The big Conservative tax and spend rethink...
In a move that has shocked no-one who talks to Conservative politicians, the party's spin doctors have put out in the Times, Sun and FT that the Shadow Chancellor is "rethinking" the Conservative commitment to match Labour's public spending commitments until 2011.
Here's what I am told: I've been trying to stand it up but now consider it stood up. That the party would commision an independent review of the public finances on achieving office, and that if the said finances were in any way found not to add up, would summarily reverse its commitment, maintaining the pledge on core services like health and education but abandoning it on, for example roadbuilding. This has been "mooted" in Cameron-Osborne circles.
However, I now think the political situation is moving fast enough for the Tories not to need this cunning plan. Since Gordon Brown's CBI speech last week it has been crystal clear that the government believes Britain is "under-borrowed" compared to other major economies: 37.5% of GDP on official figures (though as commenters on the blog point out, what happens if you include PFI?)
I had expected the coming FISIM rule change in measuring GDP to give heardoom to borrow several billion more without breaching the sustainable investment rule (40% of GDP). I read Gordon Brown's speech as saying, forget 40% as a rule - as Johnny Depp puts it in Pirates of the Caribbean, "it's more of a guideline".
Hence we have the makings of a serious political battle shaping up, even before we get to Crosby (see below): I expect Labour to cut taxes in the PBR, focusing the benefits on low-income voters, and pay for it out of borrowing, pushing the national debt higher than 40%. I expect this will - and is designed to - give the Conservatives political "permission" to abandon the "match your spending" pledge and thus open clear water between the parties.
Given much of David Cameron's fiscal philosophy has been shaped around the idea of delivering a lower tax take from growth rather than actually cutting taxes, this now has to be re-thought: there's no growth, the tax take under the present budget is falling off a cliff and he will have to cut spending unless he raises borrowing if he becomes PM.
Conservative insiders believe in any case the public mood is changing: we've had the tax rises, public services have not got better, goes the argument, so the willingness to pay more tax declines; especially in a period of high inflation. Anecdotally - though I do move more in the world of cabbies and cameramen than social workers - I think they might be right: ie I think that is becoming the prevailing public mood among the tabloid reading classes.
Now to Crosby: Will Hutton on Newsnight clashed amiably with economist Diana Choyleva over the need for a bailout of the mortgage market. We could see two banks go under if house prices decline by 30-40% said Will; let it fall said Diana. Throughout Will was mightily worried about a bank falling over and mightily pro the Crosby solution (now dwarfed and precedented by the Fannie/Freddie nationalisation) of a £40bn extension of the Special Liquidity Scheme to underpin mortgage issuance.
My guess is that Will's thinking reflects an emerging line of thinking in government. They will probably split the difference, as they always do, but they will do some form of Crosby mortgage bailout.
Actually what is emerging here, and what has already emerged in the USA, is a battle royal between the two dormant economic philosophies that - in my youth - used to underpin politics but which under Blair+prosperity seemed to go away: monetarist neo-liberalism, which says the market mechanism must sort out crises, no matter what the short term pain; and Keynesian liberalism which says the state must underpin the market. Small state versus big state is also coming back; and rows over public spending with it.
Virtually every political institution in Britain is either lined up over all this or split: Bank of England calls the Crosby suggestion dangerous; Bank of England ready to wind up the Special Liquidity Scheme. Treasury refuses to rule out Crosby etc.
And the interesting thing is that a whole new generation of politicians, Labour and Conservative, is having to grapple with it having grown up believing, implicitly, that this would not come back; that we were "post" this ideological divide; and that "triangulation" solved everything.