The chancellor has lost his reputation as a strategist, but much more is at stake in the autumn statement as he tries to convince voters and the markets he can turn the economy around
When George Osborne stands up to deliver his autumn statement at 12.30 on Wednesday, his attention may be diverted by the arch expression of the ebullient shadow chancellor, Ed Balls. But far beyond the House of Commons, Osborne will be trying to serve at least three other fidgety, frustrated audiences at once: Britain’s cash-crunched households, already bowed under the weight of tax rises and benefit cuts; the thousands of businesses clinging to survival in tough times; and Britain’s creditors in the world’s financial markets, weighing up whether the chancellor has what it takes to wrest the country’s finances back on course.
He will also be haunted by the memory of his March budget – which quickly became known as the “omnishambles budget” – even inside No 10. In the days and weeks that followed, there were U-turns on his ill-judged charity tax, which was disastrously at odds with David Cameron’s attempts to build a “big society” with the help of the charitable sector, as well as on the pasty tax and the caravan tax.
Osborne’s decision to cut the top rate of tax from 50p to 45p for those earning more than £150,000 a year was widely viewed as a crass political miscalculation and a gift to Labour, which was able to paint the government as caring only for the rich at a time of austerity.
With the warm glow of the Olympics just a distant memory, many families are facing an uncertain Christmas, with jobs under threat and living standards squeezed. Comet, the electricals retailer that has collapsed into administration, is the latest high street casualty, emblematic of thousands of shuttered shops up and down the land. Ford is laying off hundreds of workers in response to sickly demand from the eurozone, and while unemployment has never hit the highs of previous downturns, official figures show that more than three million people in Britain are “underemployed”: working fewer hours and taking home less pay than they would like to.
This wasn’t the future Osborne promised when he made his first, “emergency” budget statement in June 2010. Back then, his pact with the voters was that a few years of eye-watering austerity would give way to a stronger, more stable economy. Yet this week, he will again be forced to announce that growth forecasts – now prepared by the independent Office for Budget Responsibility instead of Osborne’s own officials – have been slashed.
That weaker growth will almost certainly lead to him breaking at least one of his fiscal rules – the promise that Britain’s debt burden would be falling by 2015.
Osborne will endeavour to blame the unexpectedly fragile state of the eurozone economies for Britain’s plight, but after he faced jeers from spectators at a Paralympics medal ceremony in September, he’s well aware of the risk that the public, and indeed many in his own party, will hold him responsible.
There will be few handouts for angry voters on Wednesday, however, apart from the well-trailed cancellation of a planned 3p rise in fuel duty. Credit ratings agencies, which assess countries’ capability of repaying their debts, will be watching closely for signs that Osborne is wavering in his determination to stick to his deficit-cutting plans.
“The bond markets are getting increasingly nervous because of the lack of growth,” says Chris Williamson, chief economist at data provider Markit.
Moody’s will rule in the new year on whether the UK will lose the cherished AAA status it held on to throughout the “winter of discontent” and Black Wednesday. “I wouldn’t be surprised if at least one of the ratings agencies takes away our AAA rating,” said Howard Archer, of consultancy IHS Global Insight.
With that threat in mind, the expectation is that Osborne will frame the autumn statement as a test of political steel in tough times. “I think he will say that this is about who has got the mettle. It will be presented as a virility test,” said a former government adviser. He is likely to extend his austerity plans for yet another year, to 2017-18, to show that he’s still serious.
The chancellor had already signalled that he would need to find a further £10bn in cuts to the welfare bill from 2015-16 to meet his spending totals without inflicting an even faster pace of cuts on Whitehall departments. There have been fierce arguments within the coalition about how those cuts could be found – and what the price should be for the wealthy.
At the same time as proving that he has the determination to wield the spending axe, Osborne must convince an anxious business community that he understands that a recession-scarred economy with a fragile banking sector will need more than just spending cuts to thrive.
In September, Cameron made great play of announcing that the chancellor would chair a new “growth implementation committee”, to ensure all the relevant ministers made boosting growth a key priority. Osborne was said to have berated his cabinet colleagues last week about their failure to deliver. But for businesses watching from far beyond Whitehall, the creation of the committee was simply a reminder that growth has so far remained humiliatingly elusive for a government whose pitch to the nation was about snatching the economy from the jaws of a crisis.
“The biggest complaint that business has against this government is that they don’t have a long-term strategy for growth, and that they have created huge uncertainty,” says shadow business secretary Chuka Umunna, who cites the coalition wrangling over the energy bill, finally published last week, as an example of the mixed messages the government has sent out. He says business secretary Vince Cable has given 16 speeches on industrial strategy since the government came to power, but “he isn’t allowed to implement and deliver an industrial strategy across government”.
The new growth committee is packed with Tories seen as less sympathetic than Cable to hands-on intervention – such as business minister Michael Fallon and planning minister Nick Boles, who enraged nimbys last week by calling for a mass house-building programme.
Many economists argue that the aggressive pace of cuts has deepened the downturn by sucking demand out of the fragile economy. Balls has made this argument consistently since 2010, and felt vindicated when the economy slid into recession last year.
But businesses accustomed to balancing their books in tough times tend to side with Osborne’s approach. Simon Walker, of the Institute of Directors, says: “I think despite the weakness of his forecasts in the short term, he shouldn’t abandon his fiscal targets. A high debt-to-GDP ratio will hold back growth.”
Since the growth spurt that marked the end of the 2008-09 recession ebbed away, though, firms have become fretful that the coalition is relying too heavily on deficit-cutting as its only tool for repairing Britain’s tattered economy.
“I would still say that the great majority of businesses support the fiscal mandate, because they understand that it’s absolutely essential to have stability,” agrees Steve Radley, policy director for manufacturers’ group the EEF. “Where you find more and more businesses are worried is over where the growth’s going to come from to deliver that.”
It was these concerns that prompted the government to publish the “Plan for Growth” alongside last year’s budget. It was a 125-page smorgasbord of vague targets and nitty-gritty measures, from “ensuring the UK remains one of the top destinations for foreign direct investment”, to redrafting the little known Outer Space Act to capitalise on the UK’s strength in building space vehicles.
Six months later, in the 2011 autumn statement, Osborne announced that he would boost growth by focusing on a blizzard of priority infrastructure projects, from the Kettering bypass to the A14 to Felixstowe, and trying to bring private sector investment, from pension funds for example, into big capital schemes.
Yet as Osborne warms up for a tough statement this week, businesses are still warning that not much is happening on the ground. John Longworth, chairman of the British Chambers of Commerce, says much of Osborne’s list of bypasses, trunk roads and rail links turned out to be “pie in the sky”, and calls instead for, “something tangible and solid”. Katja Hall, policy director of the CBI, says: “We think the government has the right plan for growth – but so far it has fallen down on implementation.”
Not surprisingly, given these concerns, Osborne, who has insisted the economy is “healing,” will try to show he’s got the right medicine. “It’s all about whether we’ve got the right plan for restoring sustainable growth,” says a Treasury insider. And as hopes of a recovery have become ever more desperate, there are signs that he is looking seriously at more drastic proposals.
Osborne will give the government’s response this week to the Heseltine review, a first-person call to arms from the Thatcher-era heavyweight, clearly frustrated by the coalition’s failure to turn rhetoric into jobs and investment. He has suggested a battery of measures, including a radical beefing-up of local enterprise partnerships (LEPs).
These were the grassroots bodies set up by the coalition to replace the big-budget regional development agencies dreamed up by Labour, which were abolished at the stroke of a pen when Osborne arrived in Downing Street.
Heseltine would like to see billions of pounds’ worth of central government funding, now trickled out through different Whitehall departments under scores of different funding schemes, “brigaded” together, and handed out to the LEPs under a competitive bidding process, so that those with the best plans for creating jobs and generating growth could make a genuine difference.
Osborne will also give more details of a £1bn taxpayer-backed small business bank championed by Cable, and is expected to revive the much-criticised private finance initiative as a way of kickstarting building projects without using too much state cash. The Treasury is offering “UK guarantees”, to back large schemes that haven’t been able to find private sector funding.
These are all part of frenzied efforts to bypass the banking system, which businesses say is still starving them of cash to expand, more than four years after the collapse of Lehman Brothers led to the darkest days of the credit crisis.
The Treasury is also considering a proposal to offer temporary tax breaks for investment. Low levels of business spending are one of the key concerns threatening recovery – and they’re also holding back the “rebalancing” the chancellor would like to see, from a free-spending, buy-now-pay-later shoppers’ society, to an export powerhouse. “We’re looking at measures that will reassure our members who are worried about the eurozone,” says Walker. Osborne has targeted a doubling in British exports, to £1tn, by the end of the decade, but there are few signs of progress.
With no new money available, and more cuts necessary over the next five or perhaps even six years, any new promises to business will have to be funded by cuts elsewhere.
And Osborne, who surrendered his reputation as a master strategist after March’s budget, knows well that he will pay the penalty for failing to revive the economy twice over, first in the unforgiving world of international financial markets – and then at the ballot box.