Despite near double-dip recession experience, ‘omnishambles’ budget and tax U-turns, chancellor ‘has proved doubters wrong’
In the intimate surroundings of the oak-panelled Soane dining room, tucked away at the back of 11 Downing Street, George Osborne mused recently to his closest political soulmates that his fortunes had started to turn the corner.
Over dinner in the ornate room, designed by the neo-classical architect Sir John Soane, the chancellor told ministers from the Green Chip group of Tory MPs that he remembered sitting in the same spot in February waiting to hear whether Britain would enter a double-dip recession.
“George knows how close things came,” one ally said. “What a difference six months make – here we are with the fastest-growing economy in the G8.”
Friends say Osborne, who delivers his first financial statement of the parliament on Thursday amid a backdrop of encouraging economic news, believes he has done better than strike lucky.
“This is a vindication of George,” argued one senior minister, who insisted that the improved economic climate was thanks to the chancellor’s decision in 2010 to reject a classic Keynesian response to a recession and to focus instead on a stable monetary policy by targeting the structural budget deficit.
One member of the cabinet said: “George can confidently make the argument that the recovery for all is on the way as a result of the decisions he has made. And he is showing this is a recovery for everyone.”But there was no sense of crowing at the Soane gathering. Osborne takes little for granted after the searing experience of the “omnishambles” budget of 2012, which forced him into U-turns on the pasty tax and charitable tax relief. “The thing about George Osborne is his ability to bounce back,” one Tory said.
The chancellor will please his neighbour in Downing Street and delight the Tory right as he announces through clenched teeth how he will fund a transferable marriage tax allowance. As one of the most socially liberal MPs, Osborne is no fan of the idea. He will also announce how he will fund the provision of universal free school meals for infant school children announced by Nick Clegg at the Lib Dem conference.
Allies know that a number of “black swans” – the phrase for a perceived impossibility coined by the group’s former favourite intellectual Nassim Nicholas Taleb – could disrupt his plans for a Conservative victory at the next election and his chances of succeeding David Cameron as prime minister.
One member of the Osborne inner circle said the continuing woes of the eurozone – Britain’s most important export market – mean that continuing economic growth is not guaranteed. Then there is the small matter of the nature of the recovery, which seems to be largely explained by the classic British trick of consumer-led demand.
“Some people say it is a credit-based boomlet we are experiencing, which will get us past the general election,” said David Ruffley, a former Treasury adviser who is now a member of the Commons Treasury select committee. “I take a different view. We have to get the British economy growing somehow and you have got to start somewhere.”
Amid fears of a house-price bubble, stoked by Osborne’s Help to Buy scheme, the Bank of England’s governor, Mark Carney, prompted Osborne this week to refocus the Funding for Lending scheme away from mortgages and on to small businesses. “There is a lot that is pointing in the right direction,” one minister said. “But it doesn’t mean that we have solved our long-term ills and there is a risk of a housing bubble.”
Another black swan appeared in the City of London during the week when Osborne’s chief rival for the Tory succession made a naked attempt to cast himself as the true successor to Margaret Thatcher. But Boris Johnson’s speech mocking people with low IQs and hailing greed as a spur to economic growth caused such outrage that his remarks were seen in Downing Street as a blessing for the chancellor.
“I think I heard the putt-putt of champagne corks popping in No 11,” one Tory said. “A wintery smile came across George Osborne’s face as he briefly interrupted his preparations for the autumn statement to do a jig. No doubt the prime minister has telephoned Boris to say: ‘Only you could get away with this.’ Ho ho ho.”
Osborne keeps a wary eye on Johnson, who is his most obvious rival for the Tory leadership. But the chancellor does not stay awake at night working out whether and when he will replace Cameron, not least because he has two more immediate goals: to secure a sustainable economic recovery, thereby “wrong-footing the ghastly Ed Balls” in the words of one loyalist, and to win an overall Tory majority at the 2015 general election. This explains Osborne’s decision to draft in the Australian election campaign guru Lynton Crosby to ensure there is disciplined election campaign in 2015, unlike the mess of 2010, which still causes senior Tories to break out in cold sweats.
At that point, Osborne would love to have the option of being able to stand for the leadership – though on friend says he may prefer to earn try and earn £20m a year in the private sector. But the prospect of an Osborne challenge – and the guarantee of a Boris bid – has led to the formation of two distinct camps on the Tory benches.
On one side stand the FOGs – the Friends of George – and on the other stand the FOBs – the Friends of Boris.
There was once a time when rival groups on the Tory benches were formed on the basis of clashes on the big challenges of the day such as Europe. The divisions between the FOGs and the FOBs are far more prosaic. Those clustering around Osborne have either benefited, or hope to benefit, from his patronage, while those warming to Johnson feel rejected.
One senior Tory said Osborne made a “dangerous move” by being intimately involved in the recent reshuffle, which saw his former chief of staff Matt Hancock, 35, promoted to a post just outside the cabinet. His two former ministerial aides – Sajid Javid and Greg Hands – were also promoted to the second most senior Tory positions in the Treasury and the whips office respectively.
Not everybody in the party was impressed. “Osborne overplays his hand in pushing forward his favourites. It pisses everybody off. This is Cameron’s government, not Osborne’s. You destabilise the party, create jealousies,” the Tory said.
Nevertheless, Osborne believes the appointments give the Tories the right mix of ministerial clout and campaigning nous to take on Ed Miliband, previously not seen as much of a threat. In a significant speech on the economy in September, in which he claimed that the economic upturn showed that Labour had lost the intellectual argument, Osborne declared that Miliband’s focus on the cost of living did not “amount to an economic policy”.
One member of the government said: “From the very beginning we have underestimated Ed Miliband. There are real problems about Miliband’s looks and I think he is very tactical. Over the last two or three months he has seized the tactical initiative.”
More recently the chancellor has reluctantly acknowledged Miliband’s success when he performed a U-turn to announce a cap on payday loans. In his autumn statement he will respond to Miliband on the Labour leader’s signature theme of the past two months – his pledge to freeze energy prices – by cutting the costs of energy bills by funding some green levies through general taxation. Osborne will say he was ahead of Miliband because he did signal in his speech in September that it is still important to help people struggling with utility bills while wages fall in real terms.
But the hostility towards green levies, which prompted one former Osborne intimate to tell the Daily Mail and the Sun that the prime minister had said he wanted to “get rid of all this green crap”, has alarmed the Tory modernisers. Leading lights among the “vote blue go green” Tories confronted the Cameron at a meeting in his Westminster office last week.
The PM had some comforting words to offer. He is prepared to talk in the New Year of the economic benefits and the potential for jobs in the renewables market. But he can only do that after Osborne has “cauterised the public angst about green levies” in the autumn statement.
One moderniser said: “The agenda is not being junked. It just feels unnourished. You don’t want to have a war about what it means to be a Conservative just at the point when we are reaching escape velocity in the economy.”
But reaching out to the modernisers will have to be balanced with comfort for the right. David Ruffley said the right want to know whether Osborne’s pledge in his conference speech to run a current budget surplus in the next parliament will mean no tax cuts. “Some clarity on these Delphic utterances up in Manchester would be greatly appreciated by the Tory economic right,” he said. “Explain that more but also give a route map for the kind of tax reductions that he thinks he is looking at.”
Yet, amid familiar pressures between left and right, there are signs that the sometimes awkward Osborne is more at ease in his own skin. A group of ex-miners appear to have been wooed by Osborne when he visited them ahead of a trip to the Thoresby colliery in Nottinghamshire earlier this month to announce the government would underwrite a fuel-benefit scheme. “He was really lovely, he was really down to earth and he was really understanding,” said Margaret Clarke, demonstrating, perhaps, a broader than expected appeal.
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