David Cameron ditched the Conservative Party's pledge to match Labour's public spending totals yesterday in a significant U-turn that will allow him to offer "permanent" tax cuts at the next general election.
The Tories changed tack after being outflanked by Gordon Brown, who is seeking big tax cuts in Monday's pre-Budget report (PBR) to soften the impact of the looming recession.
Mr Brown's revival was underlined by an Ipsos MORI poll showing the Conservatives' lead has slumped to just three points. It puts the Conservatives on 40 per cent (down five points on last month), Labour on 37 per cent (up seven points) and the Liberal Democrats on 12 per cent (down two points).
Admitting that parts of his economic strategy were "obsolete" because of the downturn, Mr Cameron promised to spend less than the £680bn pencilled in by the Government for the 2010-11 financial year. Previously, the Tory leader had matched Labour's plans for the next three years to insulate his party against the allegations of "Tory cuts" which have damaged it at the last two elections.
At the next election, the Tories will contrast their desire for permanent tax cuts with the tax rises they say would inevitably follow a Labour victory. A Tory government would allow state spending to grow by less than the 2.3 per cent real terms increase planned by Labour through savings in government programmes and cutting waste.
However, the Cabinet is already moving to curb the Conservatives' room for manoeuvre. Yesterday ministers identified Whitehall efficiency savings of a few billion pounds on top of the £30bn already in the pipeline over the next three years. The Chancellor, Alistair Darling, is expected to announce on Monday that the savings will be used to limit the increase in borrowing.
Mr Cameron's refusal to offer upfront tax cuts since becoming Tory leader angered many in his party and left him dangerously isolated both at home and abroad as countries backed a "fiscal stimulus" to boost their flagging economies.
Labour claimed the Tories would give the British economy "a slap in the face" rather than "a shot in the arm". Gordon Brown said: "The only group that is setting their face against necessary help for families and businesses now is the Conservative Party."
In a setback to the Tories, the Confederation of British Industry said: "There is a case for a well-targeted, controlled and time-limited fiscal stimulus in the immediate future."
The Tories denied a U-turn but admitted they had made an "adjustment" to their policy, saying there were now "clear blue lines" between the two main parties. Tory sources suggested that Labour's health and overseas aid budgets would not be cut but declined to make the same pledge on education or defence. Final decisions will be made after the PBR.
Mr Cameron said Labour would tell "lies" about "Tory cuts" but insisted that spending would merely rise more slowly under a Tory government than a Labour one. He said that Labour's "unsustainable" rise in borrowing meant the Tories could no longer justify matching its spending plans. "Gordon Brown is trying to find an international cover for what he wants to do for electoral and political reasons in the UK," he said.
The Tory leader said other ministers, but not Mr Brown, had admitted taxes would have to rise in the medium term. He cited Mr Darling's interview in The Independent last week in which he said that "at some stage you have to pay" for the extra borrowing.
In a speech in London, Mr Cameron promised to be honest about the economy even if that meant saying things that were not immediately popular. "That we can't afford a massive tax giveaway paid for by a borrowing binge; that we can't afford a spending splurge," he said. "It means arguing for things that are difficult. For prudence, not giveaways.
"I don't believe we can afford it. I don't believe it will work. And I believe it means running risks that we should try to avoid."
Nick Clegg, the Liberal Democrat leader, said the Conservatives' announcement was "economic madness". He added: "David Cameron has learnt nothing. It's exactly what the Conservatives did in the 1980s. To simply slash public spending when we are heading into a recession – there's no case for it whatsoever."
Clear blue lines: Tax policies
* Would no longer match Labour's spending totals from 2010-11 financial year onwards
* Would make "permanent" the "temporary" tax cuts Labour will make to limit downturn, through savings and lower spending than planned
* Claim they are now the party of "prudence" and "fiscal responsibility"
* Reject Labour's "borrowing binge"; would still protect health and overseas aid spending
* Would spend £680bn in 2010-11 (up 2.3 per cent in real terms); rising to £710bn and £744bn in the following two years
* Immediate tax cuts to keep economy moving, funded by higher borrowing
* Possible tax rises in medium term
* Would use new Whitehall efficiency savings to limit rise in borrowing
*Warns that the Tories would cut vital public services
The reaction: What the bloggers say
* Fraser Nelson, Coffee House, Spectator – The Shadow Cabinet members I've spoken to are hugely encouraged, seeming as if an artificial constraint has now been lifted from them. There is a feeling of "game on".
* Iain Dale – I'm delighted by David Cameron's announcement this morning that the pledge to match Labour's spending plans for 2010-11 has been abandoned. In his speech he annunciated very clearly that the Conservative approach to the financial crisis will be based on sound money, with no unaffordable spending or borrowing.
* Guido Fawkes – He has set reasonable objectives. Not a lot of excitement, but a reasonable attempt to take control of the news agenda.
* Andrew Lilico, ConservativeHome – Good! It was a long time coming, but no less welcome for that. It's also good that today's commitment was free-standing – not a consequence of some tax commitment.
* Tory Bear – Cameron has finally hit the nail on the head this morning and offered a clear narrative of Labour's failings on the economy and what the Conservatives would do about it. No more ridiculous ideas of matching Labour spending plans.