Osborne's economic strategy remains self-defeating

The Chancellor is wrong to fund £5bn of extra capital spending by squeezing public services.

George Osborne's decision to increase capital spending by £5bn (to be announced in tomorrow's Autumn Statement) is a belated admission that, in times of stagnation, the state must intervene to stimulate growth. The delusion that the coalition's spending cuts would increase consumer confidence and produce a self-sustaining private-sector-led recovery has been abandoned after Osborne's "expansionary fiscal contraction" turned out to be, well, contractionary. Whisper it, but Keynesianism is back. The £5bn will be spent on "shovel-ready projects", including 100 new free schools and academies, roads, and science and technology programmes.

But rather than taking advantage of the UK's historically low bond yields to borrow for growth (as the IMF and the CBI, among others, have urged the government to do), Osborne will fund the move by squeezing current spending even harder. All government departments, except health, education and international development, will be forced to reduce their budgets by an extra one per cent in 2013-14 and a further two per cent in 2014/15. By reducing demand and leading to thousands of extra job losses, the new cuts will limit the effectiveness of the £5bn stimulus, which, in itself, is inadequate. The FT's economics editor Chris Giles suggests that "on generous assumptions it might increase growth in one year by 0.1 per cent."

Though Osborne will claim otherwise tomorrow, this isn't what's needed to make a real difference at this stage.

George Osborne during a visit to the offices of HM Revenue & Customs. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Tom Watson rouses Labour's conference as he comes out fighting

The party's deputy leader exhilarated delegates with his paean to the Blair and Brown years. 

Tom Watson is down but not out. After Jeremy Corbyn's second landslide victory, and weeks of threats against his position, Labour's deputy leader could have played it safe. Instead, he came out fighting. 

With Corbyn seated directly behind him, he declared: "I don't know why we've been focusing on what was wrong with the Blair and Brown governments for the last six years. But trashing our record is not the way to enhance our brand. We won't win elections like that! And we need to win elections!" As Watson won a standing ovation from the hall and the platform, the Labour leader remained motionless. When a heckler interjected, Watson riposted: "Jeremy, I don't think she got the unity memo." Labour delegates, many of whom hail from the pre-Corbyn era, lapped it up.

Though he warned against another challenge to the leader ("we can't afford to keep doing this"), he offered a starkly different account of the party's past and its future. He reaffirmed Labour's commitment to Nato ("a socialist construct"), with Corbyn left isolated as the platform applauded. The only reference to the leader came when Watson recalled his recent PMQs victory over grammar schools. There were dissenting voices (Watson was heckled as he praised Sadiq Khan for winning an election: "Just like Jeremy Corbyn!"). But one would never have guessed that this was the party which had just re-elected Corbyn. 

There was much more to Watson's speech than this: a fine comic riff on "Saturday's result" (Ed Balls on Strictly), a spirited attack on Theresa May's "ducking and diving; humming and hahing" and a cerebral account of the automation revolution. But it was his paean to Labour history that roused the conference as no other speaker has. 

The party's deputy channelled the spirit of both Hugh Gaitskell ("fight, and fight, and fight again to save the party we love") and his mentor Gordon Brown (emulating his trademark rollcall of New Labour achivements). With his voice cracking, Watson recalled when "from the sunny uplands of increasing prosperity social democratic government started to feel normal to the people of Britain". For Labour, a party that has never been further from power in recent decades, that truly was another age. But for a brief moment, Watson's tubthumper allowed Corbyn's vanquished opponents to relive it. 

George Eaton is political editor of the New Statesman.