The what and when of spending cuts
It's not whether any more - it's what, and when. As I reported early in the summer, the chancellor won the first part of the argument with No 10 over public spending cuts and the election. But the debate on the content - and, crucially, timing - of spending restraint is much harder. As we'll be discovering this week, on these crucial questions, none of the major parties has established exactly where it stands.
In Lord Mandelson's interview on the Today programme this morning, he was still unable to utter the word "cut" (though if you listened very carefully, there was a fleeting reference to "reductions"). But neither he nor the rest of the government are running away from the government's own budget plans any more. Those imply significant cuts in real terms in most departments.
But this week, the debate is going to move on - to the itemising of possible cuts. We have already had a contribution from the Taxpayers' Alliance and the Institute of Directors which published a handy list of £50bn-worth of cuts [780Kb PDF]
Tomorrow, Vince Cable tells me, he will start itemising the areas that the Liberal Democrats would hit. On that same day, I will also be interviewing Goran Persson, the former prime minister of Sweden. He will be in London to talk about his experience cutting a 10% of GDP budget deficit, in the wake of a massive financial crisis in Sweden in the mid-90s.
You'll hear more about that tomorrow. Suffice to say that we've heard a fair bit about Canada's experience cutting its government down to shape in the 1990s - but Canada is a highly federal country, which achieved a good part of its federal spending "restraint" by simply shifting costs down to the states. Many Conservatives think Sweden is a more useful example for Britain today. Even though it was a Social Democrat wielding the axe, it was Sweden's over-arching welfare state which received most of the cuts.
So yes, this week is all about the what of spending cuts. And you can bet that the debate over how much, exactly, to itemise in their manifesto will rage within both parties for some months to some. Even the mighty chancellor doesn't have a precise answer to that one just yet.
But trust me, the question of timing is, if anything, even harder - and most economists would say, even more important.
A brief recap: between Budget 2008 and 2009, the Treasury discovered an extra £90bn in "structural" borrowing by 2010 that won't go away with the economic recovery. Think of that as the hole that needs to be filled. The chancellor's budget plans show Britain filling that hole by 2017-18. And he has said that half of the squeeze planned for 2010-2014 will be through real terms cuts in public spending. So, if nothing else changes - and Labour win the election - No 11 would be looking for many of the same sorts of cuts as those listed in the Reform report. (They might look at "cutting middle-class welfare" for example - which is page 57 of the Reform report. Abolishing child benefit and the Child Trust Fund would save just under £8.5bn a year.)
If you look at it that way, the crucial difference between Labour and Conservatives is not so much the scale of spending cuts - but the timing. On current plans, Labour will squeeze the budget by £90 billion a year over eight years. The Conservatives think it should happen faster - starting next year. Of course, if they cut sooner, the cumulative reduction in spending could end up being larger than £90bn a year, but I'm trying to keep this simple.
Can you slash the budget next year without tanking the economy? Labour like to say you can't. They want to make the debate between them and the Conservatives one of "reckless" spending cuts versus Labour's "wise" restraint.
That will be central to Gordon Brown's approach to both the G20 Leaders' Summit in Pittsburgh next week and the Labour party conference a few days later. He will say that the global economy can't afford to be taken off life support just yet. And nor can the UK.
But there are two problems with this line of argument. First, unlike all the major G20 countries, the UK is already planning to tighten fiscal policy by 2% of GDP in 2010. (Within the G20, only Argentina plans to tighten in 2010 as well.) If it's a risky thing to do, then it's a risk that Labour is already planning to take.
Second, the slogan about reckless cuts and the economy misses out two large chunks of the economic equation - namely monetary policy and the exchange rate.
As I discussed at some length earlier in the summer, there lots of different policies supporting the economy right now, and when it comes to "exit strategies" it matters a great deal which comes first. If the government - any government - announced tighter budget plans starting in 2010, it is possible that the bond markets would reward that government by pushing down long-term interest rates (also known as the interest rate on government debt). That could stimulate the economy in its own right by making it cheaper for companies to borrow. It could also, by reducing the return on sterling investments, push down the pound, giving an extra fillip to exporters. That would, non-coincidentally, also help with the long-term need to re-balance the economy in favour of investment and exports.
This is the line the Conservatives are planning to push over the next few weeks. And it's not mad. In fact, senior economists at Goldman Sachs have just published a more sophisticated version of the same argument.
It's tempting to say that tighter fiscal policy would also help defer the day when interest rates have to be raised. Indeed, that is what many economists mean when they talk about sequencing in this context. The argument would be that tighter fiscal policy would help allay fears of inflation, and thus allow the bank to keep interest rates lower for longer.
But, as the Goldman Sachs economists admit, you can't have it both ways. Either the tighter budget will cut overall demand, or it won't. If the net effect is expansionary - thanks to the fall in long-term borrowing rates - then the Bank could have just as much - or even more - reason to tighten than it did before the budget squeeze was announced.
That is what happened coming out of recession in the early 90s: real government spending didn't grow for four years. But a weak exchange rate helped support exports and the overall economy. Growth averaged 3.5% a year and interest rates rose as a result.
The basic point still stands: tighter fiscal policy won't necessarily tank the economy.
But here's the thing to remember. No-one knows for sure. That chain of cause and effect I outlined - between tighter spending and lower long-term borrowing rates and a lower exchange rate - involves a lot of loose links. We would usually expect bond yields to fall with such a change of policy, but this is a time when the Bank of England will be getting out of the business of buying tens of billions of pounds worth of government debt. The bond market will not necessarily be acting as we would usually expect.
The effect on the pound is even more unknowable, at least in the short term. It could fall, due to the fall in long-term rates. But it could also rise, in the expectation that growth will be higher than previously thought. Remember that all the textbooks would predict that quantitative easing would lower the exchange rate. Yet sterling rose significantly in the months after it was announced, probably on the grounds that it would help the economy.
Phew. Like so much that's happened in the past year, this isn't an easy topic to have at the centre of a general election. But it's a hugely necessary one. Especially because there is one thing all sides - even the economists - can agree on. If the economy doesn't recover properly, then it doesn't matter whether the plans for the budget are loose or tight. They won't be achieved.
The recovery might be hurt by a tighter budget squeeze - as Labour suggests. Or it might be helped, as the Conservatives intend to claim. But it matters which turns out to be right. Because you can't cut borrowing or spending as a share of the economy if that economy refuses to grow.
Update, 15 September: An earlier version of this post linked to and mentioned the think-tank Reform instead of the Taxpayers' Alliance - now corrected and many apologies.