Lib Dems eye the battle over cuts

It isn't just Gordon Brown and Ed Balls who are committed to the politics of "dividing lines" between Labour and the Conservatives. It's also George Osborne and David Cameron. Last autumn Osborne went to the rostrum at the Tory party conference in Manchester and took the deliberate gamble of promising an age of austerity and a programme of targeted cuts to reduce the government's deficit. Last Friday at the LSE he did it again, promising that the Tories would cut public spending straight away if they win the general election and singling out spending on benefits for the better-off as targets for the axe in the upcoming financial year. The calculation of this renewed bidding war is fairly obvious. Labour and the Tories each believe that the other is putting itself in a political position that puts trust and credibility at risk. In spite of Alistair Darling's efforts to rein them in, Brown and Balls think voters will have confidence in Labour's pitch of spending its way out of recession. Osborne and Cameron, by contrast, believe that Labour's claim to be the party of investment frightens the voters in current circumstances. The Tories think they gain respect by talking about cuts as a necessary reality. Labour thinks speeches such as Osborne's only drive frightened voters back into the Labour orbit. The problem is that they can't all be right. One or other of the parties is deluding itself about public opinion. Or perhaps, as Nick Clegg wrote in the Financial Times , they both are. Clegg says that the spending and cuts stand-off between Labour and the Tories has become a game of chicken, in which each is waiting for the other to blink first. The reality, as Clegg states it, is that cuts are necessary but they must only come in the right places (not affecting growth and fairness) and at the right time (when the economic recovery is established). The timing of fiscal contraction should be governed by economics, the Lib Dem leader says, sensibly enough. It is worth taking note of Clegg's words on this subject. One reason is that he is right. The deficit will have to be cut systematically, but only at a time and according to a timetable that safeguards not just the recovery but the social wage and public goods on which all, not just the poor, depend. That's not the same, note, as saying there can be no targeting. There is already and there will be in future. Universality is not a universal principle of the welfare state in all circumstances. Even the Lib Dems say that the state will have to stop paying means-tested tax credits to above-average earners – that means a cut for households with quite modest incomes of a round £30,000 and upwards. And Osborne said something very similar again at the LSE on Friday. The convergence with the Tories on this point is the other main reason for taking Clegg seriously on this. If the Tories win the election but lack an overall majority, they will face the daunting challenge of putting through Osborne's emergency budget with no guarantee that if will not be voted down. Clegg's views are therefore important. The Tories have already taken note of other areas of convergence – such as Vince Cable's 2009 pamphlet in which he highlights the possibility of a rise in VAT to 20%. Osborne has been careful not to rule such a tax rise out. Before we all jump to the conclusion that Clegg's FT article signals that the Lib Dems would back an Osborne crisis budget in the early summer – though it may imply exactly that – it is worth noting a quite different piece of convergence. Lib Dem views are not just reconcilable with Osborne's but also with Darling's. The chancellor's call for radical cuts in the deficit over the next two financial years chimes with Cable's suggestion that the fiscal deficit should be reduced more quickly than Labour has so far said. Public opinion may not be following all these twists and turns very carefully. But it seems fairly likely that the public takes the view that, at a time of domestic belt-tightening, the government must do the same. Keynes's view that when individuals stop spending then government must spend for them has always been a hard political sell. But increasingly the real argument in British politics is not between investors and cutters. It is now between how fast and how deep to cut and in what programmes. On this, however, the dividing lines have not yet been drawn and the public has not yet made up its mind either.