What are Osborne's choices now?

The Chancellor can do what’s best for the economy or retain the support of the Tory party faithful. He cannot do both.

The original game plan for the Conservative-led coalition was fairly simple: to eliminate the structural deficit it had inherited within the five-year parliament and ride the global recovery back to economic growth. With that achieved, the Tories’ reputation for economic competence would be restored, promises to end austerity could be made, and a thumping Conservative majority in 2015 would be the just reward. Unfortunately that proved to be one of many over-optimistic projections.

With the Conservatives and Liberal Democrats now trailing Labour in opinion polls, George Osborne appears to face a difficult balancing act between nurturing a pallid economic recovery, maintaining the UK’s AAA credit rating, broadening support for the coalition’s policies, and cementing the loyalty of the Tory party faithful. It seems unlikely that all of these objectives can be achieved simultaneously.

Broadly speaking, the chancellor has three options. First, he could slow the pace of fiscal consolidation over and above simply allowing the "automatic stabilisers" to work, reducing the fiscal drag on the economy. Yet, 90 per cent of those who support the government believe the pace of tightening is about right, or could even be accelerated. With the coalition's austerity programme not even halfway complete, reversing course now would be an admission of failure, a sure-fire way of losing yet more support in the run-up to the 2015 general election.

Alternatively, the Chancellor could maintain the current timetable of austerity but look to spread the pain more broadly across society. Economically, this could make sense. ASR’s UK Household Finances Survey clearly illustrates that those on lower incomes are most insecure in their jobs and are experiencing the most significant financial pressures; shifting more of the burden onto those with broader shoulders could help to free up disposable income and support consumer spending. But again, this issue polarises opinion.

Finally, the Chancellor could look to stay the course and stick with the current strategy. This is not as simple as it sounds. As the Institute for Fiscal Studies has pointed out, another £27bn of cuts will need to be specified if the Chancellor is to meet his fiscal envelope. Assuming the coalition endorses the opinions advanced in the Household Finances Survey and maintains the sacrosanctity of the NHS and education, this would leave other departments facing unprecedented cuts of 16 per cent in real-terms during the three years to 2017-18 – areas such as the police, defence and transport. Such cuts look unviable and would prove unpopular. In other words, maintaining the status quo is a false option; the Chancellor will have to either inflict further pain on some segments of society or abandon his remaining fiscal targets before the next election in 2015.

Is there a third way? A boost to public investment notionally financed through the private sector seems like a possible method of fiscal support. This would achieve the multiple aims of supporting growth in the near-term, enhancing the supply-side of the economy and keeping debt off the public sector’s balance sheet. Already, the government plans to guarantee £40bn of loans to finance infrastructure projects, with projects worth £10bn already under consideration. Similar schemes, such as privately-contracted road pricing schemes, might also be considered.

Otherwise, this leaves the British government looking like Mr Micawber, simply hoping that "something will turn up". There are two potential saviours. The government could lean on the Bank of England further, adapting its mandate to provide additional monetary support above and beyond that consistent with its inflation target. At the very least, further rounds of Quantitative Easing look likely. Alternatively, the rest of the world could come to the UK's rescue. A global recovery – particularly one that spreads to the eurozone – would provide a source of demand where currently there is none. Ironically, the UK public’s growing hostility towards the EU comes at a time when it needs Europe more than ever.

Dominic White is chief European economist and Richard Mylles is a political risk analyst at Absolute Strategy Research

Chancellor George Osborne leaves Number 11 Downing Street. Photograph: Getty Images.

Dominic White is chief European economist and Richard Mylles is a political risk analyst at Absolute Strategy Research

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The SNP thinks it knows how to kill hard Brexit

The Supreme Court ruled MPs must have a say in triggering Article 50. But the opposition must unite to succeed. 

For a few minutes on Tuesday morning, the crowd in the Supreme Court listened as the verdict was read out. Parliament must have the right to authorise the triggering of Article 50. The devolved nations would not get a veto. 

There was a moment of silence. And then the opponents of hard Brexit hit the phones. 

For the Scottish government, the pro-Remain members of the Welsh Assembly and Sinn Féin in Northern Ireland, the victory was bittersweet. 

The ruling prompted Scotland’s First Minister, Nicola Sturgeon, to ask: “Is it better that we take our future into our own hands?”

Ever the pragmatist, though, Sturgeon has simultaneously released her Westminster attack dogs. 

Within minutes of the ruling, the SNP had vowed to put forward 50 amendments (see what they did there) to UK government legislation before Article 50 is enacted. 

This includes the demand for a Brexit white paper – shared by MPs from all parties – to a clause designed to prevent the UK reverting to World Trade Organisation rules if a deal is not agreed. 

But with Labour planning to approve the triggering of Article 50, can the SNP cause havoc with the government’s plans, or will it simply be a chorus of disapproval in the rest of Parliament’s ear?

The SNP can expect some support. Individual SNP MPs have already successfully worked with Labour MPs on issues such as benefit cuts. Pro-Remain Labour backbenchers opposed to Article 50 will not rule out “holding hands with the devil to cross the bridge”, as one insider put it. The sole Green MP, Caroline Lucas, will consider backing SNP amendments she agrees with as well as tabling her own. 

But meanwhile, other opposition parties are seeking their own amendments. Jeremy Corbyn said Labour will seek amendments to stop the Conservatives turning the UK “into a bargain basement tax haven” and is demanding tariff-free access to the EU. 

Separately, the Liberal Democrats are seeking three main amendments – single market membership, rights for EU nationals and a referendum on the deal, which is a “red line”.

Meanwhile, pro-Remain Tory backbenchers are watching their leadership closely to decide how far to stray from the party line. 

But if the Article 50 ruling has woken Parliament up, the initial reaction has been chaotic rather than collaborative. Despite the Lib Dems’ position as the most UK-wide anti-Brexit voice, neither the SNP nor Labour managed to co-ordinate with them. 

Indeed, the Lib Dems look set to vote against Labour’s tariff-free amendment on the grounds it is not good enough, while expecting Labour to vote against their demand of membership of the single market. 

The question for all opposition parties is whether they can find enough amendments to agree on to force the government onto the defensive. Otherwise, this defeat for the government is hardly a defeat at all. 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.