The scent of blood

The desperate men of Downing Street are trying to hang on to power at any cost. Can a bold, progress

After a successful G20 summit, Gordon Brown believed he had finally regained the political initiative for the first time since the start of the year. His plan was to use his renewed sense of momentum to translate the rather remote G20 pledges into action to improve people’s lives in the coming Budget.

The strategy has been rudely interrupted by the biggest controversy to engulf him since he became Prime Minister: the foolish proposal to set up a website to smear senior Conservatives, which forced the resignation of Damian McBride, one of Brown’s closest aides, after the leaking of scurrilous emails in which he proposed unfounded stories that would appear on the Red Rag site.

Although Downing Street sought to portray the hyperactive McBride as a lone gunman, attempts to distance Brown from the row failed. He was badly wounded as Labour MPs joined the Tories in saying that McBride’s activities reflected his master’s use of the dark arts, claiming they had been deployed against Brown’s potential rivals for the Labour crown since Tony Blair captured it in 1994. Former ministers who believe they were among the victims, such as Alan Milburn, Stephen Byers and Frank Field, widened their attack beyond McBride’s actions, warning that Brown lacked a forward-looking agenda beyond his natural economic turf.

Brown aides insist the storm will pass. But even his most loyal MPs fear it will leave lasting damage, not least to Brown himself. And they wonder how he will be able to attack David Cameron, one of McBride’s proposed victims, at the general election. The Tories are delighted; they are already denouncing every attack on them as “another Labour smear”.

The Prime Minister’s “moral compass” seems to have lost its bearings. He may struggle to reclaim the moral high ground he covets, and to present himself as an experienced (and now world) statesman who is above the shallow, tactical political point-scoring practised by the novice Cameron. Perhaps the most dangerous aspect of the affair is that Labour will struggle to erase the image of desperate men in Downing Street trying to hang on to power by whatever means they deem necessary.

The pressure on Alistair Darling to turn the political tide when he unveils his second Budget on 22 April is intense. There is only one problem: as he has been warning cabinet colleagues for weeks, “There’s no money.”

In his pre-Budget report last November, the Chancellor forecast that public borrowing would be £118bn in the current financial year. That was based on the economy starting to recover in the second half of this year. Now he will not forecast recovery until around the end of this year. Independent analysts now predict the borrowing figure will be as high as £150bn.

If he spends more now, as he probably will, to combat the recession, Darling will want to reassure the financial markets that the books will be balanced eventually. Watch out for more medium-term tax rises on top of the 45p top rate of income tax on earnings above £150,000 from 2011.

The betting among ministers is that the instinctively cautious Darling will not please those Labour MPs who are pressing for the rich to be soaked immediately, and that any spending boost or tax cuts for the poorest will be smaller than many backbenchers would like. There is no shortage of items on the wish-list of Labour MPs and ministers. But, given the constraints under which Darling feels he must operate, he may manage only a nod in the direction of those urging a full-frontal attack on child poverty.

The Chancellor is expected to announce proposals, perhaps worth a few billion pounds, to ensure that Britain pulls out of the recession as quickly and in as good shape as possible. They will probably include a new set of measures to help the unemployed back into jobs and more aid for industry.

At the Treasury, officials worked throughout the Easter weekend on what, in Whitehall, has been called a “lastminute.com” Budget, because both the Prime Minister and the Chancellor were heavily involved in the G20 summit and could not turn their full attention to the Budget until that event was over.

Brown aides hope the Budget can make the political weather. So we can expect much talk of a “green recovery” and a “low-carbon economy” emerging from the downturn, as much of the investment required (such as on renewable energy) will have to come from the private rather than the public purse.

Brown may have left the Treasury, but he is still its First Lord, and no Budget would be complete without his much-vaunted dividing lines between Labour and the Tories. On the face of it, Cameron is on the right side of the line. He looked isolated when he decided to oppose the £20bn fiscal stimulus that Darling announced in November and grab the mantle of fiscal responsibility. He does not look so isolated now, thanks to the warning by the governor of the Bank of England, Mervyn King, against another splurge as well as opposition in Europe, led by Germany and France, to Barack Obama’s call for countries to cut taxes and boost state spending further.

Many voters will be instinctively sympathetic to Cameron’s position. The borrowing figures will be horrendous. They may dominate the Budget headlines and enhance the Tory leader’s claim that his party must again take on its historic task of cleaning up the mess left by a Labour government.

Yet all is not quite what it seems. Brown and Darling will try to draw another dividing line between a government committed to taking “action” to help business and families through the downturn and a “do-nothing” opposition that would let people sink or swim because of its commitment to Thatcherite economics. The Tories reject the idea that they would take no action, but leave themselves vulnerable to Labour’s charge by talking up the need for public spending cuts if they win power – without spelling out where the cuts would fall. Another line of Tory attack – that the November measures are not working – was undermined this month when a report by the Centre for Economics and Business Research suggested that the much-criticised temporary cut in VAT had boosted retail sales after all. Darling has not had much good news since becoming Chancellor. Here, at last, was a golden nugget. The bad news was that it received very little media attention, as it certainly would have done if the study had found the VAT reduction had failed.

Perhaps Darling’s greatest challenge is how to be relatively optimistic about the future of the economy while announcing some pretty grim news about the present. Aides say he is personally upbeat about Britain’s ability to come through the recession. Cabinet ministers hope the wide range of measures taken here (bank bailouts, interest-rate cuts, fiscal boost, printing money, plus the weaker pound) may allow the country to bounce back more quickly than its main competitors.

Yet it’s a safe bet that the words “green shoots” will not pass the Chancellor’s lips, in spite of some tentative signs of optimism in the housing market and service sector. And even if the economy turns at the end of this year, voters would be unlikely to feel the benefits before a 2010 general election.

How then will the Brown government find reasons to be cheerful? By offering a vision of the different economy that will emerge from the recession, and spelling out where the jobs of the future will come from, such as green industry. The plan is for Labour to claim that it has not passed its sell-by date, and has a new mission for which it is uniquely qualified: ensuring a fair recovery. Yet there was nothing “fair” about what McBride was up to. Context matters. The Budget will now be judged by a hostile media that scents the blood of a dying government.

Darling’s task was never going to be easy. It has been made much harder by the dark backcloth to his Budget, painted by the McBride affair.

Andrew Grice is political editor of the Independent