Ed Balls sets out election battle lines with promise to spend billions on housebuilding and road and rail projects

Ed Balls arrives at the Thomson Reuters headquarters to give his speech (Reuters)

Labour would stick within the Coalition’s limits on day-to-day spending if it wins power in 2015 but would plough billions of pounds more into housebuilding and road and rail projects.

The spending switch, announced by the shadow Chancellor Ed Balls on Monday evening, draws a crucial dividing line between Labour and the Conservatives for the next election. Labour would borrow more to “rebuild Britain” and boost growth, as The Independent predicted in April. But government departments would not spend more on running costs and wages in the 2015-16 financial year than the figure George Osborne will announce in his spending review on June 26 – unless there were an emergency such as an NHS budget crisis.

Mr Balls signalled that he will drop his five-point plan to kickstart growth, including a £12bn temporary cut in VAT. “As the economy begins [to grow], even in the most weak way, the balance of advantage will change over the course of this year from a tax cut to capital investment,” he said. “As for current spending, which is most government spending, I’m saying very clearly to my Shadow Cabinet colleagues: don’t plan on any more money – we’ll inherit very tough plans, we’ll have to work with those plans and reprioritise within them.”

A poll by Survation for the LabourList website suggests that sticking to the Conservatives’ limits would not bring an electoral bonus for Labour. It found that 63 per cent of the public say they would neither be more nor less likely to vote Labour if the party matched the Tories’ spending plans. Some 18 per cent said such a move would make them more likely to back Labour but 19 per cent said it would make them less likely to do so.

In an important speech in London, Mr Balls promised that Labour’s 2015 manifesto would include “tough fiscal rules” to balance the nation’s books but declined to disclose his timetable.

The shadow Chancellor set out for the first time a hitlist of possible Labour cuts including an end to the building of new free schools and huge prisons; industry footing more of the bill for its regulatory bodies; scrapping police commissioners; axeing “top brass” senior officers’ posts in the Army and Royal Navy; abolition of overlapping agencies such as those which oversee fire and police forces; slimming down the four bodies responsible for motorists and handing responsibility for the High Speed 2 project to Network Rail rather than a new company.

Mr Balls confirmed that Labour would end the Winter Fuel Allowance for 600,000 better off pensioners but said that their free bus passes and TV licences would remain.

His highly symbolic announcement on winter fuel payments, designed to show voters Labour is ready to make “tough choices,” provoked controversy because it undermined the party’s long-standing support for universal benefits. Peter Hain, the former Labour Cabinet minister, described it as a “slippery slope” that would lead to more means-testing.

Ed Miliband will spell out how Labour would “cap” welfare spending on Thursday as the party continues its drive to boost its economic credibility.

The Tories dismissed Labour’s repositioning exercise. Sajid Javid, Economic Secretary to the Treasury, said: “Ed Balls' promise of discipline on spending isn't remotely credible. The same old Labour plan for more borrowing and more debt would mean soaring interest rates with hardworking people paying the price”.

Yesterday we reported that the proposed earnings limit for the Winter Fuel Allowance (WFA) was to be £32,000 – in fact, it is around £42,000. The WFA kicks in at the rate of £200 for the over 60s and £300 for the over 80s.