"One wonders quite how they think they might do that. "
Plausible deniability is a hopeful way of circumventing this issue. Can you prove that the random file full of garbage data on my PC actually IS an encrypted file, or is it just a random data file I generated? Got to prove beyond reasonable doubt that it is encrypted before you demand a password :)
It doesn't come as a surprise to me that the government are going to such lengths to monitor us, what alarms me is the fact that they are openly talking about such grave violations into our privacy. Yes I know that criminals, terrorists, paedophiles all flock to TOR and encrypted chat as a good way to operate without being monitored, but that doesn't mean we should ban it. We need to accept that there will always be ways where we have absolute privacy from the authorities, otherwise we end up sticking cameras in everyones house because "paedophiles might be using the privacy of their homes to organize stuff". The downside of this is that criminals will use that to plan/organize/get away with their crimes, but banning the act of having privacy from the government is a much worse thing to do.
"If you've nothing to hide what's the issue?"
I do have something to hide. Nothing illegal I can assure you, but just things that I'm not comfortable with people in the government or the police knowing about. So I need a way to conceal it from them. I don't know every employee at GCHQ or every police officer, so I can't guarantee they are all legit and won't abuse the information they know about me, so I need some way to prevent them listening in on me. PGP encrypting my emails and using a vpn when browsing the internet are the steps I've taken towards that. Will those measures stop GCHQ if they are absolutely determined to see what I'm doing? Certainly not, if they decided I was a high value target that merited devoted resources, they would simply covertly break into my house and put a keylogger into my PC, or sit outside my house from some distance and monitor the EM transmissions from my computer monitor (See "TEMPEST" on wikipedia as this is a real thing) to read what's on the screen. I can't prevent GCHQ from seeing what I'm doing if they are willing to devote unlimited resources towards it. What I CAN do is prevent them from easily sweeping up my private communication in their surveillance dragnet. So I force them to make a choice - Is it worth devoting extra resources towards finding out what this guy is up to, or is he just some privacy nut? Hopefully the massive cost of devoting more resources to finding out what I'm up to, coupled with the fact that there's nothing to suggest I'm a terrorist and am just some guy obsessed with protecting his privacy, prevents them from going to these extreme measures, is enough of a deterrent to prevent them snooping.