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Ed Balls has acted to show Labour can be trusted with the public finances. But hard decisions await the next government, whatever party wins
Historically, deep and prolonged economic crises have produced lasting changes to the political landscape. The Great Depression led to the postwar Keynesian settlement, while the stagflation of the 1970s created the conditions for the rise of Thatcherism. Each reformed the basic institutional architecture of the country.
The core proposition of Ed Miliband's leadership is that the financial crisis and its aftermath demand similarly radical change. The British economy isn't working for working people: inequality, widespread low wages, pitiful business investment, chronic short-termism and weak exports all exemplify the need for deep economic reform. The Labour leader struck gold when he turned this intellectual argument into a political strategy last year, using the return of economic growth to shift the debate on to the cost of living, and channelling public outrage at rising energy prices into a wider attack on the government's handling of the economy. For a while, this worked remarkably well: Labour dominated the post-conference season. But it was always vulnerable to a strong economic rebound and rising consumer optimism.
Last week's jobs figures, upward revisions to growth estimates, and the sight of estate agents pounding the pavements again, have shifted the mood. Although household incomes are still being squeezed, memories of the crash are starting to recede.
Now the political debate is returning to the more familiar territory of tax and spend. The Conservatives have proved adept at blaming Labour spending for the deficit and George Osborne has ratcheted up the pressure by setting out £12bn cuts to welfare as a down payment on a significant fiscal tightening in the next parliament. Ed Balls's announcement that Labour would bring the current budget back to surplus and get debt on a downward path by 2020 is his most serious attempt to date to respond to the charge that Labour cannot be trusted with the public finances.
Balls has left open the door to extra infrastructure investment, particularly to tackle the chronic lack of housing, but has otherwise sought to shore up Labour's shaky credentials on fiscal rectitude. The Conservative attack will now shift to what taxes he will increase, and whether he is serious about cuts. As one journalist put it last week, Balls still needs to "shoot a puppy".
For his part, the shadow chancellor's pledge to reintroduce the 50p top rate of tax is his best chance of reframing deficit reduction as a matter of fairness, and not just competence. The Tories have proved unable to shake the perception that they are a gilded out-of-touch elite, and cutting the top rate of tax remains the biggest political misjudgment Osborne has made in this parliament. Labour will punch that bruise relentlessly.
No party is prepared to admit a more fundamental truth: that broad-based taxes need to rise after the election if we want to sustain the public services. A decade of flat spending for the NHS is unprecedented and an ageing society will place it under further strain. Nor is it likely that the "unprotected" departments will be able to bear the 7% real cuts a year that they face. The Lib Dem pledge to increase the personal tax allowance now looks hopelessly optimistic, if not reckless.
We won't get to vote on these issues yet. But the terms of the economic debate at the election are much clearer.
Nick Pearce is director of the IPPR