Economics, politics and the reality of the 'squeezed middle'

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How seven years of cuts will transform the political landscape

The notion that a Labour government in 2015 would itself be a cutting government has yet to sink in.

When it comes to big political set pieces, like yesterday's Autumn Statement, the predictable somehow still manages to surprise. Everyone knew it would be bad; and we all knew it would raise big challenges for all three parties. Yet today, everyone is caught off-guard.

In part, it's because the unprecedented duration of the cuts -- until 2017 -- is now abundantly clear and longer than many had appreciated. Think back to 2004, when the economy was booming; a rising star of the Conservative Party, David Cameron, had risen to the lofty position of opposition spokesperson on local government; Nick Clegg had just stepped down from the European Parliament; and a young Treasury advisor by the name of Ed Miliband had just returned from a sabbatical at Harvard. Seven years really is a very long time in politics. That's how long we're going to be talking about cuts for, so we'd better get used to it. We also know that the pain on public sector pay will extend to 2015 (and probably longer). Household living standards won't start to tick up until at least 2014. The wages of the typical worker are unlikely to surpass their pre-recession levels until at least 2020. The roll call of long-term economic misery goes on and on.

Which is why all parties woke up today still trying to come to terms with what it all means for their central political purpose and pitch. For the Conservatives, who currently have a clearer account of how to traverse this new terrain than any other party, it is the final confirmation, if any were needed, that they are ditching their previous modernisation strategy. Turn the clock back just a few years and think about the core elements of Cameron's one-nation argument -- a strategy which was clear, politically potent, and created the space for the formation of the coalition. Demonstrate progressive credentials via a new Tory commitment to child poverty that was supposed to warm the heart of the likes of Polly Toynbee. Create a new base of political support within the public sector. Make headway in the north of England. Reach out to new and younger voters through a "vote blue, go green" message. Convert the Conservative party into a 21st century home for hard-pressed working women. Most of these claims are now in shreds; all are severely tarnished. In their place is a very big bet that they can win on economic leadership in tough times -- a bet that may still prove right -- but one that leaves the modernisation agenda as a relic of a bygone era.

For the Liberal Democrats, perhaps more than any other party, yesterday may turn out to be seismic. It will certainly be viewed by many of their members as the moment when a bunch of Treasury civil servants, together with Danny Alexander, blew a hole in their next manifesto. The central proposition of the coalition -- coming together in the national interest to tackle the deficit within the life of the current parliament -- is no more. Now the time-span of the shared central commitment to cuts has been cast forward into the latter part of the decade. And the Liberal Democrat leadership has pledged the coalition will undertake a spending review itemising cuts beyond the next election -- presumably cuts that will therefore have to figure in both the Liberal Democrat and Conservative manifestos (so much for the much heralded "differentiation" strategy). And all this without a trace of internal party discussion -- unless, that is, someone is going to tell us that Simon Hughes and Tim Farron happened to be sitting in on the Treasury's forecasting meetings. All of which poses a few questions: the balance between tax-rises and spending reductions? The political viability of seven years of austerity for an already weakened party, many of whose members self-identify as being on the centre left? But no need to debate these trifling issues, or so it seems.

And the implications are barely less far-reaching for Labour. Above all, the worse the economic news, the higher the stakes become -- and the louder the ticking of the clock as people wait for the party's polling numbers on economic competence to turn upwards. If that doesn't start to happen soon, more and more people will wonder quite what George Osborne would have to announce about the dire state of the economy before Labour starts to take a lead on these issues.

Last week in a speech Ed Miliband rightly struck a slightly different and more accommodating tone, seeking to persuade a largely unconvinced public that his party's economic argument was right for our times. He also went out of his way to stress that if elected he will embrace the challenge of governing under austerity, though in a different way to the coalition. That sentiment is now either going to be reversed (if the leadership decides it can't stomach the gritty reality of talking about cuts in the next parliament, which would raise huge questions about Labour's fiscal credibility) or, far more likely, it will have to become mainstreamed and echoed right across the party. And that means entering the day-to-day politics and vernacular of every shadow cabinet member. The notion that a Labour government in 2015, inheriting a greatly diminished public sector, will itself be a cutting government is yet to sink in. To put it mildly, it is quite a mind shift.

Make no mistake: even though yesterday sort of went as predicted, it also changed everything.