Osborne is right: the Tories can't win a bidding war with Labour – but they won't even try

The Tories may have privately given up on eliminating the annual deficit, but they have one fiscal target they cannot afford to miss: reducing the stockpile of government debt

George Osborne is right to say the Tories won’t win the next election by trying to “out-Corbyn Corbyn” by spending more than Labour. The former chancellor told a fascinating debate on BBC TV’s Newsnight on Tuesday that the Conservatism that works – in other words, that wins elections – is “socially progressive and fiscally conservative”.

Osborne, architect of the austerity programme which began in 2010, did not directly criticise Philip Hammond’s spending boost in Monday’s Budget, but warned the Tories to resist the temptation to “outspend our political opponents”. He is right that his party could not win a bidding war with Labour. But he is wrong in the sense that, whoever leads the Tories into the next election, the party will not try to match Labour’s spending plans.

The Tories will claim to offer the best of both worlds: protecting vital public services while maintaining fiscal discipline. Of course, voters might judge that they fall between two stools: services other than health will continue to be squeezed, and they won’t clear the deficit as they promised. But as one cabinet minister put it: “The most important word for us at the next election will not be deficit but debt. We will have brought it down; Labour would increase it.”

The Tories may have privately given up on eliminating the annual deficit, but they have one fiscal target they cannot afford to miss: reducing the stockpile of government debt as a percentage of GDP in 2020-21. So they won’t.

Before the Budget, John McDonnell accused the Tories of “callous complacency” as he called for a £108bn public spending boost. But it was Labour who was most guilty of complacency at this Budget. It assumed that Theresa May’s declaration that austerity is over could not be fulfilled and decided its “broken promise” line well before Monday. It jarred with the headlines about a spending splurge.

Hammond’s pledge to raise spending by £103bn (including £83bn for the NHS, which Labour knew was coming as it was announced in June) wrong-footed the opposition. McDonnell, the shadow chancellor, is under fire in his own party for promising to keep Hammond’s tax cuts, even though they will help the rich more than the poor.

It is ironic that the left-wing McDonnell is being attacked over this by people he regards as “right-wingers” and “Blairites”. Clearly, he wants to retain the middle class, middle income voters Labour attracted at last year’s election, and so wants to hit those on £80,000 a year, not £50,000.

Presumably, he prefers a Labour row to walking into a trap set by Hammond, and headlines about “Labour’s tax-cut grab”. But McDonnell’s stance sends a muddled message; Labour would get more credit for sticking to its guns.

There have been contradictory signals on universal credit, too. It is unclear whether Labour would scrap it or reform it. The party is vague about whether it would reverse welfare cuts; almost certainly it would not. Labour bigs up its national living wage, but that does not help the jobless at the bottom of the pile.

Labour had a good party conference in September but its Budget preparations seemed lazy. It underestimated the Tories’ ability to do whatever it takes to hang on to power. Indeed the key elements of Hammond’s package were decided in No 10, not 11, Downing Street, as part of Theresa May’s strategy for surviving the Brexit minefield over the next few months.

The Budget shows that Labour is not ready for the general election it will try to force over Brexit. It needs to update last year’s election manifesto for these new times, rather than merely fight the last war. (McDonnell, for example, said Labour would use the Tories’ NHS pledge as its new baseline and add on the £5bn extra it promised last year).

The parties are neck and neck in the polls and crucially Labour is behind on economic competence. With the Tories making such a mess of Brexit, a credible government-in-waiting should be well ahead. Labour aides point out that the party was 20 points behind when last year’s election was called and came very close to winning. But that doesn’t mean it will happen next time.

Labour has one advantage: the next big economic debate will be about tax rises rather than tax cuts. It should have happened after May’s NHS pledge but was postponed by a lucky Hammond when the Office for Budget Responsibility watchdog found £13bn “behind the sofa” in higher than expected tax receipts. But “fair” tax increases to fund services amid huge demographic change will be much more palatable for Labour than the Tories, who will need to kick their addiction to tax cuts.

Labour is rightly pleased that the Tories have been forced to fight on its turf of higher spending. But that does not guarantee that voters will automatically trust Labour to implement the change of direction that both parties now advocate. Labour has a lot of work to do to earn it.