Bruce Anderson: Osborne has to find the right language

It is where the politics come in. The Chancellor has to get the tone right. While not shirking the bad news, he must persuade us that it will not last forever

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Economics is commonsense, in theory. The task facing economic policy-makers is easy to summarise: keeping a balance. They should aim for full employment and low inflation; for a sensible tax regime which finances the necessary functions of government without discouraging enterprise. Above all, their goal should be stability, which will encourage business to invest, thus ensuring steady growth and rising living standards.

That all sounds easy, but there is a basic problem. Theory does not equate with practice, because economics is about human beings, a species among whom commonsense is uncommon, and who find balance hard. As a result, economic policy is often beset by contradictions and paradoxes: rarely more so than in Britain today. There are some obvious examples. Everyone agrees that the banks need to rebuild their balance-sheets, especially as they may be threatened by a new set of toxic liabilities from the eurozone. Everyone also agrees that it is vital for banks to go on lending. We know that on both sides of the Atlantic, the property market turned into a bubble. Yet the recent increase in UK mortgage lending provided grounds for cautious optimism; perhaps the recovery is under way.

But Britain is not an economic autarchy. Our prospects depend on global conditions, which are not encouraging. Arthur Laffer, one of the wisest living economists, has recently argued that the US recovery – such as it is – is under threat from tax increases. A number of George Bush's tax cuts had sunset clauses, under which they will expire at the end of this year. Thereafter, there will be a reversion to the old rates. Professor Laffer believes that as a result, there is a temporary acceleration in economic activity to take advantage of the benign tax regime, and that there will be a fall-back after 1 January. It sounds alarmingly plausible. We can only hope that this one of the rare occasions when the Professor is wrong. When America stutters, the world economy stalls.

Nor is the US the only potential stutterer. It seems inconceivable that the pound will not strengthen against the euro. The markets will pay the UK a compliment. It is not one which our exporters or our domestic tourist industry will welcome. Then there is China. Chinese car workers have gone on strike in Japanese-owned car factories. Who would have predicted that 10 years ago? Is this to be welcomed as an inevitable part of economic and social modernisation? Or does it presage chaos? A great deal hinges on that answer. The world needs a strong, successful China.

On his recent visit to China, George Osborne found common ground, both on trade matters and on Jane Austen. This must have been a welcome interlude for the Chancellor, amidst his Budget preparations. But at least he knows what he has to do on Tuesday. It is simple, really. He must make the speech of his life and find a way through the confusion.

All sensible people agree that UK government spending is unsustainably, perilously high and that it must be drastically reduced as a proportion of GDP. But any form of economic activity is better than no activity. In the short-term, throwing hundreds of thousands of public servants out of work would merely add to the cost of government while cutting its revenues. There is a similar difficulty with tax increases. Although they are essential, they risk reducing demand at a moment of economic frailty. So how does Mr Osborne sort out all that?

He does have some assets. The public has been softened up. As they would say in the markets, pain has been discounted. Admittedly, he does not enjoy one advantage which most of his predecessors had. Even in the worst of times, there was usually some good news, or at least a mitigation of anticipated hardship. This time, that seems unlikely. Pelion will be piled on Ossa. Even so, the Chancellor will be able to draw on the authority which the new government has acquired.

At the highest level, nothing is effortless, but it can seem so when a master performer is on the stage. Over the past few weeks, David Cameron has been masterly. It is hard to think of any Prime Minister who could have equalled, let alone bettered, his response to the Saville report. Indeed, he saved Lord Saville from his critics. Twelve years, £191 m, to dissect one hour's events: lots of people were preparing to denounce the judge's procrastination, the lawyers' rapacity and the thoughtless way in which Tony Blair set up the inquiry. Then Mr Cameron spoke, and it all seemed worthwhile.

It may be that the Prime Minister will be able to provide top cover for George Osborne as well as for Mark Saville. There is now a sense that this government is now securely established and knows what it is doing. Even so, the Chancellor will have to add to that, as well as draw from it. There is still an unanswered question: is George Osborne Norman Lamont II or Arthur Balfour II?

Like Mr Osborne, Chancellor Lamont had a good intellect, political shrewdness and an impressive grasp of his portfolio. But he never acquired enough political weight. In 1886, though Arthur Balfour's intellectual powers were acknowledged, he was often dismissed as a languid lightweight and was nicknamed "pretty Fanny". He was appointed Chief Secretary for Ireland, and within a couple of years it was "bloody Balfour", a reputation which helped carry him to the Premiership. Mr Osborne's developing reputation will be crucial for the fortunes of the Cameron Premiership. On Tuesday, his figures must seem convincing: his political touch, assured.

Inevitably, the figures will be a leap in the dark. Although the government deficit sounds hideously high, it is only a residual: a mere gap between two even larger figures, expenditure and revenue. The future prospects for both of them are ensnared in variables and assumptions, most notably on growth. If there is a recovery and a revival of growth, life will become much easier. When the economy is moving ahead, tax receipts always exceed expectations while welfare spending comes in under budget. But if growth falters, everything goes wrong.

There is very little that the Chancellor can do to promote growth. So many of the factors are not under his control. The two most important are the animal spirits of the British middle classes, and luck. This is where the politics comes in. He has to get the tone right. While not shirking the bad news, he must persuade us that it will not last for ever. Although it is difficult to find fresh ways of expressing those traditional Conservative themes, opportunity and enterprise, Mr Osborne must find the language. The speech needs three phases: grimness, aspiration, inspiration. On Friday, commemorating De Gaulle, the Prime Minister sounded Churchillian. George Osborne is about three decades of cigar-smoking away from a Churchillian voice, but he must do his best.

In 1981, Geoffrey Howe's Budget was denounced by 364 economists. He and Margaret Thatcher were embattled. But they fought their way through. That Budget proved to be the launching pad for an economic recovery. In her Memoirs, Lady Thatcher claims that it was a second Battle of Britain. This government must now win a third one.

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