Balls set for revenge as Osborne faces new failure on the deficit and debt

The Chancellor will be forced to announce that the deficit will be higher this year and that the debt won't fall until 2018.

When George Osborne delivered his first Budget in June 2010, he declared: "Unless we deal with our debts, there will be no growth." But the Chancellor has learned that the reverse is true – unless you stimulate growth, you can't deal with your debts. In last year's Autumn Statement, he abandoned his target of reducing debt as a proportion of GDP by 2015-16, extending it until 2016-17. Today's FT reports that the Budget will see this ambition further delayed until 2017-18 as the OBR downgrades its growth forecasts for the fifth time since it was created. Growth in 2013 is now expected to be just half of the 1.2 per cent predicted in December. 

But worse for Osborne, as I've previously reported, is that he will be forced to announce, for the first time since entering the Treasury, that borrowing is expected to be higher this year than last. Until now, even as growth has disappeared, the Chancellor has been able to boast that the deficit "is falling" and "will continue to fall each and every year". But no more. Even with the addition of £2.3bn from the auction of the 4G mobile spectrum, borrowing will still be greater than last year. With just two months' worth of figures to go (the figures for February will be published on Thursday), the deficit is currently £5.3bn higher than in 2012. To ensure it falls, Osborne would need to borrow £23.4bn or less in February and March, compared to £28.6bn last year. As the OBR noted last month, "to meet our autumn forecast would now require much stronger growth in tax receipts in the last two months of the year than we have seen since December, or much lower-than-forecast expenditure by central or local government". Ed Balls, who was wrongfooted last year when Osborne unexpectedly announced that the deficit would continue to fall (it later became clear that the Chancellor had mischievously bagged the 4G receipts early), will have his revenge.

The combination of a shrinking economy and a rising deficit will add force to Labour's charge that austerity is "hurting but not working". Even Conservative MPs are beginning to ask what all the pain has been for if the national debt won't begin to fall until 2018. Osborne is expected to meet his fiscal mandate to eliminate the structural deficit but since this is "a rolling five year" target that aim also won't be achieved until 2017-18. The Tories, however, are confident that they can turn this failure to their advantage. First, they can argue that Labour's response would be to "borrow even more". Following Vince Cable's recent intervention in the New Statesman, which saw the Business Secretary urge the government to borrow to invest, Balls is more confident about making the case for deficit-financed stimulus but Osborne believes that the public won't accept the argument that you can "borrow more to borrow less". Keynes's paradox of thrift is just too paradoxical. 

Second, if the next election is again fought over austerity, the Tories will argue that they, not Labour, are the best choice to "finish the job". While polls show that voters believe the government is cutting "too far and too fast", Cameron and Osborne continue to be rated above Balls and Miliband for economic competence. With further deficit reduction required, the Tories' hope is that voters will turn to the original axemen. It's for this reason that Miliband is determined to define the election as a contest between two competing visions of society and the economy, rather than as a narrow contest over austerity. How successful he is in doing so will do much to determine its outcome. 

George Osborne leaves 11 Downing Street on February 27, 2013 in London. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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The clever ideological trick that could save the Labour party

The Co-operative party could suddenly get a lot more popular. 

It’s do or die for the party’s moderate MPs, who have lost the fight for the soul of Labour and must quickly move on. 

The 172 Labour MPs who backed a no-confidence vote in Jeremy Corbyn earlier this year may not like their newly elected party leader much, but they loathe John McDonnell. 

So it is little surprise that one of them, John Woodcock, reportedly looked “sick to the stomach” when the Shadow Chancellor tenderly invited him for a cuppa in his office following the leadership election result at conference. Reading the tea leaves tells me those talks aren’t going to go well.  

Yet moderate MPs would do well to revisit McDonnell’s off-the-cuff comments from a few years back: “I’m not in the Labour party because I’m a believer of the Labour party as some supreme body or something God-given or anything like that,” he told a small audience in 2012. “It’s a tactic. It’s as simple as that. If it’s no longer a useful vehicle, move on.” 

Two feather-spitting former frontbenchers called for McDonnell’s resignation when these comments emerged in March, saying they revealed his Trotskyist tendencies. "The context (a hard-left gathering) and the company (which included Gerry Downing, expelled from Labour for his comments on 9/11) didn’t make for great publicity, no," a Leader’s Office staffer privately confesses. 

But McDonnell is right: There is nothing necessary, natural or divinely ordained about Labour’s existence lest it can get things done. Which is why the parliamentary Labour party cannot botch its next attempt at power. 

In the wake of Corbyn’s re-election, Labour MPs face a fork-in-the-road: fight this civil war until its bitter end - play the long game, wait until Labour loses the next general election and challenge Corbyn again - or start afresh. 

It is a bleak, binary choice, akin to a doctor delivering test results and declaring the illness is terminal as feared: the patient can go down fighting and die a slow death, notwithstanding a medical miracle, or instead take part in a pioneering new drug trial. This carries the risk of dying immediately but promises the possibility of life as well. Both options are fraught with danger.

The problem with the first option is that moderates have all but lost the party already. A poll reveals Corbyn won 85 per cent - 15 per cent among members who joined after he became party leader and lost 37 per cent - 63 per cent among those who were members of the party before the last general election. The result: victory by 119,000 votes. 

Corbyn has already announced he wants to give these foot soldiers far greater firepower and told Andrew Marr he had asked the NEC to draft plans for increasing the membership and including it in “all aspects of party decision making”. Labour is transitioning apace into a social movement: free of formal hierarchy and ambivalent about parliamentary power. 

So why wait until 2020? There is every chance that MPs won’t any longer have the power to challenge to Corbyn within four years’ time. If Momentum has its way with reselection and shadow cabinet elections, leading rebels may not be around to begin with. 

Even if MPs mount another leadership challenge, few believe organisations like Saving Labour or Labour First could put together a sizeable enough electorate to outgun Corbyn at the ballot box. He would be voted back in by a landslide. 

The alternative is for MPs to create a new centre-left force. The main plan under consideration is to join the Cooperative party, Labour’s sister party, and sit as a bloc of “double hatted” MPs, with their own policy agenda on Brexit and the economy. This new bloc would apply to the Speaker to become the official opposition. 

Plenty of MPs and members recoil at the idea of a semi-split like this because of the mixed message it would send to voters on the doorstep. "So you don’t have faith in Corbyn, but you’re a Co-op MP campaigning on behalf of his Labour?" Many believe a full-split would be worse. They fear being pitted against Corbyn-backed Labour candidates in local constituencies and splitting the left vote, opening the door to Ukip or the Conservatives in marginal seats. 

But if moderate MPs mean what they say when they warn of total electoral wipeout in 2020, risking a new centre-left grouping is intuitively worth it.  What do they have to lose? And how many more times can Labour’s moderates cry wolf - Labour "risks extinction", Sadiq Khan said yesterday - until voters call their bluff and tell them to quit complaining and fall in line behind their leader? 

While Corbyn’s polling remains disastrous, a Co-op/Labour party would boast a mandate of 9.3m people, a policy agenda in line with Britain’s political centre of gravity and a chance of becoming the official opposition: a risk worth taking in the face of electoral oblivion. 

A handful of battle-bruised MPs are talking about coming together. "Time to unite," a deflated Hilary Benn tweeted this weekend. There is a precedent for this: first past the post means the party has always been composed of uneasy coalitions of different groups - take the trade unionists, liberal cosmopolites and ethnic minorities of the New Labour years - and it is arguably no different now.  

Yet this is not about a coalition of diverse interests. It is about two parties within a party, each of which believes Labour is their rightful inheritance. Of the two, moderates are least likely to gain anything by engaging in an all out war. It is time they took a leaf out of McDonnell’s book and accepted it is time, regrettably, "to move on". 

Gabriel Pogrund is a journalist at The Sunday Times and a Google News Fellow 2016.