Lord Mandelson: "We need to be effective state social democrats"
Labour must deal with the recession by not losing its "nerve" over public spending, Lord Mandelson has said.
In a speech in London, the business secretary urged the party to be like "insurgents who are restless with the status quo, not incumbents".
The Conservatives have accused the government of "reckless" spending, but Lord Mandelson said Labour was not "oblivious to economic conditions".
He added that party was now the underdog but would "fight back".
His speech at the London School of Economics came amid debate about how the government is aiming to halve its budget deficit - expected to reach £175bn this year - within four years.
The level of public spending looks set to be a major issue in the run-up to the next general election.
The Tories say it must be reduced now to cut government debt, while Labour says the Conservatives' attitude would damage frontline public services. The Lib Dems say "big ticket" items need to be rethought.
The crucial difference between Labour and Tories is not so much the scale of spending cuts - but the timing
Lord Mandelson said that, after 1997, Labour had a "necessary period of catch-up in public service provision" but added that this was not an "eternal doctrine" the party had to keep following.
He added: "Our 1997 manifesto described the New Labour approach as being 'wise spenders, not big spenders'.
"This is and remains a core New Labour principle. We do not believe that we should try to solve problems simply by throwing money at them. We need to be 'effective state' social democrats, not 'big state' social democrats."
He said that Labour's investment since it gained power had made "higher productivity and higher standards possible even in a period of public spending constraint".
'Foaming at mouth'
Attacking the Conservatives, the business secretary said David Cameron's party wanted "deep, savage, indiscriminate, across-the-board spending cuts".
He added: "The fact is that a new generation of Conservatives is now foaming at the mouth with excitement at the turn of economic events.
"They believe it releases them from the need to remake the image of the Conservative Party as a nice party with a genuine concern for fairness and commitment to public services now."
We do not believe that we should try to solve problems simply by throwing money at them
Lord Mandelson went on: "It presents them instead with their longed-for opportunity to take forward the mission that Margaret Thatcher, Nigel Lawson, Keith Joseph and Norman Tebbit started in 1979 but failed to complete after 18 years in government."
He promised Labour would try to create economic conditions which would "enable us to maintain frontline service delivery".
Lord Mandelson's comments came as the TUC's annual congress got under way in Liverpool, with unions warning that cuts would mean mass public sector redundancies.
TUC general secretary Brendan Barber said slashing public spending would cause a "double-dip" recession, leaving up to four million people unemployed.
Speaking earlier on BBC Radio 4's Today, Lord Mandelson did not use the word "cuts" to describe the government's approach to public spending.
But he said: "It will mean switching resources from lower to higher priority areas which do meet the new challenges. I can't be clearer than that...
Asked about whether Trident nuclear deterrent scheme and plans for ID cards could be cancelled as part of Labour's savings programme, Lord Mandelson said nothing had been decided or ruled out.
However, he said it was not certain "that the assumptions that some people are making about savings that those big projects would offer would actually come about in reality.
"I've seen some rather different figures related to the savings that would arise from cancelling those projects which don't make the contribution that some people imagine."
Shadow business secretary Ken Clarke told the BBC: "He still won't use the word 'cuts', but he's used all the euphemisms."
He called Lord Mandelson's comments about the Conservatives "rather childish", adding: "I've never met a practising politician in any party who wishes to cut provision of frontline services...
"We need reform. We need change. We need efficiency. We also need workmanlike government.
"All this [speech] shows is that the government is in a state of paralysed indecision."
Liberal Democrat Treasury spokesman Jeremy Browne said: "With many people still being hit hard by the effects of the recession, it is depressing that all we are seeing from Labour and the Tories is pre-election manoeuvring.
"Labour seem hopelessly confused over their plans, with Downing Street and Peter Mandelson at odds over Trident. Meanwhile, David Cameron is producing small, populist measures instead of the big choices and real leadership that the country needs."
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