Alf Young: Clegg needs to wipe the slate clean

Economic conditions leave Lib Dems little choice but to test coalition partner to the point of destruction, writes Alf Young

BACK in the spring of 2010, those sunlit scenes in the Downing Street rose garden as David Cameron and Nick Clegg sealed their coalition vows still fresh in all our minds, I wondered out loud whether their political partnership would last two years. I was wrong. It has. Indeed, a third anniversary beckons. But it doesn’t take a marriage guidance counsellor’s skills to see yawning cracks in their facade of unity.

In Dundee yesterday, the deputy prime minister told activists at the Scottish Lib Dems’ spring conference his coalition partner “cannot be trusted” to deliver a fairer society.

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Still smarting from the Tory leader’s abrupt withdrawal from cross-party talks on implementing the Leveson proposals on press regulation, an angry Clegg still has to decide whether to help Labour engineer a parliamentary defeat on the Tories on the issue in the Commons on Monday. But the political weather seems to be changing. With the Lib Dems clinging on to Chris Huhne’s former seat in Eastleigh against all the odds and the Tories pushed by Ukip into third place, there is growing evidence that Clegg and his colleagues are willing to test the principle of collective responsibility within this coalition ever closer to destruction, in an attempt to revive reasons for voting Lib Dem again in 2015.

They have little choice. If current poll ratings are to be believed, liberal democracy as a third force in UK politics still looks an endangered species at the next Westminster elections. However, the real clincher in this battle for electoral credibility isn’t who now trusts whom or the fate of Leveson. It’s what happens to the UK economy between now and 2015 and who takes the credit – or the blame – in voters’ eyes, for the state we are in, by then.

The omens remain bleak. Whether or not a triple-dip recession looms, the path to recovery from the great banking crash and credit crunch of 2008 is proving stubbornly long and hard. The National Institute for Economic and Social Research regularly updates a chart that best captures our predicament. It compares our recovery this time against recoveries from the five biggest recessions of the 20th century.

In the early 1990s and the early 1920s, it took the UK economy between 30 months and three years to recover all the output lost from its previous peak and start growing again. In the 1930s depression, the early 1970s and again in the early 1980s, it took nearer four years to get back to generating fresh growth. This time, fully five years on from the previous output peak in January 2008, our economy is still bumping along more than 3 per cent below that peak, going nowhere. This, the institute notes, is “the slowest post-recession recovery in the past 100 years”.

And as the Institute for Fiscal Studies green budget makes clear, comparing forecasts made in the 2008 Budget and in Chancellor George Osborne’s most recent autumn statement last December, both forecasts for the current financial year 2012-13, nominal GDP is down 13.6 per cent, tax receipts down 17.6 per cent, spending down 5.6 per cent and borrowing up a whopping 372 per cent. It wasn’t meant to be like this.

By now, the fiscal mission that brought the Tories and Lib Dems together three years ago was supposed to be bearing significant fruit. The deficit would be under control. Government borrowing would be on its way down. Our AAA credit rating would be secure. The economy would be rebalancing, in favour of making more things again and exporting more. Recession would be behind us. Growth would be back.

None of these promises have been fulfilled. But neither Cameron, nor Osborne, appear in any mood to reassess their options. The prime minister’s speech last week – in which he insisted, Thatcher-like, “there is no alternative” – will be followed, on Wednesday, by Osborne’s fourth Budget, a package promising more steady-as-we-go tinkering than any shock-and-awe fiscal pyrotechnics, it seems.

“We will stick to the plan and reject false choices,” promises Cameron. His Chancellor has been thrashing out the terms of a further spending round that will push the cuts out beyond the next election, to 2015-16. The overall spending envelope may feature in next week’s Budget, the hair-shirt details are due in late June. Once again, health is to be ring-fenced. But other spending departments, like Vince Cable’s business department, face a further squeeze.

Economists argue the toss over why the medicine hasn’t begun to work by now. The Prime Minister, who studied economics at Oxford, offered what he called “some plain truths” in his recent speech. There is no “magic money tree”, he warned, so that all the government needs to do is spend more and borrow more. But there is just such a tree in Threadneedle Street. It’s botanical name is quantitative easing and it is watered and fed, on this coalition’s watch, by the Bank of England. Indeed, there’s a whole orchard of money trees in Threadneedle Street. They’ve already created £375 billion of new money, buying up nearly 40 per cent of all the UK government gilts currently in issue, in the process. Judging by his recent voting behaviour, the departing Bank of England Governor, Sir Mervyn King, wants to plant even more of these trees. And some of the profits earned by this process have quietly been passed back to the Treasury, to lubricate its finances for now.

Meanwhile, some of the big moves the coalition made initially to curb the deficit – notably slapping an extra 2.5 per cent on VAT and taking an even bigger axe to infrastructure spending than Labour’s Alistair Darling had planned – took what little steam was left out of the UK economy post-crash. And in a western world of synchronised austerity, where governments already control up to half of annual GDP through their own spending, taking that kind of sledgehammer to the deficit problem was always likely to end in even more fiscal grief.

Cameron won’t have it. He insists our deficit is “driven by persistent, reckless and completely unaffordable government spending and borrowing over many years”. But, as Martin Wolf has pointed out in the Financial Times, the UK had the second lowest debt in the Group of Seven nations in 2007. And between 1996-97 (the year before Labour came to power) and 2007-8 (the year before the crash) spending’s share of GDP only rose by 1.2 per cent.

If Clegg really is minded to give his party a sporting electoral chance in 2015, he should be doing more of what Cable is doing, questioning the credibility of the coalition’s current economic strategy. I remember seeing a Charlie Kaufman film in 2004 about an estranged couple who sought bliss by having all recollections of the other erased from their memories. It was called, after a line in an Alexander Pope poem, Eternal Sunshine of the Spotless Mind.

I dare say there are no spotless minds in politics. But, if Clegg wants his party to be seen as credible again by more electors, perhaps he should be seeking more of that eternal sunshine. If the Tories cannot be trusted, isn’t it time to walk away?