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David Cameron’s secret Budget plan

16 March 2013

9:00 AM

16 March 2013

9:00 AM

It was the night that the Conservatives’ dream of a majority died. The first televised election debate in British history was meant to be the moment that David Cameron moved decisively ahead in the polls. Cameron and his camp had arrived at the Granada Studios in confident mood on 15 April 2010. But the evening didn’t go according to plan. Only 26 per cent of those who watched thought Cameron had won, compared to 43 per cent for Nick Clegg.

When those numbers flashed up on the screen in the media centre after the debate, the room drained of Conservatives. The politicians and spin doctors, who had been busy briefing away, beat a retreat. But George Osborne came back and kept on going until the last laptop was powered down. It was a reminder that despite his swift rise to the top of British politics, Osborne is a fighter.

This toughness has been essential in his current job. As Chancellor, he has had to contend with disappointment after disappointment. The economy remains stagnant, the nation’s triple-A credit rating has gone and his own political reputation took a battering with last year’s Budget. But as one Cabinet colleague puts it, reflecting on the aftermath of the Budget, ‘like a medieval knight, he took each of the arrows out of his limbs and carried on fighting. They might have been self-inflicted. But these were wounds that had to be dealt with—and he did.’

Last year’s troubles and the state of the economy mean that the stakes are high before the Budget on 20 March. Even some Conservative MPs, who aren’t plotting to replace either Osborne or Cameron, have told the Chancellor to his face that they’ll struggle to carry on supporting the coalition if it isn’t radical, while in the Commons tea room, ‘no change, no chance’ — the perennial motto of the Tory disaffected — is on the lips of a surprisingly large number of backbenchers.

It is tempting, easy and justified to rail against the coalition from time to time. At a moment of national crisis, government by committee is particularly unsatisfying. One can see why so Tory MPs yearn for more command and less compromise. To be fair though, Osborne has voiced some of this impatience inside government. He has pushed hard for this country to build more runways in the south-east. But he has been blocked by Cameron’s own pledges and the environmental concerns of the Liberal Democrats. Osborne has been an advocate of cheap energy, scrapping green subsidies and advocating fracking. Again, his progress on this has been limited by coalition. He’s also keen on liberalising a planning system that is one of the remaining legacies of the post-war Attlee government. Here, though, he has been thwarted by the efforts of the National Trust and a disappointingly large number of Tory MPs.

Where Osborne parts company with those who want to go faster is on the subject of tax. He is scornful of the idea of a ‘tax shock’ to get the economy moving again. Even in the boom years, Osborne was a sceptic of the argument that tax cuts should come first. Those waiting with bated breath for him to slash taxes are going to be disappointed.

Osborne doesn’t think a ‘tax shock’ is needed. At the Treasury’s pre-Budget meeting at Dorneywood, he was much taken by presentations which suggested that a normal recovery would start in the summer.

Those close to Osborne also cite Treasury numbers which indicate that the economy is in better shape than the headline numbers suggest. If you strip out North Sea oil and gas and financial services, there was no double-dip recession. Indeed, with these two sectors taken out, the economy has being growing at between 1 and 2 per cent for the past two years. These numbers have helped persuade the Chancellor that all he needs is time and a more benign global environment.

He’ll try to gain this time in the Budget. Osborne’s brief apprenticeship in the whips office had a deep effect on him. Ahead of 20 March, those around him have divided Conservatives MPs into three groups. There is the cost of living caucus, whose main concern is the squeeze on household budgets. Then there are those whose primary worry is this country’s long-term competitiveness. Finally, there are the revolutionaries who want a whole new approach. Osborne knows he can’t satisfy this last group. But he thinks that if he can please the first two, he’ll be all right.

Next week will see the long-awaited announcement of the coalition’s childcare tax break. I understand that this will be considerably more generous than expected. The cost of living caucus will also be buoyed by the scrapping of the fuel duty rise scheduled for the autumn. To boost the Budget’s appeal to the second of these groups, it will contain some movement on tax reform.

Once Budget day is done, Osborne will have to turn his attention to the 2015-16 spending review. He’s set a deadline of 26 June this year for its completion. But ministers in non-protected departments are in open revolt about his demand for 8 per cent cuts. The Tory branch of the National Union of Ministers is saying it won’t consider this request until the welfare settlement has been reopened. The Liberal Democrat branch is busy resisting welfare cuts and pushing for more spending in its own favoured areas.

The Treasury is adamant that a deal will still be done. It stresses that the sums involved are relatively small. Those close to Osborne also point out, sotto voce, that this review will almost certainly be reopened by whoever is governing after the next election so it is not worth going to the mat over.

But some in No. 10 are not so convinced that agreement will be reached. One source remarks, with a note of irritation, that the words ‘“It’ll all work out in the end” should be carved in stone above the entrance to the Treasury. It’s their answer to everything at the moment.’

I understand that No. 10 is sufficiently concerned that the numbers won’t add up that the departing head of the policy unit Paul Kirby has sketched out an alternative spending review. Rather than simply looking at departmental budgets for savings, it takes a more fundamental view. It looks at how the government could raise money by moving things into the private sector.

The Kirby review (whose existence is not a matter of public record) raises the prospect of privatisations to generate revenue, which would mitigate the need for deep reductions in the Home Office and Ministry of Defence budgets. In No. 10, key figures are seized with the importance of not going into the next election committed to cutting those Tory staples of the police and the armed forces.

There is, though, one consoling thought for Osborne. The fact that his battles have been internecine, rather than with the opposition, shows that Labour isn’t gaining traction in the economic debate. As long as that’s the case, Osborne and the Conservatives are in with a fighting chance.

James Forsyth and others discuss the Budget in this week's podcast, The View From 22

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