George Osborne has cleared the lowest bars with flying colours. The most elemental test for a Chancellor is creating conditions that boost growth. Back in 2010, he was warned that “austerity” – the combination of monetary easing and fiscal tightening that his Labour predecessor had been forced to begin – would wreck it and swell unemployment. One of the most vivid predictions came from David Blanchflower, a former member of the Bank of England’s Monetary Committee. Before the General Election of that year, he forecast that were Osborne’s policies implemented “unemployment could easily reach four million…five million unemployed or more is not inconceivable”.
Five years later, as Britain approached another General Election, Britain had the fastest-growing economy of any major advanced economy and had created more jobs under the Coalition than in the rest of the EU put together. Osborne’s approach had helped to curb recession and create recovery – and on his own terms, too. “We’re all in this together,” he had declared during his first Budget, and his ring-fencing of NHS spending had been a means of proving so to a sceptical electorate, as was a consolidation that, under some measures at least, had hit the rich hardest.
The Chancellor had cleared higher rungs, too. His Northern Powerhouse plan, boosts for science spending, stress on childcare support for working parents and support for home ownership combined to project a sense of a Government on the side of the future. This strategic direction was set by him, not David Cameron. But at the same time as suggesting the future, he was protecting the past – or, rather, the interests of Britain’s Tory-leaning older voters, by guarding that health and pensions spending. And all the while, he was shifting jobs from the Labour-supporting public sector to the Conservative-leaning private one: the public sector workforce is now at its lowest since 2003.
So far, so successful, and it can be argued that to expect wider achievements too (such as rebalancing the economy from the south, finance, consumer spending and personal debt to the Midlands and North, manufacturing, investment and saving) over the course of a single Parliament was unrealistic: there is only so much that can be done in one term. But either way, there is a hurdle that Osborne has demonstrably failed to master, the importance of which he has repeatedly stressed himself – and one, furthermore, that provides the foundation on which the rest of his policies stand.
The Conservative Manifesto of 2010 had pledged “to eliminate the bulk of the structural deficit over a Parliament”. But five years later, the deficit stood stubbornly at £90 billion – and much of it, however one may strain to gloss the calculations, is structural. True, that figure represented a reduction of about half, if one measures the deficit as a proportion of GDP. But the fall was one of rather less in absolute terms: over the five years of Coalition, it dropped from £154 billion to that £90 billion. The Chancellor had complained that Gordon Brown “failed to fix the roof while the sun is shining”. He himself had made a start – and during stormy weather, too – but the job is incomplete.
Even here, there is a powerful case in Osborne’s defence. Chancellors are not masters of the winds and waves of the world economy. Recession abroad, natural disasters, wars, trade disputes – all these, and more, can wreck the best-laid of plans. Osborne cannot be held responsible for events beyond his control. The spending test of his five years should be: did he deliver the cuts in its growth that he promised? To which the answer is: yes. Nor can these be written off by the Blanchflowers of the Right – the Chancellor’s critics on his other flank – as footling: he is undertaking the biggest consolidation in modern times, as Peter Hoskin has helped to demonstrate.
It can be argued that he should have revised his plans, during the last Parliament, to cut deeper and thus bring the deficit down faster. His judgement was that doing so might de-rail recovery, and that mid-term was the wrong point in the economic and political cycle to strengthen his consolidation. We believe that he was right. But that judgement has a sting in the tail. If eliminating the structural deficit is essential (as it is), bearing down on it afresh mid-term can be problematic (as was arguably the case during the last Parliament) and government growth forecasts are usually over-optimistic (which is undoubtedly true), a conclusion follows.
Namely, that the time for reducing spending growth in order to speed deficit reduction is at the very start of a term. In retrospect, Osborne should have done so even deeper and faster in 2010 – by cutting public sector pay, for example. This is the challenge that faces him tomorrow: he must scale back spending growth now, right at the start of this political cycle, in order both to secure economic stability and boost Conservative prospects later in the Parliament. By 2020, he – or whoever is then the Chancellor – will want to have eliminated the deficit, thus opening up the possibility of making sustainable spending increases and delivering promised tax cuts.
However, present political and economic circumstances allow him less room for manoeuvre than in 2010, for four main reasons. First, he no longer has the support of the Liberal Democrats – and thus a majority of about 80 in the lobbies, rather than the present one of 12. Second, the consequences of that ring-fencing are coming home to roost: with the NHS, overseas aid, some schools spending and now the defence budget protected, other budgets will be hard-squeezed. This protection is unsustainable. Third, recession is possible, even likely, before 2010. The Brussels shutdown is a reminder of how fragile economies can be – and of the threat of terrorism.
The wrangling between Osborne and Theresa May over the police budget demonstrates the interplay between the relatively narrow business of ring-fencing and the sudden events that can ruin the plans of governments. And finally, voters had been prepared for austerity in 2010; five years on, they are getting used to more expansive times. Their reservations were reflected by the unease of Conservative backbenchers over the Chancellor’s proposed curtailment of tax credits. The row was a taster for what will come after he makes his Comprehensive Review Statement in the Commons tomorrow.
Like others, ConservativeHome likes to offer Budget advice: in the recent past, for example, we called for NIC cuts and higher capital spending. But the combination of the stubborness of the deficit and the timing of the CSR lead inexorably to a single conclusion. The Chancellor has been accused of playing political games with deficit reduction – that’s to say, treating his surplus target as a Gordon Brown-type dividing line, a Benefits Cap-style trap for Labour to fall into, rather than as a fixed goal. There is a suspicion that proclaiming deficit reduction suits him more than delivering it – that, for him, it will always be done mañana.
By this time tomorrow, Osborne could set out for the Commons trusting that Labour will be unelectable in 2020 – and that, as long as the deficit is lower then than it is currently, the Tories will look then by far the better of the two main options. He may even be tempted to think that going a bit easy on the deficit will help his own leadership election prospects. But whether this is so or not, economic sustainability is more important. The big test for him will be that surplus target. It was doubtless crafted to give him flexibility. None the less, given the Panglossian record of Government borrowing forecasts, it is essential for him to stick to it. He has stressed the need to fix the roof, whether the sun is shining or the rain is pouring. By tomorrow evening, we will know whether or not he really means it.