Faith nickNick Faith is Director of Communications at Policy Exchange. Follow Nick on Twitter.

“Now let’s see if I’ve just cost us
the election.”  This line delivered by George Osborne to his advisers
after his party conference speech in 2009 helps explain the Chancellor’s long
term political calculations. In the midst of the financial crisis and a
deteriorating economy, Osborne had just committed the Conservative Party to
public spending cuts eight months before a general election. Voters now knew
what they stood to lose from a Tory government.

Osborne knew that Gordon Brown and
the Labour party would use his speech to paint Cameron’s modernisers as the
same old ‘nasty’ party, ideologically committed to reducing the size of the
state and attacking public sector workers. That’s exactly what Brown did in the
months leading up to the election. The Conservative’s embrace of austerity
probably cost the party at least twenty seats.

However risky Osborne’s speech was – and the Shadow Chancellor was well aware of its political implications – it did
make it a lot easier for the Coalition to proceed with its deficit reduction
programme. Unlike the Liberal Democrats’ broken pledge to oppose hikes in tuition
fees, which has severely dented the standing of the party on the national stage
and clobbered Clegg’s own personal ratings, the Conservatives had a clear
mandate to proceed with reforming Britain’s hospitals, schools and other vital
public services to drive up the quality in a more cost effective way.

Interestingly, history is repeating
itself. Ed Miliband faces a similar dilemma to the one that Osborne faced in
2009. His party is currently riding high in the polls but at the same time he
knows perfectly well that the public still do not trust Labour to handle the
public finances. Polling from this year shows Balls and Miliband have a
mountain to climb to overtake Cameron and Osborne on economic competence.

This leads us to a crucial question
that political commentators on the Left as well as the Right are starting to
already ask: in an era when it’s impossible to raise public expenditure
what does Labour stand for?

Does Miliband acknowledge the
electoral consequences of siding with the government and agreeing for the need
to reduce public spending?  One
option could be for Labour to set out how its spending priorities would differ
from the Tories’ within a tight overall spending constraint – but that means proposing
which areas of expenditure should be cut back.

Take schools. In 40 per cent of schools teaching is
no better than satisfactory, and 6,000 schools provide only a satisfactory
level of education. How can you drive up standards in state schools with no
money? The coalition is proposing radical changes in the shape of Free Schools
and Academy chains. What’s Labour’s position?

What about healthcare? The mass of
evidence is that ordinary people want much more openness, choice and control in
the NHS. They want to see information about the safety and results hospitals
and GPs deliver for patients taken out of bureaucratic obscurity and handed to
patients. Jeremy Hunt is driving forward a specific agenda focused on
transparency, accountability and competition. What’s Labour’s position?

We saw what happened when Ed Balls
announced his support for the government’s freeze in top public-sector
salaries. It triggered a near-nuclear response from several of the big unions,
including a threat by the GMB to disaffiliate from the Labour Party. Within
days, Balls was back to stressing that the cuts were “too far and too fast”.

The Labour leader has done a
tremendous job in keeping the various factions of his party together. I don’t
blame him from shying away from making bold policy announcements even two and a
half years away from the election. Party discipline comes first, policy can
wait until we get closer to polling day. However, time is ticking away as it
was for Osborne in 2009.

Labour’s policy rethink so far
consists of some interesting ideas, a lot of soaring rhetoric, but very little
detail yet. If Ed is going to capitalise on his poll ratings and really
position Labour as the party for change he needs to explain what Labour is for
when there isn’t going to be lots of money to spend on public services. That
might mean a drop in his poll ratings and a loss of some marginal seats.
However, in the long term it could give Labour the credibility to govern in a
time of austerity.