Eddie Barnes: George’s cross to bear

‘I DON’T believe in panicking before it is absolutely necessary ,” writes Alistair Darling in his memoir on his time in the Number 11 hot seat. “But I came close to considering it on the morning of 7 October, 2008.” Sitting in a conference room in Luxembourg, the former chancellor took a call from the chairman of the Royal Bank of Scotland, Sir Tom McKillop. How long could it keep going? “His answer was chilling: ‘A couple of hours, maybe’ ”.

If it had collapsed, Darling notes, “all bets on Britain’s and the world’s financial system were off”. These days, the former occupant of the Treasury hot seat is enjoying plugging his book, and playing the disinterested media pundit. But over in Darling’s old office, overlooking Horse Guards Parade, the storm clouds are gathering. “The outlook for the world economy looks as grim as at any time since the autumn of 2008,” notes The Economist this weekend. Across Europe, there is the economic equivalent of a hurricane warning alert; the windows are being boarded up, families are rushing for safe havens, and tins of beans are being stored up for the coming storm. And now it is George Osborne on the bridge.

Tomorrow he presents his keynote speech at the Conservative party conference in Manchester. Last year, in the first few months after taking over, Osborne mocked Labour’s handling of the economy, reminding people of the note he had been left on his desk by chief secretary Liam Byrne: “I’m afraid to tell you there’s no money left.” The mission would be to pull Britain away from a “decade lost to debt”. But now times have moved on. The pressing question of the moment is not whether Britain can afford to pay its debts but whether the country’s recovery is being choked to death by lack of growth across the world, and the very austerity measures Osborne has put in place. In the face of the crisis in Europe, and slow growth in the US, Osborne’s long-term plan – tighten the purse strings now, support growth to pick up the slack, and then loosen spending prior to the 2015 election – appears to be unravelling fast. Will the Chancellor this week feel he has to change tack?

The most vocal sign of the situation facing Osborne comes today when a 40,000-strong TUC demonstration in Manchester greets Tory delegates arriving in the city for their four-day annual get-together. But it will not be the Brothers who concern Osborne and David Cameron, but the millions more sitting at home who are facing what Ed Miliband described last week as “a quiet crisis”. Over the summer, the scale of that crisis has increased: analysts reckon unemployment will now rise further over the coming years, and could touch the totemic three million figure of the 1980s. Growth forecasts are getting lowered almost by the month: the IMF has reduced its own forecast this year four times already, from 2 per cent to 1.1 per cent. The year after it is marginally higher, at 1.6 per cent. Christine Lagarde, managing director of the IMF, said last week that while the UK’s plan to cut the deficit remained “appropriate”, the “dangerous” new phase in the economy meant that Osborne needed to show a “heightened readiness to respond”. A double-dip recession would ensure a deeper and longer crisis that the Great Depression of the 1930s, with untold political consequences stemming from it.

The pressure is on for Osborne to provide some shock treatment to an economy which is in danger of stagnating. Big firms and banks have plenty of cash, economists note: the problem is that everyone is sitting on that money, and not putting it to use, because the situation is so precarious. So it is up to governments to shake the tree. He is not short of advice. This weekend, senior Tory MP Andrew Tyrie is calling for tax cuts for business and has questioned government initiatives such as the Big Society. Some initiatives “have seemed at best irrelevant to the task in hand, if not downright contradictory to it”.

Peter Jay, former director of the Bank of England, this weekend says Osborne should push through an income-tax holiday which, he argues, would give a “jolt” to the economy. Last week, Labour’s Ed Balls called on Osborne to bring forward infrastructure projects, and to implement a short-term cut in VAT. First Minister Alex Salmond has also urged him to do likewise, warning that without such extra stimulus, the economy could go into reverse. David Blanchflower, a former member of the Monetary Policy Committee of the Bank of England, suggests Osborne should create a national bank specifically aimed at small-business lending. Salmond, too, has said more needs to be done to free up credit for firms which continue to struggle to find any.

But the intensely political Chancellor, whose second job is the Conservative’s chief election strategist, has seen the benefits of placing Labour on the side of the reckless spendthrifts, and the Tories on the side of prudence. His deficit plan, he argues, is “the rock of stability” on which Britain’s recovery is built, giving bond markets confidence that Britain is a country that looks after its debts. That, in turn allows the country to sell bonds at low interest rates which, in turn, ensures that interest rates for homeowners and businesses stay low.

In an interview yesterday, he laid it out. “I’m a Conservative who believes in lower taxes. They lead to a more enterprising economy. But I’m not somebody who believes you can fund lower taxes by borrowing more money because that is a deceit and the public are smart enough to see straight through it. My first priority is to deal with the deficit. I don’t want to be a Chancellor who cuts taxes one year and has to put them up the next.”

The Government’s success, argues Osborne, is “the very absence of war”, and the fact it now has a solid reputation on deficit reduction. Not for Britain the turmoil and humiliation of Italy and Spain, having to impose emergency budgets and austerity measures because the bond traders demand it.

The problem is that in recent months he has begun to look as if he is fighting a 2011 crisis still in 2010 mode. For one thing, many analysts now argue that fears that Britain would be immediately punished in the markets if it decided to spend a little more have dimmed. Ironically, Osborne’s ambitious deficit reduction plan may have been too successful as very few investors now doubt Britain’s determination to reduce its debts. Thus, it is argued, there is scope to spend a little. Last week, reports surfaced that Downing Street is having second thoughts about the deeply unpopular decision to remove child benefit from families with a top-rate taxpayer. Osborne can be assured to be getting similar requests from across Whitehall as they battle against his austerity drive.

He needs to respond to this growing clamour with some kind of plan. The speech tomorrow is therefore expected to outline the coalition’s “plan for growth”, which will be rolled out in full in November. This will include measures to introduce planning reform, in the hope of unblocking private infrastructure work. There are also likely to be reforms on employment law – one measure trailed yesterday will prevent workers from taking their employers to an employment tribunal during their first two years at a company. Osborne is also likely to take on the unions by attempting to weaken their hold on public sector settlements. The “pro-business” approach extends to the UK Treasury’s blanket opposition to a new so-called “Robin Hood tax” on the banks, as proposed by the European Commission last week.

Then, next month, it is now widely expected that Osborne will back the Bank of England in pressing ahead with a new round of “quantitative easing” – printing money. Under the move, which was tried two years ago, the Bank of England would create new money to buy up government bonds. The aim then is that investors are forced to start buying into riskier corporate bonds and stocks, helping to get the economy moving. One thing Osborne won’t be doing this week is to signal a short-term tax cut. He said yesterday: “Tax cuts should be for life, not just for Christmas”. This is the exact reverse of what fiscal stimulus backers would say (and also the opposite of Darling’s 2008 VAT cut, which was deliberately timed for just before Christmas in the hope of getting people out spending).

The stakes are high. The Chancellor will know that reputations are forged in situations when politicians stand against the prevailing wind, but who are then still standing after the storm has passed. The aim for Osborne will be standing up in front of his conference in four years’ time, telling delegates that he remained resolute when others panicked.

The problem is, as Darling notes, that there have been times in the not recent past when panic is the only rational option. And if not panic, then certainly fear stalks the land right now. Germany’s decision to support Angela Merkel’s massive increase in Europe’s bail-out fund last week was deemed to be too little too late even before legislators in Berlin had pushed it through. A much bigger, broader safety net is required. And, as Osborne has said himself, the Eurozone now has just six weeks to sort things out – with deadline day falling on 3 November, when G20 leaders meet in Cannes for potentially historic talks. Europe could also hand Obsborne an additional headache, if commissioners in Brussels push ahead with plans for a new tax on financial transactions, which will hit the City of London disproportionately hard.

Osborne’s fate too is caught up in the outcome of those talks. If a solution to the Eurozone crisis isn’t found, and the economy goes into a tail-spin, Osborne could look like the man who acted too late. The reputation of the UK Chancellor is on the line.