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Labour Must Not Repeat George Osborne's Stubborn Mistakes

19/04/2013 15:07 BST | Updated 19/06/2013 10:12 BST

There's been a good deal of comment today on new Fabian Society research looking at public spending after 2015, which calls on Labour to rule out a commitment to Tory spending plans. Our study does not call for Labour to make a cast-iron spending pledge but quite the opposite. Flexibility is one of the most important tools in a Chancellor's armoury and should not be cast away lightly. Look at George Osborne, who has trapped himself by committing too firmly to his own 2010 plans and will not change his mind 'when the facts change'.

There are a fair few people within the Labour party who think the path to economic credibility lies in outsourcing fiscal policy and signing up to George Osborne's spending plans for the early years of the next parliament. But why would Labour want to accept a Conservative plan, hatched in 2010, which it didn't agree with even at the time?

There are three possible scenarios for the economy after 2015 and in none of them do Osborne's plans make sense. First, it is just about conceivable that the economy might return to strong growth. Were we to have several years of annual growth at over 3%, our fiscal problems would simply melt away of their own accord as they did in the 1990s.

More likely is the second scenario: we will creep back to trend growth of a little over 2% a year. In this eventuality, an incoming chancellor will still need to keep a tight rein on spending, but would have more flexibility than Osborne would have us believe. In particular, by deviating a little from the Conservatives plans, Labour could hold out the hope of an end to retrenchment in public services. Freezing department budgets in real terms is surprisingly affordable, because the 'unprotected' areas suffering the deepest cuts make up quite a small proportion of public spending: ending the cuts would require an increase to overall public spending of around one per cent each year.

It would be for a future Chancellor to decide whether to pay for this through tax rises or borrowing, but the important point is that an annual spending rise of one per cent is totally consistent with sound public finances. If GDP growth is in line with OBR projections, under this plan it would take just two years longer to reach George Osborne's current target for government spending as a share of GDP.

But our analysis also shows that Labour will have to rule out a splurge in spending. While annual spending increases of one per cent would close the deficit, rises of 2% would not. Spending rises on this scale could only be contemplated once deficit reduction is complete or if growth is very strong indeed.

The third scenario for 2015 is that the economy continues to flatline, with growth somewhere around one per cent. In this context it would be hard to increase everyday public spending, because, without decent growth, even George Osborne's cuts do not lead the overall deficit to fall. But Labour would almost certainly want to spend more on investment to stimulate the economy.

We don't know what will happen to the economy, but under none of the scenarios do Osborne's plans look necessary or wise. So Labour should plan on the basis of modest increases to overall spending, which would in turn lead to roughly flat budgets for public services. But this should only be a starting point, not the party's last word on spending, for in such uncertain times a future Chancellor needs flexibility above all. Labour must not repeat George Osborne's stubborn mistakes.