Frank Field: This crisis demands a new politics

Politicians must learn to get off the backs of families and communities

This is a moment of great danger for our country. The force of this recession is shifting power from indebted countries to those with large currency reserves. The recession's power will play havoc with the future of our society.

The foundations of our economy will be changed fundamentally. Our indebtedness enfeebles the range of our responses to what are cataclysmic forces. The nature of government will change and its structure transformed. Party politics will for the foreseeable future be in the preserve of children cut off from the real world.

We are still in a phoney war. Over the past six years of boom the government has borrowed £200bn. It plans to make that almost an annual sum. When the financial market signals that it is not going to accept offloading at £150bn plus of annual government debt into the indefinite future, the real political war will start. The figures are chilling and are still almost unappreciated by our political class.

Over the past 40 years the best tax yield came in at 37.6 per cent, while public expenditure peaked at a fraction below 50 per cent, both of GDP.

At some stage the financial market will trump the political obsession about borrowing ever more and force a strict diet of bringing revenue and expenditure much more quickly into balance.

Let us put aside that all this borrowing is about a Keynesian reflationary package. The plans are to borrow 10 per cent of GDP. Keynes would be apoplectic at deficit financing on this scale. Unless resolute action is taken here, there is a very serious possibility of a sterling crisis (a real achievement with a floating exchange rate) reacting with a gilt strike of such severity that the British economy will be permanently damaged.

Practically all commentators dismiss this scenario as scaremongering. But it is important to remember that it is this very same group of commentariat that first publicised no crisis and then went along with the Government's grossly over-optimistic predictions of a short setback and a quick recovery. Since September it has seemed to me that the crisis will be worse in this country than elsewhere (www.frankfield. co.uk).

Sterling remains vulnerable falling by nearly 30 per cent in the last few months. Interest rates on gilts are rising while the offloading of government debt is still to commence in earnest. Steeply rising gilt interest rates will push up long-term interest rates and cut the very roots of economic recovery.

At some stage, the sooner the better, the government will have to see that putting up taxes and bringing expenditure into line, are the two conditions to ensure that extra borrowing is forthcoming for a softer landing. Where will the Centre Left stand on the issue of the hour?

Progressive politics for over a century have been associated with increasing government expenditure. How can Central Left progressives forge a policy when the only agenda is tax increases and real cuts in public expenditure? This real agenda should be grouped around five inter-related strategies.

First, tax increases are unavoidable even in the short run, and the Government should seize that necessity to help make our tax system more progressive. In times of economic decline it is more, not less important, to protect the poorest by developing initiatives that shift any increase in the tax burden onto those with the widest shoulders.

Central to any progressive response must be the rooting out of what are called non structural tax allowances. Allowing pension contributions at the standard rate only would raise £6bn. Second, how can the skills of service commissioners in local authorities, schools and hospitals, be brought up to the best so that cash limited budgets lead to real improvements in services?

These two moves alone, of increasing taxes on some, and cash limiting public expenditure, will mark a step change to a political culture built on debt. This programme must be implemented through the next Budget and requires the Prime Minister to open genuine discussion with the leaders of the other two major parties to get an agreement that matches the hour.

The third part of a progressive strategy involves returning to civil society parts of the government programme. Pensions are a huge part of the State's budget and are set to grow. Yet the universal pension is woefully inadequate and the means-test pensioner budget is expected to gobble up even more money. The Pension Reform Group is proposing fundamental reform. Our universal funded scheme will be built up to run alongside the state pension with a goal of a guaranteed pension taking pensioners off means-testing.

The most important point as far as progressivism is concerned is that the governance of the new scheme has to be at arm's length from the government. This scheme is redistributive so as to pay the contributions of the poor, but richer taxpayers along with all of us gain a guaranteed pension which most of them could not buy in the private market. The scheme also divides the risk the community should bare - guaranteeing a decent minimum to every pensioner – while allowing individuals to carry the risk of income above this level.

The scheme not only sets a downward trend for Government expenditure but helps achieve the fourth big change which must centre around increasing savings. The compulsory contributions will help in this respect. But by guaranteeing that all other income will be paid on top of the new guaranteed pension, there is a clear message that it pays to save. Increased savings is what the banking system is crying out for.

The fifth part of the reform programme entails changing the mind set of politicians. We are caught up in believing that it is the State that ensures social progress. History teaches otherwise. Secure social advance has been achieved by freeing up the basic impulses of human beings to do good, and to improve the conditions of their families and friends. For politicians to learn that getting off the back of families and communities might be the best way to drive a social advance may be the hardest lesson that the new politics demands.

Frank Field is Labour MP for Birkenhead. His paper on progressivism will be published by Demos this week