A chancellor blessed by Labour’s failure to regain reputation on economics

George Osborne got out of bed yesterday in his family flat overhead No 10 Downing Street to the sound of Big Ben's 6 o'clock bells, listening like so many others in the Westminster world to the BBC Radio 4 Today programme.

Hearing BBC correspondent Norman Smith’s analysis of the UK’s finances, Osborne’s mood quickly darkened.

The spending cuts Osborne plans after the May 2015 election, if the Conservatives win, will bring Britain back to “the days of Wigan Pier”, said Smith.

Two hours later, Osborne was still angry before he indulged in a pointless rant about the BBC when he spoke to the programme's lead presenter, John Humphries, complaining that he been told four years ago that his spending plans threatened social disaster.

Crime would spiral, he was told then. It has not, it has fallen.

The National Health Service would collapse. It has not. Instead, it offers 1m more operations each year. Unemployment would reach calamitous levels. Instead, job numbers have never been higher.

In reality, however, Smith’s analysis accurately forecasts the declining role the state will play in British society. Taking up office, Osborne vowed to have the UK’s current account in the black by 2015. Instead, he now says it will have “a small surplus” in 2018/19.

Despite his image, Osborne has, in fact, been a prolific borrower: £430 billion has been drawn down since 2010 – "more than all the Labour chancellors of the exchequer this century" as veteran Labour MP, Dennis Skinner, unhelpfully pointed out.

Yet, he has cut savagely, too. And he is prepared to do more. By 2019/20, central government’s spending will have fallen from 21.2 per cent of gross domestic product to 12.6 per cent – from nearly £6,000 worth of spending per head to less than £4,000.

Nevertheless, just 40 per cent of the cuts required by Osborne will be completed by next May. The rest is for the next parliament. In all, state spending will fall to 35.2 per cent of GDP by 2020 – the smallest share since George Orwell wrote The Road to Wigan Pier.

However, Osborne remains as convinced as ever of the need for less spending, even if his original timetable has been shot to pieces.

“They’ll come basically from making sure government department budgets are affordable – and so we’ve got to make sure we go on making savings in those government departments – and then, crucially, from welfare,” he declared.

Targets

Frankly, however, there is little likelihood that he will able to reach his targets in the next parliament either, unless the UK is able to benefit from fair trade winds from the European Union and elsewhere.

However, elections have to be won, too, and the UK has in Osborne its most political of chancellors – who weighs, bar some fumbles, the impact of his measures even more carefully than Labour's Gordon Brown. So far, he has been blessed by Labour's failure to recover its reputation for economic competence.

Even voters who dislike what Osborne has done believe they are better off having him as chancellor, rather than Labour's Ed Balls.

On Wednesday, Osborne scored some politically deft points, cutting house stamp duty, ending air passenger duty charges for children, along with promising to tax multinationals properly – even if that will prove difficult to deliver.

Equally, he acted to stop bailed-out banks using losses accumulated during the financial crisis as write-offs to avoid tax bills for years to come, though, again, the theory and the practice may prove different to reconcile in time.

Ireland tried similar measures, but abandoned them. One day, Osborne will want to sell the UK Government’s shares in nationalised banks.

Tax write-offs are an attraction for investors that may otherwise by hard to lure.

Blessed

However, he is blessed, too. This year, the UK will create half-a-million jobs, 85 per cent of them full-time – though the wages enjoyed by them and the others working are not rising in the way that he needs to give tax receipts a fillip.

Indeed, tax receipts are down by a colossal £23 billion. Osborne should have faced the embarrassment – one that Labour had been banking on – of having to declare that the UK’s borrowing figures were rising, not falling.

However, he escaped that because the UK’s debt interest bill will be £16 billion lower than expected, the single biggest “saving” Osborne has managed – a reward for being trusted by the financial markets, he says.

If Osborne is struggling to cope with today's spending demands, he is, however, able to clear up debts left by previous generations, including a few that date back several centuries. First, he will settle the last of the UK's first World War debt by paying off the outstanding £1.9 billion due on the "War Loan" perpetual bond created by one of his predecessors, Neville Chamberlain in 1932.

Over 120,000 people hold the bonds, which pay 3.5 per cent annually.

“This is a moment for Britain to be proud of. We can, at last, pay off the debts Britain incurred to fight the first World War,” Osborne declared.

In time, Osborne will deal with debts still, incredibly, on the books since the South Sea Bubble crash in the early 1700s – when Britain’s finances were badly holed – and the campaigns to defeat Napoleon.

His decision to make such a public play of the ancient debt – sold under the slogan, “Unlike the soldier, the investor runs no risk” – fits Osborne’s agenda: once incurred, debt takes a very long time to repay.