Labour Party, in switch, toughens stance on deficit

Britain's Shadow Chancellor Ed Balls speaks during his lecture at the London School of Economics June 16, 2011.

LONDON (Reuters) - The Labour Party toughened its stance on combating the country's budget deficit on Saturday in an attempt to regain the trust of voters sceptical about its economic policies.

In a significant policy switch, Labour's shadow chancellor Ed Balls said the party backed years of pay restraint for public sector workers and that it would make no promises to undo the government's tax rises or spending cuts if it regained power.

The switch angered trade unions, Labour's main financial backers. One union leader said Balls was signing Labour's electoral "suicide note" by alienating public sector workers.

"However difficult this is for me ... we cannot make any commitments now that the next Labour government will reverse tax rises or spending cuts. And we will not," Balls told a conference held by the Fabian Society, a centre-left thinktank.

"It is now inevitable that public sector pay restraint will have to continue for longer in this parliament. Labour cannot duck that reality," he said.

Since it lost the 2010 election after 13 years in power, Labour has consistently argued that the Conservative-Liberal Democrat coalition government is going too fast in trying to erase a deficit that peaked at more than 10 percent of national output. The next election is due in 2015.

Labour's reputation for economic management was damaged by a build-up in personal debt and perceived financial excesses that culminated in the 2008 crisis, which forced the then Labour government to rescue several large banks.

Despite the pain of the coalition's austerity policies, voters continue to harbour serious doubts about Labour's ability to take the correct decisions on the economy, polls show.

CONVINCING MARKETS

Britain is at risk of sliding back into recession as global growth slows, government spending cuts bite, unemployment rises and consumers struggle with high inflation and tax increases.

The Conservative-led coalition says, however, that the euro zone debt crisis shows it is essential to have a credible policy for reining in the deficit to keep the faith of the markets.

Despite shifting his stance on austerity, Balls repeated his call for immediate action to boost growth and jobs, including temporary tax cuts, saying this did not conflict with a credible medium-term plan to cut the deficit.

Chancellor George Osborne announced last November it would take until 2016/17, two years longer than previously estimated, to eliminate the government's structural deficit.

Osborne said pay rises for public sector workers would be capped at 1 percent once a two-year pay freeze ends in 2013.

Balls told The Guardian Labour would support pay restraint for public sector workers in 2014 and 2015.

Bob Crow, general secretary of the RMT transport workers' union, said Balls was alienating millions of Labour's core voters and signing the party's "electoral suicide note."

Mark Serwotka, head of the PCS union representing 290,000 state workers, said Balls' speech was desperately disappointing and showed the confusion at the heart of Labour policy.

"On the one hand, Labour seem to be saying the coalition are going too far, too fast ... but on the other hand saying we would have to make the same tough decisions," he told the BBC.

Michael Fallon, the Conservatives' deputy chairman, accused Labour of confusion. "Today they support cuts in principle, while at the same time they're opposing billions of pounds of cuts every week," he said in a statement.

(Editing by Jane Baird)