Andrew Grice: The coalition needs a strategy for growth as well as for making cuts

Inside Politics

David Cameron at Camp Bastion in Helmand Province, Afghanistan, in 2010 (PA)

'To be honest, we're happy to let the Tories and Lib Dems take the shit for the cuts," said the senior Labour frontbencher with a knowing smile. As his words sunk in later, I wondered what he had to smile about.

Some Labour figures appear relieved to be in opposition. Quite a few to whom I have spoken since last month's election seem to think their party did rather well. It didn't: it won 29 per cent of the vote.

So far, Labour's leadership election seems to be taking place in a parallel universe. The candidates talk about reconnecting with the voters, but the crisis in the public finances (which Labour would have had to tackle if it had retained power) rarely gets a look-in. They are more interested in connecting with Labour members. Now that the general election is over, it is safe to talk about immigration, Iraq, bankers and high earners. But there's no need to mention the c-word. The cuts can be left to the other parties and Labour can retreat to its comfort zone.

This is dangerous stuff for Labour. The voters know that Britain has a budget crisis. The Conservatives and Liberal Democrats work overtime in trying to blame it on Labour. They are also painting it very black in the hope that the cuts and tax rises in the Budget on Tuesday week will not look as dark on the day.

Labour politicians assume there is no such thing as "progressive cuts". They give the impression of gearing up to oppose whatever the Government decides. But what if it squeezes middle and higher income families and convinces people it has kept its pledge to protect the poor and vulnerable? David Cameron's team is said to have concluded that the only way he can convince doubting voters that the Tories are not the "nasty party" (which he failed to do in opposition) is to avoid nasty cuts for those at the bottom of society. That won't be easy given the scale of the deficit, but, if he succeeded, where would that leave a Labour Party that looked to be in denial about the problem?

Mr Cameron's attempt to complete his unfinished "reassurance project" by the next election can only be helped by having the Liberal Democrats on board. In a speech in Madrid yesterday, Nick Clegg argued: "There is nothing progressive about passing on this huge burden to our children. There is nothing fair about leaving them servicing an enormous debt, using money that could be spent on schools and hospitals just to pay the interest. It is our progressive values that mean we must take the difficult decisions now that do not cause more pain, worse pain, later."

He would say that, wouldn't he? But so did Lord Myners, until a month ago City minister in the Labour government. In a powerful warning shot aimed at his own party, he said this week: "There is nothing progressive about a government that consistently spends more than it can raise in taxation and certainly nothing progressive that endows generations to come with the liabilities incurred with respect to the current generation."

Of course, it is one thing for the coalition to talk about "cutting with care" and quite another to achieve it. So far, the new administration has been good at saying what it will NOT cut – the health service, overseas aid, free bus passes, TV licences and winter fuel allowances for pensioners and the defence budget, although the latter is exempt for this year only.

Mr Cameron is adamant that the NHS must enjoy a real-terms increase every year. To ditch that pledge, he believes, would nuke his reassurance project. Yet some ministers wonder whether it is right to ring-fence health. Although the Government insists the search for greater efficiency will go on in an NHS facing ever-greater demands, the guaranteed budget is bound to take some of the pressure off.

Its special protection ignores one lesson from Canada, on which the coalition's cuts exercise is modelled after the federal government reduced spending by more than 10 per cent between 1994 and 1997. One of its ground rules was that "nothing is off the table"; health and education were among the casualties.

The key questions posed by the Canadian government – such as should the state really be providing this service, should it be handed to the private or voluntary sector – were reproduced faithfully in a Treasury document this week. The coalition also aims to adopt Canada's open and inclusive approach to take people with it, although that will be hard. Another lesson is that speed is important to create some light at the end of the tunnel.

Yet the parallels can be overstated. Jocelyne Bourgon, a senior civil servant in Canada during the period, admits in a report for the Institute for Government that one crucial ingredient was "luck" – that there were no major external economic shocks.

Mr Cameron and Mr Clegg may not be so lucky. Canada had the United States economy next door to help it grow. On our doorstep, European governments queue up to wield the axe even where, as in Germany, economists say they don't need to. This "competitive austerity" could result in a huge rise in unemployment across Europe, destroying the coalition's hopes of claiming the progressive label. Mr Cameron and Mr Clegg need a growth strategy as well as a cuts strategy.