Steve Richards: Tory policy is a recipe for disaster

For all the Government's agonies, Mandelson's main argument is irrefutable

Strip away the layers of evasive political guile and what was most striking about Peter Mandelson's speech yesterday was the reasoned modesty of his arguments. Much thought had gone into his address on the explosive topic of public spending and quite a few hands had laboured over it, but his arguments in favour of a fiscal stimulus during a recession and the sensitivity about when and how the debt is repaid would not be particularly contentious in other equivalent countries. In Britain alone the debate is at a fever pitch and this is because of how Conservatives have responded to the economic crisis.

Apparently Gordon Brown is obsessed with searching for dividing lines in relation to his opponents. Over the economy he has not had to look very far. David Cameron gave him one when he took the most politically significant policy decision of this parliament.

More or less a year ago, Cameron and George Osborne declared that they were scrapping their much-vaunted plans to stick with Labour's spending commitments. Instead they called for immediate spending cuts and opposed the fiscal stimulus being planned by the government. A little earlier they had also chosen to oppose the nationalisation of Northern Rock, a decision that had been urged on the Government from more sensible voices across the political spectrum. These are very big dividing lines which the Conservatives chose to erect. They did not have to do so. There were powerful arguments they could have made if they had moved in a different direction.

Presumably if the duo had been in power rather than in the more constrained position of choosing to erect dividing lines, there would have been spending cuts at the height of the recession, no fiscal stimulus and no takeover of banks on the verge of collapse. Their policies would have left Britain isolated from the rest of the world, from the last gasps of the Bush era and on to Obama in the US to Germany and France. The US, France and Germany launched fiscal stimulus packages that were substantially bigger than the one unveiled in Britain. The main debate in those countries was whether it should have been bigger still.

The distinct economic illiteracy of the Conservatives' position merits further exploration, as it tells us much about the leadership of both Cameron and Osborne. They were adamant at the start of their reign that they would stick at first to the Government's projected spending plans, which were eye-wateringly tight. This was astute partly for tactical reasons as they recognised the dangers of getting into a detailed pre-election debate about cuts. Perhaps even a bit of them believed it was the right policy, given that the Government's future spending plans were tough and demands on public services would continue to grow. They knew some activists disapproved. They knew they would come under pressure from their right-wing supporters in the media to change their stance. They were insistent they would not do so.

At the first whiff of gunfire last autumn they changed and marched back to their comfort zone of immediate spending cuts, the equivalent of Neil Kinnock announcing that in the early 1990s he had changed his mind on the virtues of multilateralism and was switching back to his previous support for unilateral nuclear disarmament. Kinnock would have been slaughtered for making such a move. But Cameron is still widely hailed as a great modernising leader in spite of his focus on cuts and the party's still rabid euro-scepticism, two of its defining features in the 1990s.

I can see why Cameron and Osborne re-shaped their party's economic policy. Having exaggerated the scale of Britain's debt crisis, they obviously needed distinctive policies to address it. Lacking experience in economic policy-making, Cameron and Osborne consulted the party's three former chancellors, Geoffrey Howe, Norman Lamont and Kenneth Clarke. I am a fan of all three, but they are all still too nostalgically attached to the 1981 budget, not surprisingly in Howe's case as he delivered it. This was the budget that defined the Thatcher government's monetarist path, one that incidentally it did not follow for very long.

The causes and consequences of the 1980s' recession were incomparably different to the current one and yet the Tory leadership speak as if it is the same, even reviving Thatcher's simplistic metaphors about the country being the same as a household that must repay its debt. Probably the former chancellors told Cameron and Osborne what they wanted to hear. In the end, Messrs Hague, Duncan Smith and Howard found it easier to flow with media and party orthodoxy. The current leadership has done the same in relation to public spending as it did when the row about grammar schools erupted in the summer of 2007.

But in the longer term, the shift presents Cameron and his shadow cabinet with the problems he had forecast when he briefly adopted a more pragmatic approach. He is now pledged to a revolutionary shrinking of the state without being able to specify how he will go about making the big changes. His speech last week about cutting the subsidies on meals in parliament was beyond parody. Cameron is still trying to play Tony Blair in the run-up to 1997, proposing small incremental policies. The difference is that Blair was only planning incremental change.

Yesterday Mandelson made use of the space that has opened up in policy terms by highlighting the differences. For all the Government's recent hopelessly agonised contortions, his main arguments are irrefutable. The Government had to invest in the recent past in order to revive derelict public services and it has to do so now to stimulate economic recovery.

At a point when the move can be made without wrecking the economy, the debt will be re-paid. The message does not fit easily into a soundbite as it comprises a defence of the past, an investment-versus-cuts message during the recession, and a need to find substantial savings when the economy is growing again. Whatever the complexities and evasiveness of Mandelson's speech, the arguments are echoed in various forms around the world. The Conservatives choose to be in a different place and, for the country, it is a dangerous one.

s.richards@independent.co.uk