Christmas cheer in the polls for Dave

After a long period in which the polls have been in a 'holding pattern', they have delivered a Christmas present for Dave Cameron in terms of a jump in the ratings: Polls

As the experts at Nottingham University point out, this is undoubtedly related to the exercise of the European 'veto' and probably involves an erosion of UKIP support. However, they also doubt whether the boost will be an enduring one, given the low salience of the EU in British politics and the fact that UKIP voters have other concerns.

Nevertheless, it does once again raise the issue of why the Labour Party is not doing better given the overall economic and political situation. One reason is that the polling evidence suggests that the electorate have no confidence in their economic competence, a reasonable given view given the way in which they spent what would have been a substantial budget surplus after 2001.

The other factor is Ed Miliband who continues to fail to impress. There are situations in which he could made more off. For example, the 'We are the 99 per cent' claim of the Occupy movement does resonate, even though it is ultimately spurious given that it assumes that the 99 per cent have a homogeneous set of interests and values which is clearly not the case. Nevertheless, Miliband could have recognised that they had an emotional case which required some intellectual development.

What instead we get is a lot of dithering and sitting on the fence as he tries to steer a course, for example, between the public sector unions and those who work in the private sector. In the dispute over public sector pensions, the Government has had to make some concessions but has largely got what it wanted in terms of higher contributions, later retirement ages and smaller entitlements.

Labour loyalists seem determined to stick with Ed to the last, however.

Do English cities want elected mayors?

Next May voters in eleven English cities will be asked if they want elected mayors - which already exist in fourteen locations ranging from the rather special case of London to smaller towns such as Bedford and Mansfield.

The Warwick Commission on Elected Mayors which I am chairing has been set up to provide an evidence base for considering the case for and against elected mayors. We are interested in whether they make a real difference compared with more traditional forms of local government. Some people think that the idea is an important democratic innovation, others that it is just a gimmick.

If voters in one or more cities do choose to have them, we need to think about how they can be effective and this will be one of the Commission's tasks. Read more here: Elected mayors

I have also written a longer post about this topic on the LSE Politics and Policy blog: Elected mayors

Church militant?

Leamington Parish Church

Not for the first time the Church of England has made a fool of itself over handling the demonstration outside St.Paul's. The Church's response has been weak and inconsistent, revealing once again internal divisions. Given its overall weakness, these events could do it permanent damage.

The Church stands accused of being more concerned with temples of stone than a community of people and failing to preach the social gospel of the Sermon on the Mount. The placard held aloft by one demonstrator, 'What would Jesus have done?' was rather telling.

However, I do have some sympathy with the Church in terms of its positon as a custodian of what are in effect national monuments which cost a great deal of money to run but for which it receives no public money (unlike a number of European countries that have 'church taxes' such as Germany and Finland). No wonder that it relies on 'suggested donations' for admissions and is worried about the income from its gift shops.

St.Paul's is the ultimate cathedral icon because of the pictures of it standing proud among the smoke and devastation of the blitz, a symbol of the country's stand against the Nazis. But the problem is replicated on a smaller scale across the country.

In Leamington we have a Victorian parish church. It is a large building, too large for the congregation in a town that has several Anglican churches. It's pleasant on the eye not particularly outstanding architecturally and it costs a lot of money to maintain. But it's an important and familiar part of the townscape, as important as the town hall with the statue of Queen Victoria outside and if someone suggested knocking it down there would be a furore.

No doubt all these problems will raise the issue of Disestablishment again. Many outside and inside the Church of England would like to see it hapen and the arguments in favour are convincing. Probably the main counter argument is that an Estabished church has to offer its services to all its citizens.

I would be personally sorry to see the Church of England disappear, but large parts of it have failed to move with the times or not quickly enough. It still has too many echoes of the 1950s which was not a glorious age whatever historian Dominic Sandbrook (now writing daft articles in the Daily Mail) might tell us. It recalls an era of a stuffy, repressed and repressing Establishment whose worst sin was to be boring.

As a Londoner born and bred, I have never been in St. Paul's and I must do sowhen these troubles end. Incidentally, as far as the demonstration is concerned, it is become a story about the Church rather than the banks.

Not a game changer

Valencia: Reuters rang me up yesterday evening to ask for comment on Liam Fox's resignation. My view was and is that it is not a game changer for the Coalition Government.

It is clearly an embarrassing episode, but Dave has handled it as well as he could in the circumstances. It is not indicative of the kind of sleaze which haunted the last years of the Major Government. Indeed, these days to get away with two Cabinet resignations in eighteen months is not bad going given the rapacity of the media pack.

Of course, one potential future problem is that Dr Fox could act as a focus on the backbenches for discontented right-wingers.

The Government would also have preferred stability in the defence ministry given that it has been critical of the turnover of ministers there under Labour. This made it more difficult to get a grip on the cost effectiveness of defence spending.

Phillip Hammond has been an effective transport minister, facing down opposition to the high speed train proposal. He is also on the right of the party so the balance of the Cabinet has not been changed. His replacement, Justine Greening, is also a rising talent.

So there has been some reputational damage, but it is relatively limited, certainly in terms of any lasting effect.

President Dave offers leadership

Leadership was a central theme of David Cameron's speech to the Conservative Party conference this afternoon: leadership provided by him in difficult times. Apparently even the podium looked presidential.

It's a reasonable enough strategy given that the prime minister is the most popular of the political leaders (well in England anyway), not a very tough barrier to surmount. And he does run ahead of the party.

David Cameron also paraded his own liberal credentials, supporting gay marriage and emphasising the importance of overseas development aid even in tough times, something not many Conservatives - or voters - are keen on.

As I drove up to Yorkshire listening to the speech I passed a pub offering 'credit crunch lunches'. It is not easy to offer a positive message in such perilous times. But the prime minister emphasised the need for a 'can do' spirit to overcome excessive pessimism.

The speech was a bit short on content, but what was needed was to provide as rousing a message as was possible in the circumstances and that was largely achieved.

Ed's conference speech

I have to say that I am a bit underwhelmed. It often seemed that he was addressing the conference hall rather than the country. The speech went down well in Liverpool, especially the barbs against the Tories and Nick Clegg. But for me it didn't deliver a coherent strategy for government. It had the feeling of a speech that had been worked on a bit too much and hence sometimes came across as pedestrian when it aspired to be inspirational.

There was a theme there: I lost count of how many times values was mentioned. Ed was trying to say: these are my values and I think they are your values and the country's values as well. And Ed tried to sell himself as someone with an outsider's background who could deliver real change. He declared that he was his own man who would do things his way, making a real break with Tony Blair and Gordon Brown.

Much was made of the new bargain. This would create a society in which one got something for something, in which effort would be rewarded. A distinction between good and bad companies had been trailed beforehand, but how does one decide which company is a good one?

Ed thinks the system is flawed, and it may well be, but how does one make the link between this and the everyday concerns that people have, even though Ed tried to give concrete examples in his speech?

Labour's search for credibility

What Labour really needs out of its conference is the development of a view among voters that it is a credible alternative government. Of course, the first obstacle there is Ed Miliband. Voters do not see him as a credible prime minister in waiting. They think he lacks that indefinable but essential quality, charisma.

The answer of the Labour image makers is to portray Ed Miliband as 'one of us', cue photo opportunities with his children. Apart from the fact that the photos were rather trumped by one of Villa supporting Dave Cameron at the match at Loftus Road with his son, voters do not want prime ministers to be 'one of us'.

They expect them to have an understanding of their problems, but they also expect the prime minister to have qualities that separate him or her from the crowd, a sense of command and authority. Dave Cameron's confidence can shade into the appearance of arrogance and complacency, but he does look as if he is in charge.

When it comes to policy, there is something of a vacuum, reflecting Labour's overly complex policy review. Unfortunately, the first major announcement, capping student fees at £6,000 does not stand up to close scrutinty.

First, it is not clear what its status is. Certainly it is not a manifesto commitment (and what happened to the graduate tax anyway?) Apparently that is still on the agenda.

Second, the cut will only be of benefit to those who earn enough to repay their loans. So better off graduates could find their fees cut. Graduates earning more than £65k a year would have to pay a higher rate of interest on their loans, but in order to raise the required amount, these rates of interest would have to be prohibitively high.

This might seem to be a way of enticing students disllusioned with the Liberal Democrats, but students (and their parents) are going to look at this proposal long and hard.

Black hole in public finances

Ministers have been sounding a gloomy tone recently and it's not just because of the eurozone crisis. Work by the Financial Times using the Office for Budget Responsibility model suggests that the structural deficit is £12bn higher than previously thought, a slippage of 25 per cent.

It seems that the level of spare capacity in the economy, both in terms of plant and labour (with the right skills mix), is lower than was previously thought. I would add a note of caution here as spare capacity is more difficult to forecast than most economic variables.

What this would imply is yet more spending cuts or tax increases, but politically that is not viable given the sluggish growth in the economy which, according to the Bank of England, would have tipped into recession but for quantitative easing. What the Bank also admits that QE has pushed inflation higher than it would have been by 0.75 to 1.5 per cent. Of course, inflation also reduces the real value of the debt.

In any event we aren't going to see value added tax go up to 22.5 per cent which is what would be required to plug the gap. But it is does show how difficult will be for the Government to meet its structural deficit target and have some good economic news by the time of the next general election.

How to canvass

A classic film from 1950 made for the Conservatives: Canvassing

Economists disagree shock

This should come as no great surprise, indeed it could apply to any group of experts. However, I was interested to see that my colleague Mark Harrison (with whom I taught Making of Economic Policy last academic year) was one of the signatories of the letter from 20 economists in the Financial Times yesterday arguing that the 50 per cent tax rate was damaging to the economy. Today there is a reply from Andrew Oswald also in the Economics department at Warwick, although currently based in Bonn and best known as a happiness guru.

Oswald points out that the signatories produce no evidence to support their case and states that what evidence there is points in the opposite direction. The evidence that Oswald cites seems a bit limited as it is based on a case study of a tax hike in New Jersey.

In another letter, Alan Manning of LSE points out that a study of footballers, plausibly the most mobile of professions, did find that tax rates influenced location decisions, but the effect was not large and the research concluded that the revenue-maximising tax rate was well in excess of 50 per cent.

Of course one could argue that the 50 per cent rate sends out a signal about whether Britain is 'open for business'. Its main effect may not be inducing relocation, but dissuading location in the first place.

In any case the tax has not been in place long enough for its effects to be properly studied, although the Treasury is trying to make some calculations. One of the considerations has to be whether it encourages the use of tax avoidance devices.

Of course in many respects what the tax is about is political symbolism. It is a seen as a gesture towards 'fairness', although whether it does promote fairness is another matter. But withdrawing it would be politically costly when median incomes are being squeezed.

If the goal is revenue maximisation, then it is arguable that property taxes are more efficient and less distortive. A 'mansion tax', a 1 per cent levy on the amount by which a property's value exceeds £2m, would generate enough revenue to replace the mansion tax. But it might be politically difficult for many Conservatives.

Do prime ministers and chancellors always fall out?

In article in the Evening Standard yesterday reviewing Alastair Darling's memoirs the distinguished political commentator Anthony Seldon argued, 'Britain has specialised in bad relationships between prime ministers and chancellors.' If that is the case, the consequences for the conduct of economic policy would be very serious as this relationship is the very fulcrum of government.

Seldon is able to produce a number of examples to support his case: (arguably) Howe and Thatcher; Lawson and Thatcher (although not initially); Lamont and Major; and Brown and Darling.

But one could produce counter examples. Seldon has to concede Clarke and Major. Healey from 1974 to 1979 had an effective working relationship with Wilson and then Callaghan. And the relationship between Osborne and Cameron seems to be harmonious and effective.

But then Cameron allows Osborne to get on with the job. The worst situations arise when the prime minister really wants to be chancellor as well. That was a problem with Macmillan's succession of chancellors and it was with Edward Heath, having seen the untimely death of Iain Macleod in the opening weeks of his administration. Anthony Barber was arguably one of the least impressive of post-war chancellors and lacked the authority and political base to stand up to Heath.

Given the importance of this relationship, it is remarkable how little systematic research there has been on it.

Arundells and Edward Heath

Yesterday I visited Arundells, the home in Salisbury's Cathedral Close of Edward Heath. Coincidentally, I have just finished reading Dominic Sandbrook's history of the Heath Governnment, State of Emergency.

Thoroughly researched and well written as all of his books are, Sandbrook social conservatism is on display: perhaps even his big C Conservatism as he is now fulfilled the ambition that many academics dream of, giving up his post to write full time. And where has he moved? Chipping Norton.

Sandbrook's basic verdict on Heath is that he did not lack the vision thing, but tried to do too much too quickly against a difficult social and economic bacground (remind you of David Cameron?) Heath was a modernising technocrat who thought you could win through by rational argument but his communication skills were poor (perhaps because he was emotionally stunted).

Arundells is well worth visiting just for the garden (which you can go round if you can't get into the house which you have to book ahead for). It is beautifully designed and ends in a river and some water meadows while walking back to the house gives you a fine view of the spire of Salisbury Cathderal (which has an interesting contemporary sculpture exhibition on at the moment).

For a political enthusiast, the highlights include the collection of photos on the grand piano which includes one of Heath with Fidel Castro, an unlikely pairing. Bill Clinton was hidden in a draw for a while, apparently.

Another highlight is the 'cartoon corridor'. It's interesting how quickly political reputations fade as I had to explain to other visitors who John Davis (of 'lame ducks' fame) was. Indeed, I bumped into our Conservative MP at the station in the morning and he clearly regards Heath as prehistoric which in a way he is.

If you want to see Arundells, you might have to go quickly as the trustees are trying to sell it off as they can't afford the upkeep although they are encountering some resistance: Arundells

If this was the States, the house would be part of a presidential library and run as a national monument. Here there might be a case for the National Trust to take over. They would bring some commercial savvy to the operation such as asking visitors to add Gift Aid to the rather modest fee. It would be a shame if the unique collections in the house were dispersed.

Proceed with caution

Apparently some consideration is being given to replacing the 50 per cent tax rate by increasing the 40 per cent rate to 45 per cent. The 50 per cent rate (63 per cent if one takes account of national insurance) is, of course, loaded with political symbolism in terms of 'punishing the rich' but is totally ineffective in terms of generating any additional net revunue. It just complicates further an already complicated tax system.

However, in political terms one has to be very careful about increasing the 40 per cent rate. It brings within its net a considerable number of people who are potentially Conservative voters. One could, of course, increase the threshhold (which has fallen behind increasing salaries) to reduce the impact but this could minimise the revenue raising effect.

Scenarios for the UK economy

Blog from the IMF setting out possible scenarios for the UK economy. They think that a gradual recovery is most likely, but call for nimble policy responses if that doesn't happen: Economy

They anticipate a gradual acceleration of growth to 2.5 per cent which would be good if it happened, although I am less sanguine than them about productivity. It's also worth noting that two of their scenarios refer to high inflaton which is what is really squeezing incomes rather than austerity.

0.2 per cent is just good enough

The latest quarterly figures for GDP growth of 0.2 per cent are just good enough in political terms, especially given that special factors knocked off 0.5 per cent: Growth . They are below expectations and disappointing comparatively, but just enough to prevent Ed Balls creating a political firestorm.

Consumer demand is being hit by the squeeze on incomes. But what is not talked about very much is the underlying structural weakness of an economy that is so dependent on consumer demand, something like two-thirds of the total. Debt fuelled 'privatised Keynesianism' as Colin Crouch has called it is not going to return any time soon.

In terms of short term fixes, a cut in VAT has been recommended. That would stimulate consumer demand and have a positive effect on inflation. However, it would also cut revenues and that would undermine the deficit reduction policy which is already encountering plenty of difficulties.

Statement by the prime minister

Sometimes I wonder about the parallels between this current crisis and the Westland crisis which was supposed to bring down Margaret Thatcher as prime minister but which is barely remembered today (although it did unleash Michael Heseltine as an unguided missile). Actually Ed Miliband was more effective in the questions that he put to the prime minister today than Neil Kinnock was then.

Dave Cameron said that he had learnt from the experience of employing Andy Coulson and with the benefit of hindsight he would have done things differently. If Andy Coulson was shown to have lied, he would then apologise, but this 'conditional apology' was not good enough for Ed Miliband. I must say that I have never quite understood the fashion for apologies.

Ed Miliband was at his strongest when he pointed out that there were five opportunities for David Cameron to doubt Andy Coulson's suitability and the strongest of these was in relation to a New York Times article last September which led to the re-launch of the police investigation. Miliband suggested that the prime minister was caught in a tragic conflict between personal loyalty and the standards and integrity required in public life.

These are all powerful points, but Labour's relationship to the media has not been squeaky clean. The prime minister was able to castigate them as the 'slumber party' and pointed out that Rupert Murdoch had named Gordon Brown as a personal friend.

Nick Clegg's body language throughout was interesting, one of frozen immobility most of the time. Clearly the Lib Dems seen an advantage in distancing themselves over this issue.

Despite the saturation media coverage, I just wonder how interested those outside the political class are in all this. The crisis in the eurozone threatens to unleash a sovereign debt crisis and a second banking crisis which would be far more serious than what Ed Miliband described as a 'a catatsrophic error of judgment'. Which of us has not made poor personnel choices?

David Cameron faces media storm

All my hopes of a quiet Sunday at home were shattered after first Rebekah Brooks was arrested and then the Commissioner of Metropolitian Police resigned. A classic media storm quickly developed with one reporter suggesting to me that 'the dominoes are falling' and David Cameron himself might be in danger.

Apparently, Dave did not hear of the news of the Commissoner's resignation until he was 1 hour 10 mins. into his flight to South Africa when he had a satellite phone conversation with Home Secretary Theresa May.

There is no doubt that David Cameron has made errors of judgment in relation to Andy Coulson, not least in failing to heed advice that he was given, although some of that advice appears not to have reached him. David Cameron also said last week in the House of Commons that some of the assurances he was given by Andy Coulson may not have been well founded.

Ed Miliband has made good use of the situation and has been able to take his L-plates off and for once look authoritative. Tom Montgomerie suggests mischievously in The Times today that this is bad news for Labour as he is now well entrenched. His poll numbers have certainly not improved all that much (yet) but he now may look less like the head boy asked at short notice to make a speech.

Yvette Cooper has probably been an even more effective performer and has insisted that David Cameron has questions to answer. As it so happens, the Prime Minister is in South Africa and will not return until after Parliament goes into recess (he is about to give a press conference), although some Labour MPs are calling for the House of Commons to be recalled. David Cameron said in his press conference this morning that it would be appropriate for the House to be recalled on Wednesday for a statement and questions.

What is really serious about this crisis is that it further erodes trust in institutions, not just the media, but even more important the Metropolitan Police. The Met has had problems in the past with corruption and institutionalized racism and these have been tackled to good effect. Crime in London has been falling. However, it is evident that some members of the force have had a closer relationship with the media than is desirable.

It is now becoming apparent that the Mayor of London had lost confidence in the Commissioner and in effect he went before he was pushed (Theresa May would have probably implied that he should go in the Commons statement scheduled for todday). Bozza and Dave had a number of conversations over the matter over the weekend which must have been interesting given their political rivalry.

The Liberal Democrats have come out of this quite well because they were not having informal meetings with News International but in part this because they were not regarded as serious players before the last election. Nevertheless, Nick Clegg has managed to sound sensible and authoritative.

It should be remembered that there is a serious crisis in the eurozone and a potential debt default in the US, either of which could trigger a second recessionary wave at a time when governments have no shots left in their locker. Voters will make their decision at the next election in terms of the economy and public services, not the phone hacking scandal.

Nevertheless, David Cameron's image has been dented. He is good at the big picture but the flip side of that is that he does not always master crucial details and up to now has been able to breeze through on the basis of self-confidence. Clearly he now faces a more difficult phase as this story will rumble on for months and years.

But George Osborne is not going to be moving into No.10.

The effects of an ageing population

The Office of Budget Responsibility has published the results of analysis of the long-term effects of an ageing opulagtion: Ageing

The headline conclusion is that further public spending cuts or tax rises will be needed after 2016-17. The pressures are estimated to be so great that a tax rise of 1.5 per cent of national income would be needed in 2016 to put public sector debt on a path to return to 40 per cent of national income by 2060. Such a rise would be equivalent to increasing value added tax to 24 per cent.

Ageing has little effect on taxation but would raise public spending by 5.3 per cent of national income. These rises would start in the 2020s and are driven by a sharp increase in the costs of health care, state pensions and long-term care. However, it should be noted that Britain's likely burden from ageing was no worse than in the US and better than in many European countries.

However, the OBR does assume relatively modest rises in health spending which seems somewhat unrealistic given the pressures that arise from advances in medicine. If the rate of growth of health spending was closer to the historical average, it would take up another 5 per cent of national income by 2060.

There are real intergenerational justice issues here, but people have a strong sense of entitlement to benefits in old age. Moreover, older voters have a much higher propensity to vote that younger voters, approaching 70 per cent.

Public sector pensions

Last Friday The Times carried an interview with a teacher from my old primary school, St.Margaret's Plumstead Common. This 59-year old complained, 'I'd like Michael Gove to come and spend a week doing my job .. When he does that he can come and tell me about cutting my pension.' Given that she is near retirement age, her pension is unlikely to be affected much.

Even if the Government's proposed changes go through in full, those in the public sector will still be much better off than those most of those in the private sector, many of whom do not have a pension worth speaking of or have to make their own provision in schemes which are vulnerable to stock market fluctuations. If vox pop and radio show texts are anything to go by, many in the private sector resent what they see as the privileged treatment of the public sector.

There are two answers to that view. One is that relatively good pensions form part of an overall renumeration package which public sector workers signed up to as part of their contracts. But that is an argument for phasing in the changes not abandoning them which is what is proposed anyway. And if the grass is greener on the other side ...

A second argument is that poor private sector pensions need to be tackled rather than reducing those in the public sector. Employers should be 'required' to provide them. In other words labour costs in the UK should be substantially increased which wouldn't do much for competitiveness.

Career average pensions could actually benefit the less well off and the unions seemed to be prepared to concede that point. As for working longer before pensions become available, trade unionists complain that they are being made to pay for the banking crisis.

But the banking crisis didn't lead to people living longer. It's one thing to pay a pension for seven years after someone has worked for forty years and another thing to pay it for thirty years.

Where the unions do have grounds for complaint is the increase in contribution costs at a time when the pay of their members is frozen for all except the lowest paid. In other words this means a further cut in take home pay.

It is actually not as much as the figures suggest because of the generous tax treatment of pensions - something that is never really discussed. Even so, it is substantial and it is here that the Government may need to give way, although by doing so they place at risk their deficit reduction strategy. But a hot autumn could damage the Government's standing. In other words, there might be a political price to pay for failing to give concessions.

It's a tricky tightrope and while David Cameron is good at tactics, he may be less good at strategy. Given the recent proposals on paying for care, one thing that does need to be thought about is whether those of pensionable age should continue to be exempt from National Insurance contributions.

Coalition Government 'shows emotional intelligence'

The Constitution Unit at UCL has been carrying out an intensive interview-based study of the Coalition Government. They report that 'In Whitehall officials report that both parties have developed a lot of emotional intelligence and worked hard to develop effective relationships, in a welcome contrast from the Blair/Brown years.'

In Parliament, the Coalition 'has behaved no differently from any other majority government, taking Parliament for granted ... The coalition may have less flexibility to accommodate Parliament because its legislative proposals are already a carefully constructed coalition compromise which they dare not unpick.'

The Unit finds that 'The Lib Dems have had a lot of influence on coalition policy, but struggle to demonstrate it.' This finding is confirmed by another piece of research which has just been published which I hope to comment on subsequently.

A mid-term review of the coalition agreement is due to start this summer and finish in September 2012. This will be an opportunity for discontented backbenchers in both coalition parties to express their views. Conservative backbenchers have been upset recently by what they see as Lib Dem triumphalism over changes to the NHS reforms.

Many Conservative backbenchers on the right of the party think that cuts in the defence and law and order budgets have gone too far and would be prepared to cut the NHS budget (and/or introduce an element of charging).

Will no one rid me of this pestilent priest?

Dissident divines have been a problem for rulers in England for centuries. I haven't read what the Archbishop of Canterbury has said in the The New Statesman in detail but from the extracts I have seen it seems a bit pious, other worldly and cerebal which is exactly what I would expect from the current incumbent.

It is, of course, all reminiscent of the 1980s when the Church of England and the House of Lords constituted Mrs Thatcher's most effective opponents. This culminated in the publication of Faith in the City in 1985 which was denounced by one of her ministers as 'Marxist theology'.

One of my recollections of this period is going to a dinner at Cambridge University where there were a number of Japanese guests. A junior minister was the speaker and tore up his speech and launched into an attack on the Church of England. A puzzled Japanese guest asked me why the minister was attacking the bishops at a conference on government-industry relations.

The current fuss is all a bit awkward for David Cameron after a rather tricky week which has been characterised as a 'wobble'. David Cameron is, of course, a communicant member of the Church of England. But he gave as good as he got to the Archbishop.

For some Conservatives it will affect the debate about the future of bishops in the House of Lords, although that is a rather narrow take on things. As an Erastian, I have no objection to the Archbishop pronouncing on public issues, but I would be more impressed if the hand wringing was accompanied by a constructive alternative.

The Dave and Nick show

Despite the revival of formal Cabinet Government, it is interesting how much the Coalition Government depends on informal arrangements and in particular the personal relationship between David Cameron and Nick Clegg. This emerged from a presentation to the Magna Carta Institute seminar last week by Professor Robert Hazell of the Constitution Unit at UCL.

Cabinet committees are being taken more seriously and there is a right to refer issues up to the Coalition Commitee, but this ultimate star chamber has met only twice. The Coalition Operation and Strategic Planning Group was intended to meet weekly, but has been replaced by informal processes. Cabinet Committees resolve interdepartmental issues, not coalition issues.

Much depends on the bilaterals between Dave and Nick. They usually chat on the phone on Sunday evening and have a regular meeting each Monday morning. The Quad is made up of the PM and Deputy PM, plus the Chancellor and the Chief Secretary to the Treasury. Sometimes it functions as 'Quad plus' when other ministers are brought in. There are slo bilaterals between Oliver Letwin and Danny Alexander, as well as Letwin's 'policy catch ups'.

Why we should take debt seriously

There are those who argue that Britain's debt problem is not serious and simply a cover for David Cameron to slash the public sector. Two interesting posts by economist Mark Harrison argue the contrary case: Debt

Quite apart from anything else, having a large debt means that a great deal of money is spent servicing it. Britain has the lowest costs of any major country in terms of servicing its debt, but even so it cost a mouth watering £44 billion last year. Think of the opportunity cost of that.

Britain has been living beyond its means in terms of personal and public consumption for some time. How that burden is shared out between public expenduiture cuts and reduction in personal income is a matter for political judgement. However, 'rebalancing' the economy certainly involves a squeeze on personal incomes so that there is an export led recovery.

Of course, there is a political cost to that. But even if confidence in the Coalition's economic competence is declining, as polls suggest it is, voters evidently many reservations about Ed Miliband.

It may provide an opportunity for parties of the populist right like UKIP who have an alternative narrative about globalisation and Europeanisation. However, such parties are often not well led and it is difficult for them to succeed under a first past the post system.

The one leader and party that is riding high in Britain at the moment is Alex Salmond and the SNP. The Scottish question could potentially become the equivalent of the Quebec question in Canada: never resolved, but always a key factor in national politics.

Quebec has, of course, achieved considerable autonomy and even has a ministry of foreign affairs. The future for Scotland might not be separation, but it could come close to what was mooted in Quebec at one time: sovereignty-association.

Walking the tightrope

Both the Government and the Bank of England are walking a tightrope in terms of economic policy at the present time. The Bank is (quite properly) a relatively secretive institution, even if much more transparent than it was in the past and I am not claiming to have any special inside knowledge.

However, there are concerns by observers of the Old Lady that inflation has got baked into the cake. Electricity prices are expected to go up by 10 per cent in the summer and gas prices by 15 per cent, the latter driven by liquified natural gas demand from Japan.

It could be argued that increasing interest rates would actually do very little to drive down inflation and would impact on consumers by pushing up mortgage rates. The Bank does consider, however, that inflation will eventually diminish because there will be no further VAT rise; no further fall in sterling; and (hopefully) no big rise in energy prices.

Exports have been largely driven by sterling depreciation. It is particularly a matter of concern that imports by businesses resoponding to Bank surveys have not been affected at all despite a 20 per cent rise in their cost. Imports are predominantly intermediate ones suggesting that no domestic substitution is occurring. However, it is possible that the rate of growth in imports may have been slowed down.

The consequences of an unprecedented fiscal contraction in the UK economy have yet to be seen. However, big corporates do have tons of cash they could spend. Employment intentions are picking up, but a lot of it is part-time and self-employed.

There have been substantial differences on the Monetary Policy Committee (MPC), although these will diminish with the departure of ultra inflation hawk Andrew Sentance who even seemed to question the Bank's forecasts. Sentance's argument is in essence that it is really all about global imbalances rather than UK domestic conditions and the former will persist.

More generally, the differences on the MPC reflect considerable uncertainty about risks. Some members of the MPC are concerned about the credibility gap in terms of constant overshooting of the inflation target. People are arguably more concerned about growth and employment than inflation.

At the moment there is an unprecedented monetary expansion and at some point this will have to stop. However, there is believed to be some concern in Bank circles about the fragility of the economy and downside risks.

The Bank has in effect admitted that the output gap (slack in the economy) is smaller than thought and this means that any expansion may see limited productivity gains and create inflationary pressures. It is unfortunate that the output gap is one area in which data is less reliable, but it is evident that some physical capacity has been destroyed for ever. There are also some signs of skill shortages appearing, especially in engineering.

One uncertainty is the sterling exchange rate. Bank thinking is to prefer the current rate, but a mild appreciation seems likely. In any event it cannot be managed.

Growth has been driven by larger firms, but business has never been better at the company owned by one of my children and her husband. New workers have been taken on and the order book is full. However, they were not receptive to the idea of a chat with the Bank's regional agent.

The economic outlook

The Magna Carta institute at Brunel University run by Justin Fisher held an interesting event on 'The Coalition - one year on' at the British Academy earlier this week. I plan to talk about some of the other presentations later, but here is a summary of what I had to say (my statistics generally come from the National Institute for Economic and Social Research).

The 'privatised Keynesianism' model identified by Colin Crouch in which the economy is driven by consumer debt linked to the housing market is no longer viable in the medium term, if at all. Consumer spending is forecast to fall by 0.6 per cent in 2011 (it still accounts for two-thirds of aggregate demand).

Consumers are being squeezed by inflation at 4.5 per cent with real disposable incomes falling. Indeed, I think that the Bank of England has de facto abandoned the inflation target. That may not be a bad thing, but they won't admit it is what they have done. Given fiscal consolidation, the economy needs a monetary stimulus and inflation also erodes the debt burden.

Real house prices are forecast to fall by 4.5 per cent in 2011, although the London market is still relatively buoyant, especially at the higher end where it is driven by foreign buyers. There is a fear of unemployment, particularly in the public sector. The Government's austerity rhetoric may have dented consumer confidence.

Export led manufacturing growth is forecast to be 6.9 per cent this year and 4.3 per cent in 2012. This is mainly driven by the weakness of the pound. All three political parties support rebalancing the economy and this is one of Nick Clegg's little known strategic objectives. However, much of manufacuturing is now essentially assembly operations and much of the value chain in industry has been wiped out. It should be noted that past government industrial policy interventions have not been conspicuoulsy successful.

The OBR's growth forecast for 2011 is now seen as rather optimistic and many commentators anticipate 1 to 1.5 per cent. It is unlikely that the economy will grow faster than the trend rate of 2.1 per cent until 2013. The higher growth rates recorded recently have little to do with government policy but reflect the fact that they have been hit less hard by the banking crisis (so far, but they are exposed to a Greek default). The German economy also has strength in high quality, high valued added manufacturing.

The output gap is probably larger than we thought whuich means that the sustainable output of the economy is lower than thought. Productivity growth is likely to be low and the economy will not grow as fast as it did without generating inflation.

It should be noted that the Coalition Government does not aim to eliminate the cyclical deficit (the cyclically-adjusted current budget) so in fact Conservative and Labour positions on the budget are less far apart than the rhetoric would suggest. There will be public spending increases in real terms over the Parliament, although as a share of GDP public expenditure will fall back to 40-41 per cent.

Given that the weakness of the recovery will depress tax revenue, even if (a big if) spending targets are met, net borrowing will fall to 3.6 per cent of GDP in 2015-16 rather than the projected 1.5 per cent. The current budget will run a deficit of 2.2 per cent of GDP compared with the 0.2 per cent forecast.

The Government has been criticised for the lack of a growth strategy, but there are limits to what governments can do to stimulate growth. The most useful measures such as skill formation only bear fruit in the medium term.

A good night for Dave

Dave Cameron has reason to be pleased with the local election results so far. BBC projections put the Conservatives on 35 per cent as against 37 per cent for Labour and 15 per cent for the Lib Dems. This is not a bad outcome for a party implementing unpopular policies. The Conservatives are also likely to be able to celebrate a big majority in the AV referendum.

In Scotland the presidential style campaign run by the canny Alex Salmond has paid off with a clear majority for the SNP. Labour may be able to take sole charge of the Welsh Assembly, but even there the result is on a knife edge. The results hardly show that voters think that they have a convincing alternative narrative or that they see Ed Miliband as a future prime minister.

Once again it is the Lib Dems who are the whipping boys for the Coalition Government. As expected, they have lost heavily in the council elections, especially in the north. There will now be increased party pressure on Nick Clegg to differntiate himself from the Conservatives.

Some of the things said in the AV referendum have left a sour taste in the mouth. It may never be glad, confident morning again, but it is not the end of the coalition. The two parties are inextricably bound together.

AV and PR

The Elections, Parties and Opinion Polls (EPOP) group organised a panel on the AV referendum at the Political Studies Assocciation (PSA) conference this week. Although it occupied the graveyard slot in the conference it attracted a good attendance and provoked some lively discussion. But perhaps that says something about the geekiness of political scientists as one can hardly imagine that outside on a warm afternoon in West London people were discussing AV as they sipped a coffee or enjoyed an early pint before the holiday weekend.

It was agreed that the debate had often been simplistic, misleading and irrelevant, but then, as someone remarked, that is true of many political debates. It looks likely that the referendum will be defeated on a low turnout (especially in London where there are no other elections).

British people are relatively conservative and tend to favour the status quo. They have been told that AV would be complicated and expensive, although, of course, any form of democracy costs money. The poll evidence suggests that older voters are more opposed and they are more likely to turn out and vote.

Given that AV is really a modified form of first-past-the post, what would be the consequences of either a win or a defeat for PR? Some think that a win would not be what some have called a slippery slope to PR, but would end the debate. Voters would be coralled into two voting camps, leading to less representation of the diversity of the electorate. What seems more likely is that a defeat would end the PR debate as a live item for some time to come. But it has always been a debate among the political class anyway.

What seems certain is that variants of PR will remain where they are embedded in 'secondary elections' for the devolved assemblies, the European Parliament and the London assembly and mayoral elections. The defeat of the referedum might give an impetus to Lords reform as a sop to Nick Clegg. A largely elected upper house would use some form of PR, although when this prospect was mentioned a life peer in the audience went slighty green around the gills.

Inflation

The slowing in the inflation rate was unexpected and good news. It means that the pressure is off the Bank of England to raise interest rates for now. Given that most households now have variable interest rate mortgages this will at least delay a further squeeze on household incomes.

What seems to have happened is that consumer resistance to higher prices persuaded retailers to reduce some prices. However, other cost pressures remain. The oil price goes relentlessly upwards. A 10-15 per cent in electricity and gas prices is likely in early summer.

Also most consumers don't perceive that inflation is not rising so quickly. This is not surprising when the cost of so many items is still going up. However, against the background of high unemployment this may not translate into significant upward pressure on wages.

The NHS dilemma

Two generalisations can be made about the NHS. All governments seem to think that organisational restructuring is the answer to its problems. And at the first whiff of the word 'reform' the medical profession is up in arms.

Andrew Lansley has come up with a technocratic reform of the NHS which is so complex that it is said that you can see it from outer space. Of course, the slogan 'Defend the Primary Care Trusts' is unlikely to get many people excited. But concerns that local hospitals might be made unviable by transferring business to the private sector is a more potent fear.

The underlying problems that the NHS faces are an ageing population; ever more costly medical technology and treatments; and an increase in the numbers of chronically ill. The Government is expanding NHS spending in real terms but at a much slower rate than before. This will make it difficult for the NHS to keep up with these challenges.

It is unlikely that the Lansley reform will fix these fundamental problems and there will be substantial transition costs. David Cameron is clearly concerned and he has reason to be.

No longer Boy George

It should be no surprise that in the weekend before the budget both the Financial Times and The Economist have published profiles of the Chancellor of the Exchequer, George Osborne. The one in the FT magazine is particularly long and favourable and looks as if it could have been 'placed' by the Chancellor's political advisers.

However, the message of the two pieces is essentially the same: the Chancellor is no longer Boy George. Before the election there were concerns that he would not be up to the role. He was seen as too preoccupied with scoring political points. But he has grown into the role well. Although not a workaholic, civil servants think that he has mastered the technical aspects of his brief well. He has an appetite for reforming taxes, rather than just cutting them.

He also has a good working relationship with the prime minister, symbolised by the fact that he works most of the time out of No.11 Downing Street rather than the Treasury. The door to No.10 is kept pinned open and the Chancellor takes a leading role in regular strategy discussions. The relationship between the Prime Minister and the Chancellor is the fulcrum of government and when it breaks down (Lawson and Thatcher) or is tense (the Blair-Brown 'dual monarchy'), the reverberations are felt throughout Whitehall.

David Cameron has a long way to go as Prime Minister and is currently enjoying a good war. However, Osborne is now seen as a potential successor in a way that he wasn't before. The Tory right see him as more attuned to their way of thinking than the Prime Minister.

One problem is Osborne's public image. He doesn't expected to be liked, but he does hope to earn the respect of the people. However, an Economist poll shows that William Hague is seen as the most likely successor, followed by Nick Clegg! Osborne only gets 9 per cent.

In part this reflects the way in which Nick Clegg is the public No.2 in the government and has acted as a lightning conductor for its policies. What is also interesting about the Economist poll is that although the electorate have taken on board Labour's message that the government is cutting too far, too fast and that the poor will suffer most, they also largely blame the existence of the deficit on Labour. That effect may, of course, fade over time and a big responsibility rests on Osborne for restoring the economy to better health.

Labour still lacks new growth model

Labour still lacked a new growth model argued Professor Colin Hay at an End of New Labour? workshop at the University of Warwick last Friday. This would involve the channelling of credit out of the housing market to targeted export oriented sectors of the economy. An alternative account to the crisis of debt in terms of a crisis of growth could just about be detected.

It was difficult to see how a model of privatised Keynesianism (reliant on debt to fuel growth) could be resuscitated. High levels of private debt had increased the sensitivity of demand in the economy to interest rate variations.

There was a large interest rate spread between the LIBOR wholesale rate and mortgage and commercial lending. This functioned as a form of bank recapitalisation and was a drain on consumer demand and investment.

A manufacturing rebalancing of the economy would be very difficult to achieve. There was a need for downward pressure on the actual cost of borrowing. One could politicise the spread of credit, shaming banks. The Bank of England should be made responsible not only for base rate but for monetary policy more generally. Mortgage holders were likely to respond positively to such a strategy, but it was not sufficient.

Andrew Gamble asked how, given the extent of financialisation and individualisation, could this be reversed politically? How could the state change the supply of credit, what capacity would it need?

Peter Burnham raised the question of whether government needed a growth model. Jim Bulpott would have argued that it need it politically, but not economically. As far as manufacturing was concerned, the value chain was broken and three-quarters of what was left was in workshops employing small numbers of workers. One could not impose rates on any bank.

In summary the discussion suggested that there was no easy route out of the current crisis.

The competence theme

Ed Miliband made the competence of the Government his organising theme at PMQ's today. However, he is going to have a bit of an uphill struggle according to the results of a new Populus poll.

44 per cent of those interviewed said that they trust the coalition's key economic figures to manage the economy as against 33 per cent for Labour. 41 per cent agreed that the Conservatives have 'a good team of leaders' as against 34 per cent for Labour.

However, Labour's lead on 'shares my values' has gone up from 1 per cent to 9 per cent, while the number agreeing that Labour is 'for ordinary people, not just the best off' has also gone up.

The Liberal Democrats have taken a big hit on whether they are 'honest and principled' down from 40 per cent in September to 24 per cent now. No longer can they claim to be above or beyond politics.

Living standards may never recover

Mervyn King has warned that living standards may never recover from the current economic crisis: Crisis

He is surprised that people are not angrier, but they may just be despairing. The global economic balance is shifting against countries like the UK and the hope of each generation's living standard being better than the last one may no longer be achievable.

Each day I drive past a petrol station and each day the price seems to have gone up by a penny a litre. Of course this is partly a consequence of an overreaction by the markets to events in Libya which only accounts for 2 per cent of world oil production.

It's difficult for families to cut down their use of petrol in the short run as most journeys are more or less essential, particularly at this time of year. As a consequence, budgets can stretched and even low end retailers like Primark are now feeling the pinch.

On economic and political grounds the Government would probably be advised to suspend the increase in fuel duty planned for April even though it will cost them £500m. The notion of an automatic stabiliser is more problematic as it could punch a big hole in the public finances.

No depoliticisation strategy

Yesterday I went to the inaugural lecture of Professor Peter Burnham at Birmingham University. He is one of the main exponents of the depoliticisation thesis: in summary, the argument that governments place difficult decisions at one remove to avoid turning an economic crisis into a political crisis.

Sometimes they do this by adopting an external decision rule that can take the strain and the blame: examples include the Gold Standard, the Bretton Woods system and British membership of the ERM. Another option is a domestic rule of some kind such as the Thatcher Government's Medium Term Financial Strategy or possibly Gordon Brown's fiscal rules.

Pete Burnham's observation about the Coalition Government was that they have neither of these stratgies, domestic or external.

A note of caution

A welcome note of caution here about reading too much into one quarter's GDP figures, particularly when they have been distorted by bad weather: GDP

This article rightly stresses concern about inflation, although talk of stagflation in the City is a bit overdone, particularly for those of us who remember annual rates of 25%+ in the 1970s.

The pound dipped against the dollar after the figures came out because of fears that interest rate rises would be delayed, which seems likely, although two members voted for a rise at the last MPC meeting.

If the Government abandoned its austerity package, sterling would fall and inflation, which is being driven largely by world commodity price increases, would go even higher.

Inflation rate

There are some useful historical figures on inflation here: Inflation

Talking of a 'whopping' 3.7 per cent inflation rise seems a bit over the top when some of us experienced annual rises of over 25 per cent. But part of the problem at the moment is that public sector salaries are frozen and they are not going up that much in the private sector.

It's also worth noting that the inflation rate looks much lower when one excludes indirect taxation. In November the CPI was 3.3 per cent, but the CPIY rate, i.e., excluding indirect taxes was 1.6 per cent, under half as much.

From government's point of view some inflation is not a bad thing as it erodes the mountain of public debt.

Quangocide

The Public Administration Committee of the House of Commons has published a critical report on the Government's cull on quangos which looks unlikely to realise the hoped for savings: Quangos

As I observed in earlier commentary on this subject what you need to do is first decide whether a particular function needs to be performed by government and, if so, whether it is better done by a central government department or an agency.

The Government seems to believe that quangos are less accountable and I think there are senses and circumstances when this is the case. However, the committee makes an interesting point when they state 'Stakeholders and civil society play an important part in providing challenge and criticism of public bodies on a day-to-day basis, and it is easier for them to perform this role when they have a clearly identified body to engage with, not a homogeneous central department.'

One of my concerns in the past has been that some quangos have become (or have been set up as) advocacy bodies and in general I do not think this is a proper role for publicly funded bodies. I do see them as being of value in performing regulatory tasks where ministerial intervention should be confined to clearly defined and limited grounds.

The Coalition Government was hoping to save £1bn from its bonfire of quangos, but Cabinet Office minister Francis Maude had to admit that the savings were 'hard to quantify'.

Contradictory expectations

In the latest issue of British Politics Peter Dorey shows that the electorate was opposed to every conceivable tax increase at the time of the general election by a large majority. Equally they tend to be opposed to specific cuts in public expenditure that affects them.

Listening to the vox pop from Oldham East and Saddleworth this morning, one interviewee was against the rise in university tuition fees but also against the rise in VAT. Another respondent wanted more spent on the NHS.

Unfortunately, every government that comes into office wants to reorganise the NHS, imposing big transition and disruption costs without necessarily improving the standard of patient care. What the Government has unfortunately been unwilling to tackle is a different model for delivering public health care: for example, competitive insurance provision as happens elsewhere in Europe.

What never seems to be mentioned in these discussions is the changing economic and political balance of power in the world. This is not the 19th century or even the early 20th century when Britain was top dog. Transitions to a new balance when there is no undisputed hegemon are not easy to manage.

As for the by-election, I think there will be a low turnout and Labour will hold the seat with an increased majority. This will encourage those in Labour who do not want to compromise with the electorate.