Hamish McRae: Money is tight – and so is time

First the politics; next the economics. Quite suddenly the focus will shift to the most urgent practical problem facing the new government: how to fashion a fiscal policy that will bring the deficit under control and enable it to finance the debts in the meantime.

This task, always urgent, has been given a new immediacy by the events of the weekend in Europe. The eurozone, with a little help from the IMF and the other EU members, including ourselves, has rescued Greece. Or rather it has given Greece and the other weak members of the eurozone a little time to implement austerity programmes. The total panic that might have come from a default was averted in the short term but at the cost of focusing attention on the longer-term issue: the fact that the weaker eurozone countries now have debts they can never repay in full. Already the financial markets are calculating what proportion of its debts Greece can service: 50 per cent, perhaps, maybe 60 per cent, possibly a little more. But not all; some will have to be written off.

This changes everything. Until last weekend Europe did not have to confront this new reality. The eurozone leaders thought they had the luxury of time. They thought general statements of comfort would be enough to calm things. They were desperately wrong. To prevent a financial catastrophe they had to come up with what is by any standards a huge support package: the headline number is close to a trillion dollars. But it is only a patch, for while it solves the liquidity problems of the eurozone it does nothing to make weaker countries more solvent.

We here in the UK assumed that our new government would have time to sort things out. The pre-election debate was over small details: the timing of the start of the spending cuts, the profile of debt reduction, the balance of a few billion either way on taxes. We had a large deficit, sure, but we were not Greece.

Well, we are not Greece now but the pressure to move fast is much greater than it was even a week ago. Vince Cable, ever a canny observer of the relationship between politicians and financial markets, caught this wind of change. He acknowledged that events in Greece had reinforced the need for tough discipline here and said his party was not "dogmatically" objecting to spending cuts this year.

So what will happen next? There will be a new Budget in a few weeks' time. It will bring in a mixture of tax increases and spending cuts, with both phased in over the next two to three years. There will not be much detail as to the latter because there simply will not be time to do the work on that, but the overall numbers will have to be consistent with a deficit of 3 per cent of GDP, or less, within four or maybe five years. This new deficit reduction programme will be based on new and lower estimates for economic growth.

There will be some spending cuts for the current financial year but these will be more of a token nature, not for ideological or political reasons, but for the very practical one that there will not be time to do much at such a late stage. Then in the autumn we will get the detail of how the rest of the programme will be carried through. We will, I fear, be rather shocked by what we will hear. Perhaps inevitably, we have been badly prepared for what is to come.

One result will be that the economic rhetoric of politicians will change just as the political rhetoric already has. One of the astounding features of the past few days has been the way that senior politicians of all three main parties have chosen a quite different language from that they used before the election: more conciliatory, more open, you might say more adult.

Expect that same transformation to happen in the economic sphere. The dilemmas our new government faces will be set out in language that seeks to explain the consequences of different sorts of action and justifies the course taken. We, as citizens, have to be persuaded that the government understands what it is doing and why. And the people who will have to lend us the money have to be persuaded that they will be paid back.

h.mcrae@independent.co.uk