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It is Osborne’s plan that failed, but Miliband who must move on

What Labour lacks is a story to tell about how it would govern in a time of austerity.

It could have been the Chancellor's Black Tuesday. On 29 November, George Osborne stood before parliament and admitted that all of his economic calculations have been wrong. Growth will be much lower than anticipated, unemployment and debt higher. The promise to have the budget deficit defeated in time for a 2015 general election was withdrawn.

Since Osborne's timetable was designed to coincide with the electoral cycle, missing the vital deadline upsets the calculations that underpinned the coalition between Liberal Democrats and Conservatives. It was meant to be a fixed-term, joint enterprise to deal with the public finances. With austerity now due to linger on well into the next parliament, the two parties are finding it harder to imagine how they might peacefully part company before polling day. Coalition management has already become "messier", according to one senior Whitehall official, with fiercer competition to leave a yellow or blue stamp on potentially popular measures.

Question of trust

In negotiations ahead of the autumn statement, the Lib Dems pushed through plans for a £1bn fund to tackle youth unemployment with subsidised work placements. Televised images of Nick Clegg looking earnest surrounded by apprentice craftsmen were cheered in the Deputy Prime Minister's office as a triumph of political positioning. The mood was dampened when news leaked out that the plan would be financed with a freeze on tax credits for middle- income households. Camp Clegg believes this "supremely unhelpful" additional piece of information was briefed by disgruntled Tories in the Department for Work and Pensions (DWP), jealous of Lib Dem incursions on their employment policy turf.

A similar squabble erupted over plans to increase the number of free nursery places for two-year-olds. Although technically this also falls under the DWP's remit, it was the Deputy PM who forced the issue of affordable childcare on to the agenda of the "quad" - the coalition steering committee that comprises David Cameron, Osborne, Clegg and the Chief Secretary to the Treasury, Danny Alexander. Clegg wanted credit for the idea. The Tories felt he had fronted enough good news for a while. The policy was announced on the morning of the Chancellor's statement as a Treasury decision.

The atmosphere in the quad is still civil but there is less cosy consensus and more forthright bartering over policy. "It is more transactional," says a source familiar with the discussions. Tory MPs complain that the Lib Dems are the more mischievous party when it comes to leaking quad victories, while Downing Street claims to operate a policy of non-retaliation. "We try to rise above all that," says one No 10 aide.

Cameron and Osborne know there is a natural limit to Lib Dem glory-seeking. The junior party needs coalition to look like a functional model of government at least as much as it needs to get the credit for individual policies. The one fixed point of total unanimity is the need never to question the budget cuts contained in last year's spending review. It is the sacred text, enshrining the commitment to fiscal rigour that is supposed to have fended off those predatory bond traders who are now feasting on the carcasses of indebted governments elsewhere in Europe.

The coalition parties are confident that the discipline they are showing in keeping to tight spending rules puts them ahead of Ed Miliband and Ed Balls in the competition to look like reliably parsimonious custodians of the nation's depleted wealth. Downing Street still believes Labour can be defeated in a campaign dominated by credibility on the deficit. "The next election will now be fought on the question, 'Who do you trust to finish the job?'," says a senior government adviser. The gamble is that enough voters have now decided that the whole financial mess was made by Labour that they can't envisage putting the party back in charge, even if they detect truth in the opposition claim that premature austerity has suffocated growth.

Balls is admired across the Labour front bench for his formidable economic brain, but some shadow cabinet ministers worry that his determination to prevail in an argument that should have been won last summer (when Labour was distracted by its leadership contest) is blinding him to a political reality: the public cares less about what caused the deficit than about how politicians will deal with it. Balls knows what he thinks the Chancellor should be doing differently. He has a "five-point plan" to create jobs and stimulate growth. What Labour lacks, however, is a story to tell about how it would protect public services when budgets are shrinking.

Grey austerity

For that reason, public-sector strikes over government pension reforms on 30 November represented exquisitely bad timing for Labour. "A source of frustration," is how one shadow cabinet minister described it. Miliband would gladly have let the news of Osborne's economic woes reverberate through the week. Instead, the focus shifted to an issue that risks discomfort for the Labour leader, given his party's financial reliance on trade unions.

Labour's position is a queasy combination of sympathising with the strikers' grievances and wishing they were not on strike. That ambivalence probably captures the public mood fairly well, but if Miliband wants to form a government he will have to start expressing clearer views on what he thinks the state can afford, whether in public-sector pensions or any other benefit to which the coalition is taking an axe.

Labour has been craving the day when Osborne's strategy would finally be seen to have failed. Then the Chancellor's Black Tuesday came and merely blended into the calendar of grey austerity stretching ahead for years.

No politician of the current generation has ever had to imagine being in power with the state coffers so empty for so long. It is a prospect that will certainly put a strain on the coalition. The Tories and Lib Dems are struggling to agree on what government should be doing when there is no more money to spend. What unites them is the need to tell voters that Labour has nothing to offer in that debate. Miliband's urgent task is to prove them wrong.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

This article first appeared in the 05 December 2011 issue of the New Statesman, The death spiral

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.