George Osborne headed to the House of Commons on Wednesday bearing an Autumn Statement that confirmed his political and fiscal strategy had run off the rails. In Downing Street they feared the worst.

Instead this most political of chancellors emerged from the chamber with Conservative cheers ringing in his ears. By contrast, Ed Balls, his Labour opposite number, looked like a striker who had just missed an open goal.

Mr Osborne’s statement was drenched in red ink: the chancellor’s independent forecasters predicted that Britain’s economy would shrink this year, while he is way off his target of cutting debt as a share of national income by 2016.

The chancellor – the Conservative party’s most acute political strategist – was also forced to concede that his hopes of taming Britain’s deficit in time for the 2015 election had turned out to be hopelessly optimistic.

Mr Osborne hoped to fight the election on the cusp of an economic boom; instead the Office for Budget Responsibility said that today’s deficit of £108bn would fall only to £73bn by election year, meaning austerity will now extend until 2018.

In the face of this cascade of bad news, Mr Osborne somehow conjured a political message which – at least temporarily – put the combative Mr Balls on the back foot and left Labour MPs shifting awkwardly in their seats.

Part of it was presentational. Unlike his leaky March Budget, Mr Osborne managed to hold back some “good news”, while ensuring the bad news on missing the debt target was in the market before he stood up to talk.

The biggest story of the Autumn Statement was a non-story: the collective coalition decision not to introduce spending cuts now to try to keep the fiscal plan on track. “None of us wanted to chase the debt target,” said one Liberal Democrat minister.

Mr Osborne could therefore avoid painful net new spending cuts by simply extending his Plan A by another year to 2018, a distant point on the political horizon for most voters.

In the short term, Mr Osborne was able to present a fiscally neutral package which offered some help to business and working families and illuminated his own political priorities.

Money was taken from welfare claimants and the pension pots of the rich and diverted to the middle earners who determine elections, either through an increase in the personal tax allowance or the cancellation of January’s 3p a litre fuel-duty rise.

Mr Osborne praised the Department for Education for halving its administration budget and laying off 1,000 staff, exhorting others to do the same – an attack on bureaucracy which resonates well with the public, if not the civil servants who have to administer the government’s cuts.

Amid this surprising level of largesse – partly facilitated by a surprise £3.5bn pencilled in to the books for a 4G broadband spectrum auction which has not yet happened – Mr Osborne was also able to set what he believes is a political trap.

By announcing legislation and a vote on his proposed benefits squeeze, Mr Osborne hopes to put Labour on to the wrong side of public opinion.

Danny Alexander, Lib Dem Treasury chief secretary, had been prepared to offer even bigger welfare cuts in exchange for the Tories backing a mansion tax. In the end, David Cameron blocked any new property taxes.

Although many Lib Dems do not like the idea of a squeeze in welfare over each of the next three years, both coalition parties accept that they will have to look elsewhere for further savings.

The hunt is now on for a further £10bn of departmental savings in 2015-16, which is when the next general election will be fought. However, the quest could impose much greater strains on the coalition.

Those talks will take place in the first six months of next year, with Tories likely to oppose defence cuts and Lib Dems digging in to protect spending in areas such as apprenticeships and science. Mr Osborne hopes it will also further test Labour’s position on where exactly it would make cuts.

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