The upcoming emergency budget will offer the chancellor of exchequer, George Osborne, an opportunity to set up his stall as an unofficial candidate to the leadership of the Conservative Party. No other contender for the Tory leadership will have such a golden opportunity to come across as authoritative, visionary and in command as Osborne. But having an advantage over his rivals Boris Johnson and Theresa May does not mean that Osborne can take his party for granted. In order to win the leadership, he must show that he is more than just a brilliant political tactician.
Over the last five years, Osborne has been so successful at setting the national political debate that his failures were barely scrutinised. Labour’s inability to challenge the coalition government’s narrative and record on the deficit helped Osborne to present a de facto failure as economic credibility. He was, after all, the chancellor who managed to elevate the public deficit to the status of Britain’s main economic priority, despite failing to meet his own fiscal targets. Contrary to his earlier projections, the deficit was not eliminated by 2015 – it was only halved. As a result, public debt rose to 80% of the GDP, leaving Britain’s public finances in a somewhat precarious state. Indeed, things were going so wrong that by 2011, Osborne was forced to change gear and slow down the rate of public spending cuts.
Voters may be less forgiving this time, as austerity fatigue sets in. There also seems to be greater scrutiny of the chancellor’s actions, and economic actors are shifting their attention to other problems, such as low productivity. His recent proposalto enshrine in law permanent budget surpluses was denounced by economists as a “gimmick” that ignored “basic economics” and merely aimed at scoring political points.
But there are other problems with the chancellor’s proposals on the permanent budget surplus. Indeed, his commitment to “fiscal responsibility” is not compatible with the tax cuts that Conservative backbenchers want him to announce on July 8. Tax cuts won’t just endanger Osborne’s plans to eliminate the current deficit by 2017-18. They will be difficult to deliver politically, when announced in parallel with £12 billion cuts to the social security budget (cuts to tax credits, housing benefit and child benefit are expected), and another £13 billion worth of public spending cuts from other departments.
It is worth recalling that before the election civil servants told the Treasury that there was “not much low-hanging fruit left” to cut from the social security budget. This means that the £12 billion of announced public spending cuts will hurt the most vulnerable. In particular, it will effect many of those “blue collar” workers, whom the chancellor claims to champion.
The productivity problem
Osborne’s budget surplus rule also clashes with his desire to seriously address Britain’s low productivity problem. At last month’s Mansion House speech, Osborne admitted that Britain’s low productivity problem harmed economic growth, and he promised to do something about it.
But to address this challenge, and to transform the north of England into a “powerhouse”, Osborne would have to rethink his budget surplus law. Addressing Britain’s chronic low productivity problem will require big public investments in skills, infrastructure building and perhaps in championing key industries. And that is not compatible with budgetary surpluses or with a minimal state agenda.
An IPPR report reveals that northern businesses expect new announcements from the Treasury to fund transport, infrastructure and power devolution to the north of England. But so far, the Treasury has only committed £12.5m to the project, while Network Rail announced a “pause” to its plans to electrify the Manchester-Leeds trans-Pennine rail line. These facts cast a shadow of doubt over Osborne’s commitment to the Northern Powerhouse project.
In the past, the chancellor used his budgets to tactically undermine the Labour Party and placate and please different Conservative factions. But previously, Osborne was merely a chancellor obsessed with winning the next election. Now that the leadership of the Conservative Party is within his grasp, he needs to up his game and show he has a coherent vision. And for that, he will have to choose between the Thatcherite agenda that the right of his party are demanding, or the expansionary policies that Britain needs.