An improving economy may rescue Cameron and Osborne, but it won’t deliver them from some tricky questions

By Peter Hoskin
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Back in the early days of this Government, there was an easy consensus, among many commentators and politicians, about David Cameron's chances in 2015. They would rise or fall, it went, on the strength of the economy. If the Coalition had delivered us from downturn, the Tory part of it would be rather difficult to defeat. If not, then even the Sons of Brown might be given another chance.

That consensus has grown mushier and started to separate since then. This is partially because George Osborne’s economic plan has itself become less distinct, with many of its provisions pushed into the fog of the next Parliament. But it’s also because other arguments have emerged. There are those who say that, even if the economy hasn’t recovered, the Tories will be able to pitch for the don’t-rock-the-boat vote. Some say that, even if the economy has recovered, the next election will be more about living standards. And then still others talk about Europe and Ukip and constituency borders.

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David Cameron faces more opposition to pensioner perks. For once, let’s hope he gives in

By Peter Hoskin
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We don’t normally start ToryDiary posts by highlighting the words of a Labour frontbencher. That stuff’s generally reserved for LeftWatch. But there was a fairly striking moment in Harriet Harman’s Today Programme interview earlier – and it probably caught the ears of No.10, too.

It was her admission that Labour will review their policy on pensioner benefits ahead of the next election. Ed Miliband, you’ll remember, said last week that the current set-up, by which wealthy pensioners receive benefits such as Winter Fuel Allowance and free TV licences, “needs to be looked at” – before his party’s spokespeople swarmed out to reassure folk that no decisions had yet been made, that their leader didn’t like the idea of means-testing, etc, etc. But, listening to Mrs Harman, it seems as though something really is afoot. “You always have to look at everything,” is how she put it, “to make sure the provision is right for the income distribution at the time.”  

As the Telegraph’s Benedict Brogan suggests, there could be a strong dose of politics in Mrs Harman’s remarks. She’ll know that the Lib Dems are opposed to these universal benefits, and that – as Nick Clegg implied yesterday – it’s likely to be one of the sorest points of intra-Coalition discussion ahead of this summer’s Spending Review. Perhaps Labour are hoping to line up with the Lib Dems against the Tories, in this case.

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The Government regards the state-owned banks as symbolically important. The question is how it will use that symbolism around election time

By Peter Hoskin
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Talk to most Tory advisers about RBS and Lloyds, and they soon get round to symbolism. For now, they reckon, the state-owned (or partially state-owned) banks are symbols of all that was wrong and debased during the pre-Crash years. But in future… in future, all will be different. Returning the banks to the private sector, they say, will be symbolic of an improving economy. These dead weights will have become dead good.

Shuffling through the papers this morning, it seems that this transformation is well on course. After making a £2 billion profit in the first three months of this year, the share value of Lloyds Banking Group is close to the level at which the Government would break even were it to sell off its 39 per cent stake. Both the Mail and the Times (£) contain editorials urging George Osborne & Co. to consider how this might be done.

The Treasury’s stated position is to wait and see. Lloyds still needs to fulfil several requirements before a sell-off can be properly organised. This may even take until after the next election, perhaps 2016.

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How's this for a Treasury team? Liam Fox and Harry Phibbs

By Paul Goodman
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As Peter Hoskin suggested on this site earlier this week, that the economy grew rather shrunk in the last quarter is a dash of cheering colour on the canvas - and there is more around if one cares to look, particularly at the buoyant employment figures - but the backdrop against which it was set is bleak.  It is taking the economy longer to recover from recession than it did in the 1930s.  It is impossible to know how much bad debt is still swirling around the banking system.  And it may be that growth rates of the kind that Britain has experienced in the recent past won't return for the foreseeable future.

Houses can't always be built quickly, no new nuclear power stations are likely to go up soon, a decision about airport expansion has been deferred until after 2015 and HS2, like it or loathe it, won't be up and running by the next election.  In short, no new action that George Osborne takes between now and 2015 is likely to make much short-term difference to the economy.  The main right-of-centre alternative to his programme is Plan A on steroids - faster scaleback of public spending and deeper tax cuts, combined with radical supply-side action.  (Michael Fallon has been making a bit of a start in this regard.)

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George Osborne avoids the embarrassment of rising borrowing – but other dangers lie in wait

By Peter Hoskin
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That rush of air you just felt was from Downing Street, breathing out a collective “phew”. And the reason why? This morning’s public finance statistics from the Office for National Statistics – rounding off the financial year 2012-13 – have government borrowing falling from the previous year. But only just. The government borrowed £120.9 billion in 2011-12, once various distortive financial effects are excluded. And it borrowed £120.6 billion in 2012-13. That’s a difference of only £300 million, so again: phew.

Of course, fiscally speaking, that £300 million is next to meaningless. Borrowing could have been £300 billion higher than last year – and it might turn out to be, given that the ONS tends to revise its original figures; and, indeed, it was today on some measures – and the overall picture still would have been the same. The Government has basically borrowed the same amount of money for two years in a row. It’s all very different from what was expected three years ago, when the Treasury was working on an assumption of 2.9 per cent growth in 2013.

But politically, of course, that £300 million makes all the difference. Having “public sector net borrowing” declining year-on-year is not one of George Osborne’s fiscal rules, but it has been part of his promise. His opponents will not be able to accuse him of borrowing more than he was last year – at least for the time being.

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Why the significance of yesterday's IMF intervention shouldn't be overstated

By Peter Hoskin
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Much ado about the International Monetary Fund’s World Economic Outlook report, which was released yesterday. It’s not so much the fact that they’ve downgraded their growth forecasts for the UK, to 0.7 per cent for this year and to 1.5 per cent for next – we’re used to that. It’s more what they say about deficit reduction. “Greater near-term flexibility in the path of fiscal adjustment should be considered,” reads the report, “in the light of lacklustre private demand.”

So far as this recommendation is significant it’s because it adds to the forlorn chorus encouraging George Osborne to consider a different approach. Not only do we have Ed Balls and Vince Cable, we now also have the International Monetary Fund. And it’s a body that wears its historic importance heavily. No wonder the newspapers – and the Labour party – are getting excited.

But the significance of the IMF’s intervention shouldn’t be overstated, and for three main reasons. Here they are, briefly:

• An inconstant compass. Guess which organisation spoke of the “credibility” afforded by the UK’s spending cuts, last year? Guess who said, in 2011, that “strong fiscal consolidation … remains essential”? Or, in 2010, claimed that Mr Osborne’s plans were “appropriately ambitious”? Yep, don’t you just know it: the IMF. This isn’t to say that their views should be ignored, just because they may have changed. But we shouldn’t pretend that they are a firm compass, always pointing in the right direction.

• Advice that’s already being acted upon. Besides, it might be argued that, despite Mr Osborne’s continuing emphasis on the importance of deficit reduction, the Government is already weaving some of that IMF-backed “near-term flexibility” into its plans. Not only has the Chancellor stretched his fiscal rules to breaking point instead of implementing further spending cuts and tax rises, but his last two financial statements have included measures to boost capital spending. Indeed, one of the most important shifts in this Government’s thinking has come over capital spending. There’s a growing belief on Downing Street that they shouldn’t have emulated the pace of Alistair Darling’s proposed, original cuts.

• And what about the smaller numbers? A point I’ve made before, including in this recent post: focussing on the big forecasts from the big forecasting bodies can lead us to neglect the smaller numbers that often matter just as much. Parts of the UK have been in recession for decades, yet the fury and bluster seems to be held back for when bodies like the IMF change their predictions by a few fractions of a percentage point.

There is one wider lesson for George Osborne in yesterday’s report, however: never place too much stock in the judgements of external organisations, be they monetary funds or credit-rating agencies. They can look favourably on politicians’ efforts sometimes – but, crucially, they can also change their minds.

Cutting the 50p rate was the right thing to do. But the Conservatives paid a high price for it.

By Paul Goodman
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After last year's budget, which contained the cut in the 50p top income tax rate implemented today, Conservative poll ratings dived.  It is impossible to prove cause and effect, and George Osborne advanced other unpopular measures too: the freeze in pensioners personal allowances, and VAT measures - such as the pasty tax - that were eventually reversed.  But there can be little doubt that the party paid a heavy price for the cut to 45p, and it may well be that no single measure has been so damaging to it.  Rightly or wrongly, it helped to boost Labour's attack on David Cameron and Osborne as "posh boys", in the phrase associated with Nadine Dorries, who want to help their rich friends only.

The debate within the party about how best to cut income tax for poorer votes - Robert Halfon wants the 10p tax rate restored; Andrew Lilico wants the threshold raised further instead - gathered pace and momentum after the poll slump.  Tim Montgomerie counted support for the move as one of his three big mistakes.  I also supported it, and failed to learn from the timing of the master of cutting the top rate of tax, Nigel Lawson.  The Conservatives had been in office for almost ten years when he introduced the 40p rate, and were in a strong political position.  Cameron and Osborne had been in office for only two, and were in a much weaker one: indeed, they were governing in coalition.

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When it comes to Attack Dogs, Osborne's still a Big Beast

By Paul Goodman
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George Osborne is no less a pupil of Gordon Brown than Ed Balls, at least when it comes to moving pieces on the political chessboard.  To change the image, Brown was a believer in "dividing lines" - gambits designed to throw his opponents on the defensive.  "Labour Investment versus Tory cuts".  "Labour's 50p rate versus Tory posh boys."  "Labour's NHS investment versus Tory privatisation plans."  Osborne usually swerved to avoid the traps, and has been lambasted for it - especially for his early decision as Shadow Chancellor to stick to Labour's spending plans.  But it's worth noting that after the single occasion when he walked knowingly into one, the party's poll ratings slumped, and the right didn't back him up.  I refer, of course, to the cut in the 50p rate.

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George Osborne’s “man of the people” speech

By Peter Hoskin
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First, George Osborne joined Twitter. Then there was his pub-ready Budget. Then there were tweets about football. And now, today, there’s a speech on jobs and welfare, delivered to the staff of a Morrisons depot in Kent. Not only is the Submarine Chancellor becoming more visible, but he’s also becoming less remote. Mr Osborne may never be The People’s Chancellor, but it seems as though there’s at least some effort in that direction.

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The Big Bang that happened today

By Peter Hoskin
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Even though the Guardian and Mirror are overstating their collective case, today is still a day of momentous policy changes. You can see our quick checklist of the biggest – which includes a couple that didn’t make it into the Guardian’s main round-up – below. Although, before you do, it’s worth noting that there’s more to come later this month, from another increase in the personal allowance to the first trial of the Universal Credit. Here are today’s measures:

• Introduction of a carbon price floor. This is, in HMRC’s own words, a “tax on fossil fuels used in the generation of electricity” – pour encourager energy companies to use less coal, oil and gas. The Government’s early analysis of the policy suggested that its financial implications would be minimal, for the Exchequer, businesses and individuals. Yet the Institute for Public Policy Research reckons that it could drive wholesale electricity prices up by 17 per cent  across the next few years, driving thousands into fuel poverty.

• Changes to housing benefit. Whether you call it the “spare room subsidy” or the “bedroom tax”, the simple fact is this: housing benefit claimants who have one spare bedroom will have 14 per cent of their benefit removed, rising to 25 per cent for two or more spare bedrooms. It’s expected to save the Exchequer around half-a-£billion each year – from a total housing benefit bill of £17 billion – provided it can be administered successfully.

• A new system of financial regulation. The Financial Services Authority has been whacked, and two new regulatory bodies birthed in its place. The Prudential Regulation Authority is there to “promote the safety and security” of financial institutions. The Financial Conduct Authority will keep an eye on the City’s behaviour, trying to spot – and stop – the sort of dodginess that led to, say, the Libor scandal. The whole shebang will be overseen by the Bank of England’s Financial Policy Committee, another example of the power accumulating on Threadneedle Street.

• The main rate of corporation tax falls to 23 per cent. From 24 per cent, of course. The Coalition plans to reduce it further still, to 20 per cent, by the next election.

• Cuts to legal aid. The Government hopes to save £350 million from the £2.2 billion legal aid bill. That will be achieved, in main part, by lowering the cut-off point for aid to a household income of £32,000 a year. There will also be more detailed means tests for those earning between £14,000 and £32,000. Here’s an article written in 2010, by ConHome’s own Harry Phibbs, on the cuts and their scale.

• NHS commissioning reforms. Hmm, you may just have heard about these NHS reforms before. They’re the ones by which clinical commissions groups – made up mainly of GPs – steer the work of the health service. As Max Pemberton puts it in a useful article in today’s Telegraph, “They will be responsible for organising and paying for care, and deciding who will provide it”. This was controversial enough when the idea was conceived, but now it seems to have attracted another swarm of opposition. Today’s Mail highlights and attacks the possibility of GPs “awarding themselves” lucrative contracts.

• Changes to council tax benefit. Council tax benefit reduces any claimant’s council tax bill. The DWP has traditionally administered it, but now it’s asking councils to sort it out themselves – along with a 10 per cent reduction in funding. What this means for current claimants mostly depends on what their local authorities decide. The Scottish Government along with Scottish councils is, for instance, stumping up £40 million to bridge the “funding gap”.