Bad news on borrowing fuels debate about coalition economic policy

Chancellor George Osborne Some Conservative MPs have expressed their concerns to George Osborne

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The borrowing figures are "a gift for Labour".

Who says so? A senior Conservative. Off the record, of course.

Yet the Treasury say we shouldn't get too worked up about one set of statistics.

Yes, they were unexpected. And yes, they are not good news.

But wider conclusions shouldn't be drawn from a one-off event such as the closure of a North Sea oil field and the subsequent loss of revenue for the Exchequer.

So why are some coalition MPs worried? On the surface, it looks like they should hold their nerve.

The government has reduced the massive deficit they inherited by a quarter since coming to office - a fact that many Conservatives think is both under-reported and not widely understood.

But the government haven't reduced it by as much as they had expected.

So some backbenchers are concerned that the message voters will hear at the next election might well be 'you have had the pain, but not too much gain' - in other words, belts will have been tightened, cuts made but the deficit has stubbornly refused to evaporate.

Call for change

Tuesday's borrowing figures aren't a new clarion call for Chancellor George Osborne to "do something" - or, as long-time opponents suggest, irrevocable proof that his strategy is wrong.

They merely bring to the surface some of the underlying tensions at Westminster.

As one prominent Conservative backbencher said "there isn't a campaign to remove George Osborne from No11 but there is a campaign to get him to change policy".

This campaign has been going since the badly-received Budget and the subsequent news that Britain is back in recession.

Indeed some Conservatives have been arguing for a change of course for a great deal longer - but the calls are becoming louder and more people are joining in.

On the right of the party, many MPs have been pressing the Chancellor - some in person - to cut taxes and regulation on business further and faster.

John Redwood returns to this theme regularly in his blog but others who had signed up to the deficit reduction strategy are now expressing doubts privately.

'Borrowing risk'

One of them told me that a "risk has to be taken with borrowing".

In other words, cutting business tax will, in the short term, push borrowing up - but in the longer term the hope is it will help the economy grow and improve revenues.

Of course many on the right aren't suggesting the Chancellor plays fast and loose with the public finances - and some would rather see spending cut further to compensate for tax cuts.

Many feel that there hasn't been sufficient grip on the public finances, that welfare reforms are taking a while to work their way through the system so some backbenchers are pressing for "symbolic" acts such as the closure and merger of government departments to coincide with the expected reshuffle.

The trouble is the Chancellor is more constrained than many of his predecessors.

He has been buffeted by the Eurozone crisis and has had - frankly - the hard luck of being in office as some commodity prices soared and which remain unstable.

But he also is a Chancellor in a coalition and the 'Reaganomics' solutions which some in his party are suggesting - 'supply side' reforms such as radical changes to employment law - simply won't get past the Liberal Democrats.

The chancellor hasn't ruled out further spending cuts - but the Treasury say it's "premature" to talk about them now.

Shift in spending?

The time for further cuts, if any, will be when the government gets the latest official figures on the state of the economy from the Office for Budget Responsibility ahead of the chancellor's autumn statement later this year.

But as some Lib Dems will take the view that spending cuts could choke off a recovery, these would have to be subject to delicate negotiations.

Far more likely will be a decision to stick to the agreed plans overall - but to try to move more spending form 'revenue' - including welfare payments - to 'capital' such as big building projects.

Politically, the government will also try to move on to the front foot next month by setting out more initiatives to bolster growth - including expanding housebuilding - and ministers will remind us they are already making it easier for businesses to borrow.

But as long as the economy remains in the doldrums, so too will the chancellor's political prospects.

When Parliament resumes next month the government will tell us just how committed they are to giving the economy the shot in the arm it needs and that they are spending more on long term projects than Labour had planned.

But alongside this, expect a slew of pamphlets, newspaper articles and speeches from some of their own MPs who will go public with their preferred solutions to Britain's economic problems.

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