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Failure looms for George Osborne

The Chancellor will be forced to face facts in his autumn statement — there’s no other way of plugging the £190bn hole in his Budget than chasing after “plan B”.

Among Conservatives, George Osborne is known as “the submarine” for his habit of surfacing only for set-piece events such as the Budget and retreating under water at the first sign of trouble (for similar reasons, Gordon Brown was nicknamed “Macavity”, after the cat who wasn’t there).

Unfortunately for the Chancellor, on those occasions when he does appear, it is invariably to deliver bad news. When Osborne presents his autumn statement to the House of Commons on 5 December, he will again be forced to announce that growth is lower than expected and borrowing higher.

In March, when the Office for Budget Responsibility (OBR), the independent fiscal watch­dog established by Osborne, last published forecasts, it predicted that Britain would avoid a double-dip recession and the economy would grow by 0.8 per cent this year. Yet, a month later, the UK returned to recession (the only G20 country, with the exception of Italy, to have done so) and went on to suffer a third consecutive quarter of contraction. Independent forecasters now expect the economy to shrink by 0.4 per cent this year (see bar chart below).

As a result, Osborne’s deficit reduction plan, which was premised on a steady recovery, has been thrown off course. The Chancellor is fond of boasting that he has reduced the deficit by a quarter (from £159bn in 2009-2010 to £119bn in 2011-2012) since taking office, but the disappearance of growth makes this trend unlikely to continue. Borrowing so far this year is 22 per cent (£10.6bn) higher than in the same period last year and forecasters expect the government to miss its deficit target for 2012 (£120bn) by as much as £30bn. In total, it is predicted that the coalition will borrow £190.8bn more than originally intended (see graph below). At the time of his emergency Budget in June 2010, Osborne declared that “unless we deal with our debts there will be no growth”. But he has learned that the reverse is true – unless you stimulate growth, you can’t deal with your debts.


Golden rule

The parlous state of the public finances makes it likely that Osborne will announce the abandonment of his golden debt rule in the autumn statement. The Chancellor’s “fiscal mandate” requires public-sector debt to be falling as a share of GDP by 2015-2016, an aim that appears increasingly unachievable. In March, the OBR forecast that debt would fall from 76.3 per cent in 2014-2015 to 76 per cent in 2015-2016, but the IMF has more recently predicted that it will rise from 78.8 per cent to 79.8 per cent.

Although Osborne could announce billions more in spending cuts and tax rises in an attempt to meet his target, even he recognises that it would be both politically and economically reckless to do so. Instead, he will partly accept the Keynesian argument that debt reduction must not be given priority over growth.

The governor of the Bank of England, Mervyn King, with whom Osborne has an unspoken alliance, has prepared the ground for the Chancellor by stating that it would be “acceptable” to abandon the target if the economy continues to struggle. But even though Osborne, an arch-pragmatist, accepts such logic, the decision will cause him no small pain. He will, indisputably, have failed on his own terms.

George Eaton is political editor of the New Statesman.

This article first appeared in the 08 October 2012 issue of the New Statesman, Conservative conference special

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Labour tensions boil over at fractious MPs' meeting

Corbyn supporters and critics clash over fiscal charter U-turn and new group Momentum. 

"A total fucking shambles". That was the verdict of the usually emollient Ben Bradshaw as he left tonight's Parliamentary Labour Party meeting. His words were echoed by MPs from all wings of the party. "I've never seen anything like it," one shadow minister told me. In commitee room 14 of the House of Commons, tensions within the party - over the U-turn on George Osborne's fiscal charter and new Corbynite group Momentum - erupted. 

After a short speech by Jeremy Corbyn, shadow chancellor John McDonnell sought to explain his decision to oppose Osborne's fiscal charter (having supported it just two weeks ago). He cited the change in global economic conditions and the refusal to allow Labour to table an amendment. McDonnell also vowed to assist colleagues in Scotland in challenging the SNP anti-austerity claims. But MPs were left unimpressed. "I don't think I've ever heard a weaker round of applause at the PLP than the one John McDonnell just got," one told me. MPs believe that McDonnell's U-turn was due to his failure to realise that the fiscal charter mandated an absolute budget surplus (leaving no room to borrow to invest), rather than merely a current budget surplus. "A huge joke" was how a furious John Mann described it. He and others were outraged by the lack of consultation over the move. "At 1:45pm he [McDonnell] said he was considering our position and would consult with the PLP and the shadow cabinet," one MP told me. "Then he announces it before 6pm PLP and tomorow's shadow cabinet." 

When former shadow cabinet minister Mary Creagh asked Corbyn about the new group Momentum, which some fear could be used as a vehicle to deselect critical MPs (receiving what was described as a weak response), Richard Burgon, one of the body's directors, offered a lengthy defence and was, one MP said, "just humiliated". He added: "It looked at one point like they weren't even going to let him finish. As the fractious exchanges were overheard by journalists outside, Emily Thornberry appealed to colleagues to stop texting hacks and keep their voices down (within earshot of all). 

After a calmer conference than most expected, tonight's meeting was evidence of how great the tensions within Labour remain. Veteran MPs described it as the worst PLP gathering for 30 years. The fear for all MPs is that they have the potential to get even worse. 

George Eaton is political editor of the New Statesman.