The political fallout from tomorrow's Budget will be at least as significant as its impact on the economy. The stakes are very high for all three parties, partly because of the timing. None of them is yet clearly defined in this electoral cycle. They still have some freedom of manoeuvre before voters' perceptions become more clearly formed and the next election moves into view. The way each of them chooses to use their relative freedom now will determine their fates. Politically, we are entering the most important few months of this parliament.
In their very public negotiations, the Liberal Democrats both fight for their lives and live in hope that there are rewards to come. From the turn of the year, Nick Clegg has been putting the case for raising tax thresholds, exempting the low-paid from income tax, and giving a tax cut to other earners, too. Instead of accepting ownership of the entire Budget, as happened last year, Clegg plans to portray this Budget as "a deal" in which his party has secured some progressive, fair policies and has had to accept, in return, Osborne's need to appease the Tory right.
Indeed, those close to Clegg suggest that the Lib Dem's public demands have made it more necessary for the Chancellor to move rightwards in response. They claim to be relaxed about the political consequences of this new dynamic, arguing that as the Conservative leadership moves rightwards and Labour moves to the left under Ed Miliband, the Lib Dems can claim the centre ground.
This is the dream scenario for the Lib Dems, the prospect of grateful voters declaring: "Thank God, they are there to rein in the Tories now and perhaps Labour in the future." We shall see if voters come round to such a view. At the moment, the polls do not detect any sign of gratitude. Few voters seem to recognise their claims to distinctiveness and regard them as colluding in the march rightwards. In my view, their backing for the NHS bill is more dangerous than their qualified support for an economic package in which high earners get an income tax cut, but the Budget is a more forensic test of Clegg's new strategy of distinctiveness. His approach to NHS reform was much messier, beginning with outright support and ending with his tame declaration that it was not a Lib Dem bill.
For Osborne the Budget was always going to be a delicate exercise, with the right as vocal in advance as the Liberal Democrats were. David Davis, the former shadow Home Secretary and leadership candidate, is among several senior backbenchers who plan to speak out publicly if Osborne does not deliver on deregulation, the top rate of tax and other measures they regard as essential to generate growth. The likes of Davis and John Redwood have met to discuss a co-ordinated response. Both regard this Budget as the last opportunity before the election for some meaty measures. Davis believes that the Conservatives will lose the next election unless Osborne responds tomorrow.
Fortunately for them, Osborne is inclined to act in ways that will meet their approval. It has become a cliché to describe him as a tactician. This is both a red herring and an insult to Osborne, who evidently has strong convictions. He does not only see politics as a game. Cutting the top rate of tax, exploring ways of ending national pay bargaining, targeting child benefit, speeding up planning, sweeping deregulation, and toll roads are all risky for different reasons. But Osborne, who tends to look back for guidance, has read Geoffrey Howe's Budget in 1981 and Nigel Lawson's in 1988; both delivered some distance from the next election, when tough, risky decisions could still be taken. In the electoral cycle, this is Osborne's equivalent.
Within the Coalition, he has secured the space to act by lifting the tax threshold and attempting another clampdown on tax avoidance, both policies he agrees with anyway. The Lib Dems can call this a deal, but Osborne must be very content with his side of the bargain.
Even so, the new political dynamic in the Coalition is dangerous for the Chancellor and his party. Although implementing policies on the right, the genius of David Cameron and Osborne has been to convince much of the media and some in their party that they are expedient centrists without strong views of their own. The contortion will become harder with Clegg and others claiming persistently that the Conservatives are less right wing and "nasty" only because of them.
The contortionists can take some comfort from Labour's dilemma. Miliband and his bewildered party need to make some very big calls on tax and spend. Will Labour go into the next election pledged to put up income tax for high earners as it did in the 1980s and 1992 elections it lost? Tough decision for a party unsure why it won three elections, let alone why it lost last time. There will be much sincere indignation from Labour tomorrow. Indignation is not an alternative economic policy. A fiscally neutral Budget from a Chancellor trapped partly by his own programme of austerity carries huge political risks for all three parties.
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