Tribune

“If there is reincarnation”, joked James Carville, Bill Clinton’s campaign strategist, “I want to come back as the bond market. You can intimidate anybody.” Alistair Darling might have been forgiven for thinking the same thing as attention focused on financial market reactions to his Pre-Budget Report. A debt crisis in Greece did not help sentiment. Yet this PBR was never going to be good news, given the depth of the recession. What mattered was whether government finances were under credible control and whether Labour could avoid sacrificing economic growth and its key political priorities on a mountain of debt. Despite the strains and the challenges to come, the PBR succeeded on these counts.

The economy is suffering from the deepest recession for more than a generation, after the first truly global financial crisis. The Treasury now forecasts that Britain’s will fall by 4 per cent this year, with the return to growth for 2010 at 1 per cent. In April, many believed the economy would also shrink next year. This recovery may be different to past examples, because confidence dropped across the economy at the same time. Stronger GDP growth data this quarter and next may benefit from improving year-on-year comparisons.

Despite lower forecasts, the estimate of the deficit this year (2009/10) was only raised to £178 billion from £175 billion. There was a similar change to the 2010/11 forecast (£176 billion). The structural deficit (debt which will not disappear with the economic cycle) has been revised downwards from 9.8 per cent to 9.0 per cent of GDP (5.5 per cent excluding investment). Net public debt as a proportion of GDP is expected to peak at almost 78 per cent in 2014/15.

The Chancellor maintained spending plans for next year, but from 2011/12 spending will be flat in real terms – with current spending only rising 0.8 per cent a year, offset by a large drop in investment spending. The Institute for Fiscal Studies highlights that the total spending cut in the three years from 2011/12 is £35.7 billion, with the largest cut that year and much to be achieved through efficiency savings. That figure contains a net £15 billion of spending reductions that have yet to be identified, the IFS calculates. In the public sector, pay rises will be capped at 1 per cent in 2011/12 and 2012/13, high salaries will be scrutinised and the government’s pension liabilities will be controlled.

Darling is protecting spending in some key areas, after natural increases such as on debt interest and welfare. Frontline spending on schools will increase by 0.7 per cent and will be flat in the National Health Service, after inflation. Sure Start spending will be constant and police numbers will be maintained. The international development budget will rise to meet the target of 0.7 per cent of national income by 2013. This means that the cuts elsewhere will have to be more severe.

Reductions in government spending come despite tax rises. National Insurance will rise by 1 per cent rather than 0.5 per cent in 2011 and the temporary VAT reduction will soon be reversed.

The inheritance tax threshold will not now be raised – a clear dividing line with the Tories. The IFS estimates that Labour plans to tighten public finances by £76 billion, or 5.4 per cent of national income. A Fiscal Responsibility Act, designed to reassure markets, will commit the government to halving the deficit by 2013/14.

With the economy probably only just emerging from recession, stringent measures now would risk killing a recovery. Business activity remains low and people are still losing their jobs. The PBR’s commitment to get the debt down is also important, since buyers of government debt are looking for a robust fiscal framework. The economics of this PBR are right but depend on some hard decisions ahead.

The politics are also along the right lines. Labour will aim to safeguard growth, frontline services and the most important infrastructure projects. It seems the Conservatives want to relive the 1980s, but these are different times. They must say what significant action they believe this Government should not have taken to help the economy. Labour aims to build on its years of investment in public services – evident in new and better-equipped schools and hospitals, for example, – which will benefit this country for years to come. Labour is also taking action and leading international opinion on bank bonuses.

However, Labour’s message is not yet clear enough. Debt is high, due to the financial crisis, the recession and timely Government action to combat both. With fiscal policy under firm control, that should not be a major problem, but Labour is too often on the defensive. The party’s electoral prospects must not suffer a death of a 1,000 cuts and the manifesto should be more than a hundred small pledges. We must avoid endless debates about cuts here and there.

The debt situation changes much. It means progressive politics must rise to the challenge and find new solutions with a clear narrative. We need to focus on boosting productivity and changing incentives to continue the fight for equality. If we can do this, Labour will remain the party for the future.

Stephen Beer is an investment manager at the central finance board of the Methodist Church and chair of Vauxhall CLP. This article represents his personal opinion