Labour has outflanked Osborne on the UK’s long-term welfare timebomb

 
Ryan Bourne
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I WAS very critical of shadow chancellor Ed Balls last week. I suggested that, despite tough rhetoric on public spending in his 3 June speech, the only specific cut he had highlighted (means-testing the winter fuel allowance) would save just £100m. This might have been a significant break from Labour’s long-time commitment to universalism of pensioner benefits, but it represented just 0.01 per cent of total annual government spending. Was Balls really serious about the long-term public finances?

But a week is a long time in politics. By Sunday, Balls was being more hawkish than George Osborne on the previously unspeakable subject of old-age entitlements. If you’d parachuted onto earth with no knowledge of the previous debate and had to label one politician a “deficit denier”, it would have probably been the chancellor.

Balls has been the first to say that we should seek to cap overall social security spending (excluding so-called automatic stabilisers, but including spending on the state pension). This comes on top of his decision to support means-testing of the winter fuel allowance. Earlier in this Parliament, former health secretary Andy Burnham also claimed the government was wrong to ring-fence the NHS. The implication is that Labour would bring all of these seemingly insulated big-ticket items back into the mix.

While opposing almost all of the actual restraint we have seen, Labour is right to highlight that the longer-term challenge is about how to control rising entitlement spend within an ageing population. The welfare budget for pensioners currently accounts for £110bn of the total £165bn spent on benefits. Assuming the economy returns to healthy trend growth and experiences decent health productivity, state spending on pensions, healthcare, long-term care and elderly benefits is projected to increase from 16.3 per cent of GDP today (£250bn) to 18.3 per cent of GDP by 2041-42. That comes after spending on healthcare alone increased by almost 70 per cent in real terms under the last Labour government.

Yet the Conservative reaction to Labour’s honesty on health and pensions spending being key has been met with a typically partisan response. “Labour would cut the NHS” and “Labour threatens your state pension” appear to be the lines to take.

This is a mistake. The Tories have been telling us that cutting funding to services need not harm their quality. On health, they now say the opposite. Ring-fencing significant parts of the overall budget leads to unnecessarily large cuts elsewhere. What’s more, by criticising Balls for examining areas with projected large increases in popular spending, the Conservatives paradoxically improve the Labour party’s economic credibility. The Conservatives might be the party of “tough decisions”, but the Labour party could become the party of “really tough decisions”!

Many Conservatives argue that the government’s choices have themselves enabled the protection of health and pensioner spending. This is the so-called compassionate conservative choice, which may well be electorally popular, given the increasing proportion of the population in or close to retirement. But nobody will thank the government if the traditional liberal functions of the state are sacrificed as a result. And if the economic pessimists are right and growth remains slow, old-age and health spending will have to be reviewed anyway, leaving Osborne and co on the wrong side of the debate.

Ryan Bourne is head of economic research at the Centre for Policy Studies.