Leader: George Osborne may end up inheriting the wind

By refusing to contemplate any major changes to fiscal policy, Mr Osborne hopes to make a political virtue of his obstinacy.

According to George Osborne’s original plan, the £11.5bn of cuts he announced in the Spending Review on Wednesday 26 June should not have been necessary. When he published his deficitreduction programme in 2010, the Chancellor assured voters that austerity would not stretch beyond 2015. “We have already asked the British people for what is needed,” he declared in the 2011 Budget, “and we do not need to ask for more.” However, because of the near absence of growth since the election that resulted in the creation of a coalition government, the axeman is still swinging his blade. Mr Osborne is expected not to meet his chosen target of eliminating the so-called structural deficit until 2018. It is likely that Britain will experience a full decade of austerity before relief is in sight.

The results of Mr Osborne’s strategy were both predictable and predicted. As early as October 2009, when he was being lauded by much of the British press as the country’s potential economic saviour, the New Statesman warned that “the only economic plan he seems to have is for attempting to balance the books. He does not have a plan for growth. He has a plan for a lack of growth.” But Mr Osborne caricatured his opponents as “deficit deniers” and dismissed calls for a “plan B”, led by our economics editor, David Blanchflower, as Keynesian dogma. Despite the return of growth, the economy remains 2.6 percentage points below its pre-recession peak; this is the slowest recovery since the 1870s.

The Chancellor’s decision to hold the review nearly two years before the end of the current spending period had more to do with politics than economics. By announcing spending limits for the first year after the next election, the Conservatives’ chief political strategist sought to draw the battle lines in his party’s favour. He knew that if Labour accepted his plans it would be accused of ideological surrender and that if it rejected them it would 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 response was to accept Mr Osborne’s current spending limits, while leaving open the possibility of greater capital investment. For political and economic reasons, it was the right decision. While the public remains sceptical of the Keynesian case for higher borrowing, polls show that it recognises the benefits of investing in areas such as housebuilding that boost output in the short and long run, generate employment and aid deficit reduction. Because of its independent monetary policy and 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 forms of permanently lower growth and higher unemployment, far outweigh the risks of action.

In his NSessay in March, the Business Secretary, Vince Cable, urged Mr Osborne to borrow to invest, rightly noting that this would not “undermine the central objective of reducing the structural deficit” (a measure that excludes capital spending) and could even assist it “by reviving growth”. The Chancellor’s response fell far short of what was required. By choosing to fund capital spending increases through cuts elsewhere, rather than borrowing, and by delaying the greater part of the investment until after 2015, he has denied the economy the stimulus it desperately needs.

For political purposes, the Chancellor has postponed most of the remaining cuts until after the next general election. Based on current projections, according to the Resolution Foundation, £26bn of further reductions will be needed between 2016 and 2018 to eliminate the structural deficit, a figure that would require the next government to accelerate the cuts by nearly 50 per cent. Should the current ring fences around Health, International Development and Education remain, some departments will have had their budgets more than halved by 2018, with a 55 per cent cut to Communities and Local Government and a 64 per cent cut to the Foreign Office, as well as a 46 per cent cut to the Home Office and a 38 per cent cut to Defence. Alternatively, the present pace of cuts could be maintained but only through an additional £10bn of welfare cuts or tax rises.

At the last election, the Conservatives and Labour engaged in a mutual conspiracy of silence. David Cameron told voters that he had “no plans” to raise VAT, that he “wouldn’t means-test” child benefit and that he would send away any cabinet minister who proposed “front-line reductions” to services. While pledging to halve the deficit over four years, Gordon Brown could rarely bring himself even to mention the word “cuts”.

If the next government is to win the legitimacy required to justify further sacrifices, this grand deception must not be repeated. The Labour Party should not avoid making the case for a significant increase in taxes on static assets, such as property and land, and on environmental “bads”, to help create a more resilient tax base. A crackdown on tax avoidance by corporations and individuals is essential.

By refusing to contemplate any major changes to fiscal policy, Mr Osborne hopes to make a political virtue of his obstinacy.His message of fiscal discipline may well prove enough to carry the Conservatives to a narrow victory – but he may end up inheriting the wind.

George Osborne. Photograph: Getty Images

This article first appeared in the 01 July 2013 issue of the New Statesman, Brazil erupts

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

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