You’ll think this is ludicrously optimistic of me (particularly given my usual pessimism), but I think our new government – the Tory/Lib-Dem coalition – is the best one we could have hoped for. Why? Because it means that an intelligent combination of David Cameron and Nick Clegg (both basically liberal conservatives at heart) have a real chance of creating a genuinely sensible government.
I said on our blog last week that the hung parliament, along with the crisis in Europe, would provide them, should they choose to take it, with a fabulous opportunity to dump their most nutty policies under the cover of compromise. It looks like they are taking it.
Look how fast the Tory plan to raise the inheritance-tax threshold went out of the window. And look how closely it was followed by the mansion tax. Both were relatively silly policies chucked into manifestos to shut up party outliers. Both have been quickly dumped in the name of forging a stable government. That couldn’t have happened if the Tories had managed a straight majority. Expect pretty much all the other pointless policies promised during the election to go the same way.
Equally good news comes in the cover provided by the semi-bankrupt sunshine states of Europe. Thanks to them, Clegg has been able to drop his opposition to spending cuts – now everyone understands what can happen if markets think you aren’t taking your debt seriously, immediate and deep cuts are hard to argue against.
That doesn’t mean that I think there is going to be much good about the rest of the year. Our economy is still a mess; our debt is still insanely large; unemployment is at its highest since 1994 (and that’s on the official numbers); and our housing market is as fragile as ever. But it probably means we won’t be seeing the IMF any time soon. It is also good to see that Clegg and Cameron can count on support from Mervyn King. In his inflation report on Wednesday he said that inflation would “probably fall below target as the substantial degree of spare capacity pushes down on prices”. I’m not entirely convinced about the spare capacity argument (there’s an excellent case to be made that the recession has permanently destroyed capacity). But sticking to it does something useful for King: it provides an excuse for keeping rates low even as inflation rises.
And with taxes going up and public spending and employment about to fall fast, Clegg and Cameron need King to deliver low rates (read cheap mortgages) if the nation’s consumers are to survive intact. It looks like he is going to. That should keep the masses happy enough for the pair to have a good chance of holding their coalition together even as they tackle the deficit. We wish them luck.