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OSBORNE SWORD

The claim that a growing economy automatically wins British governments re-election isn’t proved by history.  The economy was in recession in 1992, but John Major still beat Neil Kinnock.  The economy had recovered by 1997, but Tony Blair won by a landslide.  (Indeed, a Conservative campaign poster brashly declared in that year: “Britain is booming. Don’t let Labour ruin it.”)  Indeed, the evidence suggests that voters are more willing to switch to Labour when they feel economically secure.  Blair and Harold Wilson, the party’s two most recent election victors, won when the economy was growing.

George Osborne reads his history and knows this well.  He must also deal with the complication that the Conservatives are not the Government: the Liberal Democrats can reasonably be expected to scoop some of the credit for economic recovery in 2015.  But he also appreciates that the great Thatcher election victories of the 1980s were won off the back of economic growth, and that although a prospering economy doesn’t guarantee victory, it’s more likely to help a government than harm it.  His aim is to strike a balance. He wants voters to feel sufficiently prosperous that they vote Conservative…but not so much so that they are prepared to risk plumping for Ed Miliband and Ed Balls.

He grasps, too, that though a growing economy and household prosperity are closely related, they are not the same thing – hence Labour’s decision to campaign on living standards, which have been under pressure since long before the recession (their growth slowed from 2002 on, long before the 2008 crash).  His best hope, therefore, is that by next spring the economy will be “going gangbusters” – to borrow the phrase of his chief economic adviser, Rupert Harrison – enough for voters outside the London and the south-east to feel the prosperity that parts of both are experiencing…but without mortgage rates having sharply increased (although the rise is beginning already).

All this will depend on how much growth there is, and we will know just a little bit more about how the land lies when the Chancellor makes his autumn statement on Thursday.  The amount that he divvies up between further deficit reduction and new tax cuts will depend on the deficit forecast, and that in turn will depend on the OBR’s growth estimates.  What is certain is that Osborne’s spending strategy is already set in stone – which is why Liam Fox, in his article in today’s Times (£), recognises that there is little point in urging the Chancellor to stop protecting health and aid spending now: that’s why he presses the case for ending ring-fencing “in the next Parliament”.

Our unambiguous priority is deficit reduction over tax cuts – though, as Fox argues, growth now looks to be sufficiently strong for there to be room for both.  Some cuts, delivered within a framework of strong spending control, would undoubtedly help to boost growth.  Fox hints at cuts in green taxes and fuel taxes; Dominic Raab wants cuts in the basic and higher rates of income tax; like other Tory MPs, he also wants cuts in business taxes (there is a campaign going to cut business rates).  Our preference would be for any income tax cuts to be targeted at lower earners – the midlands and northern marginals that we must win are packed with them.  We will write more tomorrow about cutting business taxes.

But perhaps in order to head off the Westminster Village from too much excitement about tax cuts, Osborne, rightly, is stressing spending control.  “We need an affordable state,” he said yesterday on Marr as he again floated a plan for a permanent cap on welfare spending – part of his strategy to contrast the Conservatives, the party of “hard-working people”, against Labour, “the welfare party”.  You may have read the phrase before – on this site roughly a year ago, when I made the case for the Party to press neither for a big nor a small state, but for an affordable one (voters are not clamouring for a small state, but most recognise, however unwillingly, that Britain must live within its means).

That means debate about what an affordable state might look like.  Is capping welfare spending enough?  What about healthcare and pensions spending which, as people live longer, are among the most rapidly rising of our spending challenges?  (The state pension, of course, is part of the welfare budget: indeed, it consumes about a third of it.)  Should the age at which the state pension is received rise further?  Is co-payment for health now inevitable?  These are the sort of questions that a Commission on Public Spending would be better placed to address than a party with a reputation for being “the party of the rich”.  As I’ve said before, the Chancellor should be planning to establish one.

Osborne is open to criticism on many grounds. There are few signs of the Chancellor helping to create the German-style economy that he championed in opposition. I don’t believe that Help to Buy is the fifth horseman of the apocalypse, but stoking demand without providing supply is a recipe for trouble, and some help is already being withdrawn from the mortgage market.  Above all, deficit reduction has been slow to date.  None the less, Osborne has been, amidst the Coalition’s internal disputes, on the side of the angels.  You may not like his nuclear deal or HS2, but he is making infrastructure decisions that previous governments have evaded.

The Gove schools revolution and the Hayes/Hancock push for apprenticeships should help to transform our skills base. Osborne is on the correct side of the argument over airport expansion.  He wants the green tax burden reduced.  He has already cut corporation tax and the 50p rate – which, however unpopular a decision it may be now, was clamoured for by much of the right at the time.  Day in and day out, he is wrestling with spending Ministers whose demands are as collectively disastrous as they can be individually reasonable.  And now, for a change, he has some good news on growth.  Let’s hope he makes the most of it.

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