Labour Party Chiefs Moderate Stance On British Economy

IN the face of determined trench warfare by left-wing party activists, leaders of Britain's Labour opposition have demoted the welfare state as a prime policy goal and placed the country's economic recovery at the top of their agenda. Spearheading the historic policy shift at the party's annual conference at Blackpool, which ended yesterday, John Smith, its chief economic strategist, promised that a Labour government would ``not spend more than the economy could afford.''

But his warning was quickly followed by a vote in which delegates called for an increase in state pensions much higher than the party leadership believes would be prudent.

Mr. Smith and Neil Kinnock, the party leader, later said the vote would not be binding on a future Labour government. Nonetheless, it underlined the tussle that lies ahead as Labour prepares for a general election in the hope that it can dislodge Prime Minister Margaret Thatcher and her Conservative Party after nearly 12 years in power.

A general election must be held by mid-1992 but is widely expected to take place earlier.

The Labour leadership's insistence that the welfare state cannot be given top priority in Britain's current economic climate marks the abandonment of beliefs that have guided the party since it came to office 1945. It then introduced a sweeping program of state-paid medical care, pensions, and other benefits.

Smith has the party leadership's strong support in arguing that Britain cannot afford the full panoply of welfare unless and until it recovers from a deepening recession that is accompanied by 10.6 percent inflation, high interest rates, a large trade deficit, and unemployment expected by economists to reach 2 million by early next year.

The Labour movement as a whole, however, contains millions of dedicated socialists who believe social welfare is an inalienable part of its tradition.

When it came to a vote, a majority of delegates threw their support behind higher pensions.

Ironically, Smith's position that there could be no ``quick fix'' for Britain's economy and his refusal to promise not to raise taxes also was supported by the conference.

In an attempt to explain the contradiction, Smith, who sees himself as the party's ``bank manager,'' said: ``It does not surprise me that I am under pressure to spend more, but it is my job to keep on saying that the nation cannot afford it. The fact is that it cannot.''

John Smith's approach to future economic policy has won cautious endorsement from British businessmen whom he has been carefully cultivating for the past two years. It has also drawn sharp attacks from Kenneth Baker, the Conservative party chairman, who said last weekend that Labour remained a ``big spending'' party which would eventually ``show its true colors as a party of economic interventionism.''

Mr. Baker, who is one of a number of possible candidates to succeed Thatcher for the Conservative Party leadership, said Labour's conversion to the market was ``skin deep.'' If elected, a Labour government would raise the level of spending and taxation, he said.

``If we are to defeat the Tories,'' said one Labour delegate. ``we must convince the electorate that Labour is a party of moderation qualified to run a country which is suffering from a severe economic downturn. We won't do that by trying to obtain peace dividends that do not exist and by backing defense policies that worry voters.''