The real dividing line in politics is no longer "cuts vs investment", as Gordon Brown would have us believe, "but honesty versus dishonesty". So says George Osborne, the shadow Chancellor, in arguing that whoever is in power after the next election will have to face up to the challenge of making deep cuts in public spending. Mr Osborne says that at least he admits it; the Government, on the other hand, is still trying to pretend that there are choices, despite the evidence to the contrary of its own plans, the broad outline of which are buried in the deeper entrails of the last Budget Red Book.
Two points seem worth making. The first is that the long-term prognosis for the public finances may not be as bad as now widely assumed. The last Budget made some truly heroic assumptions about medium-term growth, which seem most unlikely to be fulfilled, but it also assumed a possibly overly pessimistic outlook for tax revenues, particularly those derived from the City.
In fact, City profitability seems to be recovering rather more swiftly than anyone once thought remotely possible, even as little as four months ago. The permanent loss of output potential for the economy which helped to instruct forecasts for tax revenues may not be as bad as feared.
I'm not trying to argue that once the recession is over all will be fine on the farm once more. Even after the economy returns to full potential, a big structural deficit will remain. Mr Osborne is right in this regard; whichever party is in power will be forced to address it by cutting public spending. It is disingenuous of the Government to pretend otherwise. Even so, the situation may not be quite as bad as assumed.
Most business leaders see few signs of the green shoots proclaimed by a growing number of City economists. This doesn't mean there aren't any. It is not so surprising that signs of economic spring should be observed first in the financial and housing sectors while remaining unnoticed in the rest of the economy. First into the downturn, these sectors were always likely to be the first out.
These green shoots could easily be snuffed out if policymakers move too swiftly to withdraw the loose monetary conditions which are giving them fuel. What's more, there remains a debt overhang of daunting size, both public and private. This will have to be addressed at some stage, which could crimp growth for years to come. Yes indeed. There are lots of reasons for thinking we could be in for a double-dip recession, and/or that any long-term recovery will be anaemic.
But it doesn't have to be that way, and it is certainly the case that even deep cuts in public spending wouldn't come anywhere close to delivering the same long-term fix to the fiscal deficit that a sustained economic recovery is capable of. To the contrary, they might make the economic malaise and therefore state of the public finances even worse. Deep cuts in public spending could end up a zero sum game as far as the deficit is concerned, or even completely counterproductive.
On the other hand, if monetary conditions are kept loose for long enough to make the present, nascent economic recovery self-sustaining, it could be that the fiscal deficit turns out to be less calamitous than Mr Osborne imagines. Already there are positive signs. For instance, the cost to the taxpayer of bailing out the banking system looks ever more likely to end up at close to zero. The Government might even end up making a profit out of it all.
In the US, banks are falling over themselves to repay the capital they were forced to take from the authorities under the Troubled Asset Relief Programme. Now that confidence is returning to financial markets, and the authorities have managed to get a grip through stress testing on the true shape of bank balance sheets, the banking system doesn't seem quite as insolvent as it did in the depths of the crisis. Things were never as bad, it turns out, as the scaremongers said. Either that or banking regulators have pulled off a remarkable conjuring trick.
In this country too, some £2.56bn net of public money has already been repaid by Lloyds Banking Group under a refinancing that was successfully completed last week. With confidence returning to markets, most people now accept that the Government will get back the £37bn it has invested in ordinary and preference shares in Royal Bank of Scotland and Lloyds Banking Group, and may ultimately make a good profit on it.
Several senior sources have told me in the past week that they are now confident the taxpayer will lose nothing from the Government's "asset protection scheme", which has insured some £600bn of potentially bad assets at RBS and Lloyds. This is a complete reversal of the widely held assumption that ruled just three months ago, when it was feared that the Government might lose hundreds of billions of pounds on the scheme.
Both the Treasury and the two banks involved, having now examined the prognosis for these loans in great depth ahead of the scheme taking full effect, have been pleasantly surprised by the outcome.
It seems likely that though the two banks will burn through the first loss on the scheme for which they are liable – equal to 10 per cent of the assets insured – and that the taxpayer will become liable for some loss thereafter, the Treasury ought eventually to come out on top once the very considerable fees being paid by the banks for insuring their assets are taken into account.
Again, no one would have imagined this relatively benign outcome even remotely possible only a little while back. Little less than two months ago, the International Monetary Fund estimated the costs of the measures taken to date by the UK Government to support the banking system at 13.4 per cent of GDP, or around £200bn.
Even at the time, this seemed exaggerated. It's now starting to look like complete nonsense.
This brings me on to my second point. If the outlook for the public finances is no longer as dire as it once looked, and therefore the requirement for public expenditure cuts possibly not as great, the Tories may still be on to something in believing that "honesty" on public spending is what the electorate wants. Far from being a vote winner, Mr Brown's insistence that the main pillars of public spending are safer in his hands than those of the Opposition looks ever more like an electoral liability. As on so much else, Mr Brown has misjudged the political mood.
Rightly or wrongly, when people look at the public sector, they increasingly see waste, declining productivity, poor service and even excess. What they do not see in what Mr Brown cutely insists on calling "public investment" is value for money. Never mind the scandal of MPs' expenses, too many public servants are seen to be on the make and on the take. The apartheid of public sector pensions has added to this sense of grievance.
The public sector is a big employer, but even if all public sector workers voted Labour, they are not a large enough constituency to carry an election. Only 15 to 20 per cent of the workforce is public sector. That government is a much larger proportion of the economy than these numbers suggest is accounted for by the fact that public expenditure also sustains an awful lot of private-sector jobs. All the same, 12 years of "investment" has failed to create a vested interest of sufficient size to swing an election.
Everyone wants better public services, but we've reached a point in the electoral cycle, not unlike when Mrs Thatcher swept to power, of disillusionment in the Government's ability to deliver them. Regardless of how much money is thrown at the problem, there seems little evidence of gain. That we can no longer afford this spending is almost by the by. If it seems to be paying only for a self-sustaining bureaucracy, public "investment" won't be the vote winner it once was.