Last week's Autumn Statement has changed the political dynamic, for the rest of this Parliament and beyond. Here's why.
The game changer was George Osborne's confession that the structural deficit will still be around until 2016/17 - two years later than initially planned, and well into the next Parliament.
The Chancellor is still on course to meet his fiscal tests (just), but only because he's pencilled in £15 billion of additional spending cuts in each of the two years after the 2015 election.
This means that the next election will be another austerity election. If we are to remain credible on the international stage, each of the three main parties will need to fight the election on manifestos that include spending cuts - not the usual promises of financial largesse.
For Osborne, the risks are clear. His personal credibility is now on the line. He will not want to repeat Tuesday's experience of telling the House of Commons about another downward revision to his growth plans.
If the structural deficit gets any worse, and stretches beyond a five-year horizon, it will look like Osborne has lost control of events. So he will be praying for a euro rescue package and a growth rebound in 2013.
For Nick Clegg, the dilemma of Coalition life has just become sharper. For as long as they remain in the Coalition, the Lib Dems have to continue supporting the Chancellor's deficit reduction plan - which now includes those £15b per year spending cuts right after the 2015 election.
Although they plan to fight their own separate campaign in 2015, the Lib Dems have just been pulled deeper into their pact with the Conservatives, and are now collaborating on spending cuts into the next Parliament. This will make it harder for them to present a separate face to voters in 2015.
For Labour, the new fiscal reality is just as uncomfortable. Although the immediate sense of schadenfreude might appeal, the longer-term implications of a prolonged structural deficit are very tricky.
Eds Miliband & Balls will now have to contemplate making their own deep spending cuts, if they win the 2015 election. They will inherit a depleted public sector, impatient for payback after five years of real-terms pay cuts. But Labour won't be able to promise much.
Voters won't be bothered that much by the structural deficit itself. But they will be bothered by the implications - prolonged spending cuts. The three parties are only just coming to terms with what this means for them - and it's not pretty.
Comments