New best friends

Old political certainties are in tatters, but as <strong>Gordon Brown</strong> and David Cameron str

The combination of a dessicated financial system and depressed economy has shattered the rules that have governed politics for the past two decades. Labour is in danger of heading back to its bad old days of binge borrowing, punitive taxes on the rich, a weak pound and an enormous extension in the reach of the central state. New Labour may not be dead, but it is badly wounded. As Peter Mandelson put it recently: "The world of 2008 is simply not the world of 1997."

On the other side of the aisle, the Conservatives are in grave danger of snatching at the comfort blanket offered by Margaret Thatcher - obsessing about monetary policy, promising to slash government spending, and relying on market solutions to market problems. The model of "progressive conservatism" built by David Cameron looks fragile indeed in the face of a savage economic downturn. Just a few months ago, it looked as if the next election would be fought between new Labour and progressive Conservatives. We may soon be able to dispense with the prefixes. If the two main parties do lose their progressive dimension, the Liberal Democrats could gain - although Nick Clegg has to give a clearer articulation of the foundations and dynamics of his brand of liberalism. For the foreseeable future, the main battle will be between Labour and the Conservatives.

Both parties are struggling to reorient themselves to the changed landscape in time for the next election, and in particular to shape a new political economy. And they may not have much time. Between the lines of the pre-Budget report was a clear message: Election 2009. After the debacle of last year's election-that-never-was, nobody is likely to discuss timing. Brown will not breathe a word of his intentions to anyone - except, possibly, his wife. But the scale of the gamble taken by the government, borrowing at heroic rates to try and spend its way through the worst of the downturn, suggests that Labour will want to go to the electorate before we discover whether it has worked. Having put all his chips on red, Brown will want the decision to be made while the roulette wheel is still turning.

Having put all his chips on red, Gordon Brown will want the electorate to make its decision while the roulette wheel is still turning

It is true that the polls still look grim - internal polling on both sides, undertaken since the pre-Budget report, gives the Conservatives a double-digit lead - but Brown's best hope is to fight an election in the stormiest economic weather, in effect saying: "You may not like me much. But you know I've got the experience and skills to guide us through this difficult time. Labour has taken bold action to help the nation. We don't know yet if it will work, but we are acting. The Tories, led by what appear to be a couple of promising school prefects, have nothing to say." Labour wants the election to be about the economy - with a "do something" government contrasted with "do nothing" Conservatives.

My hunch is June 2009 - at the end of the second, probably worst, economic quarter - but some seasoned election-watchers have pencilled in 2 April. In any case, the Conservatives are getting ready. Their goal is to make the election about competing visions for the future, rather than a policy-joust on the economy. The Tory narrative will be that the whole country is in a mess - a broken society producing a bankrupt economy - and that Brown, who got us into the mess, is not the man to lead us out of it. For them, the election choice needs to be "change" versus "more of the same". Elections are usually won by whoever manages to establish the nature of the choice being made - what the political scientist George Lakoff calls the political "frame" - and this is the ground over which the pre- election battles will be fought. The broader question is whether the election will be between two parties which are in the process of regressing to old ideological positions - and how this could damage policymaking.

Labour fought hard to build a reputation for prudent economic management. Tony Blair's governments enthusiastically supported aspiration and wealth creation. These achievements are in peril. Nobody sensible opposes the government's actions to recapitalise, and in some case nationalise, the high street banks. Brown has provided effective leadership in this area. But the scale of the planned public-sector borrowing borders on recklessness, and there is a danger of the financial markets taking fright at the first upward revision of the debt figures (and everyone knows there will be an upward revision). As it stands, the Treasury plans to borrow £118bn next year, rather than the £38bn announced in the March Budget; by 2012, net government debt will be at a huge 57 per cent of GDP, and that excludes any further intervention in the financial markets. The cost of insuring Treasury debt has already risen sharply: in the G7 countries, only Italy is seen as a less reliable debtor than the UK.

The "golden rule", which stated that the government would borrow only to invest over the economic cycle, and the "sustainable investment rule", which stated that government borrowing would remain below 40 per cent of GDP, were torn up and replaced by an ambiguous "new temporary operating rule". This was a dramatic departure from Brown's previous pursuit of fiscal discipline. Prudence has been dumped. Brown argues that the scale of the crisis requires such U-turns: as John Maynard Keynes said, we may indeed need "new views of what is economically sound".

The most iconic reversal from new Labour thinking was the new 45p top tax rate, which delighted Labour backbenchers and left-leaning commentators. The measure will raise "approximately nothing", according to the Institute for Fiscal Studies. More optimistic Treasury forecasters expect it to garner £670m in 2011-2012 - a little less than the £675m that will be raised from higher duties on alcohol. So, in fiscal terms, the new rate is trivial. The halving of the tax-free allowance for those earning over £100,000 and removal for those earning over £140,000 is more significant, raising £1.3bn and introducing two narrow bands of income where the de facto tax rate is 60 per cent - a properly old Labour percentage.

Mandelson’s role in the repositioning of Labour is crucial. He is right back at the heart of government and Brown relies heavily on him

But the decision to introduce the new rate was based on a political rather than an economic calculation. People are angry with the greedy bankers, and this was their punishment. It was a fiscal comeuppance. Never mind that few of those affected are, in fact, bankers, nor that the wealthiest will find ways to avoid the tax. It's the symbolism that counts. When the Glasgow MP Ian Davidson rose at Prime Minister's Questions to ask whether Brown agreed that the "spoilt rich kids just do not get it", it was clear from the PM's countenance that he did, indeed, agree. For some on the left, politics remains a class war, and a higher rate of tax on high earners needs no further justification. But the 45p band may prove a costly political error. It opens up a Conservative attack along the lines that Labour always ends up taxing the successful to pay for its own failures.

So far, criticism of the new taxes on the rich has been muted. There has been some quiet tut-tutting in the editorials of the right-wing press, but this is clearly not a good time for anyone to act as a spokesperson for the interests of the top 1 per cent. The Conservatives don't want to be trapped into saying they would abolish the rate, and are therefore obliged to tread softly. Blairite politicians and advisers are having to play loyal, and have also been stymied by the open support for the measure from the newest of the new Labourites: Peter Mandelson.

Mandelson's role in the repositioning of Labour is vital. He is right back at the heart of government, and Brown relies heavily on him for advice. Mandelson, famously "intensely relaxed about people getting filthy rich", has reconsidered his political position. In his recent Hugo Young Memorial Lecture, he was candid: "I have to tell you the present crisis has made me deepen my thinking. I think we should be in no doubt. The global financial crisis of 2008 will be seismic in its political impact. It will change the mindset of a generation . . . It should make us a lot more pragmatic in assessing the extent to which markets can and do fail."

We should be in no doubt: this is a recantation of almost Galilean standards. It is not yet clear where Mandelson's journey will end. The speech itself made the case for "smart", "strategic" government (hard to disagree with); for a recognition that markets fail and governments often have to intervene (true and self-evident); and that "welfare systems and redistribution can be contributors to economic growth" because "strong safety nets . . . protect individual workers with wage insurance, which means they are able to move confidently between jobs" (true, and expressed in almost identical terms by Kenneth Clarke in his 1994 Mais Lecture). M andelson may have come to praise new Labour, but perhaps also to bury it. He is naturally the perfect person to do the digging. Just as John Prescott gave Blair some cover on the left, so Mandelson gives Brown protection on the right of the party. It is a brilliant silencing tactic: after all, if Peter Mandelson, yes, Peter Mandelson, supports a 45p tax rate, how could anyone to the left of Alan Walters oppose it?

The big question is: has the "mindset of a generation" indeed been so profoundly altered, and in a left-wing direction? Mat thew Taylor, former head of political strategy for Tony Blair and now head of the Royal Society for the Encouragement of Arts, Manufactures and Commerce, thinks a shift has taken place. "There is an underlying culture dynamic at work," he says. "The 30-year-long march of individualism is being challenged by a new hierarchism and egalitarianism. There is also, as a consequence of what's happening, a resurgent statism." For Brown, instinctively in favour of state action, this is an easy wave to ride. As Taylor says: "The world has come back to Gordon Brown."

Geoff Mulgan, another former senior Labour adviser and now head of the Young Foundation, argues in his thoughtful new book, The Art of Public Strategy, that "no strategy today is complete without an account of how opinion will be moved". But it seems as if it has moved on its own this time. Brown has worried for years about how to engineer a "progressive consensus". The near-collapse of the world's financial system and the attendant recession appear to have done the job overnight.

But Labour has yet to flesh out a new political economy. The government is so busy fighting fires that it has yet to establish a coherent strategy for the longer term. There is some institutional room for optimism: the establishment of the National Economic Council is a profoundly important reform, creating a centre of power outside the Treasury and a body that can think about political economy rather than just economics. But if Labour's imaginative horizons cannot expand beyond the tired, binary argument about the relationship between the state and the market - the motif of Mandelson's speech - then the chances of deep changes to the power structures of our economy and society will remain slim. This is the real danger with Labour's delighted return to the comfort zone of étatisme. It may be that, in the short run, decisive state action will help to offset the effects of the downturn; in Mandelson's terms, "ultimately it is government that keeps the show on the road".

Meanwhile, the Tories are at risk of singing along to their old favourite Thatcherite tunes. In terms of political strategy, they were right to detach from Labour's spending plans and attack the level of indebtedness with which the government plans to saddle the exchequer. Portraying Brown as an old Labour binge-borrower may get them some traction. But they need urgently to get their own house in order. If new Labour's tenets are being tested to destruction, the foundations of Cameron's progressive conservatism have been swept away. Cameron has made huge play of moving the Conservatives away from their brand as "the economics party", and has focused most of his energies on social issues, promising to fix our "broken society", raise levels of well-being and tackle climate change.

The Conservatives said they would "share the proceeds of growth" in order to help counter the "social recession". Now there's no growth, and a real recession. When in 2006 Cameron urged his party to "let sunshine win the day", little did he know what storm clouds were brewing. Now the Conservatives have a difficult task. If they abandon all the "soft" stuff, the huskies and sunshine and happiness indicators, in order to look more focused on the current economic crisis, it will make it look as if they never really meant it. This is especially dangerous, given that a lack of sincerity is one of Cameron's potentially weak points: Labour is ready to cast him as a PR man, an opportunist - a spiv.

On the other hand, the Tories have to look as if they can act commandingly on the pressing economic issues. "Right now the Conservatives do not seem to me to have a plan of action robust enough to survive four weeks of an election campaign," says Taylor.

Redistribution of power and assets and the cultivation of individual and collective resilience are goals shared by progressives of all parties

In short, the Tories, too, need a new political economy. Team Cameron knows that swaths of the party would be quite happy with a return to the recent, successful version known as Thatcherism. Just as the Labour back benches revel in higher top rates of tax, big borrowing and bank nationalisations, so their opposite numbers on the Tory benches would be comfortable with eye-watering plans for fiscal stabilisation and waves of "creative destruction" through the British economy.

Phillip Blond, a leading thinker of the right, sees the danger. "Of course there is a risk they will retreat," he says. But he believes the Cameron Project has come too far to back down, and predicts a radical departure from laissez-faire orthodoxy. He thinks the Conservatives are right to focus on the monetary dimension of the crisis. "Getting real rates down is absolutely the right priority," he says, "but the danger is that they don't follow their own logic to its conclusion. They should be advocating direct government intervention to control interest rates."

Blond's critique of Labour is clearly far from Thatcherite: "Brown is not intervening enough. The government's reluctance to micromanage, for example, through interest-rate controls, means they aren't macromanaging, either." Blond describes himself as a "civic conservative" rooted more in Burkean, 18th-century conservatism than in Disraeli's ameliorative 19th-century version. He suggests using the Post Office as a network of local, community-owned banks - an idea that would find favour among many Labour left-wingers. True progressive Conservatives - ad vocates of what Blond calls "proper, pragmatic conservatism" - see that society needs to be protected from the market, but not necessarily by the central state. In fact, it is not necessary to go back to Burke: Harold Macmillan's Middle Way, or the 1927 paper Industry and the State: a Conservative View, which he co-authored, offer good primers in progressive conservative economics.

If both parties avoid the temptations of their respective comfort zones, we should expect a number of issues to come centre-stage. For Labour, a continued commitment to radical welfare reform will be an important signal. The signs here are good: it was striking that Mandelson singled out James Purnell, driving the reforms from the Department for Work and Pensions, for praise, describing him as a "young, modern, thoughtful, intelligent guy who is really thinking about the future in a way which is refreshingly radical". If Labour is still at least partially "new", we should also expect a renewed push on the agenda of personalisation in public services, some bold moves on constitutional reform and the "citizen's empowerment" agenda.

As for the Tories, the thinking behind the progressive conservatism drive needs to be applied to economics. This will be difficult, because it will require Cameron to face down the viscerally pro-market sections of his party, and his own mind. The Conservatives need to be agnostic about the market, just as Labour needs to be agnostic about the state. Neither is an intrinsically good or bad institution, and both can either serve or corrode citizenship and autonomy.

The Conservative challenge is to construct a political economy that supports their social objectives and meets the new economic needs. The overall aim should be to enhance individual and collective resilience. To this end, there would need to be a push on a new ownership agenda. Capital gives people power; debt often leaves them powerless and dependent. The Conservatives need to argue for a capitalism with more capitalists. They also need to come good on all their rhetoric about localism, and in particular to spell out their plans for supporting local eco nomies, including local capital markets.

To prevail, the progressives in both parties will have to face down and defeat the regressives. But there is plenty on the progressive agenda that could be supported on the other side of the House. Progressive politics is, in the end, about the production and distribution of power. To be progressive is to support environments in which individuals have the capabilities and opportunities to be self-governing; to oppose dependency and subjection in all their social and economic forms and to ensure people have the collective power to shape the conditions of their shared, overlapping lives. In short, a society of citizens, not subjects. Redistribution of power and assets, and the cultivation of individual and collective resilience, are goals that are shared by progressives across all three parties.

Perhaps the economic shock will produce an even bigger aftershock in our politics than anyone at present expects. In his brilliant book on Ramsay MacDonald's 1929-31 government, Politicians and the Slump, Robert Skidelsky persuasively argues that the "real cleavage" is not between the parties, but between "the economic radicals and economic conservatives - which cuts across party lines". The party system failed to represent the real arguments, and the real alternatives, to the nation in the depths of economic crisis. We are not in quite the same situation, but the political gyroscopes are swinging wildly. Membership of a particular party is becoming a weaker proxy for a particular intellectual or political position.

In a poll undertaken by Demos with the PoliticsHome website, opinion leaders named the three most radical politicians in Britain as Michael Gove, Vincent Cable and James Purnell. Any prime minister worth his or her salt would want these three in their cabinet. There is a mechanism which could allow this; one that has often been used in times of national crisis, including 1931. It is called a National Government. Frank Field has argued that the economic crisis demands such a solution.

Why not?

Richard Reeves is director of Demos