Victory in the Lords and George Osborne’s autumn u-turn over tax credit cuts provided welcome relief after a torrid summer for the left. But don’t go mad with your celebrations. Not only was this a delay rather than a true...

Victory in the Lords and George Osborne’s autumn u-turn over tax credit cuts provided welcome relief after a torrid summer for the left. But don’t go mad with your celebrations. Not only was this a delay rather than a true defeat, we’re in danger of winning a battle while losing the war. Labour are still a long way from having a strategy on welfare and work that promises even a modest chance of electoral success. The strategy needs to include clear views on welfare, employment and the quality of work. It must be principled, consistent, reach a broad sweep of the population and be firmly grounded in economic credibility.

On the face of it poverty, low incomes and inequality should be a weak flank for this government. The Conservatives, and David Cameron’s circle in particular, are still seen as the party of privilege and the rich. Many people, including whole communities in parts of the UK, still have bitter memories of poverty and unemployment under the Thatcher and Major governments. But there are at least three good reasons why this did not trouble the Conservatives at May’s general election.

The first reason is that poverty is simply not a high-profile issue for most people. Poverty has not featured as one of the top five public concerns in MORI’s political issues index for 20 years. The second reason is the successful Tory narrative about the causes of poverty. In this story poverty is about responsibility and work, and cutting benefits is in the interests of the poor because it makes them stand on their own two feet. This may be wrong, but it resonates with many.

The third reason is that Labour has been politically hamstrung by concerns that we are fiscally irresponsible and too generous on welfare. Ask anyone who campaigned in 2015 what the public thought about our position on welfare. Too many thought we were going to take their money and give it to someone else who didn’t work, while driving the economy into the ditch. It is not good enough for Labour simply to oppose every benefit cut. Unless we have a credible alternative plan we won’t get any traction.

The Conservatives have also ridden their luck. What happened to child poverty during the last parliament? It actually fell during the recession, because the official measures were taken relative to falling median incomes. Iain Duncan Smith got to have his cake and eat it. He claimed that the poverty measures were inappropriate, but he also claimed that he would meet the 2020 targets.

That claim was always complete nonsense, but very soon it will be moot. The welfare reform and work bill that is now before parliament will abolish the child poverty targets entirely, and will rename the Child Poverty Act of 2010 the Life Chances Act. The awkward issue of poverty will be pushed further out of the limelight, just as the tax and benefit changes that were agreed by the previous government start to bite, and before the cuts planned in this parliament even start.

Let’s remind ourselves what the Osborne proposals amounted to, prior to the Lords defeat. The central provisions were cuts to the generosity of working tax credit; a four-year freeze to working age benefits; removal of family elements of tax credits and implementing a two-child benefit cap. The total planned saving was £13bn, to be partially offset by a £4.5bn pre-tax increase in the minimum wage.

The overall effect of these measures would, according to the Resolution Foundation’s analysis, have been an extraordinary increase in the number of children living in poverty by 1.6 million between 2013/14 and 2020/21. The Osborne cuts would have left the whole lower quartile of the income distribution worse off in real terms by the end of this parliament. That the government was prepared to do this – and is still prepared to do it by other means – should make clear just how much we need an elected Labour government rather than an opposition.

The cleverest part of the Tory narrative is that we should switch from being a ‘low pay, high welfare’ country to a ‘high pay, low welfare’ country. This is clever partly because it’s broadly true and accords with common sense. The most sustainable strategy for tackling poverty really is to increase income from work. However, it also establishes the falsehood that we are currently a high welfare country. In fact the UK was at almost exactly the OECD average for welfare expenditure even before the cuts agreed under the last government.

Anyone thinking this is an argument Labour can win on the doorstep needs to put a weaker e-liquid in their pipe. “Don’t worry, the French and Germans spend a lot more on welfare.” Welfare spending is always and everywhere subject to an uncomfortable trilemma. Call it the welfare triangle. You can have any two of: affordability to the state; simplicity and good incentives; and generosity to recipients. For example high and universal benefits are expensive, whereas lots of mean testing creates complexity in order to control costs.

Labour will get nowhere simply by advocating more generous welfare spending, partly because of concerns around fairness and reciprocity, and partly because the consequence is higher taxation. Under the last Labour government we increased the generosity of non-contributory, means tested support for low income families very significantly. But we did so quietly, and in the environment of a strongly growing economy with unsustainably buoyant tax revenues. The last time we successfully made an explicit case for significant tax rises was 2002, when we linked the rise in national insurance contributions directly to universal NHS spending. Does anyone really think we can do the same in the next five years for welfare, when services like the NHS and police are under such pressure?

One thing we should do is identify some priorities within the current welfare spending envelope. The government has made its strategic choice: to protect pension spending. My view is that Labour should take some hard decisions about where to focus, and that pre-school children and expecting mothers should be the priority. Extending child benefit to the period of pregnancy would help address maternal and infant health and nutrition, and make it easier for low-income mothers to acquire some of the material necessities of parenthood. Cuts to Sure Start cannot be fully reversed any time soon, but we should strengthen our commitment to genuinely free high-quality nursery care for disadvantaged children. All this could link to an argument about what measures should replace the child poverty targets: income, deprivation and life chances objectives for young children.

However, the real weak flank of the Tories is work, not welfare. Theirs is a strategy to create a Victorian Britain. 20 years ago poverty was concentrated in workless families, particularly single mothers. Now almost two thirds of poor children live in working families. Support for those on lower incomes is being withdrawn. The incentive to work will be the alternative of destitution. The trade union movement, which for over a century has protected employees’ share of national income, is under unprecedented attack via the trade union bill. It is perfectly possible to have economic growth while living standards stagnate or decline for most people. We are heading towards being a country of the working poor.

This is the real significance of the tax credits defeat. It shows Labour both the constituency it needs to win, and a way of winning them. These are working people on lower to middle incomes at the sharp end of the modern economy. Osborne’s tax credit proposals were a strategic error because they fundamentally undermine his claim to be on the side of working people. Astute Conservatives like Ken Clarke and Nigel Lawson (the latter hardly a moderate) feel this danger and that is why they spoke out.

Last parliament we focused too narrowly on those facing some of the most extreme consequences of economic globalisation: zero hours contracts on the minimum wage. This time we have to speak convincingly to a much larger group. Not just the bottom 10 per cent, but those earning £15,000 and £20,000 and more each year. The issues facing these lower to middle earners are becoming more and more acute. Job insecurity now comes from sources like automation, the widespread use of agency staff and outsourcing. These feed directly into worse terms and conditions. Pressure on living standards includes pay and living costs, but also the increasing pressure of work driven by more and more intense competition.

The strategy for tacking these issues is the same as our strategy for regaining economic credibility. It’s our central story about employment, productivity and the rewards from work. This makes education and skills central to the argument about poverty and welfare. In the last parliament we began to talk about a ‘modern industrial policy’, but it never had enough prominence or clarity. This time round we need a sustained and developed focus on science, innovation, infrastructure and most importantly business growth. We need to embrace economic devolution and work out our positive story that links Labour in power, in local government, with our national offer. We must use the cities and regions to demonstrate our economic competence and seriousness.

Perhaps most importantly, Labour’s leadership has to be seen as a convincing supporter of private enterprise as a creator of growth and jobs, innovation and affluence. Most people work in the private sector. They may want better terms and conditions, but they also want their businesses to succeed. There are undoubtedly areas of the economy where regulation is inadequate. But if our interventionist proposals add up to a lack of credibility, then we won’t get the opportunity either to implement our economic policies, or to address the welfare challenges that will be acute by 2020.

In a sense all this pushes us back to our roots as a movement: our strategy on work and welfare must be a strategy about labour in the modern world. Reducing poverty and inequality depends on our story about work and its rewards being credible, inclusive, and reaching a critical mass of the voting public. Our aim should not be to get into government in order to spend people’s money. It should be to create a thriving society and economy that rewards work and enterprise, protects rights and dignity, and genuinely supports equal life chances.