September 30, 2013 7:39 pm

Osborne paints economic picture in shades of grey despite optimism

Conservative Party Conference, Manchester, Monday. Chancellor, George Osborne, delivers his keynote speech this afternoon.©Charlie Bibby

Chancellor George Osborne

George Osborne on Monday claimed he could see the sun “starting to rise over the hill”, but the austerity chancellor’s central message to the Tory conference on the fiscal crisis was one of politically calculated gloom: “It’s not over.”

The economic landscape evoked by Mr Osborne was painted in shades of grey, the shadow of the financial crash of 2008 extending far into the next parliament with further cuts planned all the way through to 2020.

Mr Osborne declared himself an “optimist”, but his strategy at the next general election depends on one simple message to the voters: “Things are only just starting to get better – don’t let Labour back in.”

The chancellor told his party in Manchester that the next parliament would feel similar to this parliament if he remains chancellor, with a constant squeeze on welfare and other public spending to start paying down the national debt.

Mr Osborne told the Tory conference he would create a new fiscal straitjacket for himself, legislating for a new fiscal mandate requiring him to run an absolute surplus in the next parliament, provided the economic recovery is sustained.

“When we’ve dealt with Labour’s deficit, we will have a surplus in good times as insurance against difficult times ahead,” Mr Osborne said.

The policy flowing from this new fiscal mandate will frame the next election. Mr Osborne said he expected to meet his target “by reducing spending and capping welfare, not by raising taxes.”

The chancellor said the reward at the end of this decade of austerity would be sound public finances, falling debt, lower interest rates and the tantalising prospect of tax cuts – but only if they can be funded by growth or spending cuts elsewhere.

The politics behind Mr Osborne’s austere rhetoric are intriguing. His first objective is simply to reinforce the message that the economy remains precarious, and to focus political debate on a Tory strong point: “economic credibility”.

Labour believes the chancellor’s second objective is to divert attention from Ed Miliband’s “cost of living” offensive – including his proposed freeze on energy bills – at last week’s Labour conference.

The chancellor’s third aim is to raise the bar for Ed Balls, shadow chancellor, on the question of fiscal discipline. Earlier this year Mr Balls said he would match the coalition’s spending totals in election year. Now, Labour is being challenged to match Tory plans to keep cutting spending all the way through the next parliament.

By insisting that he can stay within his fiscal mandate through spending cuts alone, Mr Osborne hopes to be able to pin on Mr Balls the claim that Labour would be forced to put up taxes in the next parliament to repair the public finances.

Although Mr Osborne hopes to have eliminated the underlying structural deficit by 2018, public finances will still be under pressure because Britain is spending more on items such as debt interest payments and pensions.

Mr Osborne said surpluses were necessary to reduce Britain’s high level of debt, which stands at about 75 per cent of gross domestic product. In July, the OBR warned the fiscal pressures of an ageing population were set to push debt back up to almost 100 per cent of GDP in 50 years’ time.

Mr Osborne’s aides argue that given Britain’s ageing demographic profile and large banking sector, it would be complacent to assume the country could afford to reduce its debt levels gradually.

The chancellor’s caveat that he would pursue a budget surplus “provided the recovery is sustained” implied that the “automatic stabilisers” – lower tax revenues and higher public spending when the economy slows – would be allowed to function as normal if the recovery petered out, or if a new crisis flared.

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