Welcome to the new Independent website. We hope you enjoy it and we value your feedback. Please contact us here.

John Rentoul

John Rentoul: Politics, not economics, wins elections

George Osborne wrongfooted Ed Balls over bonuses, and such tactics will do more for him than number-crunching

Prospect magazine recently carried a cartoon of a man at a desk labelled "hedge fund". He was speaking on the telephone, saying: "Maybe." Hedge funds are one of those low-level irritations of modern life, like bankers' bonuses. No one can remember what a hedge fund is. Every time you ask someone on the business desk of a national newspaper, or look it up on Google, you think, "Oh, yes." Within minutes you – or, at least, I – have forgotten.

It is the same with bankers' pay. Up goes the cry: "Why do banks pay such outrageous bonuses?" Usually with appended subclauses: "The people who caused the financial crisis in the first place." Or: "The banks, which we own." But we can never remember the answer.

If the clamour is loud enough, politicians respond, inconsistently. One of the most surprising questions asked by Ed Miliband of the Prime Minister in the Commons was a few weeks ago, about a suggestion, which even David Cameron had forgotten he had made, that bonuses should be limited to £2,000.

No politician dare say that the moral squalor of bankers' pay is the price we pay to live in a dynamic market economy, which sustains the living standards that we enjoy when we are not pretending we would rather live in a yurt. You can see why.

There are sophisticated arguments that go back and forth over the sub-clauses. But they do not really dent the free-market case for paying people for the skills that make money. Most bankers who took the decisions that broke their banks are no longer there. Fred Goodwin has been pensioned off as a permanent soundbite used by Conservatives to fend off any Labour criticism ("Who gave him his knighthood?"). And it makes no more sense to pay bankers in publicly owned banks less than their private-sector rivals, or foreign competitors, than for a football club to say that it is not going to pay ridiculous salaries to get the best players. But it is hard to recall why it is counterproductive to try to do something about rewards that offend the sensibility of fairness.

So we end up with political posturing for politicians and reputation management for top bankers. That is why politicians and bankers formed a committee, called Project Merlin, implying that a "deal" can be done by which bankers promise to "show restraint", just as trade union leaders did in the 1970s, and to lend more to small business, as if the inner workings of capitalism could be decided by a national talking-shop. (Why Merlin? Sadly, the question is more interesting than the answer: according to the Financial Times, John Varley, former chief executive of Barclays who chaired it, is a keen birdwatcher; he had just spotted one.)

Politicians can also compete to tax the banks more, although, given that the Government is the shareholder in most of them, much of this just recycles money through the Treasury's books in a different way. Which brings us, by a long detour, to the central match-up for the next four years.

Last week was Ed Balls's debut as George Osborne's shadow in the House of Commons. The Chancellor was only just polite, saying that "of course" he welcomed Balls to his post. But he had already shown how much he respected his new opponent by jumping the gun on Project Merlin, announcing an extra £800m tax on the banks in the current financial year.

Thus Osborne proved that he and the Prime Minister were absolutely united, unlike some previous No 10 and No 11 combinations. They are united in their flexibility, opportunism and expediency.

Cameron is constantly berated by a certain kind of Labour supporter as an ideologue. This seems to me to be wholly wrong: he strikes me as a Tory Harold Wilson. He is a shameless U-turner, adept at responding to any media hoo-ha that gains traction in the focus groups.

Last week's extra bank levy was only one of three big policy changes driven by public opinion in seven days. Having originally said that the Government had no choice but to comply with a court ruling to give the vote to all prisoners, even though it made him feel "physically ill", Cameron had shifted by Thursday to: Tell you what, I'll have another word with the lawyers and see what's the least we can get away with. Then on Friday the forests sell-off was "temporarily suspended", the most predictable flip-flop of the lot.

This is, as has been observed in this column before, a source of strength rather than weakness. But it sets up a fascinating contest with Balls. The new Shadow Chancellor is himself not averse to policy adjustment – needs must if it is a condition of accepting the post – but he conveys a good impression of bull-headed consistency. He has an "everybody hates him and he don't care" swagger about him. There was even something admirable about his willingness last week to call Eric Illsley, the Labour MP jailed for false expense claims, a friend.

The outcome of the Osborne-Balls contest will not be decided on the issue of bank bonuses, however. We will forget why there is not much that can sensibly be done about apparently excessive pay in the finance sector, and Osborne and Balls will alternate between striking poses and swearing their undying love for a successful tax-generating industry.

The contest will be decided on the state of the deficit and the economy by 2015. It will be a contest between politics and economics. Osborne was criticised by Sir Richard Lambert, the outgoing CBI boss, because "politics appear to have trumped economics". Whereas Balls knows his economics, and academic economists tend to agree with him that the coalition is cutting public spending too fast. But the politics is that parties do not win elections by promising to spend, tax and borrow more.

However right Balls might be about the economics now – and that's never a straightforward judgement – I predict that, by the time of the election, the politics will win. It usually does.

twitter.com/JohnRentoul; independent.co.uk/jrentoul