Osborne red and blue backgroundWhat has been the most significant political event of this year, dyareckon? David Cameron’s speech on Europe? The vote against boundary changes? Godfrey Bloom? There is, it has to be said, plenty to choose from. And yet, to my mind, there’s decreasingly little that can compete with Moody’s decision to downgrade the UK’s credit rating from AAA to Aa1, back in February. This isn’t because of what that meant economically: as many countries have done since the financial crisis, we took the downgrade on our collective chin. It’s because of what it suggested about George Osborne and his fiscal plan.

You must remember when, before the start of this year, Osborne used to point towards our AAA rating as one of the prime justifications for austerity. His plan, he said, would keep it intact – and low interest rates with it. Labour’s plan would lead to a downgrade and bring about the apocalypse, etc. Except something went wrong: the deficit wasn’t reducing as fast as the Chancellor and the rating agencies originally expected. In fact, it got so bad that I predicted – in a column for the Times (£) written two years ago – that the Government could miss its debt target. And this, I said, would present Osborne with a harsh choice: either cut deeper or lose our AAA status.

And so losing our AAA status served to reveal how Osborne chose. He didn’t corral the deficit back to its original, steeper downwards trajectory; he became more relaxed about it. Hence why he now talks about reaching a surplus in the next Parliament.

The reason I mention all this now is, strangely, Patrick McLoughlin’s announcement of a cap on rail fare price rises, the first in a new series of Government initiatives to deal with the cost of living. Some of these measures, such as McLoughlin’s, won’t have any direct effect on the Exchequer’s balance sheets. But others, such as Osborne’s fuel duty freeze, will. British politics is increasingly a battle to put money in people’s pockets. The fight that defined the early years of this Parliament – in its simplest form, to cut or not to cut – has diminished as deficit reduction has lost its urgency.

This isn’t to say that Osborne will want, or allow, the deficit to increase. Although investors are much less fearful now that the economy is growing again, they still won’t want to see the Government descend into mad profligacy. Which raises the question of how he intends to pay for those initiatives that need paying for. Some of them, as I’ve explained before, will no doubt be covered by economic growth and the extra tax receipts it brings. Some of them might even pay for themselves, thanks to some nifty tax dynamism. But there’s also the possibility that the Chancellor will have to identify further spending cuts. Give, from the Exchequer’s perspective, often requires take.

So where will the extra cuts come from? Here, it’s worth noting again something that I’ve noted before: the Cabinet Office’s Efficiency and Reform Group. These are the guys who apply an accountant’s – rather than an economist’s – touch to Whitehall, and help departments identify and implement savings. They have already been behind £billion of savings, getting dubbed “taxpayers’ champions in Whitehall” in the process. But I reckon they will become even more significant in the years ahead, so long as the Treasury lets them. One complaint I’ve heard is about a lack of joined-up-ness between these Cabinet Office efforts and HMT’s.

And what about Labour? Will they not even pretend to pay for their giveaways, and just borrow, borrow, borrow all the way? Actually, I suspect, more and more, that Miliband will promise to stick to Osborne’s deficit reduction plan and funnel money towards “ordinary people”, and cover it all by scrapping HS2. If that were to happen, then the next election wouldn’t be so much about whether the pie should be sliced or not, as about who bakes the tastiest pie.

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