Steve Richards: He can call it what he wants, but Osborne needs a Plan B

There was no need for senior ministers to pretend that Britain was in an equivalent situation to Greece last summer

Amidst numerous famous U-turns the Coalition clings to a supposedly unyielding economic policy. As far as the NHS is concerned, or indeed the future of Rupert Murdoch, there are Plan Bs and perhaps Plan Cs. For the economy there is only George Osborne's Plan A. There appears to be no alternative. On several fronts a degree of flexibility is applied. As far as the economy is concerned the Chancellor is not for turning.

There are two explanations for the contrast between expedient flakiness in relation to public service reform and flaky resolution when it comes to a fragile economy. The first is that having taken such a big radical step on the economy last summer further, more striking, bigger leaps for public services proved to be too much. There is something in this. Osborne is known to have been one of the most concerned about the impact of the original NHS reforms.

The second explanation is more convincing. There are already some signs that the Coalition is moving away from its rigid embrace of Plan A. Its slightly bewildered expediency in other areas applies to the economy too. Osborne will never admit to this. Too much now depends on him showing that he sticks with his Plan and that it will deliver. But the Business Secretary, Vince Cable, has already spoken of a Plan A Minus and Chris Huhne, the other Liberal Democrat economist in the Cabinet, has pointed out that ifwaters prove to be choppy, a ship changes course. A flatlining economy a year after Osborne's so-called emergency Budget meets the definition of choppy waters.

Oddly, in the one area where the two parties remain genuinely united, there are already signs of change. Senior Liberal Democrats remain as committed to the deficit reduction strategy as they were last summer. Cable made this clear in his BBC interview on Sunday. And yet some of the targets agreed in the chaotically rushed comprehensive spending review last summer will not be met. The reform of the reforms to the NHS, which is still far from complete, will involve the employment of more bureaucrats to manage a transition that seeks to please left-of-centre Liberal Democrats and the ideologues that shaped the original proposals. Ken Clarke's U-turn on sentencing means that some of his savings, much hailed last summer until parts of the media recognised the policy implications, no longer apply. Then there are the costs of Britain's involvement in Libya, another much-lauded initiative at the time and now draining resources without getting very far in practical terms. There are many examples. It is much harder to cut public spending than announce the intention to do so.

The spending review from last summer was part of the evangelical crusade that marked the Coalition's dangerously intoxicating early months and is not separate from it. After Harold Macmillan sacked nearly half of his Cabinet the Labour leader at the time, Harold Wilson, noted that he had removed "the wrong half". Evidently there is scope and need for spending cuts, but last summer inexperienced ministers proposed the wrong cuts in an early attempt to impress. The cuts in local government are a typical example. There is a strong case to rethink the role of councils now that their responsibilities have narrowed, with big services including education moving partly outside their remit. Such a rethink could bring about substantial savings. But Osborne wanted significant cuts within a year, so the axe falls with a degree of indiscriminate panic.

The political context in which the axe falls more widely, also explains why consumer demand sinks like a stone. There was no need for senior ministers to pretend that Britain was in an equivalent situation to Greece last summer. There was enough goodwill after the election, at least in the media, for the Coalition to press ahead with its risky objectives without being melodramatic. As ministers mopped their brows with sweaty zeal and spoke of Britain becoming Greece the economy had grown by 1.2 per cent at this stage a year ago. In the five days after the election the outgoing Chancellor, Alastair Darling, dashed to Brussels, not to plead for the UK economy, but to take part in a rescue plan for Greece. It has become a retrospective myth that in those five days all the talk was of the need to wipe out the deficit in four years. Nonetheless, that is how ministers chose to justify their zeal, and not surprisingly consumers took note and stopped spending.

As a result they have no choice but to explore other options. At the weekend Osborne hinted at tax cuts sooner rather than later. This is quite a leap. The year began with a VAT rise and now we hear of possible cuts. Like the Thatcher government in 1979, Osborne had sought to get the pain in early, in the expectation that a grateful electorate, or enough of it, would thank him for the tax cuts planned before the election. But as with quite a lot of Osborne's political calculations, events are not going according to plan, or Plan A. Not for the first time since he became responsible for the Conservatives' economic policy he contemplates changing tack.

Vince Cable has wider ambitions in his contemplations. Cable is entirely at ease when discussing the economy with Keynsians such as the former member of the Monetary Policy Committee David Blanchflower, a vehement critic of Osborne's approach. Although Cable remains committed with the Chancellor to the budget deficit plans, Blanchflower emerged from a recent meeting to proclaim much common ground with the Business Secretary. It is on the common terrain that Cable seeks more focused quantitative easing from the Bank of England, printing money for a specific purpose, to amend Gordon Brown's old slogan. Cable also hopes for radical reforms of the banks. So far Osborne appears to be more cautious.

The economy will test relations within the Coalition more intensely than any event over its first stormy year, where there has been much agreement. But it is becoming increasingly obvious that it is in the interests of both sides to adopt a Plan B. They have already started to do so, even if it may be too little, too late and will be called Plan A.

s.richards@independent.co.uk