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The clamour to make low and middle-income earners pay for the economic crisis is growing. Hardly a day goes by without pressure to cut spending on social services, freeze public sector pay, tear up existing pay agreements or ignore recommendations of professional pay review bodies.

While bankers and their shareholders have enjoyed massive public subsidies and the Government is rushing to hand the banks back to the kind of people who wrecked them in the first place, a growing debate is being allowed to develop about whether education or health should be cut or which benefits should be means-tested.

At the beginning of this economic crisis, the Tories were driven onto the defensive as the Thatcherite ideology of the efficacy and power of free markets disintegrated in favour of universal demands for state intervention. Now a situation is being allowed to develop on cutting public spending which gives the ideological initiative back to the right.

The Conservative Party is gearing up for scorched-earth policies towards the public services. Tory leader David Cameron says he would have spent £5 billion less than Labour for this year alone. Cameron has guaranteed an inheritance tax cut worth £200,000 for just 3,000 millionaires and promised that the new top rate of tax is “in the queue of taxes we want to get rid of”.

In order to win the next general election, Labour must break out of the vicious circle on public spending and reorganise the priorities of the economy, taxation and spending so that those on low and middle incomes are protected. Tomorrow’s Progressive London conference (Saturday July 11) on “The Global Economic Crisis” will thrash out alternative policies which cut real waste, such as not replacing the Trident missile system, and penalise those responsible for the mess, not the great majority of the population.

Last weekend, Steve Bundred, the chief executive of the Audit Commission, called for public spending cuts, including a £5 billion saving in public sector pay, as well as greater efficiencies in health and education.

I agree that we need a rational debate, but the discussion needs to include those things that are usually excluded. As in any recession, we are regularly asked to think

the unthinkable about public spending. However, we rarely get a debate on genuinely radial ideas. Exactly the same debate happens in every recession; there are calls for cuts to welfare spending, pressure for means testing, and attacks on public sector workers.

Contrary to what is regularly claimed in the media, there is no easy recovery based on rising confidence just around the corner. The world has seen the biggest financial collapse since 1929, followed by a fall in international trade which is so far more rapid than after 1929.  There is dramatically falling economic output in every major economy except China and India. This has been followed by a collapse in investment in the United States and all the large economies, again with the exception of China and India. Economic growth will be determined by investment. The sharp drop in investment will lead either to stagnation or, worse, continuing decline in economic output.

So while the current pace of economic decline won’t go on forever, we are faced with the prospect of a lengthy period of stagnation at best. That is bound to be accompanied by high unemployment, falling living standards and even more pressure to cut spending on public services. Meanwhile, the loss to taxpayers of the bank bailout is

likely to be at least £60 billion, money that could have been spent on schools, public transport, health and other forms of useful investment.

Labour needs an alternative course that protects people from the attacks on investment, public spending and living standards.

Such an alternative involves nationalisation and direct control of the core of the banking sector in order to restore lending to businesses and individuals. It means a major programme of public investment to reverse the decline in overall investment and public intervention where the private sector has failed – as in the house-building and construction industries and public transport, for example.

Our priorities on public spending need to change so that we protect public services and eliminate waste – by reducing military spending at least to the level of Germany, abandoning the proposed new generation of nuclear weapons, scrapping national identity cards and other areas which contribute nothing to social justice or economic growth.

Adjusting our focus towards the most dynamic parts of the world economy – above all, China and India – and pushing forward those economic sectors which can benefit from, and contribute to, their growth is now a high priority. We need to be putting Britain at the cutting edge of the new economy emerging in both the service and manufacturing sectors.

If we want to avoid a period of sustained attacks on people, we require radical alternative economic policies to protect the great majority of the population who have no responsibility for the crisis they now face.