Gordon Brown's PBR prescription provides exactly the right medicine for Britain, says Roy Hattersley

It always seems to happen in the autumn - first the crisis and then the Labour Party's adjustment of its policies. In 1967 there was devaluation and a reluctant acceptance of the obvious truth that the exchange rate is not a symbol of the way in which Britannia rules the waves but part of the complicated equation that determines the level of national prosperity. Then, in 1976, what came to be called “the IMF Crisis”, made Labour revise its attitude towards public expenditure.

In fact the public sector borrowing requirement was not out of control. But shadowy figures who determine the level of “international confidence” thought it was. The two crises, and the two solutions, had one feature in common. The remedy had to include a demonstration that Labour Government was prepared to buy support by abandoning Labour policies - most notably by accepting a reduction in social expenditure.

Now the reverse is true. The Chancellor asserted the need to maintain spending, even though, in consequence, borrowing is increased. His tax proposals protected the least well-off and asked for a greater contribution towards recovery from “those on the highest earnings who have seen their earnings doubled” over the past ten years.

This is the social democratic moment. And not only because the financial statement was modestly redistributive and geared to the protection of public services. The underlying philosophy is even more important. The effects of the recession will be mitigated and growth will be restored by policies that accept the need for limitations on unregulated individualism and are based, instead, on collective action. That is the big change.

The credit crisis was caused by the lunatic belief that the best way to ensure prosperity is a free-for-all. Does anybody still think it that was a good idea to allow (indeed to encourage) building societies, with a primary obligation to their investors, to turn into banks, with no interest but their shareholders? Would even John Stuart Mill - “all the errors which he is likely to commit against advice and warning are far outweighed by the evil of allowing others to constrain him for his own good” - still argue against prohibiting that man from taking out a 150 per cent mortgage? The few remaining defenders of the unregulated society are the sharks. It seems incredible that, ten years ago, Labour set its face so firmly against intervention in the economy. It has learnt the hard way that it was wrong.

It has learnt too - pace the banks - that there are times when the market cannot be left to heave itself back into equilibrium. Nobody now wants to regulate prices and (attempt to) limit incomes in the way we thought right and necessary in the Seventies. But the Government's economic abdication went very near to turning a full circle.

Markets do adjust and (as Marx did not realise) capitalism survives. But the adjustment and survival are achieved at the expense of employees and consumers. Yesterday the Chancellor promised that the Government would “step in” if energy companies failed to pass on price reductions and that it would press the banks to make mortgages more readily available. That is not a return to “old Labour”; it is a reassertion of common sense and social justice. And it is long overdue.

Labour's opponents will announce that socialism, red in tooth and claw, has returned. In fact it is no more than the moderate reassertion of the proper balance between individual initiative and the common good. That seems to be a formula that opponents of social democracy, at least outside this country, regard as the necessary prescription for international recovery - though it is unlikely that the Brown Government will nationalise banks with the zeal shown by the Bush Administration. Labour has edged a few inches to the left and, in this particular, remained to the right of George Bush.

However, it is the Brown Prescription that the world has accepted as the right remedy for the recession. I am a self-confessed Brownite and I do not mean to diminish, to the slightest degree, the extent of the Prime Minister's achievement or the international status that he now enjoys. But it is essential that he leaves the country in no doubt that his success results from his acceptance of social democratic philosophy. The recovery depends on the strength of Labour's idea, as well as on the ability of Labour's leader. It is a philosophy for good times as well as for bad. Stick to it and Labour wins the next election.

Roy Hattersley was Secretary of State for Prices and Consumer Protection, 1976-79

The black hole in our public finances will grow even deeper, Andrew Haldenby says

There was an air of unreality in the Commons yesterday as the Chancellor announced his new borrowing forecasts. The scale of overspending took the Labour benches by surprise as much as the Opposition - no one had any idea how bad things really were.

The figures reveal mismanagement of the public finances on an epic scale. The Treasury's new forecast for borrowing next year - £118 billion, or 8 per cent of gross domestic product - eclipses even the most pessimistic independent forecasts. Of course, this is in part the effect of recession, but it is mostly the outcome of a decade of misguided public spending policy.

The Government has been happy to spend more than the nation can afford - and more even than public services can properly use. Its tax proposals will worsen the black hole. Alistair Darling's temporary tax rebates will force borrowing far higher than it needs to go, and confidence in the UK economy, at home and among international investors, will fall even farther.

What is more, the Chancellor's plans to cut taxes on less well-off people through a temporary reduction in VAT, and to raise taxes on the richest, is unlikely to provide a “fiscal stimulus”. But the poisonous cocktail of tax-raising policies that the Government announced yesterday is tailor-made to depress the economy, with VAT, national insurance and income tax increases kicking in at the fragile first stages of the recovery.

What is needed is a fundamental change of culture. Britain's “obese economy” has become used to bingeing on unsustainable levels of debt and consumption. We now need to find a new path based on a high savings economy that encourages sustainable long-term growth.

As of next year, the Government will be responsible for the stewardship of 45 per cent of national income. So the Chancellor must get a grip on public spending. That does not mean crisis cuts, that would increase inefficiency and - by creating a perception of underfunding - lead to demands for higher spending later on, just as happened in the 1990s.

The Chancellor's announcement of a future reduction in the real rate of increase of public spending is certainly not enough. Nor is his £5 billion in supposed “efficiency savings”. The problem isn't “waste” but the public sector structures that lead to the waste. There is no avoiding the need to tackle head-on factors such as the generous terms and conditions that public sector workers enjoy.

What is needed is the programme of public service reform that the Government should have introduced years ago. The recession should give the Government the courage to tackle the root causes of inefficiency. We need a comprehensive eight-to-nine-year programme of public service reform to counteract the eight or nine years' overspending we have seen this decade.

We cannot underestimate how much of the inefficiency in public spending is down to the targets and tinkering to which most ministers and senior officials remain addicted. A typical finding of our research is that the leaders of public services have the tools to change the way their services are run but are continually distracted by political priorities, from hospital cleanliness to changes in school curriculums and ever-changing rules on the use of police resources. The only cost of ripping up the targets would be a certain amount of ministerial embarrassment. The gains would be immediate and large - for example, if the health service became only 5 per cent more efficient, that would save more than £25 billion during a Parliament.

Next year the recession will bite hard. Then we will have vivid proof of how irresponsible was the further damage down to the public finances by yesterday's Pre-Budget Report.

Andrew Haldenby is director of the independent think tank Reform

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