ippr: Our progressive spending review plan

Our guest writer is Nick Pearce, director of the Institute for Public Policy Research (ippr)

How should Labour respond to the spending review this week? The temptation will be to oppose the cuts without offering a clear alternative. But that would be a serious mistake. Labour needs to use the opportunity to reassert its economic credibility, to reclaim the mantle of being pro-business and pro-wealth creation, and to re-establish its reputation for straight talking. This means taking some difficult decisions on benefits, tax and spending.

As a contribution to the debate around the spending review, ippr has set out an alternative to George Osborne’s plan. The first key point is that the pace and scale of deficit reduction set out in the June Budget is both highly risky and unnecessary. It threatens the recovery and is not needed to reassure the markets.

The ippr plan suggests reducing the cyclically adjusted deficit over six years rather than four. Most critically, we think it is wrong to go ahead with cutting capital expenditure so sharply, which would see spending on areas like housing and transport fall from £39 billion this year to £20 billion in 2013/14. Sadly, this decision was gifted to the coalition by the last Labour government. It’s time to reverse it.

The ippr proposes that net investment is protected at around £30 billion, or 1.8 per cent of GDP; the level it was at in 2005/6, before the financial crisis. Investment in major infrastructure projects such as high speed rail, housing and low carbon energy will help to create badly needed jobs and promote long term growth.

But this spending commitment needs to be balanced with cuts elsewhere. Labour should drop its pre-election commitment to ring fence the NHS, schools and police numbers; protecting international development alone. If all departments except the Department for International Development faced cuts, no one department would need to bear a real cut of more than 10 per cent over the next four years.

The ippr supports the principle of universalism, but this doesn’t mean protecting all universal benefits. The Winter Fuel Allowance and free bus passes serve no pressing economic or social need for an increasingly prosperous pensioner generation. So they should be cut or taxed. We also need to accept that the VAT rise to 20 per cent is here to stay, however regrettable.

These are tough calls, but these are tough times. The ippr alternative plan offers progressives a robust, credible and costed alternative.

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