Why is the Spending Review being held now? So Osborne can try and beat up Ed Balls

The Chancellor's decision to set out plans for 2015-16 nearly two years in advance has everything to do with politics and nothing to do with economics.

One question that has been asked all too rarely in coverage of the Spending Review is "why it is being held now?" There is no constitutional or economic requirement for George Osborne to set out spending plans for 2015-16 this far in advance. The current spending period (2011-15) doesn't end until April 2015 and it would have been prudent to wait until the preceding October (as in the case of the previous two reviews) when more recent forecasts will have been produced. 

Osborne's decision not to do so has everything to do with politics and nothing to do with economics. By announcing spending limits for the first year after the election, the Conservatives’' chief political strategist is seeking to draw the battlelines in his party's favour. He knows that if Labour accepts his plans it will be accused of intellectual surrender and that if it rejects them it will be accused of fiscal recklessness.

As apprentices of Gordon Brown, who similarly used the baseline as a weapon of political war, Ed Miliband and Ed Balls were well prepared for this trap. Their pre-emptive response was to accept Osborne's current spending limits, while leaving open the possibility of greater capital investment. For both political and economic reasons, it was the right decision. While the public remain sceptical of the Keynesian case for higher borrowing, polls show that they recognise the benefits of investing in areas such as housing, which boost output in the short and long run, generate employment and ultimately aid deficit reduction. With its own currency, its own independent monetary policy and its above average debt maturity, Britain can afford to borrow for growth without fear of a dangerous rise in bond yields. The risks of inaction, in the form of permanently lower growth and higher unemployment, far outweigh the risks of action.
 
Nearly two years before the end of the current spending period, Osborne's relentless focus should have been on generating growth (as ConservativeHome's Mark Wallace also argues this morning), not on squeezing £11.5bn of cuts out of ministers who may not even be around to implement them. But ever since he entered office, the Chancellor has rarely been able to resist the temptation to put politics before economics. Forget growth, forget jobs, forget deficit reduction even, Osborne has got an election to win and he thinks beating up Ed Balls will help. Your fate, dear voter, is the last thing on his mind today. 
George Osborne walks along The Strand towards a branch of Lloyds bank. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Getty Images.
Show Hide image

Theresa May gambles that the EU will blink first

In her Brexit speech, the Prime Minister raised the stakes by declaring that "no deal for Britain is better than a bad deal for Britain". 

It was at Lancaster House in 1988 that Margaret Thatcher delivered a speech heralding British membership of the single market. Twenty eight years later, at the same venue, Theresa May confirmed the UK’s retreat.

As had been clear ever since her Brexit speech in October, May recognises that her primary objective of controlling immigration is incompatible with continued membership. Inside the single market, she noted, the UK would still have to accept free movement and the rulings of the European Court of Justice (ECJ). “It would to all intents and purposes mean not leaving the EU at all,” May surmised.

The Prime Minister also confirmed, as anticipated, that the UK would no longer remain a full member of the Customs Union. “We want to get out into the wider world, to trade and do business all around the globe,” May declared.

But she also recognises that a substantial proportion of this will continue to be with Europe (the destination for half of current UK exports). Her ambition, she declared, was “a new, comprehensive, bold and ambitious Free Trade Agreement”. May added that she wanted either “a completely new customs agreement” or associate membership of the Customs Union.

Though the Prime Minister has long ruled out free movement and the acceptance of ECJ jurisdiction, she has not pledged to end budget contributions. But in her speech she diminished this potential concession, warning that the days when the UK provided “vast” amounts were over.

Having signalled what she wanted to take from the EU, what did May have to give? She struck a notably more conciliatory tone, emphasising that it was “overwhelmingly and compellingly in Britain’s national interest that the EU should succeed”. The day after Donald Trump gleefully predicted the institution’s demise, her words were in marked contrast to those of the president-elect.

In an age of Isis and Russian revanchism, May also emphasised the UK’s “unique intelligence capabilities” which would help to keep “people in Europe safe from terrorism”. She added: “At a time when there is growing concern about European security, Britain’s servicemen and women, based in European countries including Estonia, Poland and Romania, will continue to do their duty. We are leaving the European Union, but we are not leaving Europe.”

The EU’s defining political objective is to ensure that others do not follow the UK out of the club. The rise of nationalists such as Marine Le Pen, Alternative für Deutschland and the Dutch Partij voor de Vrijheid (Party for Freedom) has made Europe less, rather than more, amenable to British demands. In this hazardous climate, the UK cannot be seen to enjoy a cost-free Brexit.

May’s wager is that the price will not be excessive. She warned that a “punitive deal that punishes Britain” would be “an act of calamitous self-harm”. But as Greece can testify, economic self-interest does not always trump politics.

Unlike David Cameron, however, who merely stated that he “ruled nothing out” during his EU renegotiation, May signalled that she was prepared to walk away. “No deal for Britain is better than a bad deal for Britain,” she declared. Such an outcome would prove economically calamitous for the UK, forcing it to accept punitively high tariffs. But in this face-off, May’s gamble is that Brussels will blink first.

George Eaton is political editor of the New Statesman.