“It would be absolute folly to turn around and say it will all be fine by Christmas. Anybody who says we are absolutely certain we are bouncing back to strong growth is being very optimistic. What I am confident we will be able to say at the next election is we were a strong hand on the tiller.”Basically, this is a recognition that the gamble the Tories decided to take in 2010 probably isn't going to pay off. The argument was that austerity measures would allow the government to say that they had been tough on debt, while the economy would be rebounding by 2015 anyway. Indeed, if austerity made the recession worse and the recovery slower, well, that just meant a bigger bounceback closer to election time.
This is starting to look increasingly unlikely. I'm still optimistic that the output gap is larger than most people think, and that we'll have a recovery eventually that gets us at least partway back to trend, but it might not happen until too late to win the Conservatives a majority. Remember that in order to do so the Tories would have to flip voters that they couldn't attract when they were running against Brown. And not winning a majority means not governing, because even if they win the most seats in a hung parliament, as last time, the Coalition is unlikely to persist beyond 2015. It would be the end of the Lib Dems.
It's not too late, of course, for the Conservatives to jump-start the recovery. Of course, George Osborne is extremely unlikely to direct the Bank of England to raise its inflation target, or in a best-case scenario target the level of nominal GDP. But there are other things the Treasury could do.
I'm more optimistic than most market monetarists about the potential usefulness of fiscal stimulus, particularly in terms of the 'balanced-budget multiplier' - shifting government spending from low-multiplier items to high-multiplier ones. It's not completely implausible that the Tories could decide to reduce low-multiplier cash transfers (i.e. benefits), and spend the money on building new roads and houses. And the standard critique of the balanced-budget multiplier, that the composition of government spending is inappropriate as an instrument of short run demand management, doesn't really apply, because we probably should be spending more on public goods and less on welfare in the long term.
Ultimately, though, the Tories are going to have to start thinking about what they're going to do in 2015 if growth over the next few years remains decidedly anaemic. It might be almost too easy for Labour to point out that a 'strong hand on the tiller' isn't a good thing if you're steering in the wrong direction.