One of the most potent weapons in the arsenal of the Chancellor of the Exchequer is “the baseline”. With the aid of a small army of civil servants, the governing party is able to outline its post-election spending plans in advance (“the baseline”) and challenge the opposition to match them. Should it fail to do so, punishment is swift. A Conservative government will accuse Labour of planning to clobber Middle England with tax rises; a Labour government will accuse the Conservatives of planning savage cuts to public services. The electorate, fearful of the unknown, usually sides with the government.

In 1992, Labour rejected the Tories’ baseline and lost the election after being accused of planning a £1,250 “tax bombshell” for the average British family. The party’s victory in 1997 came only after Gordon Brown had pledged to stick to the Conservatives’ spending plans (described by the then chancellor, Kenneth Clarke, as “eye-wateringly tight”) for the first two years of the new parliament.

In the two subsequent elections, Brown mercilessly used the baseline to his advantage as the Tories, having refused to match Labour’s plans, exposed themselves to the charge that they were planning sharp cuts. So long as they stood prepared to slash spending on schools and hospitals, the Conservatives were incapable of victory. In September 2007, in an attempt to spike Brown’s guns, George Osborne announced his own version of Labour’s 1997 pledge. In an article for the Times, headlined “Tories cutting services? That’s a pack of lies”, the then shadow chancellor vowed that a Conservative government would stick to Labour’s spending totals for at least two years.

Line of attack

In November 2008, confronted by the UK’s ballooning budget deficit, the Tories reneged on their pledge and announced that they would increase spending at a slower rate than Labour. By the Conservative conference of 2009, Osborne was speaking openly of the need for cuts and promising an “age of austerity”. But while the Tories’ candour won them the respect of the economic establishment, it proved electorally costly. Labour’s warnings of cuts to tax credits and universal benefits were enough to deny the Conservatives victory in the seats they needed to form a majority.

Now in possession of the baseline, Osborne intends to use it to check Labour’s advance. After this year’s spending review the Chancellor will challenge the opposition to say whether it would match his spending plans up to 2018. Whether or not to do so is the biggest decision Ed Miliband and Ed Balls will make before the next election. If they accept Osborne’s baseline, the left and the trade unions will accuse them of embracing “Tory cuts”. If they reject it, the Chancellor will accuse them of planning billions in additional borrowing or tax rises.

Both courses of action are fraught with political danger. The former would, in the words of one Labour MP, “make the row over the public-sector pay freeze look like a tea party”. The unions, responsible for 82 per cent of donations to Labour in the past quarter, could threaten to withdraw funding and support anti-austerity candidates at the election. Should Labour reject Osborne’s baseline instead, the Tories, whom voters still trust more than Labour to manage the economy, will deploy “tax bombshell” posters. Having abandoned hope of meeting their original deficit-reduction targets, they believe another election fought over austerity could yet favour them. In 2015, their pitch will be, “Yes, it’s taking longer than we thought. But who do you trust to finish the job – the government, or the ones who got us into this mess?”

A pledge by Balls to match Osborne’s spending plans would be an efficient means of closing down this line of attack. For this reason, it is an option that the shadow chancellor’s team notably refuses to rule out. As chief economic adviser to Gordon Brown, Balls helped mastermind the original 1997 pledge and has already declared that his “starting point” is that Labour will “have to keep all these cuts”, a step towards accepting Osborne’s baseline. When Harriet Harman told the Spectator in September that Labour would not match the Tories’ spending plans and abandon its “fundamental economic critique” of the coalition, she was forced to issue a retraction.

Fantasy world

An additional factor shaping the party’s thinking is the position of the Liberal Democrats. Nick Clegg and Vince Cable have quietly accep­ted Osborne’s post-election spending limits and Labour wants to avoid a situation in which the two governing parties unite during the election campaign to portray its leaders as fiscal fantasists, a trick they performed so successfully in the early months of the coalition.

A promise to stick to the Tories’ baseline would not entail supporting all of the cuts proposed by Osborne; rather, Labour will need to replace any cuts that it rejects with tax rises or cuts of equivalent value. While acknowledging that it cannot avoid austerity, Labour would vow to distribute the pain more fairly, ensuring that the richest bear a greater burden. The party will almost certainly pledge to reintroduce the 50p top rate of income tax and adopt some version of the Lib Dems’ “mansion tax”. Miliband and his advisers are encouraged by last year’s electoral success of François Hollande and Barack Obama, both of whom won office on a platform of higher taxes for the well-off.

Yet the scale of the fiscal mess that the party will inherit is such that squeezing the rich will not be enough. The Office for Budget Responsibility forecasts that in 2014-2015 the deficit will be 5.2 per cent, the largest in the western world. At some point before the next election, Balls and Miliband will need to explain to their party what is only dimly understood at present: not only will Labour be unable to reverse all of the coalition’s cuts, it will need to impose more of its own. Something close to an all-out war could result. For this reason, among others, David Cameron and George Osborne will continue to appear unreasonably cheerful in 2013. Most of their tough decisions are behind them; Labour’s are all still to come.