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

Photo: Getty Images
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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.