Senior party members were quick to deny suggestions that ministers were proposing an extra £5bn of capital spending
Share 0
inShare0
Email 
Vince Cable said there are no easy answers to the dilemmas the government faces in reducing the deficit. Photograph: Martin Argles for the Guardian
The Liberal Democrat leadership went into overdrive to quash claims that the social democrat Keynesians in the cabinet – Vince Cable and Chris Huhne – had mounted the standard of revolt and called for a shift away from existing deficit reduction plans.
Officials close to Nick Clegg are privately seething at the suggestion that an extra £5bn of capital spending might be countenanced. The finger of blame, rightly or wrongly, is being pointed at Huhne, the energy secretary.
The difficulty is that the Liberal Democrats are merrily entitled to air disagreements with their coalition partners around the margins over human rights, the NHS, profit-making schools or welfare, but the economy is a no-go area.
The Treasury is understandably neuralgic about any suggestion of a shift from Plan A. There can be no public differences. Agreement on tackling the deficit is the glue that keeps the coalition together. The markets and the bond traders would not tolerate a government that was thought to be wavering in its will to tackle the deficit.
For the Treasury chief secretary, Danny Alexander, the coalition would lose its greatest asset if it was seen to be backtracking on plans set out for the end of the parliament – bringing the structural current budget into balance and ensuring the debt GDP is falling by the end of the parliament.
Yet there is a debate under way between the top Liberal Democrats. It would be extraordinary if there was not. The Treasury consensus forecast on growth has been downgraded in 2011 to 1.2% and to just 1.8% in 2012.
Some Liberal Democrats argue that extra capital spending on housing, for example, would not damage the fiscal mandate of bringing the structural current budget into balance. Yet, as soon as the BBC's political editor, Nick Robinson, suggested that Liberal Democrat ministers were proposing £5bn extra capital spending, the Treasury sent out firm denials early Tuesday evening.
The next morning Alexander was despatched on to the Today programme. Huhne appeared on BBC 5 live and extracts from Nick Clegg's speech were briefed to show that the Liberal Democrats would not waver on deficit reduction.
Alexander said he did not recognise the £5bn number. Huhne said there was no room for a cash injection. Clegg's aides briefing his speech said spending would not be brought forward from one year to another, there would be no increase in total spending and no switching from current to capital.
So the Treasury and Clegg had crushed the rebellion as soon as the flag of revolt was semi-unfurled. Story over? Not quite.
Some of this conversation about Plan A and Plan B is ridiculously simplistic. Both Osborne and Cable point out there is greater flexibility in the spending plans than is recognised. The automatic stabilisers allow borrowing to rise to cover extra spending on higher unemployment and lower revenues. This affects the cyclical deficit, not structural, the number targeted by the government's fiscal mandate. The Office for Budget Responsibility has said in its latest forecast (March 2011) that total net borrowing will be £46bn over the next five years, compared woth its previous forecast in November 2010.
In my own conversations, and it is the only topic of private conversation at the top of the Liberal Democrats, it is clear that some cabinet ministers and their policy advisers are casting around for ways to stimulate flagging demand. They regard capital spending as the most effective way of doing so. They are hesitant about proposing additional spending, partly because of the impact of the markets. They do argue, however, that extra capital spending need not affect the aim of bringing the current structural deficit into balance by the end of the parliament. The £5bn figure is illustrative.
The senior Liberal Democrats making this case were supported by Sir Alan Budd, the interim head of the Office of Budget Responsibility. The believe it might make it more difficult to meet the target of reducing the debt-GDP ratio by the end of parliament.
This general discussion is not a secret. Cable said as much in an interview in the Guardian on Saturday and in a pamphlet published last Thursday through CentreForum, the Liberal Democrat thinktank. This pamphlet called for funded tax cuts, imaginative quantitative easing, more capital spending and supply side measures. The pamphlet was cleared with the Treasury in advance, even though it pushed the envelope of agreed coalition policy.
In both private and public Cable is sympathetic to the dilemmas chancellor George Osborne is facing, and does not pretend there are any easy answers. The borrowing figures released on Wednesday which revealed that last month's borrowing hit a record high of £15.9bn demonstrate the problem. He would also admit we do not yet know whether the economy is about to nosedive. GDP figures released later this year will be crucial.
Cable is scouring the country for shovel-ready capital project from his perch. He has suggested new roads built by tolls, an idea backed by the CBI. He has also proposed penalising house builders that hoard land on which they have permission to build. House construction is seen as essential to boosting the economy.
Temperamentally, Cable wants the government to be seen to be more active and thinks there are technical ways of immunising the government from the bond markets by selling long-term gilts.
Aware of the independence of the Bank of England, Cable is reluctant to spell out precisely what kind of quantitative easing should take place, or its size or timing. But he is clearly siding with Adam Posen, the monetary policy committee member most favourably disposed to another round of quantitative easing. He would like to see easing specifically help small business.
All of this requires careful coalition management by Clegg. No 10 will be seething at the loose talk circulating on the margins of his conference, and will be pulling rank as the major partner. But the rebellion is not yet over.