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There is an iron law in politics – the party that sets the agenda wins. A year ago, Labour was rising in the opinion polls as it set a clear political agenda: the global financial crisis could only be addressed by massive state intervention. Thatcherism, the real ideology of the Conservative Party, was shattered throughout the world and, first and foremost, in its citadels of Washington and Wall Street, with the carrying out of the largest nationalisations, by market value, in history.

That does not mean Labour’s response to the crisis was right. It was not. It unnecessarily bailed out bank shareholders, at vast cost to the population, without taking real control of the financial institutions it now effectively owns to instruct them to resume lending to business and individuals.

State intervention was the right policy, but bankers and their shareholders should have been left to enjoy the downside of the markets from which they had profited and whose merits they had extolled for so long. When their shares collapsed completely, the Government should have then taken them over at virtually zero cost, while exercising real control as, for example, in China, to restore lending in the economy.

Partly as a result of this hugely expensive mistake and partly as a consequence of caving into concerted pressure, the Government has now handed the agenda almost entirely back to the Tories by accepting the false argument that the critical issue facing the British economy is to cut public spending.

Ministers make one very important and correct proviso: that to make the cuts now, in the midst of recession, would make a bad situation worse, choking off any chance of recovery in an economy where unemployment will rise for a very long time to come.

Nevertheless, surrendering to the Tory agenda – that public finances are out of control and must be cut, albeit a little later, has been a catastrophic political mistake and, moreover, is economic nonsense.

Making public finances the central issue is as ineffective as a doctor focusing on the symptoms rather trying to cure the disease that actually causes them. The position of public finances has deteriorated because economic growth has seen its worst collapse since the Second World War.

Falling output, profits and employment have resulted in a drastic fall in tax revenues. This is compounded by the immense and unnecessary cost of bailing out bank shareholders. The working of so-called automatic stabilisers, such as unemployment benefits, whose costs naturally rise in a recession, is exactly that – they reduce the scope of the economic collapse by maintaining individual consumption.

Therefore, the only way out of the crisis, including the deterioration in public finances, is not cuts, which will make a bad situation worse, but to restore economic growth.

The biggest fall in growth in more than 60 years is not caused by the supposedly “bloated” public sector of Tory legend, but by a collapse in investment. If we take the components of demand in the economy, up to the first quarter of the year, private consumption fell by 1.8 per cent, government consumption rose by just 3.7 per cent, but investment fell by a massive 14.7 per cent.

This trend has continued. In the second quarter, business investment was fully 28.2 per cent lower than in the same period last year.

If the only way to stabilise public finances is to restore economic growth, it is clear from these figures that the one way to do this is to restore the level of investment in the economy.

That requires full control of the banks and ordering them to resume credit at affordable interest rates and direct state intervention into the sectors of the economy where the investment collapse is most calamitous – above all, house building.

Within that framework, wasteful public spending, which does nothing to benefit either the economy or the population, should be cut – the Trident programme should be abandoned, defence spending cut to the same share of the economy as Germany, national identity cards and other grotesquely expensive gimmicks should all go.

Labour must seize back the political agenda from the Tories by explaining that the top priority is to restore investment and growth, which, in turn and over time, will restore public finances.

We need investment to restore growth, not cuts which would make a bad situation worse. That must be at the top of the Labour Party agenda. The old, defeatist, Labour right, whose members walked out of the Government before and after the European elections, has nothing to contribute to that. They want more, not less, capitulation to the Tories. Sections of the left should stop playing games with them and instead work to change Government policy in a really progressive and economically literate direction.

If Labour stops bending to the Tories on cuts and sets its own clear agenda for investment and growth, the general election will be anything but the forgone conclusion even many Labour politicians currently predict.