiscally neutral or mildly deflationary budgets to gradually reduce the deficit.

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