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The end of the recession, but just the beginning of the PM’s problems

3 November 2012

9:00 AM

3 November 2012

9:00 AM

Since the end of the recession was confirmed a few days ago, confidence has returned to at least one part of -Britain. Ministers are beginning to strut again as they wander round Whitehall and their conversations include the occasional reference to a second term. Political recovery will, they think, follow economic recovery. As evidence for this, they point to polling which shows that the coalition’s reputation for economic management has already returned to pre-Budget levels.

David Cameron, though, is more cautious. Over the past difficult few months, he did his best to keep his own and others’ spirits up. Colleagues were regularly told, ‘Well, it was never going to be easy.’ But now he is airing some of his suppressed irritation. He has ticked off Tory Cabinet ministers for too much loose talk about their colleagues and the Downing Street operation.

Cameron is in for a rough ride between now and Christmas — due in part to Europe. This week’s Commons vote over the EU Budget was another reminder that the issue splits the party and will test his authority as Prime Minister. But this vote was a mere squall compared to the storm that’s coming when Cameron actually sets out his European plans: to commit himself before Christmas to a policy of renegotiation followed by a referendum in the next parliament.

But will this be enough to satisfy his increasingly Eurosceptic party? Many of the Eurosceptics want Cameron to entertain the possibility of leaving the EU if the rest of the member countries won’t engage with Britain’s demands. But Cameron, who remains convinced that EU membership brings Britain genuine benefits, is determined not to be dragged down that path.

The impasse has led several of those close to him to wonder if they should take matters into their own hands. They are considering making it clear that they would advocate withdrawal if the other 26 member states reject Britain’s requests out of hand.

Other problems lie in wait for the PM. Next week it’ll be the negotiations for the Chancellor’s autumn statement that dominate the agenda. Ministers now think it will be a smaller package than was expected over the summer. There’s a determination to avoid including any policies that will have to be overturned at a later date.

A third problem: before 5 December, the coalition will still have to resolve what to do about its second fiscal rule, that the national debt must fall as a percentage of GDP by the next election. The Office for Budget Responsibility is expected to say that the coalition is on course to miss this goal by tens of billions. One MP who follows this matter closely predicts that the coalition will be £16 billion off. Others put the figure far higher.

George Osborne takes the view that it would be worth tightening further to meet the target. He is supported in this by the influential Free Enterprise Group of Tory MPs, which contains many of the Chancellor’s allies from the 2010 intake. In the coming weeks they plan to outline a series of cuts which could ensure that this target was hit. But the Liberal Democrats are loath to agree to significantly deeper cuts — at their party conference, Nick Clegg and Vince Cable both took the line of ‘not a penny more, not a penny less’. One can imagine them agreeing to cut only if there were to be a significant new tax on the wealthy. Given that the Chancellor has already ruled out a mansion tax, new council tax bands and changes to the taxation of non-doms, it is hard to imagine what such a tax could be.

Perhaps the trickiest political decision the Prime Minister will take this autumn, though, will be what to do about the -Leveson report. Whitehall expects Lord Justice Leveson to set out his views on a future regulatory system for the press by the end of November. He is expected to propose a system that involves, at the mild end, statutory underpinning for a new regulator. At this point, Cameron will have to decide whether to accept Leveson’s recommendations — which will earn him the ire of most newspapers and many Tory MPs — or reject them and end up in an argument with the victims of phone hacking.

Labour has already declared that it will accept what Leveson recommends. No. 10 is sending out a very different signal, making clear the Prime Minister’s discomfort with the idea of statutory regulation.

The rise in ministerial confidence has not yet filtered through to the back benches. There’s an ever-growing number of MPs prepared to rebel at the drop of the hat; the signatures to the latest rebel amendment on Europe went from six to 30 in 24 hours. Even those backbenchers who aren’t defying the whips are in truculent mood. When I asked one whether Cameron had a ‘people’, a group his government was for, I was met with the answer ‘Yes, the Rwandans’ — a reference to the ever-rising international aid budget.

The next few months will test Cameron’s ability to manage relations with his party, the press, his coalition partners and the other European Union member states. Crucially, the growing economy has given him more room for manoeuvre in nearly all these cases. For a mid-term Prime Minister still to be master of his own fate is no small achievement.

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