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.

Many of these additional considerations are significant and true, but it’s still worth remembering that original idea, that it’s mostly about the economy. In a substantial sense, an improved economy will make a difference in ways that really matter to folk: jobs, the cost-of-living and all that. In a political sense, it will be harder for the Tory leadership’s internal and external opponents to charge it with failure. It’s all so simple that it barely warrants mention – but that doesn’t mean it ought to be forgot.

The reason I mention this now is because there is indeed cause for hope on the economy. Mervyn King captured the tenor of it in his press conference yesterday, when he spoke of “a modest and sustained recovery” and revealed that the Bank is raising its forecasts for growth and lowering them for inflation. But it has also been written into the newspapers in recent weeks. The triple-dip was, most likely, missed – and not least because there may not even have been a double-dip. Manufacturing may be on the up again. And the public's optimism seems to be strenghtening.

So is it time for bunting and cake in the Treasury? Not quite. In his speech to the CBI last night, the Chancellor did note that “the most recent economic news has been more encouraging,” but he was careful to add that “we are travelling a hard road”. And he’s right: even an improving economy doesn’t absolve him from some tricky questions and decisions. Among those questions is one that the Chancellor hasn’t been fortunate enough to properly consider in the past: what does he do with improving growth forecasts?

A couple of years ago, I wrote an article for the Times (£) setting out what declining growth forecasts would mean for Mr Osborne. I warned that he could break his fiscal rule for the national debt (as he eventually did), and that this put an unenviable choice before him: cut faster and deeper or lose Britain’s AAA-rating. But now that growth forecasts may be revised upwards – bringing future tax receipts up with them – this presents the flipside of that choice. Does he use the slack to bring the deficit down quicker, perhaps even back towards its original trajectory and within the bounds of approval set by the credit-rating agencies? Or does he leave the deficit as it is, and use the unforeseen receipts to either cut taxes elsewhere or to ease up on spending cuts?

If I had to guess, I’d say Mr Osborne would veer towards the second option. The effects, both political and economic, of losing our AAA-rating have not been as great as I feared in that original Times article. And the Coalition is still winning the argument over deficit reduction, even though its reduction of the deficit has been pushed back a few years. The Chancellor may now reckon that there’s more political capital to be gained from a surprise tax cut or two – particularly with an election approaching.

Of course, we shouldn’t get ahead of ourselves: there is still cause for concern. This week’s employment figures hardly set hearts afire (although, given that they are a lagging indicator, perhaps we should expect that), and, as I’ve pointed out before, there are plenty of tragedies hidden in the smaller economic numbers. Besides, we ought to question what sort of economic growth we are getting, if that is indeed what we are getting. Far from the Coalition’s original conception of a freewheeling, entrepreneurial digi-country, there’s plenty to suggest an over-dependency on quantitative easing and housing prices.

But, be that as it may, none of it overrides my original feeling: if anything is to make politics look very different in a year’s time, it will likely be the economy.