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Realism about the economy

by Martyn Eden

To address this, the two Eds have made important speeches this week, Ed Balls on public spending and his leader on welfare policies. In the former, Mr Balls tied a future Labour Government to matching the Chancellor's spending limits and in the latter Mr Miliband abandoned a traditional Labour commitment to universal benefits and embraced the contributory principle. 

Thus, a Labour Government in 2015 would cap Housing Benefit and Incapacity Benefit for at least three years to prevent welfare spending spiralling out of control. Also unemployed people who have paid National Insurance contributions for at least five years would receive a higher rate of benefit than those with no contribution record. Ed Miliband also said Labour would cut benefits for anyone who refused to prepare for work once their children reach the age of five. What he did not say is how a Labour Government would stimulate economic growth to create the jobs those people could do. Fourthly, a Labour Government will not reverse the Coalition's cuts to Child Benefit for families with at least one earner on £50,000 a year. 

The Prime Minister ridiculed the latter decision yesterday as evidence of Labour's "complete confusion and weakness". For the last three years the Opposition has opposed this and every cut the Government has made so this reaction was predictable. However Labour's change of tack is not surprising even though it will be seen as a betrayal by many socialists wedded to the principle of universal benefits. Public opinion is hostile to people living on welfare as a way of life, making no effort to find work, and might have punished Labour if they had not made this change. As one Labour MP put it 'we are the Labour Party not the Welfare Party'. 

More important than these political reasons are the economic ones. Public sector net debt was £1,185.3 billion at the end of April 2013. That is equivalent to 75.2% of GDP. It is funded by borrowing. So far interest rates have been low but no Government can presume that will continue. If borrowing does not fall, interest rates will sooner or later rise. The higher they rise the less we can afford to maintain the present welfare provision. That is why the Government has cut public expenditure but despite this net borrowing is still forecast to be £120.9 billion this year. 

Whoever manages the UK economy in the next decade has to stimulate economic growth at the same time as cutting borrowing and they have to do this against a background of expectations about spending on the NHS, welfare provision, pensions, the military, education and other major public services, expectations that can only be met if difficult choices are made and national debt reduced. That is the rationale for Ed Miliband's speech.

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