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We're all shocked by the overnight news from India, that terrorists have attacked a number of places in Bombay - the Taj Palace and Oberoi hotels and the famous VT railway station, hospitals and other busy places - with machine guns and grenades. As I write at lunchtime, two of the terrorists are said still to be in the Oberoi and Indian security forces still seem to be trying to take control of the Taj Palace, right by the Gate of India. Over a hundred have been killed, with blood on the platforms of VT station. A truly outrageous planned carnage, for which people calling themselves the Deccan Mujahideen have claimed responsibility.

To me, these attacks show several things. First, that politicians like Tony Blair were right to argue that Al Qaeda-inspired terrorist are a risk to every western country, regardless of its involvement in Iraq or Afghanistan. Yes, Islamists may have beefs with India over Kashmir, but whatever happens about things like that, Islamists will imagine grievances over homosexuality or especially about equality for women, if they have nothing else to complain about, because their entire world-view depends on anger and confrontation. The fact that they attacked a Jewish centre speaks voumes about them: Islamists hate Jews and if nothing else incurs their wrath they'll be hostile to places they see as "Jew-ridden", just as Hitler was. Second, I think it shows that terrorists like these will direct their attacks where they can, just as the IRA did in its last ten years when it seemed less able to target London than it had been in the seventies and eighties. I reckon international Islamism has more difficulties in recruitment than we sometimes fear and that it is significantly constrained by western intelligence and security. It now attacks where it can find the men and the opportunity. Finally, it may show, depending on how we can make sense of last night's events, that Islamism is no longer so dependent on suicide attackers for its attacks, but may adopt these guerilla tactics if it can: if that's right, the move may strengthen Islamist terrorism in some ways, but it will weaken it in others.

The aim was clearly not just to frighten the Indian public - which the attacks on stations and hospitals certainly will have done - but through the attacks on hotels to deter business travellers, tourists and non-resident Indians from going to Bombay. Let's hope that fails: if I weren't trying to scratch an impoversished living together I'd be tempted to book a flight so I could walk down green University Road again, and take a whisky and soda outside the Gaylord.

Labour's emergency budget

Downing Street/CreativeCommons

This was much more than an autumn statement; more, even, than an ordinary budget. What Alistair Darling set out in the Commons today was effectively a master-budget for the next seven years, spelling out the government's plans to combat the recession we're already in, to bring government accounts back into balance over the next Parliament, and to shift the burden on to the better off to bring that deficit down. It's by far the most left-wing and the most daring budget by Labour since they came into government in 1997.

Alistair Darling predictably heaped blame on "America" for the country's troubles, and that line may be credible to some extent since the credit crunch did start in the United States. I doubt it's good enough to deflect blame entirely though, for where we find ourselves now. Gordon Brown has presided over boom and bubble in excelsis since 1997 and has piled up public debt massively while allowing private debt to do the same. I don't say spending should have been less - I think the country needed the huge injeciton of money into the NHS that the government has made, the rise in education spending and the redistribution towards pensioners and the worse off. But it would have been wiser to tax more, earlier, and to take steps to cool the housing market rather than bask in the illusory feelgood it gave off for so long. George Osborne is right to attack Gordon Brown for having talked so often and confidently of having ended boom and bust.

But what of today's measures? Brown and Darling have clearly decided they need to do something to soften the impact of the recession, and to attempt to bring recovery on more quickly. I agree that a fiscal stimulus is a good idea now - worth trying even with public borrowing already so high - and this is without doubt the risk-taking I urged on the government two months ago. A few months ago, conventional wisdom was that Gordon Brown was doomed, and I thought perhaps he should stand down. But he's finally showing some of the decisiveness and political energy he needs to have any chance of keeping Labour in power beyond 2010.

The stimulus obviously comes from cutting VAT to 15% from next Monday. Business may whine about the costs of changing labels - it seems to me that handwritten ones will be good enough for consumers, as long as price reductions are passed on - but at least this measure has the virtue of being immediate in terms of any real economic effect, and of being immediate in terms of confidence. An awful lot depends on this small lowering of costs, and the hope that it will boost consumer spending - it may or may not. Of course very soon we may realise that prices in the shops are not the problem - if deflation begins to take hold, this VAT cut will be overwhelmed and obscured by the effect of naturally tumbling prices. The cut also stores up some political trouble, because it lasts until end of 2009: the government is bound to come under pressure to extend the cut in the last few months before an election. Perhaps they think they can turn this to advantage by accusing the Tories of threatening to restore the full rate of VAT at that time. 

There were a few more measures aimed at putting cash in pockets, though. Darling announced a permanent extension to the increase to personal allowances for basic rate payers that was originally a temporary way of compensating for withdrawal of the 10p rate. He's also softened the new car tax regime to make increases less steep on most polluting cars, and brought forward to next spring his planned increase to Child Benefit. He's also threatening to use statutory powers to cap gas and electricity bills if need be.

To help small business, he's spreading the period over which they can pay tax, allowing them to offset more losses against tax and deferring the 1% increase in corporation tax he plans for them. Plus, he's creating a temporary credit scheme for small businesses on flexible terms . On top of this, he's bringing forward capital spending on roads, housing, school infrastructure and energy efficiency.

Will all this make much difference? I'd like to think so, and if it does, Brown and Darling will deserve the votes they hope to win by this strategy. But I wonder whether the Treasury's growth forecasts are realistic, even after the biggest downward adjustment ever: they forecast -1.25% to -0.75% growth next year, which may be optimistic and 1.5% positive growth in 2010, which strikes me as Polyannaish. But I admire the chutzpah of this: it's a gamble that may mark the end of monetarism. That doctrine hit British politics in Jim Callaghan's famous speech to the 1976 Labour conference in which, in words written for him by Peter Jay, the new Prime Minister said

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

Thirty years later, Brown and Darling hope they can prove Callaghan wrong - at least in a time when deflation, not inflation, is the present danger. I applaud them for trying.

Just as important politically is the government's long-term plan for coming back into fiscal discipline. Darling projected a deficit for the whole of the next Parliament, and debt will peak in the middle of the next Parliament in 2013 at a dizzying 57% of GDP. 

So, from April 2011 150,000, those earning over £150,000 will pay a new higher 45% rate of income tax, affecting the top 1% of incomes, Darling says. I say: good as far as it goes. But this measure will not bring more than a few billion back into the Treasury, the very highest paid continue to pay relatively low taxes, and rates now are much less than they were during the vast majority of Margaret Thatcher's time in office. I'd have welcomed a 50% rate on earnings over £100,000, and and even higher rate - say, 60% - on earnings over £200,000. I think this is extremely tentative redistribution and that the public would have welcomed more of it. 

To be fair to him, from 2010 those earning between £100-£140,000 will see the value of their personal allowances reduced, and above that, personal allowances will go altogether. That must be right.

More problematically, from 2011, national insurance contributions will rise by 0.5%, clawing back the biggest share of Darling's deficit. He will raise the lower earnings limit to protect the less-well paid, but the rise will still act as a tax on jobs through employers' contributions. He's increasing fuel tax to offset the VAT cut; and he's planning to cut waste from government spending to the tune of £5 billion.

The credibility of this matters a lot: we'll see what happens to sterling. But what matters most of all is how people feel during 2009, which will be the longest and most critical year in politics for a long time. There's a good chance the VAT increase will have little real or confidence-building effect, that people will experience only gloom, and that 2009 will see voting intentions shift decisively against the government. I'd be surprised if growth and borrowing figures turn out as good as darling projects, and I doubt he's achieve the savings from waste that he mentioned. But Brown and Darling are gambling everything, hoping people will notice some effect, and give them the credit for their activism through the recession. And that no further crises are going to send public debt beyond any semblance of control.

The next election is now warming up to be a major strategic and ideological battle between a neo-Keynesian redistributive Labour, highly activist and believing in state power, and monetarist or at least traditionalist sound-money Toryism, aspiring to tax cuts and spending cuts possibly before that. I expect the turnout at the next election to go up, and applaud Gordon Brown's boldness and decision. He's put on his big red wig.

World Economic Forum/CreativeCommons

I mentioned yesterday that Dmitri Medvedev's reaction to Barack Obama's election was stupid: how he can think a sensible policy is to threaten America by stationing missiles near the Polish border, I have no idea. Obviously the Russians want the US to abandon missile defence, or at least to site it somewhere other than eastern Europe; they want American support for Georgia to be reduced and for NATO expansion to be slowed or halted. But this isn't the way to achieve any of that. Can't Medvedev see that his move is strongly reminiscent of the Cuban missile crisis in the early sixties? Obama makes many Americans think of Kennedy, and has encouraged the comparison by his staged speech in Berlin earlier this year - and now Medvedev has cemented the parallel. By doing so, he makes it politically impossible for Obama to be as moderate as he might have hoped to be: he's considered dangerously doveish by enough Americans already, and dare not be seen as less willing to stand up to Russia than Kennedy was. Medvedev, therefore, has trapped Obama in just the position Moscow would like Washington to abandon. A masterstoke of silliness.

How much shrewder it would have been to welcome Obama's election fulsomely, to look forward to a breathrough in bilateral relations and to express hope of early change from the rigid positions of the past - perhaps mentioning Iraq and missile defence specifically - in this way not only inviting and permitting Obama to back off, but actually making it difficult for him to maintain current positions without seeming to go back on his own promise of change in American foreign policy. I think Medvedev needs new advisers.

Barack Obama/CreativeCommons

Barack Obama is President-Elect of the United States, as everyone now knows. I want to say how I think he achieved it; what this election means in terms of American history; and something about what his Presidency might mean for the world.

Obama won this election not this autumn, in my view, but before Easter, when Obamamania at its height put him clearly ahead of Hillary Clinton for the Democratic nomination. He chose to stand for hope rather than fear, for change and something new, and for transcending the American past; she made the mistake, at that time, of seeming to argue for a return to something, for retreat to a non-existent experience, and for winning the culture wars of the nineties. It was that strategic victory that I think was decisive because in my view, Hillary would have beaten John McCain last night just as clearly as Obama did. In fact by the end the financial crisis would have played well to her working-class, blue collar appeal. She would have divided Americans more than Obama promises to do, but I think the economy would have won it for her - which is why I say the primary campaign was so critical. It was not so much Obamamania that triumphed yesterday, as a traditional cry for fairness and for change.

Obama's election is historic of course in a country in which, when it was founded, he could have been a slave, without rights. For a clear majority of Americans to have chosen him shows how much things have changed there since the sixties, and that white racists and ultra-conservatives no longer have a political veto over there. His nominaiton and election show too, though, how much the civil rights movement and black America have the,selves changed: he could never have been elected had he occupied the traditional welfarist position of figures like Jesse Jackson - to win the White House, Obama needed to transcend, at least to some extent. I don't think we will ever again see a serious black candidate for office in America standing on a predictable or traditional platform; I think may may well see a proliferation of Mitt Romneys, Condy Rices, Bobby Jindals, and candidates of all backgrounds now standing on all kinds of ground. Obama's achievement is to have broken the familiar mould. A lot, though, will depend on how he governs and on how many of those new candidates break through. If his administration ends in abject failure he may be remembered only for the fact of his election - which may prove not to have been the massive step forward it seems now.

Finally, the world. Dmitri Medvedev has already made a stupid intervention recalling the Cuban missile crisis and making it more difficult, not easier, for President Obama to take a moderate line with Russia next year. I doubt Russia will find that US policy changes, much. I'm sure they will leave Iraq more quickly - Obama will disappoint millions if they do not. I fear Obama may not redouble American efforts in Afghanistan, but hope he will. I think we will see some more positive engagement over Iran, but I hope for no dramatic change in policy towards Israel, though support for moderate elements in Israel itself would be welcome. I have no fear of a new protectionism, unlike Rupert Murdoch: I think this new President will put relations with Europe, Canada and Africa ahead of that.

The biggest change will be on climate, energy, Kyoto and all that: to have a US President who's actually committed to action in the same way as European governments and others is really a revolution. I'd like to see him now insist on action now, not just distant targets; and that others do not retreat now that economic times are tough.

Sunday's election reveals a political culture in deep trouble

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Who's the dashingly suave fellow in the cheesy, Jason King-like seventies pose? This is Jörg Haider, the leader of the populist right-wing BZÖ party, and the only Austrian politician many foreigners have heard of. He's also one of the big winners in Austria's general election held last Sunday. 

I've written before about the troubles of the Social Democrats, and the desperate tactics of the outgoing Chancellor, Alfred Gusenbauer. Unsurprisingly the SPÖ did badly, achieving less than 30% of the votes although remaining the biggest single party in the Federal Parliament. Here are the results, with figures for the 2006 election for comparison. The other big losers are the mainsream conservative Austrian People's Party or ÖVP, with just a quarter of the votes. It used to be almost a joke that these two parties ran Austria: everyone was aligned with one of the two big parties or the other. But this election has seen them receive fewer votes, taken together, than ever before - and a marked swing to the right. Austria has two populist parties, believe it or not - the "Freedom Party", a formerly more or less liberal party which Haider took over in the 1980s and gave a radical anti-immigration makeover, but which fell out of love with him a few years ago; and Haider's new breakaway BZÖ. Together these two parties gained 29% of the votes: more than the Austrian far right's previous high of 27% back in 1999, when it entered into coalition with the ÖVP, to the distaste of many elsewhere in Europe. The other main party, the Greens, also did badly - down from 11% to under 10%.

There's cause for real concern about all this. Partly because Haider, for whom this result represents a serious comeback, is a deeply questionable figure. He has a history of making provocative remarks and political gestures with strikingly anti-semitic overtones - see what the Anti-Defamation League says about him - and sometimes even implying sympathy with Austria's Nazi past. Reuters are I think far too generous in calling these "gaffes": Haider is an extremely skilled communicator and accomplished dog-whistler who I think knows exactly what he says and does. One of his most notorious maverick stunts was visiting Saddam Hussein in 2002, something that contributed to a decline that made it look as though Haider was finished as a national political figure a few years ago - but no.

Sunday's result is also worrying, though, because Austria is facing a broader crisis of confidence in democracy. Neither of the two main parties is capable of governing alone under Austria's proportional electoral system, and the lack of a popular centrist party - Heide Schmidt's Liberal Forum got less than 2% of the votes and no parliamentary seats, together with the weakness of the Greens, means that neither of the big two can form a coalition except with one of the right-wing parties - or with each other. In 1999, the ÖVP decided to try colation with Haider's party, a controversial venture, but one that led to a declien in support for the radical right and Haider's marginalisation. In 2006, though, the social democrats and conservatives were forced to form a "grand coalition" - a disastrous situation in my view because effectively it deprived Austrians of a real political choice. All governments, in time, lose popularity; and some alternative government is bound to benefit from that. If, in Britain, Labour and the Conservatives were by some weird chain of events to end up working together in a national unity government, undoubtedly the LibDems would grow fat on protest votes and grow into a serious alternative administration. But what if there were no LibDems? Who'd be the natural opposition then? That, in brief, is where Austria has got to. And that's why the populist right is resurgent. Yet the likely new SPÖ Chancellor Werner Faymann's only likely coalition partner is once again the ÖVP, and the two parties are now again discussing a renewed grand coalition. The Greens are hopeful the big two might include them in a so-called "Kenya Coalition" (Kenya's flag being red, black and green - the colours of the three parties) but Faymann sees no point in this. I agree.

Far from bipartisanship and national unity, Austria needs to give the choice of government back to voters. Another grand coalition will merely confirm angry, dissatisfied and cynical voters in the belief that voting changes nothing, as a clearly unpopular government will in effect survive the election anyway, although the faces of ministers may change. Involving the Greens will only damage them, too, and leave the anti-politicians of the far right - the Freedom Party's Heinz-Christian Strache is no more admirable a fgure than Haider - as truly the only alternative.

Faymann should form a minority social democrat government, seeking ad hoc support from conservatives, greens and any right-wingers who will back his measures, and Austria's respectable politicians should work together to build a bipolar politics in which voters in future choose between red-green government on the one hand, and conservative government on the other, even if supported by one or other of the right-wing parties. Just as happened in France at the last election, a clear and reasonable choice between right and left is what's needed to build confidence in politics and weaken the forces of disaffection. Otherwise, I fear the new right will end up running Austria one day, and sooner rather than later if all Europe experiences economic depression in the next few years. The only good news is that the split between Haider and Strache makes them weaker than they ought to be in this situation: something mainstream politicians must take advantage of.

If you want to read more, here's an article by Marion Kraske for the German magazine Der Spiegel, and a piece in the Telegraph by Edward Lucas, who agrees with me about the need for political competition rather than cooperation. He's right, too, that Austria's problems bode ill for Germany.