Steve Richards: So who said what to whom? The truth about the cuts debate

The decision to put up taxes again caused angst beyond the Treasury

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I must have read and heard more about the ministerial infighting over last week's pre-Budget report than is healthy for anyone, the equivalent of watching a long American soap opera in a single sitting. For those who lead healthier lives I will offer a brief summary of what is said to be the story so far.

The Chancellor, Alistair Darling, had a tough time of it at the hands of the reckless Gordon Brown and his sidekick, Ed Balls. Darling is increasingly assertive, an economically realistic and politically attuned Chancellor. Sadly he is hampered by his neighbour who is disastrously obsessed about dividing lines with the Tories.

Balls wants to spend more on education in order to improve his chances of becoming the next leader of the Labour party. Quite sensibly the Treasury wanted to increase VAT rather than put up national insurance contributions. Equally sensibly Darling wanted to spell out in more detail how the cuts would fall. He had the full support of Peter Mandelson who has fallen out fatally with the Brownite entourage. As a result of this calamitous pre-Budget report, the Government will not dare to have a Budget next spring. Therefore the election will be held in March and Labour will be slaughtered.

Writing this summary, I feel as Hercule Poirot often does in the middle of an investigation when he turns to his own sidekick, Hastings, to declare "Mon ami...This doesn't feel right to me. There is something we are missing".

Part of the gap arises from the internal contradiction in the accounts. How could Darling be both more assertive and yet hugely disappointed with his own pre-Budget report because Brown and Balls prevailed over him? There are other elements that do not quite add up.

Most fundamentally the participants have a background, a past, that does not make sense in this new narrative. I know it is unfashionable to make this point nowadays, but when Brown and Balls were at the Treasury they managed to forge economic policy in ways that were electorally popular and at least credible at the time. Of course, they were operating in an almost comically more benevolent climate, but Labour chancellors tend to be persistently unpopular whatever the economic circumstances.

I do not believe that Brown and Balls are politically illiterate or have suddenly become so. Conversely, I would be surprised if Darling has acquired so quickly all the titanic skills required to meet the immediate challenge and would be flourishing if it were not for the lunacy of the Brownite entourage. Darling's genius in previous ministerial assignments was to keep his policy area out of the news altogether. The collapse of the economy cannot go unnoticed in quite the same way.

I note also that the source of a revelation tends to be treated by journalists as authoritative and those on the other side of the source's argument as wrong. Would a further Treasury-inspired rise in VAT have been more popular or wiser economically as some reports imply? I suspect that there will be a gloomy enough mood when VAT returns to its old higher rate of 17.5 per cent in the New Year. Similarly all parties agonise about whether giving more details of sending cuts is the right pre-election move.

If Poirot had probed further, he would have discovered broad agreement between Brown, Balls, Darling and Mandelson about the overall strategy, protecting front-line services, putting up taxes as part of the package, and making clear that the deficit would be cut. Most specifically there was no argument about the need to maintain spending levels for another year. Darling also agreed several months ago that spending on education would go up slightly in real terms.

His dispute with Balls was over the presentation of this decision. The Treasury wanted the focus of the pre-Budget report to be on the stringency of its approach and not to highlight the increase in spending. Balls thought it was ridiculous to hide a decision that showed how the Government was prioritising education in an otherwise bleak set of plans. He had a conversation with Darling on the Sunday before the pre-Budget report and his officials were engaged in discussions with their Treasury equivalents until the final moments to ensure that what Balls regarded as a positive message was not underplayed or ignored entirely. There was no row between Balls and Darling about the principle of an increase in spending on schools.

At several meetings with Brown Darling also made it clear that the Treasury preferred a VAT rise over an NIC increase and that it wanted to spell out in more detail where future cuts would fall. But some ministers believe that this was not necessarily Darling's own settled view and that as an MP representing a relatively marginal seat he was aware of the downside of an even tougher approach in a statement that already included more overt tax rises than any government had introduced for decades.

The actual strategy was less timid than most reports conveyed. The decision to put up taxes again, with a further increase in NIC contributions, was one that caused angst beyond the Treasury. Brown had his doubts at one point, not surprising for someone who became a chancellor in 1997 convinced that it was politically impossible to make the overt case for any tax rises. Now he contemplates an election with VAT going back up, income tax rises for high earners, a phased NIC increase, which is another income tax increase for all but low earners.

That decision was made partly to give some credibility to the limited spending aspirations and to signal the Government was willing to make unpopular decisions in order to repay debt over time. Electoral calculations played their part too. Will the Conservatives put up VAT in their emergency Budget? How will they pay for their schools programme if they do not commit to Labour's increase in spending? Such questions are widely dismissed as those silly old "dividing lines", as if disagreement is unhealthy, but politics is partly about a divide based on values and expedient judgement connected with those core beliefs. The fuss over dividing lines is a red herring.

Other highly charged issues are much more significant, although they are not directly connected with specific economic policies. Darling feels a deep sense of personal betrayal that Brown contemplated ditching him for Balls last summer and is at the very least relaxed if the media hails his supposedly more prudent approach. Brown still rates Balls' judgement on economics and politics more than any other figure, not easy for a Chancellor.

Meanwhile, some Brownites complain that Darling is not a robust enough advocate at pivotal moments, such as last week. Other cabinet ministers fume to journalists about Balls' largesse as they contemplate heavy cuts in their departments. Peter Mandelson is still far from thrilled at Brown's manoeuvring in Europe that resulted in the relatively obscure Baroness Ashton securing the foreign affairs portfolio.

But he remains engaged and spoke to Balls at length before the latter gave an interview to Andrew Marr on Sunday. Both agreed that it was necessary to play down talk of a March election. My strong sense is that all the key players in the Government are working on the assumption that the election will be in May and want to present a spring Budget by which time they hope there will be more critical focus on what form a Conservative alternative would take.

Mon ami... Take a deep breath. There is still a long way to go.

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