The Labour leadership election will, finally, end on 25 September. But the identity of the shadow chancellor will be unknown until 7 October, when the results of the shadow cabinet election are announced. 13 days after this the new leader and shadow chancellor will lead our response to the comprehensive spending review. “It is”, as a leadership contender has said, “an incredibly tight timetable for the new leader and their shadow chancellor to map out a policy that might yet determine how we are viewed for the rest of the parliament.”

The general election too quickly gave way to the leadership election. (Which should have started later and been shorter). With the end of the leadership election, the formal involvement in the shadow cabinet election of four of our would-be leaders begins. This is a grueling pace. But the new leader and shadow chancellor will need immediately to demonstrate economic literacy, which means robustly critiquing George Osborne and articulating a credible and appealing alternative economic approach. While this is challenging, there are some relatively simple points that are worth underlining.

First, like the Liberal Democrats, we consistently warned prior to the general election that it was too much of a risk to the economy’s recovery to cut public spending this year. There is no evidence that these risks have significantly diminished.  Business credit remains weak. Lending to businesses fell for the eleventh consecutive month in July. Consumer demand remains sluggish, as tens of thousands of homeowners are expected to face at least four more years of negative equity and redundancies in the public sector are thought unlikely to be absorbed by additional private sector employment.

Second, no matter how the Liberal Democrats defend the shift in their position on public spending cuts this year, the UK is not Greece and was never in danger of becoming Greece. As Rachel Reeves has noted, national debt in the UK in 2009, as a percentage of GDP, was 72 percent, while in Greece it was 119 percent. Additionally, and crucially, having our own currency and a central bank that can set interest rates in the interests of the domestic economy provides us with far more flexibility than is available to the Greeks within the eurozone.

Third, our opposition to cuts this year derives from a deeper view: sustaining economic growth is an indispensible precondition of deficit reduction. In the absence of growth, the deficit will widen as tax receipts fall and unemployment benefit payments rise. Public debt levels are generally more sensitive to growth than changes in tax and spending. George Osborne can cut as aggressively as his Thatcherite heart desires, but if we slip back into recession this cutting will do little to contain the deficit. Indeed, it also risks a deflationary spiral if Osborne responds to recession by persisting with his cuts.

The risk to public finances posed by a double dip recession must be balanced against the risk of higher interest rates cascading through the economy – further credit crunching businesses and raising household mortgage payments – if the deficit reduction plan fails to convince markets. Reduce public spending too early and the double dip risk increases; cut too late and upward pressure on interest rates becomes more likely. George Osborne, in cutting earlier and by £40bn more deeply over this parliament, is putting more emphasis on the later risk than Alistair Darling’s plans do.

Yet, as no lesser economic authority than the FT’s Martin Wolf has observed, “the market is screaming its lack of concern about UK fiscal credibility”. In these circumstances, forcefully illustrated in Ed Balls’ Bloomberg speech, it is perverse for the chancellor to underplay the double dip risk of cutting too early and too deep for the sake of masochistic cuts ostensibly justified by market concern about the deficit.

In truth, Osborne’s plans are driven by an ideological imperative to reduce the size of the state. This goes against the premium which Anatole Kaletsky places upon pragmatism in Capitalism 4.0; his weighty tome on the financial crisis and capitalism’s future. “In an indeterminate world”, he writes, “both economic and institutional decisions will have to proceed by a zigzag process of trial and error.” Rather than this flexibility and adaptability, Osborne, as Pat McFadden has noted, has given us “faith-based economics”.

Labour must be careful, however, that we too do not become inflexible and dogmatic. While Osborne is underplaying the double dip risk, which even those red-blooded socialists at the British chamber of commerce worry about, and is willing a private sector led recovery through little more than his faith in it, the interest rate risk attached to the deficit should be squarely confronted by Labour. Being squeamish about this not only betrays our credentials as the party of pragmatic economics but leaves us seeming trapped in what Phil Collins has called “the comforting illusion that state spending is a straight line to progress”.

This illusion can attach to social as much as to economic policy. And the public sees through it. The mood music emanating from Labour risks seeming too statist if we seem unwilling straightforwardly and even-handedly to address the deficit. Alistair Darling has left plans which should take us a long way towards avoiding this outcome. But our new shadow chancellor will still have crucial decisions to take during a testing first fortnight in office.

The Daily Telegraph isn’t normally essential reading for Labourites. But yesterday it should have been, especially for Harriet Harman. Fraser Nelson set the backdrop to the politics of the deficit and the “emergency” Budget, to which she, as acting leader, will respond. This week’s report from the new Office of Budget Responsibility (OBR) dramatically changes this political context. Nelson has been quick to realise this and, while our instincts differ markedly from his, we need to be equally fleet-footed.

The limited discussion on the deficit in the leadership election has denied our candidates the opportunity to demonstrate this quality. Though, of course, they could engineer such an opportunity for themselves. I’d be impressed if any of them do flesh out a more substantial economic platform, not least as The Economist is right to note that, “nothing will make or break the next leader of the opposition like his response to the government’s austerity programme”.

The coalition, preparing the ground for the scorched earth to come, has grasped any and every opportunity to exclaim their horror that “it is even worse than we thought”. Labour, apparently, have not just cooked the national books, but eaten and spat them out again. It’s what we always do. We can’t help ourselves. It is the coalition’s duty to pick up the pieces; in the national interest, of course.

The coalition has pushed this story since its creation. It matters whether it is believed. It wasn’t until after black Wednesday that the spectre of the winter of discontent stopped being a drag on Labour’s support. If the deficit is perceived as Labour’s deficit, then the pain of reducing it will be a similar drag. However, a major spanner has been thrown in the coalition’s attempts to embed this perception. As Nelson observes, “something is going badly right” for the British economy.

The OBR reported earlier in the week, as Nelson noted, that unemployment “will be almost 200,000 lower than had been feared. Economic growth will not be quite as strong but the tax revenues – which are far more important – will come in much more strongly than Mr Darling gloomily forecast.” So, the reality is that public finances are in better shape than the Treasury forecasts bequeathed to the coalition gave them to expect.

How troubled George Osborne must be that this reality, so out of kilter with his desired spin, has been presented by the OBR. After all, he established this body, as Nelson puts it, with the intention to “demolish the economic Potemkin Village that Gordon Brown built during his time in Downing Street and reveal the full extent of his fiscal vandalism”. Yet, rather than exposing Labour irresponsibility, the OBR has shown “Mr Osborne’s election goal – to abolish “the bulk” of the structural deficit by 2014 – would have been easily achieved had Mr Darling remained in place. No more taxes need to be raised, or budgets cut, to honour this Tory manifesto pledge.”

This is a tremendous vindication for Darling and inconvenience for Osborne. If Osborne now persists with plans to cut further and faster than intended by Darling, he will be doing so for reasons of political belief, not economic pragmatism. Nelson understands this and urges him to press on “because he wishes to restore the power balance between state and society. A true liberal believes that people spend their own money more wisely and effectively than government can do on their behalf.”

While Rachel Reeves has expertly explained why comparisons – encouraged by the scaremongering spin of the coalition – between the UK and Greece are spurious, our deficit does require careful management. However, there is a world of difference between the careful prudence of Darling’s plan and the ideological, small-state zeal that would carry Osborne beyond it. Nelson encourages Osborne in this direction because “with Labour embroiled in a five-way leadership contest, he will never face weaker opposition”. Precisely why we must be vigilant against him.

What the formation of the coalition told Philip Stephens about David Cameron was that “he is a Conservative in the centrist tradition of Harold Macmillan rather than a radical such as Margaret Thatcher”. However, we need to be ready for his Chancellor leading the coalition on a distinctly Thatcherite course in his first Budget. Having scrapped the Child Trust Fund and the Future Jobs Fund this might be no surprise, particularly after the coalition agreement made, as James Purnell noted, “no mention of abolishing child poverty. Of reducing inequality. Of protecting education funding. Of guaranteeing jobs for the long-term unemployed.”

In responding to Osborne’s Budget, the key distinction is between actions that can be justified as decisions of economic necessity and those that are driven by political belief. We strip ourselves of credibility if we do not acknowledge the necessity of some pain. We can absorb more of this pain in the form of taxes than Osborne will propose, but we can’t hide from the need for some spending cuts. To remain credible we need openly to concede this, but we also need clearly to identify the areas in which Osborne is acting as the ideological vanguardist that Fraser Nelson wants him to be, losing sight of the sober economic reality presented by the OBR.

That this reality is much brighter than the coalition’s spin is a credit to the decisions we made in office. We need to be equally strategic and forensic in our economic decision making in opposition.

Almost certainly less than the Bank of England may potentially be able to. “Inexplicably”, Willem Buiter convincingly argues, ”the Bank of England has not made full use yet of the instruments it has at its disposal.” Interest rates may go lower still (to zero or even beyond) and quantitative easing, which has taken a markedly different form in the UK from the US, might be revised in the UK. The UK’s programme has produced, in round terms, £2bn of outright purchases of private securities and £169bn of Treasury securities. There is a strong argument that shifting the balance between these purchases would do more to get credit flowing to businesses.

This isn’t a shift which it is within Darling’s gift to make, however, and Buiter does not anticipate “much joy … from fiscal policy as a means for boosting aggregate demand in the UK in the short run”. So, Darling’s ability to get credit flowing is constrained. Nonetheless, he’ll come under some pressure to provide greater fiscal stimulus in the pre-budget report. This might be a last gasp of Keynesianism. For this gasp to achieve anything, though, it needs to be the kind of smart Keynesianism that I have previously praised. This is a Keynesianism that recognises that what the government spends its money on matters as much as how much it spends.

The next round of monetary and fiscal stimulus must both put an emphasis on quality, not quantity. Well targeted government spending can make a difference, even on a limited scale, and the form which quantitative easing takes is as important as its scale. If these revisions can be made on both the fiscal and the monetary fronts, businesses may be able to access credit on more favourable terms than they can at present and, if this were to be the case, the green shoots really would be coming into view.

If David Cameron is so pro-nuclear, how is his close relationship with the avowed anti-nuclear campaigner and Tory PPC for Richmond Park Zac Goldsmith to be explained? Could it be that the Tories want to say one thing in Richmond Park and another in Copeland?

Irrespective of what they say in different parts of the UK, a Conservative government would not be heard in Brussels, as David Cameron has already made decisions which have, according to France’s European Minister, castrated British influence in Brussels. This materially impacts upon economic wellbeing in Copeland. Chris Whiteside speaks of removing barriers to new nuclear investment, but securing a higher and more stable carbon price would remove a key barrier to this investment. Lowering the cap in the EU-ETS is the best available policy lever for achieving such a carbon price, but this lever will only be pulled by a British government capable of commanding influence in Brussels and across the EU. The castration of British Conservatives in Brussels threatens the nuclear future of west Cumbria should we ever have a Conservative government.

It is odd that Chris Whiteside bemoans, rightly, attempts to misrepresent the policies of other parties and then proceeds not only to misrepresent Labour policy but also his own party’s history.  

As far as his own party’s history is concerned, it is one thing to attempt, as Cameron and Andrew Lansley, the Conservative health spokesman, are doing, to re-brand the Conservatives as champions of the NHS. Great is the joy for the sinner who repenteth. But it is quite another to ask us to forget the sin, as Chris Whiteside’s perplexing praise of the record of past Conservative governments on the NHS asks us to do. The NHS was on its knees when Labour came to government in 1997. We turned it around because we have always believed in the NHS and not seen it “as a 60 year mistake”, as a Conservative MEP recently described it; comments which cause one to doubt the sincerity of the repenting we are being asked to embrace.

As for misrepresenting Labour policy, since when has Budget 2009 been a leaked document? This very public document set out plans for a cumulative 6.7 percent reduction in public spending over the three years from April 2011. I can only presume that the 10 percent figure that Chris Whiteside refers to is the reduction which is implied across most of the public sector by the Conservative commitment to both match Labour’s spending restraint and ring fence increases in health spending. This ring fencing is intended to convince us of the sincerity of Tory repenting on the NHS, but one’s confidence in this sincerity is further shaken by Chris Whiteside’s capacity not only to confuse a leaked document with Budget 2009 but Labour Party policy (which is for a 6.7 percent reduction) with Conservative policy (which is for the 10 percent reduction he refers to).

Nonetheless, Whiteside is correct to be concerned about public debt and we look forward to the Chancellor, Alistair Darling, setting out full plans for the management of public debt in the Pre-Budget Report later this month. He will do so on a basis that both preserves confidence in the public finances and maintains the public services that Labour has turned around since 1997. To re-coin a phrase, this will be prudence with a purpose. Chris Whiteside’s obvious lack of either prudence or sincere purpose is a danger to Copeland.

“The question of the size of individual payments is not one for financial regulators. That is one for politicians and society as a whole. If politicians wish to take a view on that, then they should say so, but they should not be asking the regulator to carry out a pay policy”.

Politicians should step up to this plate. So, it is welcome to read reports that Alistair Darling, the Chancellor, is considering means of doing so.

Any nervousness that might be felt in relation to this should be quelled by reflection that Martin Wolf, Raghuram Rajan and Paul Krugman were arguing for this long ago. Of course, we should, as ever and as the Times argues, be wary about unintended consequences. But the Times – hardly a bastion of red blooded socialism! – proposes a sensible way ahead:

“Only a small fraction of a bonus should be paid at once. The rest of the payment would follow only if subsequent years of good performance confirmed that the profitability was sustainable. In this way, the incentive to make short-term profits with very risky transactions might be avoided. It would be reasonable to penalise banks that did not comply by requiring they offset the risk by holding more capital”.

Deferred compensation schemes seem the way forward.

These are desperate times, indeed, for Labour and while the expenses revelations “will hurt the reputation of all politicians”, argues Andrew Rawnsley, ”the damage is likeliest to be greatest to Labour at the next election”. Another poll supports Rawnsley’s view. There have been many highs and lows under PM Brown. But each low seems lower and more desperate than the last one. I didn’t think it was possible to go any lower than the McBride affair but recent days have probably managed it.

It may be that everything that has been revealed in recent days was “within the rules”. What McBride was up to certainly was not. Nonetheless, Brown’s response in both cases was to blame the rules and insist upon their reform. But people, especially public figures, have to take responsibility for their actions, irrespective of what the rules may or may not say. While the McBride affair was undoubtedly depressing in the extreme, there is something even more depressing about the expenses revelations because the people concerned are people who are widely respected and admired within the Labour Party, in contrast to McBride.

Of course, as I have heard Tessa Jowell and Ed Miliband say on TV, we should avoid making judgements on the basis of partial information and Ben Bradshaw and Phil Woolas also challenge the versions of events that have been reported about them. I am afraid, however, that, whatever the reality of the situation may prove to be, the damage has already been done and the dye has been cast for Labour. The party can now only, to mix metaphors, walk into the hurricane of public anger.    

What a prospect. It must make the most battle hardened Labour campaigner nervous about door knocking. Those lions have been lead to this by the expenses claims of the donkeys that lead them. Alan Johnson, however, doesn’t appear quite so donkey like. According to Rawnsley, he, along with Hilary Benn and Ed Miliband emerges ”as acmes of frugality who make modest and entirely reasonable claims for performing their duties”.

James Forsyth argues that this increases the likeihood of Miliband “winning the leadership after the next election”. But the question will increasingly be asked whether, if this were to happen, this would make him the next leader of the Labour Party. Even before the expenses story broke The Mirror did not seem disinclined to the prospect of the frugal Johnson, who has recently appeared to indicate more of willingness to take on the top job than previously, replacing Brown before the election. That frugality must have been good for his conscience at the time and now also appears a smart career move.

 Matthew D’Ancona speculates that he ”may yet be the first person to become Labour leader by going on television and radio repeatedly to deny that he is either capable of the job or interested in it”. These denials mean that Johnson is considered to lack a steely, Michael Heseltine or Brown like determination to accede to the very top. Given this and past experience – the lack of any challenge to Brown either when he became leader or last summer – D’Ancona seems justified in his view that “for all the sound and fury we can expect over the summer”, in terms of plots against Brown, ”the PM will still survive and fight the general election”. But D’Ancona was writing prior to the expenses story. Is this story a game changer? And, if so, how will the game end?

Martin Bright is right think to that there is a “distinct possibility that (it may end with) the Labour Party (going) into terminal decline as a credible political force”. He argues that the best way to avert that outcome is for “the younger generation of Labour politicians … to take control now”. Who can he have in mind? I don’t think Johnson or Harriet Harman, another potential successor to Brown, can be considered part of the younger generation. But James Purnell and Jon Cruddas could. Allegra Stratton has them down as a ‘dream ticket’.

“Why don’t James and Jon grow some balls and get together and challenge GB”, a “Labour grandee” apparently recently told her. The “grandee” will presumably hope that the expenses story has made these balls grow. At this stage, however, I am not sure whether it is certain that Purnell, nor Ed Balls or Yvette Cooper, either of whom (but surely not both?) might well consider standing in any contest that featured Purnell, is out of the expenses wood - though, this is far from the only question that might be raised about the supposed dream ticket. They are usually considered, for one thing, to be on opposing wings of the party. David Miliband – another member of the younger generation with leadership ambitions – certainly hasn’t come out of the expenses story as well as his brother or Johnson.    

If Brown can be prised from Downing Street – and that definitely remains a big if – then the number of names discussed here (Johnson, Harman, Purnell, Cruddas, Balls, Cooper and both Milibands) would seem to open up the spectre of an unseemly scramble for Number 10 – if they all were to grow balls, as it were - at a time when we face challenges so grave that Frank Field has been talking about the need for a national unity government. Peter Mandelson may insist that Brown is focused on these challenges, not his cleaner, but polls of 23 percent cannot fail to darken Labour’s mood music. It may now be the Tories turn to hold the expenses spotlight but David Cameron senses enough weakness around Brown to be edging towards a confidence vote, via the Royal Mail vote.

The chances are that Brown will avoid a confidence vote by giving enough concessions to Labour backbenchers to win the Royal Mail vote with Labour votes, while losing Cameron’s support for his Royal Mail plans. But how many concessions can Brown give without losing the support of the responsible Minister, Mandelson, a potential Geoffrey Howe in this drama if ever there was one? It’s bizarre that Brown has ended up in a position of such dependence upon his old foe – The Sunday Telegraph speculates that Brown may reduce this dependence, in respect of the Royal Mail vote at least, by moving Mandelson to the Foreign Office, “a post he has long coveted”. How these once bitter rivals play their cards on the Royal Mail vote may go some way to determining whether everyone’s favourite ex-postie, Johnson, ends up as PM. The Sunday Telegraph also suggests that Brown may try to prevent this happening by making Johnson Chancellor and, thus, “binding him in” to Brown. This creates the risk, however, as Peter Hoskin notes, that Alistair Darling will play Howe.

All of this, however, is just fluff and hot air – or “sound and fury” to use D’Ancona’s term. Not only is it fluff and hot air, it is fluff and hot air at a time of crisis. Shuffling deckchairs on the Titantic is the right expression. Martin Bright correctly grasps the depth of the crisis facing Labour. The worst thing Labour could offer now (and I have stopped assuming that things can’t get any more desperate, as that assumption has proved sadly, too unrealistic) is more fluff and hot air. That is to say more talk of a challenge to Brown. Talking about challenging Brown but not actually challenging Brown, i.e. not growing balls but pretending to, is the worst of all Labour worlds. It is worse than growing balls and challenging Brown. It is also worse than not growing balls and supporting Brown.

This is a crisis of fluff and hot air in a deeper and more dangerous sense than this, however. Brown promised the country a vision but, frankly, this only came into view with the credit crunch. This gave his government a sense of purpose that it otherwise lacked. Once a government and a party becomes so lacking in purpose that it needs a global crisis to give it one, it is little surprise that the public have little sense of what the party’s purposes, motivations and convictions really amount to. I fear that those battle hardened Labour campaigners, who are newly nervous about door knocking, would struggle to give a convincing answer as to what the point of a fourth Labour term would be, if asked on the doorstep. These lions have again been let down by the donkeys that lead them. And just as badly let down as they have been in respect of expenses.

The Labour Party, whoever leads it, desperately needs a stronger sense of direction. Until the party rediscovers, re-imagines and revivifies its purposes, it cannot complain about these purposes being unclear to the electorate. The most encouraging thing about the latest ‘date‘ between the ‘dream ticket’ is that it occurred at the launch of an exciting new Demos pamphlet. The Liberal Republic is a great publication by Richard Reeves and Phil Collins, which is likely to appeal to Alan Milburn, a name sure to be mentioned among the plotters. The likes of Milburn, Purnell and Cruddas are intelligent and bright enough to think through the thoughts that will need to be thought through for Labour to really rediscover its sense of direction. They should have the balls to do so and not to get distracted by the fluff and hot air. Only one of these pursuits, ultimately, will make a real difference. We were promised vision and we were promised substance. That is still what is required, whoever leads Labour.

However, he might reflect upon the second part of Barber’s observation, as he draws up his Budget. Anatole Kaletsky may have him question its wisdom, while Dieter Helm would praise it. An energy crisis may only be six years away, argues Helm. The recent comments of Lord Browne may cause us to wonder about the proper role of energy markets in both keeping the lights on and meeting our climate change obligations. Helm makes a convincing case that government decisions made now will massively bear upon our ability to keep the lights on in six or so years time; with the possibility that we will be diminished in this ability far more real than we might imagine. While Kaletsky joins Samuel Brittan in encouraging Darling to focus on economic growth in 2010, not the state of public finances in 2015. The later only deteriorates without the former, even if focusing on the former involves more borrowing now, which inevitably has implications for public finances in 2015.

The McBride-affair has made the political challenge facing Darling even bigger. But, as Matthew Taylor has noted, there are some “huge choices to be made” on policy. These are such that the policy-making and economic dilemmas facing Darling are, arguably, even bigger than the political dilemmas.  They are certainly more important. This isn’t a time to play political games but to face up, as honestly and as fully as possible, to the real challenges that we face as a country. Ironically, to do so might also be the best political response. This would be to place political strategy above political tactics; the reverse of what Taylor claims is the defining trait of Gordon Brown’s administration.

“The world cannot support indefinitely continued debt-financed overconsumption on the part of the US, whether this consumption takes place at the private or public level, and it cannot support continued growth in Chinese capacity without more rapid growth in Chinese consumption.  To continue in this way almost certainly means little more than to postpone a larger and more difficult adjustment on the part of both countries, and will probably eventually lead to a collapse in international trade”.

Troubled times, indeed. But, at least, the US is going to soon be under superior leadership. And the special relationship will help the UK steer through any choppy waters, right? Well, it may no longer be safe as houses (and how safe is that?) if it needs to rest upon an Obama-Cameron axis.  It seems that Obama takes a dim view of the pro-American and Eurosceptic mix offered up by Cameron. 

Where does this leave the UK? A senior Labourite is reported as reacting to Obama’s view on Cameron by saying: “Obama will want to work with a united Europe, not the 27 divided nations envisaged by a David Cameron, William Hague and [the Eurosceptic backbencher] Bill Cash vision of Europe. Tory isolationism is the last thing Obama’s new foreign policy team will want from London”.

In a world potentially ruptured by a trade war emanating from the Pacific, the kind of squabbles across the Channel that have personified Cameron’s approach to foreign policy seem pathetically irrelevant and marginal. What a contrast with the global reverence and respect which Gordon Brown’s economic management has recently earned.