Steve Richards: Miliband made a mistake. Now it has been corrected

To mark this down as a victory for the Labour left is wrong. Balls does not easily fit the caricature of 'Red Ed Two'

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The departure of Alan Johnson and the elevation of Ed Balls are as significant as the outcome of Labour's leadership contest last year. The battle over economic policy determines the outcome of general elections. Shadow chancellors are almost as important as leaders of the opposition.

Over the past few months Labour has desperately needed a coherent and forensic assault on George Osborne's policies. In the longer term it requires a credible but popular alternative. Alan Johnson was never going to rise to the titanic tasks. From his first day in the post Johnson openly proclaimed his lack of expertise in economic matters, a proclamation that was proven in the subsequent months.

This was the easy opening phase for a shadow chancellor, when the main role is to expose flaws in a new government. The even more daunting task of framing an economic policy that might return Labour into power was almost certainly beyond Johnson. More immediately if Labour loses the current debate over whether it was responsible for the current economic gloom the next election will soon be beyond its reach. Johnson showed no sign of prevailing against the relentless insistence from Cameron and Osborne that Labour got the country into the "mess" that they seek to clear up by unprecedented cuts in spending.

On one level the Tory leadership has an easier target in Ed Balls. He was in the Treasury for most of the period of the last government. If they can pin the blame on Balls personally for the "mess" they have won the equivalent of the political jackpot.

They will struggle to do so. Balls is a formidable strategist and an economist, a rare combination in British politics. He is one of the few politicians capable of making policies while taking full account of a thousand political implications that arise from them.

Already, before yesterday's dramatic events, he had given some thought to how Labour should respond when Osborne presents his tax cutting pre-election Budget in a few years' time. He knows the traps Osborne plans to set and will not fall into them.

Although Ed Miliband has known about the probable departure of Johnson for a few days Balls had no idea until yesterday. He had given some thought to economic policy because he lives and breathes the subject.

Some commentators will argue that Balls's appointment marks a triumph for leftish Old Labour. This is a misreading. Balls has taken a robust approach to opposing spending cuts while the recovery is fragile, but he will not easily fit the caricature of Red Ed Two. Balls was the architect of Brown's early policies too, including Brown's highly successful phase as shadow chancellor. Tax cuts played as big a part as tax rises. Spending rises were limited at times. As a City minister Balls was highly respected by business leaders. But he – and Miliband – were also key figures in the successful and popular implementation of a tax rise to pay for investment in the NHS and recognises the importance of public spending in developing an economy and improving the quality of services.

Another easy line of attack is that Balls's elevation marks the return of the "Blair/Brown"tensions, with Balls wanting to become leader at the earliest opportunity. There is a danger of a repetition. The two Eds are not close and view each other with mutual wariness. Miliband's unease about Balls as a colleague was the main reason why Balls was not appointed as shadow chancellor in the first place last September. Balls has cause to view Miliband's soaring rise with a degree of bewilderment. He was the more senior figure in the Treasury.

But politically the duo share a similar political outlook. The two of them have also learnt from the destructive elements of the Blair/Brown relationship and know that their master, Brown, was damaged deeply by the interminable rivalry. Perhaps they will succumb to similar tensions, but it is not inevitable.

Overall this is a much more effective and better balanced Shadow Cabinet. Yvette Cooper was wasted at Foreign Affairs and will have a higher profile in Home Affairs. Douglas Alexander was going to be offered the Foreign Affairs brief last September. In his first shadow cabinet, Miliband planned to make Cooper shadow business secretary, but she insisted on a more senior post, having topped the shadow cabinet poll, and went to the Foreign Office brief.

Miliband faces an awkward few days. He has lost a shadow chancellor very soon after the appointment that he should never have made in the first place. Some of his internal critics will join the Conservative Party in claiming that Gordon Brown is continuing to lead Labour in the form of his two disciples. His judgement will be called into question. This is quite a big reshuffle so early on in his leadership. The hurdles are worth it to secure a more impressive and coherent team.

Cameron and Osborne have more cause for concern this morning than at any point since Miliband became leader.

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