After months of squabbling and not-so-civil war, the coalition now appears to be functioning again. This is one immediate consequence of George Osborne’s Autumn Statement. The Chancellor was allowed to present a package to the House that had not been leaked earlier by coalition partners in an act of preemptive spin. This matters not only for the orderly proceeding of affairs of state but also because the Autumn Statement was the first of a two-part coalition effort to seize the political initiative. The second will come in the new year with the publication of its mid-term review.

Time is running out for further radical reform. The Autumn Statement was limited in its ambitions, and the mid-term review will be the last chance. Any policies announced much later than the start of 2013 are unlikely to have an impact before an election in May 2015. I understand that new policies on child care, education and social care are all part of the final negotiations on the package. One No. 10 source predicts that ‘the mid-term review will have more of a lasting effect than the Autumn Statement’.

It is hard to overstate the damage that the March budget (and the leaks which preceded it) inflicted on government relations. Until then, the coalition was run smoothly by a four-person council at the top: David Cameron, Nick Clegg, George Osborne and Danny Alexander. This ‘quad’ took all the key coalition decisions, and never leaked. But the budget changed that. The most politically sensitive decision the government has taken — the cut in the 50p rate — ended up on the front pages days beforehand.

When I asked one mild-mannered individual who had been present at the birth of the coalition and then returned to Downing Street after the budget what had changed in their absence, they replied, with a note of shock, that ‘people in there really hate each other now’. Much of that poison has been drained from the system by the smooth run-up to the Autumn Statement. Reaching agreement on policy was also easier than expected.

A couple of Liberal Democrat ministers — including one member of the Cabinet — would like to increase government borrowing further to fund a new stimulus package. But Nick Clegg and Danny Alexander have accepted that their credibility depends on sticking to the aim of balancing the budget in five years’ time. This might not be the most rigorous of targets; it is the fiscal equivalent of the St Augustine pledge: Lord, let me balance the books but not yet. But it does bind the coalition together. When the two parties first came together, they hoped to do this in 2015. Now the forecast runs to April 2018.

But the Lib Dems who want a fiscal stimulus can take comfort in the fact that Osborne’s imperatives have changed. One figure at the heart of government observes that ‘a year and a half ago, the emphasis was on cutting spending. Now, it’s growth.’ This subtle change in approach can be seen in how the Treasury is using the money from the sale of the 4G spectrum, which the government expects to raise £3.5 billion. The proceeds will not be used to reduce borrowing, but to fund time-limited tax cuts for businesses to try and boost investment.

Combine that with another cut in corporation tax (it will be 21 per cent from April 2014) and you see the outline of a private sector stimulus package. Importantly, the administrative savings in Whitehall that Osborne has ordered will not go to the Treasury. Instead, they are being funnelled into infrastructure projects.

The announcement that spending cuts will continue until at least 2018 means that the next election will not be about how to share the proceeds of growth but about balancing the books. Hardly the approach that Osborne envisaged back in 2010; then he dreamed of running a British version of Ronald Reagan’s 1984 ‘morning in America’ campaign. But it does allow the Conservatives to play the card that Labour is still in denial and wants to borrow even more. The Tories believe that this line will still resonate despite the coalition’s failure to bring the budget back into balance.

This attempt to frame the 2015 election campaign will inform the mid-term review. It is a sign of its importance that Cameron and Clegg have been involved in detailed negotiations about its content since before the party conference season. Indeed, a whole new Quad process has been created for it. All meetings on the subject are attended by Oliver Letwin and David Laws — which has changed the dynamics of it. ‘When it is six, it strengthens the Prime Minister and Deputy Prime Minister,’ I’m told. ‘And it weakens the Treasury.’

So important is the mid-term review that it has been delayed three times. Its focus will be on, in the words of one Downing Street source, ‘how you put the reforms in place to win the global [economic] race and what you do across the generations to help those who work hard and want to get on’.

Education continues to be the area where the government is moving fastest. Michael Gove has accepted the recommendations of the independent panel on teachers’ salaries and will do away with automatic rises and staff being paid based on length of time served. Heads will now be free to offer salaries based on merit. This is a full-bore assault on union power and stands in stark contrast to the relatively minor changes being proposed by the other pay reviews. I understand that there is considerable Liberal Democrat nervousness about this move, but that the Gove-Osborne axis has overridden these concerns.

In publicity terms, the coalition took a deliberately cautious approach to the Autumn Statement. There was no attempt to dominate the news agenda in the weeks leading up to it. No. 10 enthusiastically agreed to the Leveson report coming out the week before, as they knew it would dampen the media’s attention. The strategy seemed to have worked: the Chancellor was able to announce that the 3p rise in fuel duty had been cancelled and that the personal income tax allowance had been increased again. In Westminster, it will help repair much of the damage done to Osborne’s reputation by the March Budget.

So stability, for now. But the mid-term review is when the coalition will have the chance to demonstrate that it has not run out of ambition, ideas or momentum. Its radicalism (or lack thereof) will tell us whether the coalition will limp to the next election, or charge.

This is James Forsyth’s column for this week’s Spectator. To subscribe to the magazine, click here.

Tags: Autumn statement, Coalition, UK politics