Andrew Grice: Fear of a double dip stalks the Coalition, but still no sign of Plan B

Inside Westminster

(Getty Images)

It is the elephant in every Whitehall room: the Coalition Government cannot admit that it might need an economic Plan B.

Ministers know they might be forced to slow the pace of their public spending cuts. But to even admit such a possibility would be more than an embarrassing U-turn. It might spook the financial markets, turning a drama into a crisis. So they stick to Plan A and keep all their fingers crossed.

It is an understatement to say ministers are worried about this week's disastrous figures showing the economy shrank by 0.5 per cent in the final three months of 2010. "This is a brown trouser moment," a Tory minister told me. He wasn't smiling.

Ministers have ringed 27 April in their diaries in red ink – the day when the figures for the first three months of the year will be issued. Another minus figure would push Britain back into recession, just before the 5 May elections to the Scottish Parliament, Welsh Assembly and English councils.

George Osborne, the Chancellor, took refuge in the snow this week, citing the bad December weather ad nauseam as he tried to play down the chilly economic news. Privately, ministers were less sure. "We are praying it really was caused by the snow," a Liberal Democrat minister admitted.

The figures were the second body blow in a painful week for the Government. It was also wounded by a stinging valedictory attack by Sir Richard Lambert, director general of the Confederation of British Industry, who said the Coalition needs a long-term growth plan as well as a deficit reduction plan, saying that merely cutting spending and killing demand would make matters worse.

If there is one thing that hurts ministers it is being accused of being "one club golfers", obsessed only with ideologically-driven cuts. That is partly why they talk up ambitious reforms on health, education and welfare. But people are worried about jobs and the Coalition has failed to spell out where the new ones might come from.

Plans for a green or white paper on growth were shelved because it would have been threadbare. In fact, there is a lot of work going on behind the scenes, notably at Vince Cable's Department for Business. But there is no silver bullet. Only old ideas – tax cuts for business, more apprenticeships, reducing red tape for small firms and so on. Mr Cable is working out which ones will work best in which sectors and Mr Osborne will present the results in a "Budget for growth" on 23 March.

While ministerial nerves jangled, spirits on the Labour side rose this week. An opposition can't glory in bad economic news, of course. Unpatriotic. But the surprisingly poor figures gave Ed Balls a perfect platform to begin his rightful role as shadow Chancellor. Although he can't bank on a repeat of Tuesday's statistics, the contraction in the economy vindicates his stance that big spending cuts could stall recovery. Yet Labour should not get carried away. Mr Balls provides Labour with some heavy firepower but he also gives the Coalition some ammunition.

As Mr Miliband sat down with his advisers for a "prepping" session for Prime Minister's Questions, they did not circulate a speech by Mr Cameron or Mr Osborne but copies of Mr Balls's landmark address to Bloomberg last August, in which he rejected the previous Labour Government's policy of halving the deficit over four years because "the pace was too severe to be credible or sustainable". It is now Mr Miliband's policy, so Mr Balls has had to swallow it – even though Tuesday's figures, if repeated in April, would make his Bloomberg speech look remarkably prescient.

There are undoubtedly tensions between Mr Miliband and Mr Balls. The leader is more prepared than the shadow Chancellor to admit the party made economic mistakes in office, believing that must happen before it can credibly challenge the Coalition's claim that the deficit was caused by Labour overspending. Even if the Government's economic strategy is seen to fail, Labour cannot be sure of victory unless people trust it to do better – and for now, they don't. "Ed M gets the need for a mea culpa; Ed B does not," said one frontbencher.

Mr Balls's natural instinct is to defend Labour's record rather than dump on Gordon Brown. But that plays into the Coalition's hands, according to Mr Miliband's allies. The Tories and Liberal Democrats are very happy to remind voters about Mr Brown and think Mr Balls's presence on the economic front line helps.

Senior Labour figures hope desperately that the critical Miliband-Balls relationship works. "If it doesn't, we are fucked," is the phrase on many Labour lips.

For the moment, the heat is on the Government rather than the Opposition. Mr Cameron and Mr Osborne squashed Sir Gus O'Donnell, the Cabinet Secretary, when he had the temerity to raise the prospect of a Plan B. They might never call it that but they shouldn't be in denial. They should draw up Plan B, because they might need it.