A future Labour government could find £5bn in further savings in the welfare budget, a group set up to explore its spending choices has concluded.  The Fabian Society commission said Labour should raise long-term spending on capital projects but continue to rein in day-to-day expenditure.

Options include ending the guaranteed 2.5% state pension rise and limiting tax relief on private pensions.

Labour has said it will stick to the coalition’s spending plans in 2015-16.

Shadow chancellor Ed Balls has said that, if the party forms the next government, there will have to be an “iron discipline” on spending and further cuts will have to be made.


Although critical of the coalition’s austerity programme over the past three years, Mr Balls has accepted the broad outline of the government’s plans for the first year of the next Parliament – in which Chancellor George Osborne is seeking £11.5bn of cuts.

The BBC’s political correspondent Iain Watson said the commission had been exploring how Labour could regain economic credibility in the face of opinion polls suggesting many did not trust it to take tough decisions.

The commission, set up by the Labour-supporting Fabian Society think tank, said it believed “huge cuts” could be avoided at the same time as continuing to reduce the deficit.

It says a 1% real-terms increase in spending each year from 2016 onwards would be “realistic and credible”. This would imply spending £20bn more in 2016-17 than Mr Osborne is currently planning.

Lord McFall, the former Labour MP who chaired the commission – and who presided over the cross-party Treasury select committee in the last Parliament – said the party shouldn’t “get a mania” about its public spending commitments.

‘Triple lock’

While Labour should be prepared to say it would outspend the Conservatives and Lib Dems, Lord McFall said increases should be relatively modest and targeted at long-term spending that would help to boost the economy.

The commission’s report implies that day-to-day spending would still be squeezed, with expenditure on public services such as the NHS and schools “broadly flat”.

It suggests more could be cut from the welfare budget, saying Mr Balls should go further than his existing plan to remove the winter fuel allowance from better-off pensioners.

It says the coalition’s “triple lock” pledge on state pensions – a guarantee to increase the state pension every year by a minimum of 2.5%, or by inflation or average earnings if they are higher – could be scrapped.

Combined with “modest” tax rises targeting the better-off, such as reforming the system of tax relief on private pensions and some changes to disability benefits, the commission says £5bn could be raised.

‘Tough choices’

It is also recommending that Labour sets up an Office of Public Performance to ensure that any increases in government spending bring about tangible improvements to services.

“No-one denies the fiscal challenges that an incoming government will face,” said Andrew Harrop, the Fabian Society’s general secretary.

“The UK’s economy is not out of the woods yet and tough choices will have to be made.

“But compared to the government’s cuts to public services and social security, our ideas for savings avoid cuts to the most economically beneficial spending and maintain a fair system of social security that protects lower-income households who have been hardest hit by living standards crisis.”

But the Conservatives said the report’s recommendations suggested Labour had learnt nothing from past experience.

“What got our economy into a mess was too much spending, too much borrowing and too much debt,” a Tory spokesman said.

“Now Labour’s official think tank is calling for more spending, more borrowing and more debt.

“That would mean higher taxes and higher mortgage rates for hardworking people.”