Cameron's Nixon moment
Nixon famously denied he was a crook. At the weekend David Cameron denied he was a recovery-wrecker, confronting directly the argument that faster deficit reduction would jeopardise growth. Intriguingly, he also talked about "co-operating with the Bank of England" to achieve that end.
I'll say more on the Bank in a minute: I'm not sure Mervyn King would be happy to hear the process described in such terms.
But first a recap of the fiscal side. In his interview the Conservative leader said there wouldn't be "swingeing cuts" in public spending in 2010 (George Osborne never said there would be). But yes, he would "make a start" on cutting the deficit:
"And to those who say you're taking money out of the economy, I would say, if you don't do this, even more money could be taken out of the economy in two ways. One, because interest rates could go up as they have done in Greece. Secondly, money gets taken out of the economy because there isn't the confidence there and it's confidence we need so badly. "
He then claimed that if the UK was paying a Greek-style risk premium on its government debt, the average British mortgage would go up several hundred pounds a month. That's what I mean by a more "punter-friendly" explanation (later this week I'll say something about the comparison with Greece.)
For months, I've been wondering why Messrs Cameron and Osborne hadn't made more effort to dispel the idea that they would put deficit reduction before economic growth.
Rightly or wrongly, both men believe that cutting the deficit quicker and deeper than Labour plans - starting in 2010 - could actually help the recovery, by preventing a costly run on government debt, and sharply higher long-term interest rates as a result. By and large, they've struggled to get this highly respectable - but deeply counter-intuitive - idea across to the British people. But yesterday, Mr Cameron had a bloomin' good try.
This may be read as a "softening" of the Tory rhetoric around cuts. In some ways it is. But I don't think the substance of the Conservatives' post-election Budget plans has changed much in the last six months. What has changed is that they have finally decided to confront the "risking the recovery" argument head-on.
For months, I've been asking Tory strategists why Osborne or Cameron didn't assert more clearly that they wouldn't do anything to put the recovery at risk.
In their response they have often adopted the slightly patronising tone of the professional political operative talking to a naif. That would sound hopelessly defensive, they would explain - and risked giving the opposing argument more weight. Like Nixon saying "I am not a crook".
Yesterday, those concerns went out the window:
"Return to strong, sustainable global growth is still some way off. I can reassure you that we are not about to jeopardise Britain's economic future by suddenly pulling the rug from under the recovery."Put it another way: "I am not a recovery-basher." Defensive, maybe. Necessary - quite probably. Tory high command now realise that if they don't make the growth argument crystal clear, there will be too many voters worrying whether the Tories will pay any economic price to get spending and borrowing down.
Now, one of the big reasons why Cameron et al think the economy could withstand some fiscal tightening is that they believe monetary policy could counteract any effect on growth - if not by cutting interest rates (a bit tricky just now), then by holding off rate rises for longer.
In the interests of the new clarity, the Tory leader tried to incorporate this thought into his comments yesterday as well. But in so doing he started walking on some very thin ice. Here's what he said:
"The fact that we need to make a start is absolutely clear - must, must happen. The scale of what can be done should be done in co-operation with the Bank of England, with the monetary policy authorities... because of course one of the aims of what's being done... is to keep those low interest rates."As of May 1997, our central bank is supposed to be independent of the hopes or needs of any government. Arguably, the Bank's quantitative easing policy has already blurred that independence at the edges, because all those public and private bond purchases since last March have been underwritten by the HM Treasury. Everyone accepts, this is an exceptional arrangement for exceptional times. But as we are now seeing, the times will continue to be exceptional after the election. Whichever party wins.
There are already regular consultations taking place between George Osborne and senior Bank officials (including Mervyn King) to help each side know what they can expect from the other if and when that Osborne emergency Budget in the summer ever gets delivered.
But, arguably, that falls into the category of appropriate consultation. For Cameron to say bluntly that the scale of any 2010-11 tightening would be set in "co-operation with the Bank of England" takes both sides onto dicier ground.
Independence means the MPC sets interest rates by a monthly vote, independent of what any minister might have wanted - or been promised.
Many have thought that QE posed the greatest challenge to the Bank's independence since 1997. As it turns out, QE could be just the start.