George Osborne, the shadow chancellor, delivered an economically illiterate, and fear-mongering, rant to the Tory conference claiming that Britain is drowning in a sea of debt.

As veteran economic commentator Samuel Brittan pointed out last week, this is sheer economic nonsense. Brittan wrote:

The British political classes are going through one of their occasional bouts of masochism, with party leaders vying with each other on the theme of who can cut public spending faster and more effectively … My own bottom line is that all this is in response to a largely imaginary budget crisis. If we have a normal economic recovery the red ink will diminish remarkably quickly. If we don't, it won't and won't need to.



This good sense contrasts with the shadow chancellor, who did not say a word about how he would restore economic growth, the real key to healthy public finances. He should not be allowed to get away with it.

There is an iron law in politics – the party that sets the agenda wins. A year ago, Labour was rising in the polls as it set a clear political agenda: the global financial crisis could only be addressed by massive state intervention. Thatcherism, the real ideology of the Conservative party, was shattered throughout the world.

That does not mean the government's response was entirely right. It was not. It unnecessarily bailed out bank shareholders, at vast cost to the population without even taking real control of the financial institutions it now effectively owns.

State intervention was the right policy, but bankers and their shareholders should have been left to enjoy the downside of the free markets whose merits they had extolled for so long. The government should have let their shares values collapse and then taken them over at virtually zero cost, while exercising real control to restore lending in the economy.

Partly as a result of this hugely expensive mistake, which Osborne went out of his way to support, and partly caving into concerted pressure, the government has now handed much of the agenda back to the Tories, by accepting the false argument that the critical issue facing the British economy is to cut public spending.

In reality, claiming that cutting public spending is the main issue facing the country, makes as much as a doctor focusing purely on the symptoms rather trying to cure the disease which causes them.

The position of public finances has deteriorated for two reasons. First, because bailing out the bankers and their shareholders is projected to cost a mind-boggling 9.5% of GDP in the current financial year. Second, because the worst collapse in economic growth since the second world war has seen tax revenues fall by a projected 3.4% of GDP this year.

In other words, as in any serious recession, tax revenues have fallen with output, profits and employment, while immense sums have been transferred from taxpayers to bank shareholders. These two items, the fall in tax revenues and the bankers' bailout, far outweigh the rise in inevitable rise in state benefits as people lose their jobs.

Public sector pay and pensions have literally nothing to do with the deterioration in public finances yet the Tories want to make them the scapegoats.

The only way out of the crisis, including the deterioration in public finances, is not cuts or attacks on public sector pay, which will make a bad situation worse, but a restoration of economic growth.

That requires tackling its real cause, a huge drop in private investment.

If we take the components of demand in the economy, up to the first quarter of the year, private consumption fell 1.8%, government consumption rose just 3.7% but investment fell by a massive 14.7%.

This trend has continued. In the second quarter business investment was fully 28.2% lower than in the same period last year.

The only way to stabilise public finances is to restore economic growth, and the only way to do that drastically raise the level of investment in the economy.

That requires full control of the banks and literally ordering them to resume credit at affordable interest rates and direct state intervention into the sectors of the economy where the investment collapse is most calamitous, above all, house building.

Within that framework, wasteful public spending, that does nothing to benefit either the economy or the population, should be cut – the Trident programme should be abandoned, defence spending cut to the same share of the economy as Germany, ID cards and other grotesquely expensive gimmicks should all go.

Labour must seize back the political agenda from the Tories by explaining that the top priority is to restore investment and growth which in turn will, over time restore, public finances. Otherwise we have a race to the bottom, with parties competing to promise more and more savage attacks on public sector pay, older people and everyone else who depends on public spending.

If Labour stops bending to the Tories on cuts and sets its own clear agenda for investment and growth, the general election will be anything but the forgone conclusion even many Labour politicians now predict.