Knives out for George Osborne as report says austerity stunting growth

With the budget just over a week away, there is pressure from all sides for the chancellor to abandon austerity. But will he listen?

George Osborne made one thing crystal clear in his first speech as chancellor of the exchequer on 17 May 2010. Under his stewardship of the economy, there would be no more fiddling of the figures, no more hoodwinking the public about the true state of the nation's finances. After 13 years in which he said Labour had massaged the data, it was time for honesty and transparency.

"To do this, I am today establishing a new independent Office for Budget Responsibility," he told an audience at the Treasury. "I recognise that this will create a rod for my own back … and for the backs of future chancellors. That is the whole point. We need to fix the budget to fit the figures, not fix figures to fit the budget."

This weekend – as faith in the government's economic policy is being challenged from inside and outside the coalition – Osborne and David Cameron must be wondering whether that high-minded decision was such a smart one after all.

On Friday, only 12 days before Osborne's fourth budget on 20 March, Robert Chote, chairman of the OBR, turned on his organisation's creators, in effect accusing them of the kind of slipperiness for which they had criticised Labour and that persuaded them to set up an independent watchdog in the first place.

Riled by the prime minister's claim last week that the OBR believed spending cuts and tax rises were not responsible for choking off growth, Chote fired off a blunt letter to Downing Street denying that his independent body thought any such thing. In fact it thought the reverse. "It is important to point out that every forecast published by the OBR since June 2010 has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth, at least in the short term," he said. "We believe that fiscal consolidation measures have reduced economic growth over the past couple of years."

It was a devastating intervention. The OBR, as Osborne feared, had indeed come back to haunt him. Not only was Chote calling into question the validity of Cameron and Osborne's core assertion that there was no link between austerity and stunted growth, he was also bolstering the cause of those who, increasingly, are calling for a change of direction.

The OBR's challenge to Cameron may turn out to be a decisive moment for his chancellor, providing those who disagree with his economic policy with what is, in effect, a licence to turn up of the volume of dissent. If the government's own independent economic forecaster believes austerity is hurting but not working, then surely everyone with a view now has a duty to step forward and express it. What now? What is the alternative?

From within the cabinet, business secretary Vince Cable has for some time been doing just that, arguing for more capital spending and less emphasis on austerity in the 2015-16 spending review. Cable wants higher borrowing to fund housing and infrastructure projects, a position far closer to Labour's than to that of Osborne. Upping the ante further in an interview with the Guardian, Cable broadened the line of attack, saying that if those Whitehall departments which have already taken big hits on spending are targeted again there would be "disproportionate damage".

His position opens a wide crack in cabinet unity and exposes the gulf between rightwing Tories and many Liberal Democrats. He also wants higher taxes on the rich, including a mansion tax, rather than the further cuts to welfare favoured by many Tories. The implications of this row run wider than mere disagreements over economic policy, important though they are. Cable's willingness to speak out is a sign of a new Lib Dem assertiveness as the party seeks to decouple itself by stages from its Conservative coalition partner in the second half of the parliament. The question is whether the coalition can hold together under the strain. "Cable is playing a dangerous game here," said one Tory MP. "He is essentially challenging the foundation of this government's entire programme."

At the Liberal Democrat spring conference in Brighton, former party leader Paddy Ashdown urged his party to cherish its role in government – but made clear the next two years would mean battling against the Tories' meaner instincts.

The task was trickier than when he was leader. "In some ways, what's ahead is more difficult than it was then, with the legacy of Labour's economic disaster to overcome, with Tory heartlessness to fight and tough decisions to take in government," he said. For Lib Dems, after winning the Eastleigh byelection, taking on the Tories is no longer something to fear but to relish.

But it is not just Lib Dem assertiveness that Cameron has to worry about. Alarmingly for him, discipline appears to be draining away among Tory ministers too. With talk of a possible future leadership challenge in the air, several have made life more difficult for the prime minister and Osborne in recent days by pleading for special budget treatment as the threat of further cuts looms large.

At defence, Philip Hammond argued last week for his department to be given special protection from more cuts, an intervention immediately slapped down by Cameron. The home secretary, Theresa May, who appeared yesterday to be brandishing her leadership credentials in a wide-ranging speech that went well beyond her brief, wants police budgets protected, while Eric Pickles, the communities secretary, has come out against more cuts to local government. Together this group has been labelled the National Union of Ministers.

The sense that all sides are now pitching in with ideas in defiance of the leadership has been heightened by calls from the Tory right for aggressive tax cuts in the budget. Osborne has made abundantly clear such cuts cannot be afforded, other than by an even more brutal assault on the welfare budget which the Liberal Democrats would never permit. The different sides of the argument within the government parties are poles apart.

Then there is Boris Johnson, the mayor of London, who is being openly critical of what he sees as the chancellor's failure to stand up against EU plans to cap bankers' bonuses – a move he argues that would damage the City of London and thereby undermine the strongest sector of the UK economy.

Johnson, favoured by some MPs to take over from Cameron one day, said that EU plans to limit bonuses to 100% of salary, or 200% if approved by a specific shareholder vote, was a "nakedly aggressive" attempt to undermine Britain and the City, one that would hit not just rich bankers but hundreds of thousands of people on modest salaries who rely on the City for their jobs lower down the salary scale.

Talking to the Observer last week, Johnson said the chancellor should act more like a French minister would in his position: "If this was agriculture and the French agriculture minister had been presented with something which so clearly undermined the interests of French farmers, they would not accept it. There would be a stalemate. I don't know why we don't," he protested.

Osborne, he added, must invoke the so-called Luxembourg compromise – the EU nuclear option under which a member state can block a measure by insisting a vital national interest is under threat. Osborne, who was outvoted on the plan at a recent EU meeting, has suggested he will not go nuclear on the bonus measure.

Other Tories back Johnson in urging Cameron and Osborne to open up more clear blue water with Labour by standing up for wealth creators, after years in which backing bankers has not been the done thing.

David Ruffley, a Conservative member of the Treasury select committee, said that while his party had to be careful not to be seen to be supporting "scandalously high bonuses", it should now make absolutely clear that it is on the side of responsible wealth creators, particularly as Ed Miliband and Labour appeared so ready to do them down over bonuses. "The argument has to be carefully put, but we cannot be seen to be against wealth creators," said Ruffley. "If we attack them we just kill the goose that lays the golden egg."

Even rightwing commentators such as Fraser Nelson, editor of the Spectator, have been critical.

For Labour, the intervention of the OBR and the fracturing of coalition unity have been gifts. Since Moody's, the credit rating agency, stripped the UK of its AAA rating, shadow chancellor Ed Balls has been in full cry, accusing Osborne at every turn of "humiliating" failure. There may be tensions in the shadow cabinet over the party's own economic direction, with some saying Miliband seems too much on the side of benefit recipients and not supportive enough of wealth creation, but in the short term at least the problem is the government's.

The public is losing faith with its economic policy. As our Opinium/Observer poll shows, only 20% of all voters think the economic measures pursued by the government have benefited the economy, against 58% who think they have been harmful. Even among Tory supporters, only 55% think the policies had been beneficial. And all close to a budget that is expected to see the OBR downgrade economic forecasts again and reiterate its view that austerity is to blame.


Toby Helm, political editor

The GuardianTramp

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