´óÏó´«Ã½

The arrest of Damian Green and the forced search of his parliamentary office have caused on all sides of politics. From Tony Benn to David Davis and Nick Clegg, there is fury at the police's violation of the sanctity of the Commons and the challenge to the duty of an opposition member to hold the government to account.

I am grateful to a colleague for pointing me to the defiant words of Speaker Lenthall to Charles I in 1642.

They were uttered when the king tried to have five MPs arrested in the Commons. On his knees before the sovereign, the Speaker explained why he would not co-operate, explaining that his duty was to the House and not to the king.

May it please your majesty, I have neither eyes to see nor tongue to speak in this place but as this house is pleased to direct me whose servant I am here; and humbly beg your majesty's pardon that I cannot give any other answer than this

P.S.: My earlier post seems to have generated anger from those who were appalled at the arrest of Damian Green.

Having covered the cash-for-honours case (rather more vigorously than the government was comfortable with), I was merely trying to answer the two questions which were asked then and are being asked now: why did the police feel the need to arrest Damian Green and to raid his house?

Incidentally, I thought that comparing Green with Churchill might just have hinted that I saw the gravity of the situation.

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at the arrest of Damian Green mirrors the anger that many in Labour felt when Tony Blair's aide in the cash for honours investigation. Although their cases are very different there are important similarities.

Green (pictured left), like Turner (pictured right), was arrested under suspicion of conspiracy. In other words, he has not been arrested simply for receiving leaked government documents, but under suspicion of conspiring to have them leaked.

Also like Ruth Turner, he found a large number of police officers turning up on his doorstep instead of having an arranged interview. The justification will be the same in both cases - that the suspect could not be relied on to produce computer or documentary evidence that the police want to see.

There are plenty of people who believe that Green like Turner is unlikely to ever face successful charges, and there are plenty of parliamentarians who see another parallel with Churchill. He of course relied on a foreign office mole Ralph Wigram to tell him of the failure to prepare to stand up to the Nazi threat. Damian Green's revelations may be on a rather less dramatic scale but they raise real concerns about the capacity of parliamentarians to do their job.

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The Treasury's plan to was dropped as late as last Friday. It followed what I'm told was a lively debate between Gordon Brown and Alistair Darling although both sides insist there was no row.

The Whitehall line is that this reflects the sort of choice that governments have to face all the time.

The case for a VAT rise was that it would increase the stimulus effect of a temporary cut in VAT as shops can say "buy now before VAT soars". As it is not a tax on income it would have no disincentive effect and would not encourage the wealthy to move abroad. However, since it is a regressive tax - the poor spend a greater proportion of their income than the rich - it would not fit into Labour's "fairness" agenda. It was, after all, Margaret Thatcher's policy in 1979 to cut income tax and raise VAT.

The arguments for a new top rate of income tax and rise in NICs will have been that it highlighted the choice between the parties. What's more it's not as politically risky as it once was since there's public anger with rich bankers, traders and the like. It's also less economically risky since other countries - the USA, for example - are planning to put up taxes on the rich. The downside, of course, was that it would allow the Tories to say that it was the thin end of the taxation wedge and to claim that New Labour is dead.

Historians will enjoy looking hard at this. They will be fascinated at the light it shines on Gordon Brown's last minute decision making.

However, the story has further to go today.

I have been told by one apparently well informed source that the Treasury were considering a further VAT rise to 20% in 2012.

The question all this raises is - did the Treasury want to promise to raise more tax than was announced in the PBR in order to look credible? Remember that each 1% of VAT raises around £5bn.

Did Gordon Brown fear that this would frighten consumers and voters - undermining the effect of the fiscal stimulus and also, of course, Labour's re-election chances?

In the summer, before the banking crisis worsened, some in Whitehall talked of their hopes that Alistair Darling would become a chancellor like Roy Jenkins or Ken Clarke. In other words someone prepared to raise taxes for the good of the country even if it damaged their party. Indeed, Mr Darling spoke of his desire to be open and transparent with the voters. To be fair to him the PBR did spell out both the scale of the budgetary problem Britain faces and some pretty uncomfortable medicine too.

But did he originally plan to go further?

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A Treasury document signed by a government minister states that in 2011-12 - which would represent an unannounced 1% rise in the level of VAT now.

The Tories are claiming that it's evidence of "Labour's secret tax bombshell" and claim that it explains "why there is a black hole in the pre-Budget report because at the last minute Gordon Brown clearly decided to keep secret his plan to hit everyone with an extra tax rise to pay for his borrowing binge."

Not surprisingly the Treasury has a rather more innocent explanation. They insist that it's a document that reflected an option that had been considered by ministers but then rejected before yesterday's statement by the chancellor. This fits in with what both I and the ´óÏó´«Ã½'s Business Editor, Robert Peston were told in the few days before the PBR.

The Treasury insists that the government has no plans to raise VAT. That, of course, does not rule out them forming those plans in future. Of course, governments of all colours never rule out anything if they can avoid it.

The document is an explanatory memorandum to the statutory instrument (legal document) that enacts the temporary cut in VAT. It's been widely issued and can still be found on a government website. It states that:

"VAT is a tax on the final consumption of goods and services, production and distribution. It is charged on the majority of standard rate of 17.5%. The proposed changes will reduce 2008 until the end of 2009. The standard rate will then return 2010, and subsequently increase to 18.5% in 2011-12."

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Alistair Darling's big gamble is not simply that an injection of £20bn can make the recession shallower and shorter. It is that the economy will recover strongly and swiftly enough to allow him - or his successor - to pay back not just that £20bn but the eye wateringly large half a trillion pounds of borrowing which he revealed today.

What's more the chancellor's bet depends on other risky gambles. First, that the British economy will recover as early as the second half of next year. Second, that the government can deliver a major clampdown on spending and huge efficiency savings. Thirdly, that the electorate will support a significant rise in taxes targeted at the wealthy but which will hit those on middle incomes too.

As such this represents a break with both the economics and the politics of the last 30 years - a break with the caution that led Labour's Prime Minister Jim Callaghan to say that you could not spend your way out of a recession and Tony Blair to shy away from increasing income tax.

If Mr Darling wins his bet the economy will be boosted and Labour will dare to dream of winning a record fourth term. If he loses, we will all be paying much much more for a long long time but it will be a Tory not a Labour chancellor who's sending out the bills

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The cut in the chancellor's growth forecast for next year - minus 0.75% to minus 1.25% - is the biggest ever made by the Treasury.

However, his growth forecasts for the future are very optimistic predicting a return to growth in the last two quarters of next year and significant growth in 2010. Conveniently, this significantly improves his forecast for borrowing.

UPDATE, 03:52 PM: Wow.

Alistair Darling has admitted that borrowing will increase to a higher level than it did after the recession in the early 1990s and that national debt will increase every year until 2015. And this, remember, is based on his optimistic forecasts. If he's wrong about a swift return to strong growth borrowing and debt will be much worse.

UPDATE, 04:10 PM: Sure enough. The chancellor has announced a series of other tax changes to pay to fill the budget black hole.

National Insurance will go up in 2011 for all but it's those earning over £100k who will suffer the most.

Not only will there be a new 45p tax rate for those earning over £150k, there will also be a smaller personal tax allowance for those earning between £100k and £140k and no personal allowance above that figure. That's a major tax rise for the wealthy and may make quite a few people ask not to have their pay go above £140k.

Combined with the announcement of an increase in the personal allowance for 22 million basic rate tax payers, it's now clear what Mr Darling means by fairness.

UPDATE, 04:49 PM: The Treasury red book spells out the cost of those income tax and NICs rises.

It says that in 2011

* those on incomes over £40k and below £100k will pay on average £156/year more
* those on incomes over £100k and below £140k will pay on average £1044/year more
* those on incomes over £140k and below £200k will pay on average £3168/year more

UPDATE, 05:29 PM: Apologies I got the last two figures wrong, it should be:

* those on incomes over £100k and below £140k will pay on average £1144/year more
* those on incomes over £140k and below £200k will pay on average £3172/year more

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The word from the Treasury is that no-one will be able to talk about a tax bombshell after Alistair Darling sits down as he "will have told you everything". In other words, the claim is, that there'll be no nasty surprises lurking in the pre-Budget report small print or in a secret Labour manifesto to be revealed after the next election.

It's quite a claim and it means that Alistair Darling will have to spell out significant tax rises above and beyond the new top rate of tax and a major spending squeeze as well. It would be a break not just from Labour's past but that of previous Tory governments too.

John Major and Norman Lamont ran a campaign promising tax cuts in 1992 before embarking on massive tax rises in 1993 and 1994. Gordon Brown consistently denied the need for tax rises to pay for the NHS in the 2001 election and then put up National Insurance soon afterwards. Incidentally, I'm pretty sure that that's where he'll find the money this time too - in a rise in NIC for everyone but an extra rise for richer people too.

So, why you may wonder should this government be candid now?

One good reason is to try to put the Tories on the spot. Labour's message will be - in effect - we're pledged to squeeze spending as much as it is safe to do so and we've raised taxes on those who can afford it most. Then they'll demand to know - what would you do - protect the rich and hit the poor?

In other words, a tax and spending time bomb rather than a tax bombshell.

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The pledge not to raise income tax rates was one of the foundations of New Labour. It was designed to reassure voters that the party had no desire to punish those who worked hard, however much they earned. It is to be ditched in the name of fairness when a new 45p tax rate is created for those earning £150 000 a year or perhaps even more.

The sum raised - £2bn or £3bn - is relatively small but the political significance of the move is vast. It will come on a day when the Chancellor delivers not one but, in effect, two budgets both equally dramatic. The first - a crisis budget - will spend billions to get customers and the government itself spending in an effort to get the economy moving again. The second - which won't be felt in full until 2010 or 2011 - is to fill the budget black hole that can simply no longer be ignored by ministers.

Alistair Darling will say that the income tax rise will only happen if Labour is re-elected protecting him from charges of breaking the party's last election manifesto and, in effect, writing the first sentence of the next one.

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The government is preparing to admit that a huge and unplanned-for rise in government borrowing will have to be paid back in the years to come. The chancellor is expected to announce spending rises and tax cuts to boost the economy in his pre-Budget report on Monday but he'll also make clear how the money he spends will have to be paid back.

Next week, the chancellor has to tell the country how far we've gone into the red. He's preparing to reveal that we'll soon be borrowing over £100bn - that's 11 noughts at the end.

A collapse in the tax the government receives from house sales and from the City of London means we're heading for an annual overdraft worth one twelfth of the country's annual income - a figure that will raise a few eyebrows. It's not been seen since Denis Healey was Chancellor - back in the 1970s - the last time Labour was in power.

I'm told that Alistair Darling wants people who watch his speech to clearly understand how he'll reduce the nation's overdraft without having to read the small print.

The last time a chancellor had to give advance warning of tax rises was under the Tories in 1993. Norman Lamont announced plans to put VAT on gas and electricity bills one year and double it a year later. It caused Labour outrage. Gordon Brown was sitting on the front bench that day.

Today Mr Brown faces opposition taunts that he's planning a tax bombshell. He insists that however high borrowing is already, it's got to go even higher, telling Jeremy Vine on ´óÏó´«Ã½ Radio 2 that "You have got to act now so that we avoid a worse problem.

"My father used to say 'a stitch in time saves nine' and I think that's an important message."

The prime minister was also asked the question he's always fudged - whether he regretted his promise to end boom and bust.

"Of course politicians make mistakes, and I've got to be honest that we've made mistakes."

It's Alistair Darling who has the job of undoing some of those mistakes - on Monday he has to be honest about the long term pain we face while promising enough short term gains to stop the country sliding into a slump.

The Treasury's talking about a package of measures that will be "decisive". That means a stimulus - paid for by extra borrowing - of more than 1% of national income GDP - over £15bn to be spent on:

Cancelling planned tax rises - on cars, small business and income tax allowances

Temporary tax cuts - targeted at those most likely to spend the money - the lower paid

And increased spending - on projects that can be started quickly.

It's often said that chancellors' speeches are forgotten a few days after they're delivered. This one looks like proving to be an exception.

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Margaret Thatcher took on 364 economists who challenged her 1981 budget. I've not counted how many are now opposed to David Cameron's on the need for a fiscal stimlus but it's growing.

And it's not just economists or international bodies such as the IMF and EU (albeit that they say only those countries with healthy balance sheets should do it), it's also the 2 main business organisations - the CBI and the IOD.

Today the Times' Anatole Kaletsky .

The Conservatives are, however, pointing to the latest minutes of the Monetary Policy Committee to back their contention that interest rates are being kept higher than necessary because of government promises to spend more and tax less.

The MPC considered a 2% cut rather than a 1.5% cut at its last meeting but decided "it would make sense for the Committee to reassess the required scale of monetary easing after the chancellor's pre-Budget report".

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If you thought the banking crisis was over, think again. That was the message taken to Downing Street yesterday.

Robert Shapiro, an economic adviser to Barack Obama's campaign and former US under secretary of commerce for economic affairs warned Team Brown to prepare for further shocks to the financial system. His fear is that the underlying cause of the economic crisis - the collapse of the US housing market - has yet to be remedied.

Here's my interview with him:

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Sure enough, Downing Street says there will be new measures to get the banks to lend more to small businesses in next week's pre-Budget report.

This on the day the Lib Dems suggested either the creation of a new national bank to supply affordable credit at prudent levels or the use of local councils or the Post Office to distribute state funds directly into struggling companies.

David Cameron at PMQs and a Tory briefing note referred to "the establishment of new institutions to underwrite lending". However, the party now says they don't mean a new institution like a bank - they mean "new government guarantees" to underwrite loans to businesses.

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Are we going to see the creation of a nationalised national bank to give loans to businesses that the commercial bank simply will not give?

I ask the question because first David Cameron and then Nick Clegg raised the idea of the government directly lending to businesses that probably can't get the credit they need to stay in business.

Noticeably Gordon Brown didn't seem to knock the idea down. Instead he said that you needed fiscal action, government spending in other words, in order to help small businesses in the way they said was necessary. This is intriguing. Much more work to be done to work out what's really going on.

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With one bound they were free.

The Tories are no longer committed to matching Labour's spending plans. In a speech this morning David Cameron says that his party will take another look at what government should be spending in what is likely to be general election year 2010-11. However, he doesn't and won't say what level of spending there should be.

This is designed to get them out of the political bind they've been in.

The country, they've been saying, cannot afford Gordon Brown's tax cuts because the cupboard is bare and it's irresponsible to borrow to cut taxes.

With a commitment to match Labour's spending plans, the Tories risked being painted as committed to tax rises to fund the gap. They could not promise what many in their party have been demanding - spending cuts to fund tax cuts.

Now they can.

They may be free of one constraint but they are opening themselves up to an old Labour attack - warnings of Tory cuts.

Team Cameron's calculation is that the change in the economic outlook blunts that weapon. If Labour warn of Tory cuts they will be telling the country that they'll carry on spending regardless of current economic circumstances. That will allow the Conservatives to say that Labour's borrowing bombshell will be matched by a tax bombshell.

UPDATE, 11:55AM: George Osborne says that today's move spells out a clear choice for people - spending restraint under the Tories and tax rises under Labour.

Somehow I doubt that's where Labour will want to leave the matter.

Remember that although today is politically significant it still leaves most of the important economic questions unanswered.

All the Conservatives have told us is that they would spend less than the government currently plans to in 2010-11. However, they concede that the government is itself committed to reviewing its spending plans for that year. What's more, the Tories haven't got answers to the really hard question - how much less should be spent on what?

It's clear that David Cameron wants voters to conclude that he tells it to them straight whereas Gordon Brown has a history of being misleading on tax.

Today Labour are pointing out that today's speech did nothing to offer families and businesses help now. In the longer term, I suspect that they will respond by pointing out that the Tories have tended to be rather better at calling for government to do more (more prison places, more money for the armed forces, more tax breaks for marriage... etc) than to do less thus allowing them (you guessed it) to say that the Tory sums don't add up.

UPDATE, 8:30PM: The whole point of David Cameron and George Osborne's commitment to match Labour's spending plans was to neutralise Gordon Brown's favourite election strategy - Labour investment versus Tory cuts.

I explained in my earlier post why the Tories decided to change their position.

It's already obvious, however, that this will throw up difficult questions for the Tory leadership as the Tory right demand bigger cuts sooner and Labour suggests that there'll cut anything they don't make specific promises to match Labour's spending on.

I've just and he did give one indication of the scale of spending curbs that might be needed:

ROBINSON: Is it your plan to cut spending so that taxes don't have to go up under a Conservative government?

CAMERON: Basically yes. We need to recognise we cannot go on as we are. If we have the current debt we've got plus the government's borrowing binge, which they are going to go ahead with, plus their spending plans, there will be really massive tax increase, a big bombshell after the election. The government aren't really denying it, they're talking about a £15bn or maybe £30bn extra. If they do that and money's got to be paid back through a tax increase, we're talking about 4p on the income tax rate, something like that, a really big increase. Now if we want to avoid [this] we've got to change something. What I'm saying is we need to change the growth of public spending, to get it under control, because we don't need a tax increase like that just as we're trying to come out of recession.

So, to avoid tax rises after the next election is David Cameron saying that public spending will have to rise by around £15bn less than under Labour?

P.S. Before anyone writes in to point out the difference between a cut and a slower rate of increase in public spending, I do know the difference. Indeed, I once had a rather memorable exchange with Tony Blair about just that distinction when during the 2005 election campaign he unveiled a poster claiming that the Conservative Party would initiate cuts of £35bn.

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The prime minister has just warned that Britain faces deflation next year.

Now a period of falling prices might sound rather attractive. Until you think about, that is.

A sustained period of falling prices leads people to postpone spending as they wait for prices to fall. Businesses that cannot sell their goods cut jobs. Prices are cut to stimulate sales. A deflationary spiral results and it's very hard to escape it.

In addition, deflation also increases the cost of debt. Think about it in terms of, say, a mortgage. Normally inflation means that the amount you pay back in a few years time is less in real purchasing terms than when you took your mortage out. Deflation reverses that.

Ask anyone who's Japanese and they'll tell you of the horrors of deflation in the 90s. Anyone old enough could tell you about the Great Depression of the 30s.

The political significance of the D word, of course, is that Gordon Brown can use the fear of it as another justification for trying to stimulate the economy via borrowing to cut taxes and spend.

The Tories' best argument is that interest rate cuts and the fall in the value of sterling do a lot more to kickstart the economy than a stimulus of a few billion here or there, particularly when that few billion has to be repaid.

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WASHINGTON: Labour say he's being irresponsible. The Tories that he's showing the courage to be prudent.

Either way George Osborne must have known he was risking huge controversy by warning of a possible "collapse of sterling" whilst the prime minister is abroad at the Global Economic Summit.

The shadow chancellor's thinking is this. A British fiscal stimulus package will be too small to make any real difference if it's affordable, or unaffordable if it's big enough to make a difference.

Why? Because unlike China or Australia we do not have budget surpluses to spend and unlike Germany our budget deficit is not at a level where it's safe to borrow more. Osborne points to warnings by the Head of the European Central Bank amongst others that only those countries with fiscal room for manoeuvre should go for a stimulus.

What's more he has heard from former chancellors Howe, Lawson, Lamont and Clarke and the former Permanent Secretary of the Treasury, Lord Burns about how they tried in vain to stimulate the economy in the recession of the early 1990s.

What, though, of the backing of the governor of the Bank of England? Osborne points to the two caveats that Mervyn King added - that any stimulus be temporary and be accompanied by government setting out a clear path back to prudent levels of borrowing.

What the shadow chancellor was warning of today was the reaction of the markets if they lose faith in the British government's financial responsibility.

What's his evidence? He points to the 25% drop in the pound against the dollar and the fact that markets are demanding double the risk premium for British government debt as they are now for German government debt.

Politically, Team Brown believe the Tories have made a huge mistake and claim he's talking the economy down as the prime minister's trying to boost it.

In policy terms some are more candid, admitting that they are dealing with a balance of risks and arguing that the risk of doing nothing in the face of a serious recession is greater than the risk of being punished by the markets.

UPDATE: Speaking in the House of Lords earlier this month (3 November 2008) Lord Burns warned of Sterling problems, though in a rather less graphic way than George Osborne.

He said: "Each of the three serious downturns that I have observed at close quarters --1974-75, 1980-81 and 1991-92 -- have had two striking characteristics: namely, the emergence of a budget deficit that increased to a point where the restoration of structural balance was a long and painful process; and at some point a depreciation of Sterling that moved from just about being welcome to becoming very painful. Let us hope that we are not forced to repeat those experiences."

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NEW YORK: Gordon Brown has signalled that he regards help for people on low incomes as the most efficient way to stimulate the economy.

Speaking in New York, the prime minister said there was a huge debate about what works, and suggested that government faced a choice between cutting taxes, boosting infrastructure spending and helping people on low incomes. He noted that around half of the money spent by the Bush administration on tax cuts had been saved rather than spent and that it was hard to speed up infrastructure spending.

However, he pointed out, people on low incomes were inclined to spend. Stand by for increases in tax credits. Asked about Britain's borrowing problem, the prime minister said we can afford to do this, even though current borrowing is high. That's an acknowledgement he's rarely made before.

He went on to tell the tale of how he'd found a copy of Keynes's book in the library of the Treasury. A book the economist had donated in 1929. Inside, the permanent secretary of the day had written "inflation, extravagance, bankruptcy". The prime minister hopes that that's not what people will accuse him of, although I think he knows that they may well.

There was one other interesting note - a shot across the bells of the incoming administration of Barack Obama - when he warned that protectionism was a road to ruin. In a country where they're discussing bailing out the car industry, the prime minister must have known exactly what he was saying.

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NEW YORK: Not everyone here in America is as enamoured of Gordon Brown as Professor Paul Krugman. The is damning: "The need is for sensible, reassuring policy, and a global government spending spree financed with higher taxes or more borrowing won't stimulate much of anything save perhaps Mr Brown's approval ratings." Ouch.

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NEW YORK: What do you call a group of economists? "A contradiction"? Or, perhaps at times like these, "a gloom" might seem more appropriate. Not though if you're Gordon Brown. For him a group of economists represents a night well spent in New York. Last night at the Waldorf Astoria the prime minister gathered a half dozen of them to give him advice on the eve of the global economic summit.

One whose advice will have been listened to particularly closely is Professor Paul Krugman - the man who in the week he won the Nobel Prize for economics described Mr Brown as the saviour of the global economy. It's a plaudit that the prime minister is understandably fond of. Only this week at the Lord Mayor's banquet he claimed that Britain was leading the world in the search for a way out of the current economic crisis. In the same speech he invited comparisons with President Roosevelt - the man credited with spending America's way out of the Great Depression.

Not so, says Professor Krugman, who .

Why, you may wonder, does this historical argument matter? The reason is that Krugman is not merely an admirer of Gordon Brown's, he's a cheerleader for President-elect Obama and he's urging him to spend big to kickstart the American economy.

Nobel Prize-winning economists don't trifle with the sort of numbers bandied about on Budget days - a billion here to there. They talk instead in terms of a share of national income. He wants Obama to spend 4% of America's GDP on a fiscal stimulus. That, to you and me, is $600bn - that's a six and 11 noughts. If Gordon Brown were to want a fiscal stimulus that would mean spending an unthinkably large £60bn - or the entire budget for state pensions.

Now, of course, President-elect Obama has not signed up to anything on this scale nor has or could Gordon Brown. It is, though, an indication of how economists and politicians are beginning to think the previously unthinkable.

The prime minister will argue at this weekend's G20 summit for an internationally co-ordinated stimulus. He will encourage others to follow the plans already unveiled by China, Germany and Japan.

Now, none of these countries have Britain's problem - a massive budget deficit. No matter, he says, we can and should borrow to pump prime the economy at this time. And he now has an answer to those who say that the very idea is a betrayal of his old friend Prudence, to risk higher interest rates and a run on the pound. The governor of the Bank of England himself gave backing to the idea earlier this week. He did, however, add two important caveats that borrowing for spending increases or tax cuts must be temporary and that there must be a credible plan to pay the money back.

Now, for every prof who believes in a stimulus there is another who argues that, at best, it would have no effect or, at worst, a malign one. Posed against Gordon Brown are both the Conservative and Liberal Democrats.

Some believe that Gordon Brown's motive this weekend is not just to plot our economic recovery but to get political cover for the fact that his government has let borrowing get out of control.

It's another 10 days before the government has to unveil the size of its fiscal stimulus. The debate in Whitehall is still ongoing. It may well though have been influenced by drinks and canapes last night at the Waldorf in Manhattan.

This was the script of my report on the Today programme

NB. Here's what Paul Krugman had to say when I spoke to him about the economic challenges facing world leaders.

And here's .

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A baby dies gruesomely, avoidably and in circumstances which people had dared to hope could never happen again. The speaker of the Commons is forced to intervene to calm tempers after the prime minister and the leader of the opposition engage in an angry clash. "Good grief" will, no doubt, be the reaction of many and "a plague on both their houses"

However, as the heat subsides a little, what light does today's PMQs exchange shine on the policy issues and the political positions of the two men?

David Cameron suggested that the Haringey inquiry into what went wrong was "completely unacceptable" since it was "being led by Mrs Shoesmith, who is the council's own director of children's services". Repeatedly he asked Gordon Brown, "Do you agree with me that she cannot possibly investigate the failure of her own department?"

The prime minister did not answer that question. He simply explained that the government was considering the local "serious case review" into what had gone wrong and Lord Laming - who carried out the Victoria Climbie inquiry - was looking at social service protection for children in every part of the country.

The problem arises because the director of children's services in Haringey is also the head of the Local Safeguarding Children Board which commissioned the report into the failures which led to Baby P's death. Whitehall guidelines state that "any report must be commissioned from a person who is independent of the agencies/professionals involved". It doesn't state that any report should be commissioned by someone independent. A statement is due from the children's secretary which I suspect will set up an independent enquiry.

What then of the politics?

Today's row was triggered by Gordon Brown accusing David Cameron of making a "party political" issue of the tragedy.

It's clear that David Cameron was much keener to talk about this case rather than about the topic pretty much everyone expected him to raise - the economy. Before PMQs began, which they'd splashed on their front page. This may have been because he felt passionately about it. It may also have been because he wanted to avoid a debate about taxes and the case for a fiscal stimulus - a view that would have been reinforced by today's comments by the governor of the Bank of England which posed some very awkward questions for the Tories (see my earlier blog).

What's also clear is that Labour backbenchers were relishing the prospect of a political punch-up on the economy. That's why they shouted when the Tory leader chose another subject. That, perhaps, is what was in the prime minister's mind when he suggested that Cameron was playing politics.

My immediate reaction on ´óÏó´«Ã½2 was to say that the prime minister had shown a "political tone-deafness" to the mood outside Westminster and that Mr Cameron probably could not believe his "political luck" that he managed to avoid talking about the economy. Labour's John Cruddas and the Lib Dems' Charles Kennedy - who were in the studio with me - agreed. Interestingly, some who were watching in the Commons gallery did not. They thought the Tory leader's visible loss of temper showed him in a very poor light.

Of course, beyond the Westminster village the public will demand that this story does not become a he says/she says row like those over or . If you don't remember them, don't worry. That makes my point.

UPDATE: 17:50: Things are moving fast.

No sooner had Gordon Brown defended the Haringey enquiry into the death of Baby P as "independently compiled and independently assessed" than Ed Balls appears to have ordered a review of the review. Ofsted, the Comission for Health Care Audit and the Chief Inspector of Constabulary will review Haringey Children's Services and report within a fortnight.

If it shows evidence of management failures Mr Balls has the power to take over the running of Children's Services in the borough - effectively replacing the entire management team. He does not have the power to sack individual staff.

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The governor of the Bank of England has created a real problem for the Tories. This morning Mervyn King backed the idea of a fiscal stimulus - borrowing to raise spending or cut taxes - which the prime minister's been pushing and the Conservatives have portrayed as irresponsible.

"In these extraordinary circumstances it would be perfectly reasonable to see some use of fiscal stimulus" he said, before adding riders that two conditions should be met. One is that it will be temporary, purely temporary, and secondly is that it will be clear that there was a medium-term plan to bring tax spending back into the sustainable balance over the medium-term." He went on to explain why he backed the idea in the current circumstances. (See his full quote below.*)

Meantime, many Tories who agree with Messrs Cameron and Osborne on borrowing are criticising them for not promising spending cuts to pay for tax cuts.

Yesterday the shadow chancellor was asked to name a single politician around the world - right wing or left wing - who shared his position. He didn't. Anyone?

* Mervyn King said: "There are two changes which mean that in these circumstances it is reasonable to think about fiscal policy as a complement to monetary policy. One is... credit constraints on households which make fiscal policy likely to be more effective and secondly the fact that the transmission mechanism of monetary policy has been in part impaired through the banking crisis and it's precisely in those circumstances... that fiscal policy has
a role alongside monetary policy. But it still has to be temporary. And it still has to be consistent with a medium-term framework which shows a sustainable path for tax and spending. If not, the benefits can be lost in terms of higher long-term interest rates."

UPDATE: The Tories insist that Mervyn King's comments on a fiscal stimulus should be read as only limited and conditional support for Gordon Brown. They point to these comments by the Chief European Economist at CitiGroup, Michael Saunders who argues that "the governor opened a tentative door to nearterm fiscal stimulus, but hedged that around with ...quite careful conditions."

Saunders goes on "The governor is required to support government policy as long as it does not conflict with the inflation target. But, his comments lay down a marker that only very limited forms of fiscal stimulus would really get his support. It is a clever way of trying to constrain the scale of fiscal easing - and such constraints are important now that the government seems to be returning to a 1970s stance of favouring high budget deficits - without yet being in the awkward position of explicitly opposing the government's fiscal policy."

A view that is, interestingly, .

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Two rival news conferences, two competing economic approaches, two political gambles.

First David Cameron, then Gordon Brown made their choices clear this morning. The , or what you may recall he used to condemn as an unfunded tax cut. This, he claims, is the right time for this new approach.

Meantime, David Cameron has adopted his rival's shunned old friend, Prudence. He insists that it's irresponsible to pay for tax cuts this way and to incentivise businesses to take on new workers.

Gordon Brown is gambling that he will be rewarded rather than punished for a policy U-turn at what is a unique time. David Cameron is betting that there will be long term rewards even if there's short term pain in appearing rather too responsible.

Both men have an interest as presenting this as a big political divide. It may in truth turn out to be much less so.

If the government loosens fiscal policy by just a few billion, that stimulus will be dwarfed by the scale of the recession.

In addition, David Cameron's claim that his tax cuts' promises are all "funded" is about to be put under heavy scrutiny as Labour claim he's implausibly promising to spend £12bn in this way.

UPDATE, 2:30PM: At this morning's Downing Street news conference I asked the prime minister whether he'd be honest with the electorate and admit that taxes would have to go up after the recession. He replied that now wasn't the time to make predictions for several years ahead.

The employment minister, Tony McNulty, was clearer when pressed on the same point by Andrew Neil on the Daily Politics this morning as you can see here.

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So, everyone appears to agree. The recession's going to be much worse than originally feared. Borrowing's high and going to get much higher. There is, therefore, no money to spend. So, now's the time to spend money on cutting taxes making sure that there's even less money in the exchequer.

Hold on a second. How can this possibly be?

The answer is that politicians and economists are all asking themselves the same big question - what if big interest rate cuts don't get the economy moving again? What, in other words, if the central banks prove to be impotent in the face of the looming crisis? Then, the argument goes, it would fall to governments to act. In the jargon, if a monetary stimulus fails they will have to try a fiscal stimulus.

Now, if you're looking to stimulate a failing economy you're not talking about the sort of figures that are normally bandied about on Budget Day - the odd couple of billion here or there. Economists talk, instead, of spending one or two per cent of national income. Now, one per cent of British GDP is about £15bn. That's where the talk of tax cuts on that scale has come from but that's all it is, so far at least. Talk.

It is, however, talk that Gordon Brown's fuelling. This morning on GMTV he said:

"What I am determined to do is to get all countries round the world trying to get their economies moving again and one way you can do that is by putting more money into the economy by tax cuts or by public spending rises. But that's something that we've got to look at in the next few weeks."

As I've written before, it is still far from clear whether he is simply trying to put a better gloss on the dreadful borrowing figures which the chancellor will have to unveil soon or whether he's seriously contemplating borrowing much more than he's forced to in order to stimulate the economy. Bear in mind that if ministers did nothing in the forthcoming Pre-Budget Report taxes would actually rise - the £2.7bn rise in tax allowances to end the 10p tax fiasco was funded for one year only and the controversial car tax (VED) reforms are looming.

Meantime, the Tories are on the brink of unveiling a tax cut which, they say, will help keep people in work. This is the same party that was only recently saying that "the cupboard is bare" and which boasted that they wouldn't promise tax cuts they couldn't afford. In the FT today, the that they've not shifted their position arguing that "Spending our way out of recession will not work. Targeted tax cuts would help but they must be properly funded". Until we see the colour of their money it's hard to assess how different their ideas really are.

The Lib Dems are the only ones who've consistently proposed major tax cuts for some time (though they're paid for by their tax increases) They propose to cut the basic rate of income tax from 20p to 16p with the £18bn cost being paid for, they claim, by closing tax loopholes for the rich and increases in green taxes. They, like the Tories, argue that tax cuts should not be paid for by extra borrowing.

So, there may be agreement on the need for tax cuts to help stimulate the economy but there is none on the type, the scale or how they should be funded.

Some countries have, of course, already unveiled stimulus packages. The Australian government, for example, recently pledged to spend 10bn Australian dollars - estimated to be just under 1% of their GDP. In stark contrast with Britain, however, they're had budget surpluses for the past decade.

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Just a few long weeks ago when the Labour Party was gathering for its conference all agreed that the Glenrothes by-election was already lost and many felt that this might prove to be the trigger for a full blooded leadership coup. That, it was argued, was why voting should take place in the week of the American election so that bad news could be quickly forgotten if not actually buried.

Even yesterday, on the day of voting, Labour MPs were convinced they'd lost and the SNP did nothing to downgrade expectations of the political earthquake which Alex Salmond had once predicted.

Gordon Brown has re-written the textbooks for leaders in crisis. It was never before thought helpful for leaders in trouble to organise a global economic crisis.

The question today is how much this was a local rather than a national election?

Gordon Brown isn't just the MP for the neighbouring constituency. He was born and bred a Fifer - a citizen of the Kingdom of Fife. Labour's candidate was the highly respected and well known head teacher of his old school. His wife Sarah regularly popped in to campaign from their home four miles down the road.

The SNP were the incumbents. They ran both the council and the Scottish government and, although this was a Westminster election, Labour successfully turned this into a referendum on the SNP's performance - their local spending squeeze and their national promise made in headier times that an independent Scotland could join an "arc of prosperity" with, er, Iceland.

The economic downturn - which has led news bulletins for weeks - has yet to be felt by many in Fife. There's anxiety about job losses at the nearby Rosyth dockyard and fears that they'll soon follow in the banking sector, but when I spent two days there last week I could not find local examples of economic gloom. That is why the SNP campaigned not on the looming recession but on the soaring cost of fuel bills.

Nevertheless, none of this would have mattered a jot if Labour voters had felt ashamed of their government and embarrassed by their leader. In Glasgow East, in the aftermath of the 10p tax fiasco, many felt both. In Glenrothes it's clear that many did not.

None of it would have been possible if Alex Salmond's long honeymoon with the electorate had not ended (you can read much more about that on the blog of the ´óÏó´«Ã½'s political editor in Scotland, Brian Taylor).

Now, of course we should remember that this was always a safe Labour seat. Of course, we should note that there was still a swing away from Labour. Of course, we can observe that the party could not run this sort of campaign in a general election.

However, what matters in politics is momentum and narrative. This was scheduled to have been the week when the voters of Glenrothes declared "It's time for a change". Instead, by casting what politicians like to call "real votes in real ballot boxes" they have confirmed that the Brown bounce is real.

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Can the government force the banks to pass on interest rate cuts and, if so, why won't they? That's the question I put not once but several times to the Chancellor this afternoon.

Alastair Darling's reply was instructive. It's "imperative" that banks pass on the cut he said but the government could not set the price of their financial products.

Hold on a second, you may cry. Didn't we the taxpayers bail out the banks? Weren't we told that in return the Treasury had demanded strict conditions? The answer is yes, yes and but.

The government helped every bank in the country by guaranteeing lending between banks. It got no promises on lending in return for that.

It fully nationalised two banks - Northern Rock which is obliged to lose customers and shrink its business plus Bradford & Bingley which is effectivley closed to new business.

It took stakes in three banks - RBS, Lloyds/TSB and HBOS - in return for promises that they stood ready to lend on the same scale as last year, that their loans would be "competitively priced" and that they would be properly marketed.

These conditions were designed to ensure that the banks didn't merely pass taxpayers money onto their shareholders. What they did not do is allow ministers to force banks to pass on individual interest rate cuts.

As shareholders the government clearly has huge power. However, as one Treasury insider put it to me, it's the power a Sainsbury shareholder has to raise concerns about pricing policy not the power to set the price of cabbages in Wigan.

But let's get to the nub of the matter. Ministers don't want to set the price of loans (let alone cabbages). They know that the the Bank of England base rate is not the price banks pay to borrow money on wholesale markets.

They are hopeful that that rate - the LIBOR - will come down.They believe that with the help of a bit of added political pressure the rates banks charge small homeowners and small businesses will come down. They accept that that might take a few days.

What if they're wrong and those rates still don't come down? That's one answer I didn't get.

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The Obama campaign is over. Campaign Obama has only just begun. He may no longer need to obsess about winning friends and influencing people. It is, though, now the turn of other world leaders to try to become his friend and to influence him.

In embassies across Washington DC diplomats are angsting about whether their leader will be the first to meet the president-elect, the first to greet him at home and the first to be hailed as America's special friend.

Gordon Brown must hope that his last meeting with Barack Obama has not clouded the prospects. When the two men met in London this summer the guest was forced to come to the defence of his host. The air was thick with talk that there would be a new British prime minister long before there was a new American president. When Obama met David Cameron, on the other hand, he was heard to congratulate the Tory leader on his success.

No matter say those close to the prime minister. Brown and Obama got on well, they share the same progressive values, their aides and advisers have formed close ideological bonds. And besides, as one minister puts it memorably, the real Brown government only began a month ago and leaders around the world know that.

Brown, they argue, is a man with a global economic plan who can come to the aid of a president-elect who's talked vaguely of mending the plumbing of the world's financial system without actually spelling out how. The Democrats, one Brown ally told me, admit that they've not thought this through - well, he added, Gordon has.

Obama's promise of change is somewhat clearer when it comes to foreign policy. He's pledged a rapid withdrawal from Iraq whilst talking of the mirror image - a military surge - in Afghanistan. His most controversial pledge was for re-opening dialogue with Iran without pre-conditions. There is, one senior Whitehall figure told me, a real danger that as the British government struggles to escape from its partnership with the Bush administration it is left looking flat footed. Another said that "anyone who tells you they know what the next president will actually do is lying."

Some close to Gordon Brown have been recalling a previous close bond between a young charismatic new kid on the global block and an older, more experienced British leader. Harold Macmillan struck up a real friendship with Jack Kennedy posing as the wise Greek advising the young Roman. This comparison is now officially frowned upon for being, well, just a tad patronising to the next leader of the free world.

And, of course, as British politicians and diplomats plot their charm offensive, others in Berlin and Paris are doing exactly the same. When Barack Obama finally takes office some joke he'll probably find President Sarkozy waiting there for him.

When George Bush became President eight years ago it was President Chirac not Prime Minister Blair who was first through the door of the Oval Office. Former civil servants from the time now protest that the race to be first or closest is at best pointless and, at worst, demeaning.

Those who are still in those jobs admit privately that it's a campaign they don't want to lose.

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Gordon Brown: "I know Barack Obama and we share many values...We both have determination to show that government can act to help people fairly through these difficult times facing the global economy."

Political translation - I know Barack Obama, Mr Cameron, and you are no Barack Obama.
- Obama's a progressive like me who believes in the role of the government, internationalism and helping the many not the few.

David Cameron: "In these difficult times people everywhere are crying out for change. Barack Obama is the first of a new generation of leaders who will deliver it."

Political translation - It's time for a change. I am the next in that generation of leaders who will deliver it.

Alex Salmond: "This was a victory for optimism over pessimism, for hope over fear."

- Scotland's first Minister extended an invitation to Barack Obama who traces his ancestry to William the Lion, who ruled Scotland from 1165 to 1214, to visit the country in Scotland's Year of Homecoming in 2009.

Political translation - Vote for cheery Alex not gloomy Gordon in the Glenrothes by-election on Thursday.
- If Obama visits Scotland they'll stop asking me about Iceland.

UPDATE, 12:56 PM: Yet more evidence at prime minister's questions of how our political leaders will try to surf the Obama wave. As previewed yesterday David Cameron turned Gordon Brown's conference warning that "this is no time for a novice" back on him. The prime minister replied by picking another quote from that very same speech "What I said was that serious times needed serious people. Once again you've proved you are not serious."

Then it was onto Cameron's message on change: "On the day the American people voted for change aren't people in this country entitled to ask: how much longer have we got to put up with more of the same from a government that has failed?"

That was followed by Brown's claim that the American people voted for change because they wanted "progressive policies" and that "Conservative Party policies are rejected in America and in Britain..."

Nick Clegg claimed to be the British advocate of Obama's most important policy - cutting taxes on the middle classes by raising them on the richest.

Prepare for this Obamania to go on...and on...and on.

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"This novice is waiting with interest to see how that novice performs". So said David Cameron at last night's launch of (a new anti anti-American campaign).

Thus the Tory leader made his claim to be the first British politician to seek to turn the expected result of today's US election to his own advantage.

Standby for Gordon Brown to cite an Obama victory (if it comes*) as evidence of a resurgence of the centre-left and a victory for belief in the role of the state, internationalism and global co-operation.

No matter that the Labour leadership originally threw their weight behind Hillary Clinton and the argument that it was experience that counts. No matter that the Conservative leadership hailed John McCain when he came to speak at their party conference or that both parties embraced the Bush foreign policy that Obama has run so hard against.

Everyone will want to be seen to be the new guy's best friend. This election will have profound implications for Britain not just in terms of policy but in shaping the national mood.

* With memories of Neil Kinnock being proclaimed our next prime minister in 1992 and with due reverence to the act of voting you'll note that I'm staying cautious about proclaiming the result before it's actually known.

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