The IMF's check-up will give George Osborne another headache

Miliband may need five symbolic cuts to convince that he means business on the deficit
  • @IndyPolitics

It was a classic political deal that suited both parties. In 2011, George Osborne anointed Christine Lagarde, the French finance minister, as the “outstanding candidate” to become managing director of the International Monetary Fund (IMF).

They even flirted with each other – politically, at least – when they appeared on the BBC’s Newsnight programme.

The impressive Ms Lagarde got the job. And she was happy to repay Mr Osborne by giving the IMF’s seal of approval to his deficit-reduction programme. It was very useful cover.

Now, however, times have changed. Last week, Ms Lagarde suggested the Government should slow the pace of its cuts. The Chancellor’s problem is about to get worse. A team from the IMF arrives in London next month for its annual health check on the British economy. The patient is still sickly; the monitor shows it is still flatlining.

After Thursday’s news that the economy grew by 0.3 per cent in the first three months of this year, Conservative ministers struggled to disguise their relief that a “triple dip” recession had been avoided. Liberal Democrats were wisely more restrained. “The Tories are getting carried away,” one Lib Dem minister said. Indeed, there was little to celebrate and the IMF’s call for a change of course to secure some meaningful growth was more significant than the GDP figures.

Labour has won the economic argument about the cuts being “too far, too fast” and strangling growth, but the politics remains in the balance. Labour may not get much credit, because many voters still blame it for the deficit.

Ed Miliband now needs to look forward to 2015. I doubt many people will say then: “Ed Balls got it right in his brilliant speech at Bloomberg in August 2010.” If growth finally picks up, Labour could be left fighting the last war. Even if voters believe the Osborne plan was wrong, that may fade in their memory by 2015 and, in any case, it doesn’t mean they will flee into Labour’s arms.

If the Tories have a problem on growth, then Labour has an equally large one on the deficit. The voters’ judgement on the two parties’ respective weak spot could decide the next election.

There was some good news for Ed Miliband this week. I wonder whether Len McCluskey, the outspoken leader of Unite who warned Mr Miliband he would be consigned to the “dustbin of history” unless he sacks the Blairites in his Shadow Cabinet, is really a secret agent working on Labour’s behalf.

It will be harder for the Tories to brand Mr Miliband as “Red Ed” if “Red Len” constantly attacks him. “Red Ed” was always an over-the-top nickname. The Tories have already stopped portraying the Labour leader as “weird” because, as the public start to get to know him, they no longer regard him as a bit strange. There was nothing weird about the statesmanlike way in which he responded to Margaret Thatcher’s death, and recently he has got the better of Mr Cameron at Prime Minister’s Questions. Instead, the Tories will portray Mr Miliband as “weak”.

So he will need to look strong. His problem is that strong words hitting back at left-wing union leaders might not be enough. He intends to say in 2015 that Labour would outspend the Conservatives to invest in housing and infrastructure to “rebuild the economy”, but will surely only get permission from the voters to do that if they judge him strong enough on tackling the deficit.

So Labour will need some symbolic cuts. I can only recall one so far – continuing the Coalition’s restraint on public sector pay. That provoked predictable howls of protest from the unions, which meant voters probably noticed the policy.

Mr Miliband does not like picking fights with members of the Labour family; to him, that is so New Labour. But he is going to have to arrange some more. He might need five symbolic cuts – as big as the squeeze on public sector pay – to convince people he means business on the deficit, notably on welfare.

I hear that Mr Osborne is working out what traps he might set for Labour in 2015. Labour thinks its big dilemma is whether to stick within the Coalition’s spending plans for 2015-16, to be confirmed in June. But its headache is about to get much worse.

I’m told the Chancellor may set out spending totals for the five years up to the 2020 election. The Lib Dems would not go beyond 2015-16, but the Conservatives most certainly would. Their 2015 election manifesto could include, say, another £40bn of welfare cuts over the next five-year parliament. The Chancellor would then challenge Labour to match them. Mr Osborne’s plan, Tory Cabinet ministers believe, is to say in 2015: “We have cut the deficit by half. Let us finish the job.” Despite the lack of growth now, it could yet prove a powerful message.