Andrew Grice: Osborne must sell destination, not the best way to get there

Inside politics

(Reuters)

The inquest at Conservative Campaign Headquarters into why the party did not win an overall majority last month identified a crucial lack of support in Scotland – among ethnic minorities and public sector workers. It is hard to see how any of these groups – especially the latter – will feel more favourable towards the Tories after George Osborne's first Budget on Tuesday.

The Tory HQ verdict is a reminder that the Government has a political as well as economic mountain to climb. Voters knew the Tories would cut and clearly many working in the public sector feared they would do so savagely. The Tories kept their plans deliberately vague (as did Labour) in the hope of not frightening the horses. But it didn't work well enough.

Mr Osborne did have a moment of candour last October. At the Tory conference, he trailed specific cuts – including a public sector pay freeze and withdrawing child tax credits from better-off families – which will probably resurface in next week's Budget. But the Tories suffered a dip in the polls and Mr Osborne retreated tactically into his shell. We will finally see the real George Osborne on Tuesday.

The Tories' Liberal Democrat partners talk about "soft," "careful", "caring" and "progressive" cuts, but the failings of such an approach were clear after the starter served up by Danny Alexander, the Liberal Democrat Chief Treasury Secretary, on Thursday. He halted £2bn of unjustified pre-election spending by the previous government – including an £80m loan to Sheffield Forgemasters that would have created 200 jobs – in what looked like Part 57 of Operation Blame Labour. In the unlikely event you hadn't noticed, Part One was to style next Tuesday an "emergency Budget" well before the election.

With £6.2bn of efficiency savings already announced, there is no easy meat left. It will be hard for the coalition to argue that cancelling a hospital (as Mr Alexander did in Hartlepool) or cutting school building (as Mr Osborne will do) does not affect frontline services. So those public employees who shunned the Tories in May will surely see their numbers swelled as job cuts, pay freezes, pension curbs and reduced services become clear.

Yet the Chancellor does have some political cover. The willingness of the Liberal Democrats to "dip our hands in the blood" – as David Laws put it – has not diminished since he resigned and was succeeded by Mr Alexander. Liberal Democrats sometimes struggle to explain their sudden U-turn in support of spending cuts this year.

At the election, a majority of voters backed parties which opposed immediate cuts – hardly a mandate for the axe to be wielded on Tuesday. Liberal Democrats insist they were more open about the scale of the crisis than the Tories or Labour and identified more cuts (£15bn). These included withdrawing child tax credits lower down the pay scale (families with an income of about £25,000) than the Tories proposed (£50,000), which will make the Liberal Democrat plan a tempting option for Mr Osborne.

However, the enthusiasm with which Nick Clegg has put his shoulder to the Treasury axe-grinder is not shared by some Liberal Democrat activists. He may have a lot of explaining to do to his own party after the Budget, especially if the Chancellor does raise VAT.

Other tax rises aimed at the rich would help his task, as will the progress Mr Osborne will announce towards the Liberal Democrats' flagship goal to raise the personal tax allowance to £10,000. But many Liberal Democrats would like tax increases to take more of the strain of reducing the deficit; Mr Osborne wants 80 per cent achieved by cuts and only 20 per cent from higher taxes. A 2:1 ratio would be fairer than his 4:1 one if the tax rises targeted those at the top.

The Chancellor also has cover from international bodies. On Thursday the EU joined the clamour for tough action on budget deficits. Despite US reservations about the stampede, next week's G20 summit in Canada is likely to endorse the new global austerity. In recent weeks, these blocs were still talking about a fiscal stimulus as the recovery was so fragile. Now the recovery is still fragile but they are clamouring for cuts, spooked by the Greek debt crisis and financial market jitters. John Maynard Keynes (a Liberal) would surely turn in his grave.

In 1931 another Liberal Conservative coalition produced an emergency austerity budget after the collapse of a Labour government. Keynes denounced it as "folly and injustice", mocking the idea that by refraining from economic activity everyone would become prosperous again. Liberal Democrats and Tories argue Keynes would have understood the need to reduce a deficit running at 12 per cent of GDP and interest on borrowing accounting for £1 in every £4 spent by the government.

At the EU summit, Mr Cameron looked round the table and realised that Britain had one of the biggest deficits in Europe. True on paper and yet an economic health index published by the European Policy Centre think tank – which takes account of deficits, national debt, growth and competitiveness – puts Britain comfortably in mid-table; ninth out of 27 EU members and way above the countries in the relegation zone – Greece, Italy and Portugal.

Mr Osborne will doubtless argue that we must address an unsustainable balance between the public and private sectors. He must somehow try to project a vision of the sunny uplands that could lie ahead if the nation takes tough action now. Not easy.

But some Liberal Democrats fear the missing piece of the Budget package will be significant measures to ensure economic growth. The decision on Sheffield Forgemasters does not bode well. Mr Osborne is expected to confirm plans to cut corporation tax paid by companies, portraying that as part of a growth strategy. Yet the money will probably come from reducing capital allowances, which would be giving with one hand and taking with another.

Whatever Mr Osborne does – and whatever the fate of the Liberal/Tory partnership – the Budget will be the landmark moment that shapes our politics until the next election.

a.grice@independent.co.uk