Labour's chance to lead fiscal policy Britain today is at the start of an argument about the role of monetary policy in responding to the challenge of stagnation and debt - a discussion triggered by the imminent arrival of Mark Carney as Bank of England governor. Compare that to fiscal policy, where the government and opposition stick rigidly to scripts written half a parliament ago. The Conservatives rolled the dice on austerity and are left hoping something will turn up before 2015. If it doesn't, they will fall back on the counterfactual: it would have been even worse under the other lot. Paradoxically, Labour has more room for manoeuvre. No party has yet addressed how fiscal policy should be governed after the election. And the need for Labour to get on the front foot here is self-evident: it is blamed for the deficit and trails on economic credibility. One widely held view at Westminster is that Labour will revert to its 1997 playbook at the coming election and promise to match the coalition's fiscal plans, varying public spending and the balance between taxes and spending, but not the pace of deficit reduction. The hope is that this will convince voters that it can be trusted with the public finances. While good politics made for good economics in 1997, they will not do so in 2015. Further fiscal tightening between now and the election will depress growth, companies will still sit on their cash and the British consumer will remain saddled with some of the highest household debt in the rich world. Lower-income households - already crippled by falling real wages, cuts to tax credits and rising utility prices - are particularly exposed. So, in 2015, the UK could still be in a balance sheet recession, in which the private sector is saving, not spending. In the absence of an implausibly large export spurt, only government will be able to maintain demand in the economy. A fiscal squeeze would then be guaranteed to trap Britain in stagnation. The worst thing Labour could do is give the impression that it will reverse the cuts, only to do a handbrake turn in its manifesto and sign up to the coalition spending plans. So it needs to map out an alternative. It could reflect the central bankers" debate about making monetary policy contingent on growth and apply the same logic to fiscal policy. When the economy is flat, governments should boost demand. When growth is strong, they should cut the deficit faster. The key question for Labour is how it can gain the credibility required among voters and investors to adopt this strategy. Alongside plans for structural reforms to the UK economy, it should commit to reduce the ratio of public debt to gross domestic product over a 10-year period; thereby lowering interest payments and preparing for any future economic shock. Planning a cut from 80 per cent to 65 per cent by 2025 would show that Labour is serious about debt reduction while leaving room early in the parliament to boost growth. Net capital investment should also be gradually increased, even at the expense of greater restraint on current spending. Labour should then charge the Office for Budget Responsibility with judging whether its spending and tax plans were on track to meet the debt target. The OBR would be judge and jury, not ministers. This would provide a real constraint on a future Labour government, prompting it to maintain fiscal discipline in the good times, when it is vital to do so. Such an approach should be buttressed by clearly costed cuts, switches in spending and targeted tax rises to fund new priorities such as childcare and youth employment guarantees. It should be combined with measures to help the private sector take over as the engine of growth, such as making sure businesses have access to lending. George Osborne's fiscal rules have already been stretched and breached. By 2015 they will in effect be a dead letter. New fiscal rules are needed. Labour should lead the debate and set itself back on the path to economic credibility. The writer is director of the Institute for Public Policy Research