Borrowing figures add up to a political headache for the government

Whitehall fears voters will make an irrevocable judgment that George Osborne has failed to deliver on his economic pledges

Westminster will be working itself into a familiar frenzy when David Cameron embarks on his first substantive ministerial reshuffle early next month.

Downing Street knows that the excitement of new faces walking to No 10 for their first cabinet meeting will be a complete irrelevance if the government is perceived to have failed in the area that always decides elections: the economy.

Labour says the government has done just that: Rachel Reeves, the shadow Treasury chief secretary, describes the increased government borrowing figures as a “damning indictment of a chancellor” who has delivered a double-dip recession leading to “soaring borrowing”.

The Treasury played down the significance of the figures as it blamed a cut in North Sea oil production for most of the fall in corporation tax receipts, necessitating the increased borrowing.

But there are deep nerves in Whitehall that George Osborne is reaching the stage where voters will make an irrevocable judgment that he has failed to deliver his two key economic pledges made during the 2010 election. These were to stabilise the public finances and to preside over an economic recovery led by a rejuvenated private sector.

In both these areas Osborne is unlikely to be able to claim success by the time of the next election. He has already admitted failure in the first area when he announced in last November’s autumn statement that he would not meet his target, set out in his emergency budget of June 2010, to eliminate the structural budget deficit by the time of the next election.

The chancellor is also struggling to deliver his second pledge – an economic recovery spearheaded by the private sector, which was meant to pick up the slack as public spending was cut. The double-dip recession indicates that the public spending cuts may have sucked demand out of the economy at such a pace that private growth has been stifled.

A key moment for Osborne will come when he delivers his autumn statement in November. The chancellor has little room for manoeuvre because he played his trump card last year – reminding voters that his deficit reduction plan is an aspiration and not a fixed target. His fiscal mandate has been dubbed Osborne’s “ever flexible friend” because the target for assessing the deficit is judged on a rolling five-year basis. This means that a definitive judgment never needs to be made.

Osborne may, as he did last year, announce that he is extending the period of spending cuts without breaking his mandate. Had Osborne stood by his initial informal target to eliminate the structural budget deficit by the time of the next election, he would have had to impose punitive spending cuts and tax increases.

Unease over the government’s economic policy is creating some unlikely bedfellows. Vince Cable and Boris Johnson are the most senior figures in the two coalition parties to raise concerns about the lack of a growth strategy.

In a leaked letter in March, Cable warned of an absence of “a compelling vision of where the country is heading beyond sorting out the fiscal mess”. Johnson recently called on Cameron to stop “pussyfooting around” and support a new airport for London, highlighting concerns among many Tories about the failure of the government to acknowledge the significance of large infrastructure projects.

Some Liberal Democrats are concerned that Osborne has stumbled because he thought the key economic tool was what he calls active monetary policy. The Lib Dems fully support an active monetary policy because they agree that focusing too much attention on fiscal policy as a way of stimulating the economy through spending is largely to blame for the parlous state of the public finances.

But the Lib Dems fear that Osborne may have laid the grounds for the current lack of a growth strategy by believing, initially at least, that monetary policy is the only tool. Lurking in the background is Osborne’s belief that low taxes are the best way of creating a vibrant economy.

No doubt the debate over tax and spending in the US presidential election may come into play over here. President Barack Obama has described the Romney-Ryan proposals for tax cuts as “snake oil”. The president said: “They’ve been trying to sell this trickle-down snake oil before.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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