Labour's pledge to cut the deficit

Ed Miliband has unilaterally decided that the general election campaign has begun. And what matters about his speech this morning is that it unveils Labour's first pledge for the next parliament - which is to "cut the deficit every year while securing the future of the NHS", and not to initiate any policies that require "additional borrowing".

Many may of course see this as Labour's leader tattooing on the back of his hand, "I must not forget the deficit," following what was widely seen as his gaffe at Labour's conference of omitting to mention it at all in his big address to delegates.

What it shows, in case we were in any doubt, is that establishing credibility for the mending of the nation's finances will be perhaps the most important battleground between the main parties in coming weeks.

But it is going to be a confusing debate, because Labour, Tories and Lib Dems all talk very tough on the need to see public sector debt start to fall as a share of national income or GDP, but their respective strategies are significantly different.

Labour, as confirmed by Ed Miliband today, is promising that public sector debt as a share of national income will be falling by 2020 and that it will no longer be borrowing to finance "current" spending - that's day-to-day expenses such as civil service salaries and welfare payments, but not investment - also by 2020.

By contrast, the Lib Dems are wedded to the first portion of the path of deficit reduction outlined in last week's Autumn Statement, which would see the deficit on current spending, adjusting for the economic cycle, eliminated by 2017-18. But they are not signed up to as deep spending cuts as those planned by their Conservative partners in government.

As for the Tories, they want to see a surplus on the overall budget, that's including current and investment spending, by 2018-19.

And another important fiscal differentiator is that the Lib Dems and Tories are signed up to seeing the national debt as a percentage of national income falling by 2016-17, or three years earlier than Labour is committed to seeing it fall.

So what this means is that the Tories are wedded to the biggest spending cuts or tax rises (although they are saying they want to do it all with spending cuts), followed by the Lib Dems as the second most parsimonious, and then finally Labour as the least axe-wielding.

Now as I pointed out last week, these different approaches mean that by 2020, a Labour government would need to have made £50bn less in tax rises or spending cuts than a Tory government.

Which is equivalent to roughly half of the budget of NHS England, and means Labour would plan to shrink the state much less than the Conservatives.

Labour insists this does not mean an end to famine in most government departments. Even to meet its targets, the shadow chancellor, Ed Balls, believes he will need to see cuts every single year in departments that aren't being specially protected - which is all departments except health and overseas development (though schools are bound to be ring-fenced and protected by the time of the general election).

And he has written to his shadow ministerial colleagues warning them that life in government - if they are privileged to experience it - will mean a life of belt-tightening month after relentless month.

For what it's worth, Mr Balls thinks he has found £500m of local government savings, which he is announcing today. But that is a drop in the ocean of today's £91bn gap between what the government spends and what it raises from taxes.

Ed Miliband is also insisting that a Labour government would not announce any new policies if it can't also say how those policies would be financed, either with cuts or with tax rises. It would not take on any new debt for new initiatives.

In this way, it hopes to shine a light on one apparent contradiction in the Tories' supposedly hairshirt approach to balancing the books, which is that the prime minister in his autumn conference speech promised £7bn of tax cuts without saying how they would be financed - which implied that if a Tory government were to hit its target of achieving a public-sector surplus of £23bn by 2019-20, it would have to cut welfare or departmental spending even more.

So what are we left with when we go underneath the claims of all the parties to be the most fiscally righteous and correct?

That the Labour, Lib Dem and Tory paths to public-finance redemption are - as you would expect - very different and reflect their respective traditions.

Please forgive a shorthand that may hide important nuances, but Labour believes that by cutting less in the short term, the economy would grow faster - and that would yield higher tax revenues that would finance a relatively bigger public sector. And debt as a proportion of GDP would be reduced by a swelling of the GDP denominator.

The Tories are convinced that the momentum in the economy is sufficient to absorb more immediate and larger public sector cuts - and that the imperative is to cut debt sooner rather than later.

And the Lib Dems, well, they would in effect be Tories in the first two years of the next Parliament and Labour thereafter.