Labour must regain trust on the economy, but not by backing a failed Tory plan – Ed’s article in tomorrow’s Times

‘You can’t borrow your way out of a debt crisis.” That is the simple mantra we have heard from the Prime Minister week after week. The Government took it as read that deep and immediate spending cuts and tax rises would at least serve the goal of deficit reduction — no matter how much Labour warned that going too far, too fast would be bad for borrowing as well as for jobs and growth.

So while the scale of borrowing set out in last week’s Autumn Statement is certainly a challenge for Labour, it is a jarring setback for the Government. Far from reducing the deficit as promised, it is now set to borrow £158 billion more than planned.

The Chancellor had claimed that public retrenchment would boost private sector confidence, investment and job creation. He called it “expansionary fiscal contraction”. But this has turned out to be a false prospectus — a repeat of the discredited “Treasury view” of the 1920s. Instead, fragile consumer and business confidence was crushed by the inflationary rise in VAT, the anticipated fall in public sector demand, the reality of falling incomes and the fear of rising unemployment. And so it is George Osborne who is being forced to borrow billions more — to pay the price of slow growth, increasing job losses and a bigger benefits bill.

Yes, in recent weeks, worries about the eurozone crisis have added to the gloom. But our exports have actually been overperforming compared with expectations. It is weak domestic demand that has driven growth in the UK down, borrowing up and depressed interest rates on long-term government bonds. This is not a sign of enhanced credibility but a reflection of stagnant growth in our economy, as it was in Japan in the 1990s and is in America today.

But, I can hear Conservative ministers scoffing, Labour’s proposal is to borrow even more. Let me deal with that argument head on — not in the phraseology of economics textbooks, but in the language of the real world .

This autumn, many young people who would otherwise have stayed on at school have lost their education maintenance allowance and — after the abandonment of the Future Jobs Fund — many more have gone straight into unemployment, contributing to the one million young people out of work.

On the surface of things, cutting EMAs and the Future Jobs Fund saved money and reduced borrowing. But how much more will it cost our society and economy to leave those young people unemployed and unproductive, receiving benefits rather than contributing to the national wealth?

And this is the simple argument: if we let a year of flatlining become a decade of stagnation, what price will our country pay in the long term? That is why I believe it makes sense to act now with temporary tax cuts and investment in jobs and growth to save ourselves from the future bills of failure.

Even the IMF has said that if our economy undershoots expectations and risks a period of stagnation, the UK should slow down the pace of spending cuts and tax rises. That is why it is right for Labour to set out a clear jobs plan now — to stop a decade of slow growth and higher debts becoming a self-fulfilling prophecy.

The fact is, any British government would be borrowing now. The argument is whether it is better to be borrowing billions more to keep people out of work on benefits or whether action now to get our economy moving will get more people into work paying tax and help to get the deficit down in a fairer way.

But it would be naive for anybody to think that the Government’s deepening economic failure will automatically translate over the coming months into success for Labour. We have never denied that a plan is needed to get the deficit down and that it would mean tough decisions on tax and public spending. The question was not “whether” but “how” and “when”. And yes, we would not have started from here — a fairer and more balanced approach to deficit reduction would not have choked off recovery and thrown borrowing plans wildly off track.

But we are where we are. And the question the public naturally ask is whether and when Labour can be trusted on the economy again. After all, the biggest global financial crisis since the 1930s happened on the previous Labour Government’s watch.

That is why it is so important that we set out before the next election tough fiscal rules that the next Labour government will have to stick to — to get our country’s current budget back into balance and national debt on a downward path. And these fiscal rules will be independently monitored by the Office for Budget Responsibility.

The same iron discipline that guided decisions such as granting independence to the Bank of England and using the £22 billion windfall from the 3G mobile phone auction to repay the national debt (despite Tory demands to spend it) must guide a future Labour government too. So in our manifesto we will commit to do the responsible thing and use any windfall gain from the sale of the Government’s stakes in RBS and Lloyds to repay the national debt rather than for a giveaway. And as Ed Miliband and I have made clear, we will need long-term reforms of our economy to deliver social justice in straitened times.

Credibility is based on trust and trust is based on honesty, so we must be clear with the British people that under Labour there will have to be cuts. But honesty does not mean going along with a failed Conservative plan because it is easier in the short term. We tried that when Labour supported the disastrous decision to join the ERM in 1990 and stuck with it .

I have heard much advice over the past year from people who admit that combining stimulus now to get the economy moving with a tough but balanced medium-term deficit plan may be good economics, but they argue that it is bad politics because it is “out of tune” with the public mood.

But I also remember the advice of my old friend Ken Clarke: that, in the end, good economics is good politics too.

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Posted December 5th, 2011 by Ed's team