Outlook If this is a blinking contest, there is only one winner. For those who believe the UK economy now needs another stimulus to avoid the recovery petering out completely, there are two possibilities. Either the Bank of England's Monetary Policy Committee returns to its programme of quantitative easing, or the Treasury slackens off the pace of its fiscal consolidation.
If you're waiting for the latter, don't hold your breath. Even if the Chancellor is now harbouringprivate doubts about Plan A, he has boxed himself into a corner politically. To change course now would be a U-turn too far for this government.
Never mind that Plan A edges closer to failure by the day, even on the assessment of the International Monetary Fund whose support Mr Osborne is so fond of quoting when defending his austerity measures. Following its latest revisions – and note that NIESR was much more gloomy yesterday – if the IMF's forecasts for UK growth get even a shade weaker, the Treasury will fall short of its deficit reduction targets. The economy will simply not produce sufficient revenues for the exchequer.
The debate is the same across the Western world: by how much can governments cut borrowing without slowing growth so markedly that tax revenues fail and more borrowing is required? That is the quandary at the heart of the US debt saga, just as it is the central question in the UK. We have seen what happens at the extremes – in Ireland, for example, where austerity measures have devastated the economy – and the slowing of the recovery here suggests we may be going too far in that direction.
There is no chance of Mr Osborne taking that view, however, even if his obstinacy requires him to forge some uncomfortable alliances. With even the IMF now warning the UK may eventually have to consider tax cuts to get the recovery going again, the most vocal support for the Chancellor yesterday came from Bob Diamond, the chief executive of Barclays Bank. Mr Diamond, who even Peter Mandelson once described as the "unacceptable face of banking" is not the sort of ally most politicians would seek.
Against this backdrop, the MPC begins its deliberations today. Does Sir Mervyn King feel at all responsible for this impasse? After all, it was his advice to Nick Clegg following the general election last year that prompted the Liberal Democrats to sign up to the coalition's deficit reduction plans.
Given that the Governor of the Bank of England helped the Chancellor set the Government on this difficult path, maybe he'll feel compelled to help out by lending his name to the campaign for a monetary policy stimulus.Reuse content