Economy

The leaders of both coalition parties are seeing ministerial colleagues and backbenchers trying to push them further way from the centre at present. Nick Clegg has Vince Cable continuing to push for what Ed Miliband might call 'good borrowing', telling the Today programme that he'd borrow to improve the economy, rather than to keep an inefficient economic model going.

If you want to know what the Liberal Democrat’s message at the next election will be, read Nick Clegg’s speech to the party’s Spring Conference today. He kept to the refrain that the Liberal Democrats are for a stronger economy and a fairer society and you can’t trust the Tories with society or Labour with the economy. In a sign of the new, more disciplined Lib Dem machine there were no detours from this core theme. Listening to Clegg, you would have had no idea that the leadership had lost a vote on secret courts this morning. Clegg knows that his internal position hasn’t been this strong since the Liberal Democrats entered coalition.

Further to Isabel’s post this morning, I understand from a senior coalition source that the two parties have now reached an agreement on how to handle Tuesday’s vote on Labour’s mansion tax motion. The Liberal Democrat leadership has assured their coalition partners that they’ll back a government amendment to it. This amendment will concede that the coalition parties have different views on the issue. The only question now is whether the speaker John Bercow will call it. I suspect that this agreement has been helped by a desire to limit coalition tensions post-Eastleigh and pre-Budget. There is also reluctance on the part of the Liberal Democrats to get dragged into playing Labour’s game.

So David Cameron says there is 'no magic money tree'. In his big economy speech today, the Prime Minister said:  'Now of course there are plenty of people out there with different advice about how to fix our broken economy. Some say cut more and borrow less, others cut less and borrow more. Go faster. Go slower. Cut taxes. Put them up. We need to cut through all this and tell people some plain truths. So let me speak frankly and do just that. 'There are some people who think we don’t have to take all these tough decisions to deal with our debts. They say that our focus on deficit reduction is damaging growth. And what we need to do is to spend more and borrow more. It’s as if they think there’s some magic money tree.

Panic, once let loose, is hard to corral. And there seems to be plenty of panic on the Tory benches at Westminster. The Eastleigh by-election result, the stagnant economy and the rising sense that the Prime Minister has somehow lost his way all contribute to this. Each fresh setback - or perceived setback - now has an impact disproportionate to the actual size or importance of the problem. These things are no longer measured on a linear scale. Read, for instance, Ben Brogan's analysis in today's Telegraph and you will perceive an under-current of deep panic presently afflicting the Tory tribe in London. Similarly, when Paul Goodman is writing - correctly, I think - that a post-2015 leadership campaign has already, if quietly, begun you can sense the fear in Tory ranks.

Jobs are being created in Britain, but the economy isn't growing. In the last year, the number of people in work rose by 2 per cent, but economic output rose by just 0.3 per cent. As the below graph shows, employment is now 0.7 per cent above its pre-recession peak, whereas GDP is still 3 per cent below it. This adds up to a big drop in productivity. Output per worker is now 3.8 per cent below its 2008 Q1 level, and 13.3 per cent lower than it would be if the pre-recession trend had continued. In a piece for this week's issue, The Spectator's business editor Martin Vander Weyer points out that this slump is 'the equivalent of an extra five-minute fag break outside the fire exit for every employee, every hour'. (On the latest figures, it's more like an eight-minute break.

George Osborne spent an hour in front of the 1922 this evening. 40 Tory MPs took the opportunity to promote their own Budget ideas to him. From what I understand, the tone of the meeting was cordial with Osborne in relaxed form. A big theme was the cost of living with three MPs including Rob Halfon pushing the Chancellor on fuel duty. Osborne’s responses were non-committal but significantly he didn’t say that binning the fuel duty rise scheduled for September was unaffordable. Instead, a distinct vibe was given off that these MPs concerns would be accommodated. Two other MPs-- Steve Brine and Henry Smith—made the case for a cut in air passenger duty, something that the influential chairman of the ’22 Graham Brady has been a public advocate of.

Forget Moody's. If you want to see market panic, just look at Italy. As Isabel reported this morning, the unexpectedly strong performance of Beppe Grillo's anti-establishment party, the Five Star Movement, has produced an extremely close election result, and no clear winner. While the electoral system guarantees a majority in the Chamber of Deputies for the group with the largest vote share (Pier Luigi Bersani's centre-left group), it does not do so for the Senate. With no group securing a majority in the upper house, Italy now faces coalition negotiations and likely another election.

It seems that Moody's downgrade of UK government bonds on Friday night has — so far — had more effect on the headlines than the markets. After the news on Friday night, the pound fell by about a cent against the dollar, from $1.525 to $1.515. And against the euro it fell from €1.157 to €1.147 (it's fallen a little further this morning, to €1.144). But that's no bigger than the drop on Wednesday on the news that Mervyn King and two other members of the Bank of England's Monetary Policy Committee had voted in favour of more quantitative easing. And it doesn't seem to have raised the cost of borrowing much. The yield on ten-year government bonds did rise slightly from 2.11 per cent at close on Friday to 2.

The United Kingdom’s triple A rating is now lost with one credit rating agency, Moody’s. This is a politically difficult moment for George Osborne. Back in February 2010, he set keeping the triple A rating as one of the key tests of a Conservative government’s economic policy. His opponents will delight in pointing out that he has failed the test he has set himself, while nervousness on the Tory benches about the coalition’s economic strategy will be heightened by this news. Economically, though, I doubt that this will have much impact. In recent weeks, Britain’s debt has been trading more like that of France, which has lost its triple A rating, than Germany, which still has it.