Watching the Chancellor on The Andrew Marr Show on Sunday morning, I had to check that my heart was still beating and that my coffee was having the desired effect, because if what he said was true, then I had fallen asleep and been transported to another planet.

On Planet Darling, the new Labour government had inherited an economic mess in 1997.  The subsequent ten years of broadly benign economic growth had nothing to do with the world economic situation, and everything to do with Gordon Brown’s stewardship of the British economy. 

Suddenly, in around August 2007 with the onset of the “credit crunch”, Britain’s economy had become miraculously interlinked with the rest of the world, and all that is bad in our current situation was driven solely by those global forces, and domestic policies and politicians were powerless in the face of those forces.

With some confidence, one can put forward a case that is slightly closer to reality.  After the 1992 ERM debacle which meant the Major government never recovered a reputation for economic competence in voters’ eyes, things did stabilise.  Labour in fact inherited a generally favourable economic situation when they came into government. 

After pledging to match Conservative spending pledges in the 1997 election, so as not to “frighten the horses”, the brakes came off government spending in 1999-2000, and Labour have since overseen an unprecedented expansion in the public sector’s share of overall economic activity (as measured by GDP).  It is only very recently that the government has been forced to re-apply the brakes to an extent, as tax receipts begin to fall. 

Much of this increased spending has been fuelled by government borrowing.  Having forecast in his March Budget that government borrowing would be £43bn next year (compared to an original forecast in the Pre-Budget Report of £36bn), on Sunday the Chancellor did not give a clear answer when asked whether he would now break his self-imposed fiscal rules.  The OECD certainly seems to think that he will – see http://www.oecd.org/dataoecd/7/4/20209191.pdf

The central charge against the government is that, having and borrowed and spent like drunken sailors when the economy was going well, they are singularly ill-prepared to weather the current downturn.  The accusation certainly holds a great deal of truth, and for the moment all that the electorate can do is cross their collective fingers and hope that this batch of Labour ministers are better at tidying up their own mess than their predecessors (Denis Healy going to the IMF for a loan to prop up the pound in 1976 springs to mind).

As well as laying blame, it is also necessary to ask what would be a coherent policy response to the current situation?  Mr Darling calls for pay restraint in both the public and private sectors to stop inflation being fuelled, but serious doubts remain about Labour’s ability to really stand up to the unions (given their symbiotic relationship). 

It should be one of the central planks of policy to focus hard on cutting government debt (rather than, for example, borrowing an additional £2.7bn on a whim to fund a series of measures to replace the 10p tax rate abolition).  This would reduce debt service costs and give some room for manoeuvre to help particularly hard-pressed parts of the economy.

Reducing debt levels will mean reducing spending.  Labour’s knee-jerk response to this suggestion has always been to say that this necessarily means cuts in “schools ‘n’ hospitals”.  The case must be made forcefully that this is not true (and it manifestly is not!).  The current government is on the cusp of losing its reputation for economic competence once and for all, and for many a government this is fatal. 

The opportunity is now there for a convincing alternative narrative to be put forward – one that shows that we can reverse the trend of a transfer of economic activity from the productive private sector to the non-productive public sector (productive versus non-productive in the sense of having the ability to generate economic wealth), and that we can do so in a way that will leave us better placed than we are currently to emerge from the downturn with strong economic prospects and growth.