“Credibility on economic policy is the holy grail of politics. If it can be obtained, the way ahead for a wide range of policies appears much clearer. Without economic credibility, it becomes almost impossible to convince the public of any...

“Credibility on economic policy is the holy grail of politics. If it can be obtained, the way ahead for a wide range of policies appears much clearer. Without economic credibility, it becomes almost impossible to convince the public of any other aspect of your policy agenda. All the policy ideas in the world are worth nothing if Labour fails to learn this lesson afresh.”

This was the key message of my Fabian Society pamphlet, The Credibility Deficit – how to rebuild Labour’s economic reputation, published in 2011. Unfortunately, its message was little heeded and the lesson on credibility was not learnt. Labour adopted some of the policies advocated, but the Party’s efforts to address its economic credibility deficit were half-hearted and amateur. Labour managed in fact to put itself in a worse position with the electorate than it had been in 2010. As a result, Labour now faces a ‘Credibility Chasm’ which it must find a way to cross if it is to win power.

Labour’s manifesto began with a statement about fiscal policy. Somewhat condescendingly perhaps, it was an ‘offer’ to the electorate of a so-called “Budget Responsibility Lock”. It promised that amongst its spending pledges “not one commitment requires additional borrowing” and that Labour would cut the annual deficit each year. In a familiar style, having ‘banked’ that pledge the leader mentioned it only in passing in his foreword. Dedicated voters had to read on until page 10 to find another brief reference to cutting the deficit. Cutting the deficit and controlling spending were not principles that ran clearly through the manifesto.

The deficit reduction commitment itself was a welcome step towards greater economic credibility. However, it was obviously bolted on to what the leader and his colleagues regarded as more interesting pledges. It also came too late and for that reason had to appear more demanding than might have been necessary.

Despite the deficit cutting pledge, Labour went into the election campaign without a comprehensive economic policy. While it committed to reducing the overall level of annual borrowing, it had still not worked out whether it would borrow to invest. Figures from the Institute for Fiscal Studies showed that Labour’s pledges could be met while maintaining the Coalition government’s plans to borrow just over 1% of GDP each year to fund the capital budget. This was perfectly reasonable. Labour’s targets prior to its manifesto also permitted further borrowing to fund increased investment spending. By the time of the election campaign, it was not clear whether Labour thought this would be a good idea, or whether in fact it would aim to borrow less than the Coalition planned to fund investment if it could. At the heart of its fiscal policy was the hope that it would not come under too much scrutiny, probably with an eye on maximising manoeuvrability once in government. More importantly, it had taken five years to get to this point. Deficit reduction and spending control should have been included in every statement made by the leader and shadow cabinet since 2010.

Labour undertook a great deal of work on industrial strategy prior to the election. This included measures mentioned in The Credibility Deficit such as a British Investment Bank, a renewed focus on infrastructure, and measures to reform the City. However, without getting the basics right on economic credibility, this good work was wasted. It was also confused by other policies aimed at reforming ‘broken markets’, which seemed to focus on telling companies what to do rather than ensuring markets actually worked well.

The Credibility Deficit argued that there were two aspects to economic credibility. The first was financial and fiscal credibility. In other words, did Labour’s plans to manage the public finances stack up? The second was whether Labour’s economic policy was relevant to most people’s lives. Since before the crisis “a perception grew that most people were ignored when economic policy was made” and people were relying on debt to grow or maintain living standards. The subsequent refusal of banks to reform themselves adequately after having been saved by taxpayers, while households and small businesses struggled, supported this conviction. Labour understood well the injustice of rising inequality and economic powerlessness of the citizen. Yet despite offering the electorate some solutions, ultimately people were not convinced.

This was probably because many people still believed Labour had spent too much when in government, as opinion polls, doorstep campaigning experience, and the pre-election BBC Question Time clearly showed. The fact is that Labour was too relaxed on spending before the financial crisis, even if it had begun to slow spending growth and had not exceeded its fiscal targets. In The Credibility Deficit I argued that Labour needed an “effective spending guarantee” that any additional spending would be independently audited and discontinued if it did not deliver. Combined with a credible fiscal plan, that would help build economic credibility. The zero based spending review was a significant step in this direction that should have been more publicised by the leadership and shadow cabinet.

The Conservative Party was able to make unfunded spending pledges and promise harsh but undetailed spending cuts, while Labour’s ‘offer’ of budget responsibility was firmly rejected by the electorate. Labour’s task of reform is now much harder but even more essential and it will need the active and thoughtful support of Fabians. The message of the Credibility Deficit still applies: “Labour can make real progress by recalling its core values on the economy while recognising that the economy is dynamic. Economic policy is not simply about pulling a few levers in government and watching growth take off or inequality destroyed. It is about creating the incentives and overall conditions for growth and for a more efficient and fair economy.” That is where we should start as we try to bridge the economic Credibility Chasm that now lies before us.

Stephen Beer is Acting Chief Investment Officer at the Central Finance Board of the Methodist Church, responsible for managing socially responsible investment funds. He blogs at www.stephenbeer.com and tweets at @stephen_beer. This article represents his personal opinion.