Embattled George Osborne prepares to face his opponents on economy

Faced with a national strike, euro crisis, a struggling economy and rising deficit, what can the Chancellor do to see off his foes in his Autumn Statement, asks Eddie Barnes

BENEATH a corner of the UK Treasury building, overlooking Westminster’s St James’s Park, are the Churchill war rooms. Protected from the world above by a bomb-proof concrete ceiling, they house the bunker where the greatest of all prime ministers sat safely in the Blitz, protected from the bombardment above. Not for the first time in recent years, Treasury officials might be forgiven for thinking this week that they would be better off going down there themselves.

For the hard-pressed staff who inhabit the pleasant airy offices above, the next few days promise to be fraught. Tuesday: dire growth forecasts and the Chancellor’s Autumn Statement, setting out how to deal with them. Wednesday: a national strike over public sector pensions. Any given moment: the collapse of the Eurozone, Britain’s biggest trading partner. Various metaphors were being used to describe the mood in Whitehall at the end of last week – and many chose to adopt them straight from the war. Sandbags are being filled, rations are being stored away. For Chancellor George Osborne, the option of finding shelter somewhere safe is not available. This is the week when, despite the bombs raining down on his offices and the air-raid warnings sounding, he must somehow come up with what sounds like a plan.

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Osborne is not short of advice. Professor Brian Ashcroft, the respected head of Strathclyde University’s Fraser of Allander Institute argues: “Basically, there is scope in the economy to do some kind of fiscal expansion.” In other words, a tax cut or some extra spending.

“The Chancellor has zero room for manoeuvre,” counters Scotia Capital economist Alan Clarke. “Market confidence in the credibility of the public finances is critical. We believe it would be suicide for the government to abandon its fiscal austerity plans at this stage.”

Against this backdrop of conflicting views, Osborne looks down on a chess-board that isn’t stationary. A week ago, Sir Mervyn King, governor of the Bank of England, declared: “In the last three years, we have seen extraordinary events. Who knows what’s going to happen tomorrow, let alone next month?” Unhelpfully put – but true. A collapse of the euro – which this weekend is being discussed as a likelihood, not a possibility – would sweep away all Osborne’s chess pieces. “He’s in a really difficult position,” adds Mike McCuster, private business partner at PwC in Scotland. “It’s a very, very difficult time to be in power.” Over the board, the Chancellor looks down, aware that his call could be the difference between a government which succeeds or fails in its term in office. What moves will he make?

The trouble will begin for Osborne when the Office for Budget Responsibility (OBR), the independent forecasting body set up by Chancellor himself, publishes its new growth figures on Tuesday morning. They are certain to deal him a body blow. The forecast is likely to predict growth for next year of little more than 1 per cent. That lack of growth, and the smaller tax revenues it entails, means that Osborne’s borrowing forecasts will inevitably go up; by around £100 billion. It spells big problems – leaving Osborne open to Ed Balls’s charge that the very austerity measures designed to cut debt are actually doing the reverse.

Since getting into power, Osborne has found a knack of convincing voters in everyday language that the slowdown in spending was necessary. The country needed to pay down its credit card bill, he declared. Now, however, the bill is going up. And now it is Labour’s Ed Miliband who has the snappy pocket-book way of putting it. “Everyone knows you can’t pay off a credit card bill if you lose your job, or see your income fall,” he noted last week.

The Treasury team of Osborne and Chief Secretary to the Treasury, Danny Alexander, are not for turning, however. Labour is urging a short-term VAT cut to boost consumer spending and get the economy rolling. But Alexander, Liberal Democrat MP for Inverness, Nairn, Badenoch and Strathspey, argues there isn’t the scope to add even more on to Britain’s tab. “We are still borrowing vast amounts by historical standards. This year’s deficit is still one of the two or three largest deficits since the Second World War. This year we are borrowing more than the entire cost of the NHS across the UK.”

And borrowing more now would only see Britain fall into the same “debt storm” as is threatening Italy and France, he says. “At the time of the last General Election, British rates were at the same rate as Italy’s. Now there is a four-point gap between the two and the difference is that we set out very clearly a credible plan to deal with the huge problems we were left. Whether it’s Plan Balls or Plan Berlusconi, neither is going to work.”

The government’s actual influence in achieving the low-debt interest rates the UK’s bonds attract is disputed; it may be they are low mostly because the Bank of England is buying up billions of pounds worth of bonds with its newly printed money, essentially guaranteeing it as risk-free. Consequently, argue some economists, there is a window for ministers to borrow more without fear of an Italian-style panic. Ashcroft argues: “We are poised at the edge of a recession. We’re likely to see flat growth in the fourth quarter of 2011. I believe the government is far too tied up in debt.” He adds: “In no way am I saying we should spend willy-nilly. What we are talking about is about the timing. Of course, we need to get our debts stabilised but the issue is timing.”

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And when times are tough, a fiscal stimulus might correct what Ashcroft sees as the big problem: the lack of demand in the economy. Businesses, everyone agrees, are currently sitting on piles of cash. But they aren’t investing it because they fear everyone is too worried about losing their job to buy things. A vicious cycle ensues (witness Sir Philip Green’s decision to close up to 260 Arcadia stores last week) – leaving the whole system in danger of snarling up.

But a short-term fiscal stimulus – like Alistair Darling’s pre-Christmas VAT cut of 2008 – can be ruled out. Osborne is instead likely to offer a mixed assortment of proposals which reflect both the two-headed nature of the coalition and the over-riding pledge to get public spending down. On Friday, Deputy Prime Minister Nick Clegg unveiled a £1bn wage subsidy scheme, advocated by the CBI, under which the government will pay half the salary of new apprentices taken on by firms. Getting the Tories to back it, one Lib Dem source was reported as saying, was “like getting a vegetarian to go and buy a kebab on a Friday night”.

The Lib Dems are also likely to lead the drive this week for a major push on infrastructure investment, with Alexander given the task of pushing through as many as 40 major projects. Upfront cash provided by Britain’s huge pension fund would – crucially – not appear on the government books as more debt. Osborne will parade his “credit easing” plan, the as yet undefined plan which will see government buy up bonds from those small firms who cannot get loans from the banks. And the ever-political Chancellor is also likely to offer a crowd-pleaser – with a pledge to scrap the planned 3p a litre rise in petrol prices, or a National Insurance holiday for new recruits hired by firms, seen as two likely contenders.

Osborne’s problem will be finding the money – with Lib Dem MPs claiming to have scored “a victory” this weekend after blocking Treasury attempts to cap proposed increases in next year’s state benefits. Lib Dem MP for Edinburgh West, Mike Crockhart, declares: “I am fairly confident that we have won that argument around the uprating of benefits. That is a clear fault-line between the two parties.”

Politically, though, the big problem for Osborne and Alexander is that the lasting impression from Tuesday is likely to be the forecasts – and not what he has to say. “The Chancellor will be keen for these growth measures to be the major take-away from the Autumn Statement,” says Lloyds economist David Page. “To our minds, it will be the further increase in the headline deficit projections that echo as the Chancellor sits down.”

The danger for the government is that the public begins to ask, what was the point of austerity if not to get Britain back on the straight and narrow, and come Wednesday, sides with the striking teachers, nurses and civil servants protesting about the changes to their pension deals. Alexander – who has led government negotiations on the pension deal – strikes a frustrated note on the subject of those strikes, noting how, in a surgery on Friday, he had mollified one constituent in Inverness after explaining what the new terms were all about. Some of the union chiefs who “just want to have a confrontation with the government” have distorted the terms of the deal, he argues. He says: “It is just bizarre to be going on strike in the middle of a set of negotiations which are moving forwards reasonably well. It is a completely ridiculous situation.”

Ministers were out in force at the weekend warning of the disruption the strike will cause; they know all too well the dangers of being seen to be on the wrong side of an argument involving public servants.

All that would be quite enough for one week normally, but there still lingers the chance that Tuesday and Wednesday could be overshadowed by the Eurozone blowing up. All the vulnerable Euro nations are due to sell more debt this week, with interest rates edging ever higher, as markets begin to price in the risk that the euro could hit the rocks. Officials are said to be preparing for all eventualities. Alexander confirms: “As a government we are preparing our contingency planning to understand the importance of all the different scenarios.” It means that while this is the week where Osborne has to show he’s in charge, it’s also the week when an economic storm could blow in to demonstrate the fallacy of anyone being in control in the first place.

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The trick for Osborne will be in how he plays the prevailing conditions. Over coffee last week, one senior Labour figure noted drily how Labour and the Tories had swapped each other’s clothes over the past two years. When Gordon Brown was in charge, Labour had blamed global economic conditions for the financial crunch, while the Conservatives sought to pin the blame on Downing Street. Roll on to today, and it is the Conservative-led government which is blaming Britain’s economic woes on abroad, while Ed Miliband points the finger at Osborne.

Both governments were mostly right. Both opposition parties were mostly opportunist. None the less, last year, the voters blamed Labour. This year, Osborne’s task is to ensure he escapes the same fate.