Labour’s Spending Review starts to pick through the clutter

Emran Mian of the Social Market Foundation looks at the principles that will guide Labour’s spending decisions.

Emran Mian is director of the Social Market Foundation

This morning Chris Leslie made his first major speech as shadow chief secretary. Ranging over almost every area of public spending, he provided more details of Labour’s spending review.

This has kicked off and the first announcements will be made in the Spring. In the meantime, this speech was about the approach to the spending review.

Every spending review has a story. 2010 was about taking urgent action to cut the deficit – in particular reducing welfare costs and wasteful spending – while making some large progressive choices, such as creating the pupil premium; and promoting growth, by protecting transport and science spending while increasing money for apprenticeships.

Labour were the ones to create the concept of the multi-year spending review in the late 1990s. Their emphasis then was on proving that a Labour covernment could be prudent. They did that by signing up to the outgoing government’s spending plans and kicking off a zero based spending review for the future.

This time they are signing up to running a budget surplus, just the same as the two parties in the coalition – though Labour are aiming for one year later than the chancellor and it may only be a surplus in the current budget rather than the total sum that includes capital investment too.

Broadly speaking, their plans are looser than the coalition parties, but at this stage it is hard to say by how much.

And they are returning to that zero base idea, too. Shadow cabinet members have been told that they have to rebuild the case for any spending in their area starting with a blank piece of paper.

But all of this is scene setting. What are the principles that will guide Labour’s spending decisions?

Leslie said today that there are five: value for money; fairness; optimising impact; early intervention (what Labour used to call ‘invest to save’); and ‘de-cluttering’.

He spoke at greatest length about the fifth of these, giving examples ranging from more sharing of office space among local government offices, through reducing the number of layers in NHS management and commissioning and consolidating the funding of the third sector.

While Leslie stated several times that none of this was abstruse tinkering and instead the objective was to produce “cashable savings”, he did not yet say what the amount that they are targeting from such efficiencies might be.

Undoubtedly de-cluttering will mean more public sector job losses, but the number for those was missing too.

What he did suggest is that there is a distinctively Labour approach to making these changes: the purpose is to rebuild the case for action through the state, a different rationale to what some Conservatives might want, i.e. to substitute private action for the role of the state.

In Labour’s outlook, the state is large, but it isn’t big. It’s WhatsApp rather than BT.

Leslie also revealed that Labour will not make its judgements on whether or not to ring-fence some areas of public spending until the manifesto is finalised. There may be some more detail on welfare reform before then.

In the meantime, we should expect to hear more about the other four of Leslie’s five spending review themes.

What is most striking about these is that there is no mention of growth, or productivity – the largest difficulty facing the UK economy. A narrative on growth has been at the heart of the coalition’s spending announcements and the failure to produce more growth is at the heart of Labour’s critique of the chancellor’s performance.

However, even while growth is back, productivity is flat. GDP will soon be past the 2007 peak, productivity is a long way below it. Productivity is important because it determines how strongly wages and living standards will rise.

While business investment can be a major driver of productivity, there may also be a need for government action alongside it on skills, infrastructure and innovation. Business investment in skills declined last year, yet you might expect skills spending to go up when productivity is in the doldrums.

Under the coalition’s plans, public investment in skills continues to slide downwards as well.

In terms of innovation, the UK now only has two companies among the top 100 in the world for research and development investment. There may be public incentives that can help to change this, and there is a direct role for government investment too.

Currently UK government invests about the same in innovation as Finland, a country with an economy that is one tenth the size of ours.

On infrastructure, the coalition has an ambitious programme of new investment, capped perhaps by HS2.

The challenge that this poses for Labour’s spending review is not only the question of how to continue it – HS2 alone could eat up the current account surplus that Labour wishes to run – but also the maintenance of the infrastructure that has already been built.

Increasing the stock of productive infrastructure increases the cost of maintaining it in a productive state.

Making a commitment to doing that should be the starting point of a spending review principle on growth and productivity, with further commitments to come depending on the shape and size of private sector investment in skills and innovation over the period between now and a 2015 spending review in government.

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