The coalition's carefully prepared strategy to present a united front in the runup to the budget has been thrown into disarray after Vince Cable questioned George Osborne's "plan A" economic programme.
In a direct challenge to David Cameron, who will warn on Thursday in a major economic speech of the dangers of increasing borrowing, the business secretary suggested the Treasury should use record low interest rates to fund housing and infrastructure projects.
Labour, which will be criticised by the prime minister for making the same arguments, welcomed Cable's intervention. "Vince Cable may at last be seeing sense," said the shadow financial secretary, Chris Leslie.
The business secretary, who has long called for a "plan A+" strategy of deficit reduction and greater initiatives to promote growth, exposed divisions when he declared that greater public investment was crucial to reviving the economy.
In an essay in the New Statesman, Cable came close to siding with the shadow chancellor, Ed Balls, when he said it would be absurd to say the government was incapable of mobilising capital investment.
Cable wrote: "The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for house building. This last is crucial to reviving an area which led economic recovery in the 1930s but is now severely depressed.
"Such a programme would inject demand into the weakest sector of our economy – construction – and, at one remove, the manufacturing supply chain [cement, steel]. It would target two significant bottlenecks to growth: infrastructure and housing."
Cable challenged one of the chancellor's central arguments – that increased borrowing would add to the fiscal deficit.
He writes: "Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth … It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator."
The business secretary offered a gloomy assessment of the economy. "There was next to no growth during 2012 and the prospect for 2013 is of very modest recovery, he wrote. "We are also currently below trend growth and below capacity."
Cable's intervention contrasts with the prime minister's speech in which he will attack Labour for calling for increased investment and will give an optimistic assessment of the economy.
Cameron will say: "Within one year of this government we had a faster rate of new business creation than at any time in our history and a trade surplus in cars for the first time in almost 40 years. Today we have more than a quarter of a million new private sector businesses – the biggest increase in private enterprises on record and with more than three-quarters of these new businesses created outside London. Of course, these signs of progress are just the beginning of a long hard road to a better Britain."
The prime minister will insist that there will be no change to Osborne's deficit reduction strategy. "While some would falter and plunge us back into the abyss, we will stick to the course … I know some people think it is being stubborn to stick to a plan. That somehow this is just about making the numbers add up with no care whatsoever for what it means for people affected by the changes we make.
"But nothing could be further from the truth. My motives for sticking to the plan are exactly about doing the right thing to help families and business up and down the country."
Meawnwhile, Tony Blair warned on Wednesday of the importance of tackling Britain's record fiscal deficit. In a speech in Edinburgh, the former prime minister said: "If you analyse a lot of what is being said here but also across the water in the US and in the elections happening over Europe at the moment it's very much about left versus right. Personally I think that is the wrong way to look at it. The truth about deficit reduction is that it is right versus wrong. You've got to have a deficit reduction plan in place."
The Treasury, which vetted Cable's speech, made clear it was relaxed by his intervention. Cable qualified his remarks and makes clear he was not siding with Balls entirely when he dismisses the "crude and binary" argument that sticking to plan A poses a greater risk to the economy. "There is a body of opinion arguing that the risks to the economy of sticking to existing plans are greater than the risks stemming from significantly increased and sustained public investment targeted at those areas of the economy where there are severe impediments to growth (housing; skills; infrastructure; innovation).
"But this is also too crude and binary a characterisation of the position; the government has carried out considerable policy reform in these areas, not least in my own department, the fruits of which take a while to mature. The balance of risks remains a matter of judgment."
Cable's article was published hours after the prime minister once again attacked Labour for advocating increased borrowing. "He has no proposals to do anything about welfare other than to put up borrowing," Cameron said of Ed Miliband.
He also defended the chancellor's deficit and debt reduction plan on the grounds that Osborne had been flexible. "The data does not support the conclusion that deficit reduction has had dramatic effects on the economy," writes Cable. "There has been only modest reduction in the budget deficit, partly because the government has been allowing counter-cyclical stabilisers to operate, and partly because we have taken the conscious decision not to introduce further cuts at a time when the weaker economy has damaged tax revenues."
Leslie said: "Vince Cable may at last be seeing sense. He is right to admit that there have been economic consequences to deep cuts to capital investment. But he has consistently supported a failing economic policy which has led to stagnation, falling living standards, slashed investment in infrastructure and rising borrowing to pay for the mounting costs of economic failure.
"Now is the right time to bring forward infrastructure investment and build thousands more affordable homes. It would kickstart our flatlining economy, create jobs and in the long-term strengthen our economy and help get the deficit down.
"Labour, business groups and even the IMF have spent the last two years making the case for this. If Vince Cable is finally coming round to that view he needs to start winning the argument round the cabinet table, but his words today read like they have been written by a secretary of state who, despite being in office, is not in power."
A spokeswoman for Cable said: "There is nothing here that he has not been saying for the last two years. His plan A+ combines deficit reduction measures and growth measures which in no way contradicts the government's economic policy – he is a strong defender of fiscal discipline."
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