Osborne's secret weapon to cut the deficit

First published in the Telegraph on 9 September 2009

Within the next nine months, George Osborne should become the youngest Chancellor of the Exchequer since Lord Randolph Churchill in 1886, at just over 39 years of age. By most yardsticks, it ought to be a magnificent achievement. The problem is, neither the City nor the broader electorate much likes the idea of a thirtysomething taking control of the economy. Ask anyone from the Square Mile why they are unconvinced by the shadow chancellor and although they may mention his preference for political manoeuvring over economic theory, his insistence on sticking to Gordon Brown’s spending plans until the 11th hour, or his ill-advised holiday in Corfu, what it really comes down to is his youth.

The past six months have, admittedly, brought an almost imperceptible change. Perhaps it is the fact that a Tory triumph is all but inevitable. Perhaps it is because Osborne has been rather more sure-footed in responding to the economic crisis than Alistair Darling. Perhaps it is merely the sense of resignation that shrouds the City. Whatever the truth, Osborne has achieved a kind of grudging acceptance.

What is remarkable, however, is that he has done so despite a number of policy blunders. In the early part of the crisis, he opposed Labour plans to pump cash into the economy. In the event, the entire Western world agreed to do precisely that. He implied that he was against, or at least sceptical about, the Bank of England’s quantitative easing policy, which is increasingly felt to have helped Britain avoid a harsher recession. Both episodes, in the eyes of key City figures, showed economic naivety and political opportunism. His proposal to hand regulation of the financial system back to the Bank of England hardly went down any better: most in the City think that while the Financial Services Authority has made mistakes, it does a relatively good job, and that Mervyn King is privately aghast at having to take on so many extra responsibilities.

Such errors, however, are par for the course in opposition. Before 1997, Gordon Brown spewed out policies like an incontinent cash dispenser, but most never made the statute book. What is far more important is the sudden shift in the economic consensus. It is now clear that there is little alternative but to hope for a change of government at the next election. This is not a party-political point. If markets are to carry on buying British government debt – and keep the nation afloat – they must believe that the Government is willing to bring the deficit down significantly. Despite Alistair Darling’s relatively stern words yesterday, Labour has historically been incapable of any such effort. Part of the reason the debt markets have remained relatively sanguine in the face of a staggering collapse in tax revenues and increase in the deficit is that they are assuming a Conservative victory: when the prospect of an Alan Johnson leadership challenge briefly made a hung parliament more likely, they panicked.

Will Osborne and David Cameron be able to follow through on such hopes? The Tories already have plans. Although the NHS budget has been safeguarded, it will receive tiny real-terms increases for at least the first few years. (As Osborne has been advised by his cabal of former Tory chancellors, from Howe and Lawson to Lamont and Clarke, health is the hardest department to tame, so best to look for low-hanging fruit elsewhere.) The international development budget will increase in line with UN commitments, which will frustrate some Tories until they realise how little extra cash this will actually mean. But everything else is vulnerable to major cuts – education, defence, transport, and, above all, the social welfare bill, which accounts for more than 28p of every pound spent by the Government.

Are such cuts politically feasible? Thatcher cut the size of the state largely by privatising industries rather than root-and-branch reform of the welfare system. But in their meetings with the City money managers who decide whether to keep pouring their clients’ cash into British investments, the Tories cite one key secret weapon in their effort to succeed where she failed: an Office for Budget Responsibility. Populated by leading economists and fiscal experts (Robert Chote, the current head of the Institute for Fiscal Studies, is the number one choice for the chairmanship), its job will be to tell the Government by how much it needs to cut the deficit. Gordon Brown reassured the City that he would not send the UK towards an inflationary spiral by hiving off interest rates to the Monetary Policy Committee; the OBR is designed to do precisely the same thing for the deficit.

It is a start, though whether it will provide enough cover to start slashing public-sector jobs, thereby provoking probably the biggest round of strikes in recent memory, is another question. What is in no doubt is that Osborne’s succeeding Lord Randolph Churchill seems almost assured. The precedent is less than encouraging, however: Churchill lasted less than six months, before resigning after a dispute over military spending. His political career never recovered.