Andrew Grice: Balls has to address the past before he can shape the future

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The second sudden resignation at Westminster within 19 hours, when Andy Coulson quit as Downing Street's director of communications, was greeted with jubilation by Labour.

It ensured that the media spotlight panned quickly away from the resignation of Alan Johnson as shadow Chancellor.

Labour shouldn't celebrate too much. Mr Coulson was an important aide to David Cameron and his departure is a blow to the Prime Minister. But he will be long forgotten by the next general election, due in 2015. In contrast, Ed Balls, who replaced Mr Johnson, will be a major player on the political stage.

His appointment to the job Ed Miliband denied him three months ago transforms the terms of political trade. The battle between Mr Balls and George Osborne, the Chancellor, will be almost as important as the contest between Mr Miliband and Mr Cameron.

More important still will be the relationship between the Labour leader and his new shadow Chancellor. They worked alongside each other as aides to Gordon Brown but relations have been frosty for years. Now they will sink or swim together, and Labour will drown if they don't make their partnership work. There are spooky echoes of Blair-Brown. The junior partner overtakes the senior one to grab the Labour leadership. The relationship goes from bad to worse and destabilises the party.

The key test for Miliband-Balls is whether they can learn the lessons from the war of attrition of the Blair-Brown era. It is one thing to say you will "move on" but quite another to achieve it.

Mr Balls was understandably miffed not to land the Treasury brief after Mr Miliband bagged the top prize. He and his wife Yvette Cooper, also a candidate for shadow Chancellor but exiled to foreign affairs, were semi-detached members of the Shadow Cabinet. They became three-quarters detached when, by accident rather than design, Mr Miliband failed to include them in his inclusive approach to those who had not backed him for the leadership.

But he tried to put that right before Christmas, inviting Mr Balls and Ms Cooper into his "inner circle" of shadow ministers, which also included Mr Johnson, Harriet Harman, Douglas Alexander, John Denham and Liam Byrne. So the Miliband-Balls relationship was already on the mend when Mr Johnson told the Labour leader nine days ago he wanted to quit frontline politics.

Mr Miliband still needed to talk through his economic policy differences with Mr Balls who, during the leadership election, argued forcefully that the former chancellor Alistair Darling's plan to halve the deficit over four years was too severe, while Mr Miliband backed it as his starting point. They can probably square the circle on this, but other questions remain.

Why is Mr Balls fit for the Treasury brief now when he was not three months ago? According to Team Miliband, Labour didn't have an economic policy then but does now, the bones of one, at least. In other words, Ed M wanted to sketch it out himself, and not let Ed B do it.

More problematic is the other reason Mr Balls did not get the job last autumn: his close association with Mr Brown as the architect of his economic policies. Miliband aides argue that the Balls appointment is a sign of his strength, not weakness. It may be counter-intuitive but they have a point: if Mr Balls is the co-architect with Mr Miliband of Labour's economic strategy, it might carry more conviction with the voters than if he were skulking on the sidelines. Far better for Ed B to be a driver than a brake on what Ed M wants to do, which includes admitting Labour's mistakes on the economy in its 13 years in power.

Mr Miliband, tentatively and belatedly, has begun to acknowledge that Labour under Mr Brown was too slow to admit the need for deep spending cuts. Mr Miliband rightly judges that the Conservatives and Liberal Democrats will succeed in pinning the blame for the deficit on Labour overspending unless Labour admits the error of its ways. Blaming the global crisis alone won't wash with voters unless Labour accepts some culpability.

Mr Miliband has been cautious enough and will need to say it a thousand times before people notice. In interviews yesterday, Mr Balls seemed even more reluctant to do this necessary "mea culpa". He grudgingly admitted Labour did not get everything right but then rattled off a list of things he said they did. "The reason why a year ago unemployment was coming down was because Gordon Brown and Alistair Darling, in the face of a global financial recession, made the right calls," he insisted. Memo to Ed B: more contrition needed to throw off your "deficit denier" tag.

To be fair, Mr Balls did get a lot right; Bank of England independence and stopping Mr Blair taking Britain into the euro. He was also right to press Labour to pledge not to raise VAT at last year's election. Mr Darling refused, neutering Labour's attacks on the Tories.

Unless Labour concedes the Brown government was partly to blame for a deficit caused largely by global events, it will not regain people's trust on the economy. And that means it will not regain power.

Mr Balls would much rather talk about the present (the Coalition's "reckless" cuts) and the future (the need for a jobs and growth strategy). But until he says more about the past, Labour will not have much of a future.

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