The case for Mr Osborne's austerity
George Osborne has already shown he is a courageous chancellor. But is he also mad? In essence, the fate of Britain's recovery over the next few years depends on the answer to that question.
But, in a major speech last month, the chancellor took credit for having put Britain's budget on a different path. If he's had any second thoughts, he wasn't letting on.
Ten days later we had a fierce response from the opposing camp - a speech by Ed Balls in which he accused the government of "ripping out the foundations [of the recovery] just as the hurricane is about to hit."
Though all agree that Britain's budget deficit must come down, there is an unusually - some would say, disturbingly - wide range of views on when this should start, and how fast it should proceed. Even more unusual, some of our leading politicians occupy the farther edges of that debate.
Ed Balls doesn't just want to delay cuts - he wants to spend more in the next year or so. Martin Wolf, the FT's chief economic commentator seems to agree with him [registration required], but you won't find many in the city who do.
On his side, the chancellor has the support of Mervyn King. The likes of the IMF and the OECD have also broadly endorsed the coalition's approach. But jitters about the global economy - especially the US - mean that his June Budget looks more extreme now than it did a few months ago. The City still generally supports cuts, but it's difficult now to think of a serious contributor to this debate who thinks he should be cutting more quickly than Mr Osborne has proposed (though I'm confident that writing that sentence will flush some out).
Which side is right? That's for you to decide - and history to judge. But as part of the BBC's series on the spending review, Stephanomics is providing a cut-out and keep guide to the debate.
Let me start here with what Mr Osborne would say to convince you that he's right.
First, he would say, this isn't about what's desirable. It's about what's possible, given the massive deficit that the last government left Britain with. It might be nice to cut taxes - or raise spending - to help the recovery. But in my view, that option simply isn't open to UK.
If the government hasn't announced a tougher approach to the deficit, Britain would have seen its international bond yields go up in the past few months - as they have in the likes of Portugal and Spain. Instead we have had new falls in interest rates - which means lower borrowing costs for the taxpayer and for business. People now talk of the UK as a "safe haven" for international bond investors. But that wasn't the perception at the end of last year.
It's true that there's a lot of uncertainty about how the economy will go. But if you look at the underlying pace of growth over the past few quarters it's not very different from past upturns. Few expect the surprising 1.2% growth in the second quarter to continue, but even if the economy slowed to half that pace over the summer, as many expect, 0.6% growth would be more or less Britain's trend rate of growth, and broadly in line with what the city expected a months ago.
There's been a lot of hand-wringing about the impact of our cuts, but last time I looked, the average private forecast was for growth of 1.9% in 2011 in the UK, and the IMF is expecting the world economy to grow by more than 4% in 2010 and 2011. That's not as high as it might be, but it's not a double-dip.
Second, people say we don't have a Plan B. But the Bank of England is Plan B - it can and will act if the economy seems to be weakening. The same can be said of the Federal Reserve. Its chairman, Ben Bernanke, recently spoke in detail of the options available to the US central bank if deflation and/or recession became a serious risk.
Third, yes, there are risks to what we are doing, but you have to consider the risks of the alternative. By supporting market confidence, the academic evidence suggests that efforts to cut borrowing which focus on spending cuts don't undermine growth - in fact they are often expansionary, even in the short term. We might have seen that already in the fall in bond yields since the election.
Dark talk of a deflationary cycle in the US at least has some basis in fact, with inflation there running at less than 1%. Here it's 3.1%, having been above the Bank of England's target for most of the past two years. In fact, the UK is one of the only major advanced economies that now has higher inflation rate than at the start of 2008. It's expected to remain relatively high, well into next year - just as the Bank of England starts to think about how they will mop up the £200bn they've pumped into the economy by buying government bonds. This is not the time to raise suspicions that the UK would rather inflate away its borrowing than bring the deficit down the hard way.
Finally, remember the starting point. When this government took office, public spending was fast approaching 50% of GDP, a level of spending not seen since the mid 1970s. Under Labour, there were large parts of the country where two-thirds of jobs created since 2001 came from the state. There aren't many serious economists who think it would be good for the long-term health of our economy to let the state take an ever larger role.
Of course, the likes of Ed Balls say they will bring borrowing (and spending) down in a few years, when the risks have passed. But that's what they always say. When he was chancellor, Gordon Brown was always promising to balance the books in a few years' time, at the same time as explaining why that year's borrowing had overshot.
The public knows that it's time to get real. That's why every recent poll - including one recently published by the BBC - shows two-thirds of the public in favour of cuts.
So much for Mr Osborne. In my next post - a summary of the arguments against.