Labour could spend £20bn more in 2017-18 than the government currently plans, funded by tax increases, slower deficit reduction and revenues from better growth, a Fabian Society commission on the future of public spending says.

The commission, led by the former Labour chair of the Treasury select committee, Lord McFall, and some leading left-of-centre economists, is probably the fullest attempt to set out the spending options facing Labour after the 2015 election. It assumes Labour will have to follow the 2015-16 spending plans already set out by the coalition, but it suggests Labour can take a different approach for the rest of the parliament, including allowing extra borrowing for current spending.

The findings will put some pressure on the shadow chancellor Ed Balls to veer away from simply following the tax and spend options that the Tories propose.

Chancellor George Osborne has already said he will hope to achieve a budget surplus by the end of the parliament and says there is no need to raise additional taxes.

Although Labour has had some success in making living standards an issue, few of the party's strategists doubt the familiar issues of tax and spending will again be at the heart of the next election.

The commission, after a year-long inquiry, proposes that public spending as a proportion of national income could rise by 1% from 2016. Even with this more relaxed approach, it still recommends £5bn of social security cuts, including means testing the winter fuel payment, introducing a less generous system for uprating pensions and making some changes to disability benefits.

It would require departmental budgets, including education and health, to stay flat and some tax rises, mainly through pension tax relief, or the date to eradicate the deficit could be set two years later than the government target of 2017-18.

Of the £20bn, £5bn would be allocated to extra capital investment and £15bn to current spending, reducing cuts to most departments from about 15% to 3% in the two years after the next election.

The proposals come as some economists predict growth will be higher than forecast by the spending watchdog Office for Budget Responsibility, bringing substantially improved revenues in 2015-16. This would make some of the Fabian options less difficult to implement. Ministers are preparing to hail better than forecast employment figures on Wednesday.

The Fabians say the aims should be for a rise in capital investment; a modest reduction in social security entitlements; "flat" real spending for the health, social care, education and economic budgets; and a 3.5% annual cut for all other departments. It would probably need higher taxes than proposed by the coalition – mainly focused on pension tax relief.

Andrew Harrop, the Fabian Society's general secretary, said: "Politicians are never keen to talk about tax but if the choice is between national debt rising even further, falling standards in public services or very gradual rises in taxes, this is a conversation we need to have."

The commission points out that, under current forecasts, total spending, as a share of national income, will return to the same level in 2017 as it was under Labour in 2007, but there will have been a significant shift away from future-oriented expenditure, towards interest payments and pensions.

In a set of proposals that have been received favourably by Balls and his team, the Fabians suggest holding a spending review which sets detailed departmental budgets for three years and the possibility of setting indicative budgets for a further two. Capital investment plans and the broad outline of tax and spending should be set for five years.

The Fabians also recommend:

• The creation of an Office for Public Performance – "a powerful independent cross-government body, tasked with championing excellence, driving productivity improvement and encouraging innovation. In doing this, it will help improve the use of public spending and help build trust in public services".

• All spending decisions should undergo a "10-year test" which considers long-term impacts, including the effects on society and other public agencies.

• Local government should co-ordinate and scrutinise all local public service spending decisions to champion joined-up early action.

• In the absence of sufficient progress, ministers should consider mandating budget holders to switch a proportion of their annual spending from existing activities to early interventions, beginning in the second half of the next parliament.

• In the long term, public debt should be returned to its pre-2008 levels over the coming decades. Under this scenario, revenues would need to rise to about 41% of GDP, which would require the government to increase tax as a share of GDP by 2-3% in the decade or so after 2020. If implemented gradually, this could be achieved primarily through "fiscal drag" on personal taxes.