David Prosser: The Chancellor boxed himself in: now it is too late for a Plan B

Click to follow
The Independent Online

Outlook So why doesn't George Osborne have a Plan B? In calling for the Chancellor to come up with a back-up plan should he be proved wrong in insisting that his aggressive approach to cutting the deficit will not kill off the recovery, the Institute for Fiscal Studies joins a long list of economists who wish the Treasury would at least entertain the idea.

If only it were that simple. While the IFS says contingency planning "makes sense", its own analysis of the public finances provides one answer to the question of why Mr Osborne is being so stubborn.

The good news from the IFS yesterday was that Government borrowing in the current year is likely to come in £3bn lower than the Office of Budget Responsibility has forecast. Less happily, the pledge Mr Osborne has made to eradicate the deficit before the end of the Parliament looks tough to keep, says the IFS, because he may not be able to deliver the cuts necessary and growth is likely to be slower than the OBR expects.

There is part of the answer. Faced with a recovery that some fear is stalling fast, Mr Osborne could use next month's Budget to plough some of that £3bn into a fiscal loosening, in the hope of giving the economy a boost. That would be a credible Plan B. But, says the IFS, the Chancellor needs to bank this year's saving in order to plug shortfalls in his programme that are likely to materialise in the years ahead. In any case, the IFS warns, boosting the economy might mean the Bank of England has to raise interest rates sooner, which would cancel out the gain.

The narrow margin for error is not the only difficulty. The bigger problem for the Chancellor is that having made such a song and dance about how crucial it is to have an austerity programme of the severity he proposes, any back-sliding could cause exactly the type of crisis he set out to avoid.

To put it another way, Mr Osborne could have got away with what would now be Plan B – slower deficit reduction via more modest spending cuts and tax rises – had he offered it in the first place. But to be forced into this course of action – or even to give the impression that it is being considered – would be to risk a backlash from the bond markets. At the very least, we would see market interest rates begin to rise once again.

In other words, the Chancellor has backed himself into a corner. He does not know how this gamble will turn out (and it is as gamble, however much he denies it, not least since there has been no modern example of a similar austerity programme to make reference to). But having laid his cards on the table so boldly, he can't ask the dealer for a different hand to play.