Cameron’s bold bids to keep ahead of coalition sceptics

Accidentally perhaps, the test paper for the success of the Lib Con coalition has just been set by the centre left commentator Will Hutton in the Observer. Why should a comment piece be so significant? Because Cameron has just announced the dramatic appointments of Hutton to head up a commission on public sector pay and maverick Labour MP Frank Field as poverty czar. This is triangulation with a vengeance and will cause much Conservative heartburn.

Hutton’s test paper deals with another part of the waterfront, banking regulation. In it he champions the radical reform package of Vince Cable, the nation’s favourite economic guru before the election. It’s in the nature of coalitions that a role for Hutton in one area of policy doesn’t read across automatically to agreement in another. All the same, it shows how Cameron is rewriting the political terms of trade and shows his determination to keep one step ahead of the coalition sceptics.

Deep doubts among previous Lib Dem leaders about the wisdom of the coalition are better aired immediately, when the only possible answer is ” let’s see how it works out. ” A massive practical test will come over splitting the banks. Vince Cable is unambiguously committed to this. It was also Vince who pressed hardest for a deal with Labour up to the last minute. The acid test of the Lib Dems’ role will be seen most clearly in the battles Vince wins.

Early Lib Dem claims for Cable’s role were exaggerated. Since last Friday senior Lib Dem Simon Hughes has been touring the studios making the misleading – or misled – claim that Vince is in charge of banking reform. This morning David Cameron made it clear to Andrew Marr that the Chancellor George Osborne will chair the relevant cabinet committee on which Vince – described by Cameron as ” a complete star” – will sit.

In his Observer piece, Hutton makes clear that Treasury supremacy is inevitable but he nevertheless manages to reconcile  the respective roles of Osborne and Cable. Whether this works out in practice remains to be seen. Splitting the banks is a massive high stakes  decision,  perhaps even  an unworkable one.   Cameron and Osborne will have  read the piece.  Edited extracts of Hutton’s long article shows how he sets a radical economic agenda for the coalition.

(Cable)  will jointly agree on the chair and membership of the commission that will make recommendations on whether and how the banks should be broken up and his department oversees bank competition, consumer protection and the lending targets. His view is uncompromising – and it’s right. The status quo is impossible, he told the Financial Times yesterday. The banks must be broken up, lending targets met and curbs on their bonuses imposed. This is a fully joint exercise between himself and Osborne.

On this issue the Tories may have more spunk than Labour. They cannot afford another banking crisis. The economic future of the country depends on reform. Managing the aftermath of the banking crisis will define the coalition government. banks.

It is new territory. Old assumptions about economic policy have to be challenged.

But not in the coalition, it seems. What is worrying is that the Tories are still wedded to the old-time religion of the minimal state. Of course budget deficits have to be cut, but this is not 1976 or 1993. After a credit crunch there is a “new normal”.

The scale of the reductions now contemplated within one parliament might make sense if the rest of the world was booming and if the economy was reasonably balanced. In today’s circumstances, they are close to an economic and political suicide note.

The geography of where spending cuts will fall should alone make the coalition stop and think.

Deficit reduction should start, but the government must declare that if the economy wobbles, it will act fast to boost it, not blindly plough on with deficit reduction. It is an exercise in expectation management. Business is not ideological. It wants orders – and couldn’t give two hoots about the small or big state when its back is against the wall.

There is a lot to welcome in the coalition’s economic policy – raising capital gains tax to 40% or more and lifting people earning up to £10,000 out of tax altogether are two good moves. But these are abnormal times requiring abnormal responses. Cable’s instincts on both banks and the deficit are right.

The coalition’s prospects will depend on how much Osborne really can make common cause with his Lib Dem opposite number. Both party leaderships jumped into the unknown with this coalition, and both need it to work. But it is the big judgment calls that make or break governments. And none is bigger than how to manage the aftermath of a banking crisis.

The Cable-Osborne relationship will make or break the government.

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