The debate about what Labour's fiscal policy should be seems to be hotting up. In this, a large part of me sides with Hopi's fiscal conservatism.

You might object that such conservatism - insofar as it is directed at reducing the deficit - is dishonest. Basic national accounts arithmetic tells us that government borrowing will fall if and only if private sector net lending falls. This means that the only genuine deficit reduction policies are those which stimulate private sector investment and/or reduce their savings. Whilst some of Hopi's proposals (an industrial bank?) might do this, it's not clear that, taken together, they would all greatly do so.

But there's a place for dishonesty in politics. If the next election campaign is anything like its predecessors, every footling Labour policy proposal will be met with the question: "where will the money come from?" Whilst Keynesians have an intelligent answer to this, fiscal conservatives have a simple one, understandable by even the densest journalist. When you're faced with a mad dog, you don't reason with it, but throw it a bone.

However, fiscal conservatism doesn't just have low campaigning merits. There's another case for it, even if we leave aside the arguable possibility that intelligent cuts in government consumption might promote long-run growth. I'm thinking here of its impact upon tax morale.If people believe tax-payers' money is being wasted, they'll be loath to pay tax and so anti-statist ideology will grow. If, however, they see a state that's careful about spending, hostility to higher taxes will diminish, at least a little. In this sense, short-term fiscal conservatism might create social norms more supportive of social democracy.Perhaps, then, Hopi is more right that he realizes when he says:

Holding down spending in the public sector...[is] the only way to build an economy that could support a superb public sector in many years to come.

On the other hand, I have three quibbles with him.

First, I'm not sure whether more years of a squeeze on public sector pay are feasible. The problem here isn't just a "pay peanuts, get monkeys" one, but of gift exchange. Squeezing pay risks eroding the goodwill that has caused public sector workers to do thousands of hours of unpaid work, thus eroding the efficiency of public services.

Secondly, if I read him aright, Hopi wants a shift from public consumption to public investment. Over time, this would tend to increase macroeconomic volatility pretty much arithmetically, by shrinking the size of an automatic stabilizer. Yes, fluctuations in public investment can in theory stabilize growth - but only if governments see recessions coming and so raise investment accordingly, and governments don't have this foresight and aren't going to get it.

Thirdly, and most importantly, unless there's an economic miracle, Labour will enter the next election with mass unemployment. Shifting spending from low- to high-multiplier areas will be nothing like sufficient to tackle this. The challenge for fiscal conservatives, then, is how to combine fiscal austerity with job creation?