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28 November 2013updated 26 Sep 2015 10:16am

Osborne must choose between austerity and giveaways

If the Chancellor starts doling out goodies he risks undercutting the Tory message of long-term discipline.

By Rafael Behr

The debate around next week’s Autumn Statement is predictable. George Osborne will declare that the economy is healing and that Labour have nothing of substance to say on the economy because they forecast apocalypse and no apocalypse came. The Chancellor’s message will be couched in appropriate parliamentary language and he will strive to avoid sounding smug, but the essence will be that Ed Balls is –  as we used to say in the playground – badly sussed.

Labour’s response will be that Osborne’s recovery has come along later than it should have done and isn’t helping the right people. Growth that doesn’t fix the cost of living crisis is no cause for celebration.

To that, the Tory riposte is that the surest way to bring relief to hard-pressed households is by delivering growth (which, it will be said, Labour doesn’t know how to achieve) and that the government is implementing a mature long-term plan for prosperity. By contrast, Miliband’s remedies – notably the pledge to freeze energy prices – are desperate gimmicks. I’m told that the Treasury is confident that average wages will start to rise again in line with growth some time around next spring, which would make it harder for Labour to insist that the recovery is felt only by the rich few.

A return of widespread economic optimism would obviously be good for Conservative electoral prospects but it poses an intriguing dilemma. To maximise the advantage, it will be tempting to start doling out goodies. Tory MPs are already nagging the Chancellor for tax cuts. But the current campaign strategy relies on the claim to be focused unerringly on the long-term – finishing the job that was started in 2010, which specifically means repairing the public finances. A significant announcement at this year’s Conservative conference was Osborne’s pledge to turn deficit into surplus by the end of the next parliament (presuming a Tory government is returned).

The logic of this move is simple. In the months after the last election, Labour lost the political blame game over responsibility for Britain’s economic woes and was saddled with a reputation for reckless profligacy. Since then, Balls and Miliband have been forced repeatedly to declare their own commitment to future spending restraint. The shadow chancellor even says he wants the Office for Budget Responsibility to vet Labour’s manifesto. So the Chancellor has moved the goal posts. If the opposition agree that the deficit is a problem, and the economy is back on course, why would they not also want to get the nation back in the black? Gordon Brown failed to mend the roof last time the sun was shining, now the storm has passed and, guess what, Ed Balls is itching to kick off the slates. Etc.

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There is no doubt that this is a threat to Labour, but it will be diminished if Osborne gets too generous with his pre-election giveaways. An interesting report appeared in my inbox yesterday from the pro-market think tank Reform, arguing that Westminster and Whitehall are still in denial about the scale of the fiscal challenge ahead. It dwells in particular on demographic trends – the way that an ageing population imposes a growing burden on expenditure and wreaks structural havoc with future revenues. It is worth reading in full, but the short version is that tax cuts now or any time soon should not be on the agenda. (It is worth noting at this point that Osborne has also said he thinks the next stage of deficit reduction should be managed entirely with spending cuts. The Tories know Labour would never match that pledge and they want to fight a campaign warning against a Miliband tax bombshell.)

In reality, tax rises in the next parliament are all but guaranteed, regardless of who wins, but it wouldn’t exactly be unprecedented if British politicians on all sides conspired in failing to mention that until after the election. Still, the Tories will have to decide whether they think their interests are better served by immediate tax relief for voters – ramping up the feel-good factor – or by reinforcing the 2010 dividing line that colours Conservatism as the doctrine of sober frugality and Labour as the drunken wastrels.

Osborne could always try a bit of both, but it’s risky. If he starts promising to “share the proceeds of growth” again, he might signal that the pressure is off and that the fiscal crisis is over. That, as one government advisor puts it, “might give people permission to vote Labour again.”  There are clearly divisions at the very top of the Tory party over this issue, as reported recently by Fraser Nelson in the Telegraph.

In Miliband’s office, the expectation is that big headline-grabbing tax cuts are inevitable in the run-up to polling day. Labour strategists speculate that Osborne will not be able to resist a triumphal flourish, accompanied with a message along the lines: “thank you for being patient and putting up with the misery while we repaired the damage. Let me reward you by giving you some of your own money back. Oh, and by the way, don’t forget that Labour will be nicking that cash off you the first chance they get!” It’s what one senior Labour figure recently told me he imagines he would do if he found himself in Osborne’s shoes; the obvious attack.

It is also worth pondering the position of the Lib Dems in all of this. Clegg’s decision to bind his party to Osborne’s original austerity programme in 2010 helped discredit Balls. The most prominent argument of the first two years of the current parliament became a two-against-one battle to define what was imperative in the national interest. Labour lost. Now the Lib Dems want their share of the credit. But they also want tax cuts – specifically Clegg wants the personal income tax threshold to rise again before 2015. This is the signature Lib Dem policy that is meant to signal generosity to people on low incomes, although how well it achieves that is open to dispute. Meanwhile, Clegg reminds anyone who’ll listen that Cameron once rejected it as unaffordable. The Lib-Dem centre-hugging strategy requires being fiscally disciplined but not obsessive. So the junior coalition party is unlikely to match Osborne’s ambitions to eliminate the deficit entirely, partly so they can leave open the possibility of coalition with Labour but also because they think the promise of perpetual austerity may be a dividing line too far. One Clegg advisor recently told me he thinks the Chancellor’s determination to keep punching the bruise of public fear over debts and deficits might be overdone. There is a possibility that by 2015, voters will be suffering from austerity-fatigue and will turn away from the Tories if they start to look bloodthirsty in their addiction to cuts. Cameron himself once identified the hazard of Conservatives coming across as “hatchet-faced accountants.”

Ultimately, of course, all of these calculations are hypothetical. The performance of the economy over the next 18 months will force certain choices on all three parties. But one thing that can be said with some certainty is that the big fiscal arguments – how much to cut, how much to spend; when and for whom – haven’t stopped being the defining issue of current British politics. Labour’s cost of living crusade has been effective at changing the subject. Next week, Osborne will do everything in his power to change it back.