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Martin Rowson on the coalition's job creation scheme – cartoon


George Osborne: R.I.Plan A | Editorial

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The question as the chancellor prepares his autumn statement is whether he has faced up to the country's economic reality

Whatever else George Osborne announces in his autumn statement on Tuesday, one thing is clear: plan A has been binned. The chancellor began the year claiming "there is no plan B", but that is exactly what ministers are now scrambling for as the economic outlook gets ever worse. So what voters can expect next week is a tacit admission that plan A hasn't worked, as forecast after forecast is pushed down yet again, followed by a raft of fresh proposals. The big question is whether Mr Osborne has faced up to economic reality, and whether his new measures go far enough to help stave off a second recession. The portents are gloomy.

Strip out the numbers and plan A boils down to a simple precept: the government embarks on a historic programme of public spending cuts on the premise that private spending fills the gap and powers Britain to a sustained recovery. This was not only the coalition's belief: for the past year, the independent Office for Budget Responsibility has been counting on a private investment boom, Britain exporting more than ever before and for private-sector jobs offsetting the loss of jobs in the public sector.

Put bluntly, it hasn't happened. To take one example: 111,000 jobs were shed by the public sector in the three months to June; only 41,000 were created in the private sector. The chancellor wants to blame this on the euro's crisis, but the slowdown predates that as these figures for spring indicate. What ministers have learned the hard way is what many warned long ago: that if you suck public spending out of a recession-hit economy where the state is a major driver of activity, a massive slump will result.

Which is why policy-makers have spent the past few months in a panic, fumbling around for new levers to pull. In his party conference speech, the chancellor promised something called "credit easing", to extend loans to smaller firms. This could prove important, but it all depends on the details which officials have been scrambling to sort out ever since the sudden announcement. In October, the Bank of England announced another £75bn of quantitative easing – money injected into the markets. And in the past few days all sorts of kites have been flown: underwriting of mortgages, apprenticeship schemes and the leak of a plan to bring forward spending on infrastructure, even while cutting day-to-day outgoings (a trick few government departments manage).

Many proposals carry the distinct burnt-rubber smell of the U-turn. The new quantitative easing was welcomed by the same Mr Osborne who had only two years ago described it as "the last resort of desperate governments when all other policies have failed". Credit easing marks a recognition that February's Project Merlin agreement has failed to get the banks lending enough. And yesterday's strategy to help the million young jobless looks like a cut-price version of the Future Jobs Fund introduced by Gordon Brown – and scrapped by David Cameron. The impression is of an administration that has put nearly all of its policy chips on the wrong number – and is now scattering the remainder all over the roulette wheel.

Next week the various strands will be tied up into a growth strategy. It may have a magic ingredient missing from either the growth review of last November or the growth plan from this March – but one wouldn't bet too many drachmas on that. Some measures do sound interesting, but few will be help much right now. The best, credit easing, will take a long time to introduce without the aid of Mervyn King – which doesn't look to be forthcoming. Inveigling pension funds into investing in infrastructure and pumping-up the housing market both look like lengthy processes. The chancellor will need more than this in his autumn statement. If he doesn't provide it, the only numbers to cut through on Tuesday will be the yet-lower forecasts from the OBR, outlining just what a bleak few years Britain faces.


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Osborne will cap rail fare rises and cut loan costs in autumn statement

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Package of measures to boost economy as chancellor is forced to concede UK is on brink of another recession

George Osborne is to cap rail-fare rises for commuters and cut the cost of borrowing for small businesses in his autumn statement this week in a bid to ease the pain of the economic downturn, as he is forced to concede that Britain is on the brink of recession.

The chancellor will present a bleak picture in his twice-yearly update of the health of the economy in the House of Commons on Tuesday, with the independent Office of Budget Responsibility expected to predict growth of well below 1% in 2012, raising the prospect of a double-dip recession.

He will insist that sticking to his deficit targets is essential to protect the UK from turmoil on European bond markets.

But Labour will accuse him of choking off the recovery. Rachel Reeves, shadow chief secretary of the Treasury, said: "This doesn't feel like a safe haven to families and businesses and young people. This time last year the government were blaming the snow, then in the spring it was the extra bank holiday for the royal wedding, now it's the eurozone. At some point the government's going to have to take responsibility for its own actions."

Ministers have been searching for ways to kickstart growth and offer some relief to households hit hard by the spiralling cost of living. Transport secretary Justine Greening has won an agreement from the Treasury to cap the increase in regulated rail fares, due to be implemented in 2012, at 1% above inflation, instead of the 3% planned rise — though that will still mean prices go up by more than 6%. This temporary measure will cost £300m, and covers season tickets and peak travel on key commuter routes.

The chancellor is also expected to postpone the planned 3p increase in fuel duty for January, which has been the subject of a petition on the Downing Street website, paying for the measure by closing tax loopholes for the wealthy.

Free childcare places for toddlers and two-year-olds, currently restricted to the poorest 20% of households, will be expanded to more families, in a bid to improve life chances for disadvantaged children.

As well as offering populist measures for hard-pressed households, Osborne will take action to offset the growing squeeze on businesses. As part of a radical package of measures dubbed "credit easing", the government will offer to underwrite borrowing by the banks, helping to bring down their funding costs, which have been driven up by uncertainty about the euro crisis. The banks will then be instructed to use the funds raised to offer cheaper loans to small and medium-sized businesses.

The scheme is similar to measures introduced in the credit crisis to prevent the banking sector from seizing up. The Treasury hopes it will cut the interest rate on business loans by one percentage point – worth £5,000 on a £5m loan.

There will also be measures to encourage private sector investment into corporate bonds, and channel pension fund money into infrastructure projects.

A Treasury source said the package "should be a game-changer for credit for small companies by cutting the cost of finance and over time opening up new options for how it is raised."


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Laissez-faire has failed us. Now we're getting panicky intervention

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The coalition came to power with the promise of austerity and small government. Now, on the brink of disaster, state-sponsored initiatives are suddenly back in fashion

For families stuck in cramped and overpriced rental accommodation who'd love to get a place of their own, last week's housing strategy must have seemed like a godsend: 100,000 people would be helped to buy a home, and scores of stalled construction schemes up and down the country kickstarted with taxpayers' cash.

But at second glance, the package is neither as generous nor as radical as it sounds; and it speaks volumes about the way the coalition thinks.

The offer is only available on newbuild homes. In theory, this is to make it worth builders' while to restart projects halted during the past 18 months. In practice, it's likely to allow them to offload unwanted flats in developments that should never have been built, and which are unlikely to hold their value. That's certainly what often happened under similar schemes, such as HomeBuy Direct, the equivalent under the last government.

In fact, this latest housing wheeze only came about after lobbying of housing minister Grant Shapps by the housebuilders. They're sitting on thousands of acres of land, banked during the good years, which it isn't worth their while to develop at current prices. The £400m Get Britain Building fund will come in very handy, thanks.

Under the mortgage indemnity element of the scheme, the government will guarantee part of the cost of a deposit, which is meant to help bridge the gap between the 25% many mortgage lenders are now demanding, and the 5% cash-strapped buyers are able to raise. But if house prices fall, the buyer will still be left facing the first loss; and there was nothing in the announcement about what interest rate the lenders would be able to charge on these new mortgages.

Even if the targeted 100,000 buyers get a loan, the most likely impact will be to artificially drive up the price of new-build homes, with the buyer taking the risk and the builder pocketing the profit. In other words, it's little more than a bung for developers.

A forthcoming report from the IPPR thinktank will argue that the lumbering, uncompetitive housing firms need a kick, instead of yet more encouragement to prop up the prices of poor-quality flats. This is the same government, remember, that is slashing the budget for social housing by more than 60% and has overseen a catastrophic 99% collapse in the number of affordable homes being built.

Homelessness campaigners concede that the sharp drop, revealed in official figures on Tuesday, is partly the result of a hiatus before the government's Affordable Housing Programme comes into force. But that scheme involves social tenants paying higher rents – up to 80% of market rate – to give developers an incentive to build more. At the same time, benefits will be capped, potentially forcing thousands of the poorest tenants to the fringes of expensive cities such as London. It's a muddled mix of standing back and letting the market mechanisms rip – and then floundering about desperately when it doesn't work.

When the coalition was forged last year, with a powerful narrative about a country on the brink of bankruptcy, it had a coherent plan. First, it would get to grips with the demon deficit; then it would tear away the tax and regulation stifling the private sector, and allow long-neglected sectors of the economy such as manufacturing to blossom. Vince Cable and George Osborne might have disagreed about how to tame the banks or whether workers' rights should be torn up, but both could sign up to the classic liberal agenda of getting government out of the way.

This dry economic liberalism was somewhat leavened by No 10's enthusiasm for the idea that you can use incentives – or "nudges" – to tempt firms and consumers into action. Benefits changes would nudge the borderline sick back into jobs; lower corporation tax would coax entrepreneurs to our shores; national insurance holidays for new firms would spark a hiring frenzy. But the driving philosophy was one of fiscal austerity and laissez-faire.

Even by the time of the budget in the spring, this approach was looking threadbare: the economy was tanking and George Osborne was piqued into unveiling what was grandly called a "plan for growth", including a smorgasbord of policies, some of which looked surprisingly interventionist for a Tory-led government.

Eight months and one euro-catastrophe later, the housing strategy is only the latest example of the fact that not only is the economy in a far worse state than it was a year and a half ago, but the government has run desperately short of ideas. Nick Clegg's Youth Contract, announced on Friday, sounds suspiciously like a reheated version of Labour's Future Jobs Fund, which was unceremoniously cancelled by the coalition when it came to power.

This time it will be private, not public sector employers, which will be subsidised to take on young workers; but the structure of the scheme is much the same.

And while Osborne will make much in his autumn statement of 40-plus shovel-ready infrastructure plans hastily brought forward, government capital investment is slated to fall by almost half in cash terms by the end of the parliament, and a rescheduling of projects, while helpful in boosting short-term demand, will mean a sharper cut in future years.

Don't expect to hear anything on Tuesday that will prevent the economy sliding back into recession. Like the business groups that clamoured for austerity and are now squealing just as loudly for massive infrastructure investment and tax breaks, this is a government whose guiding philosophy hasn't stood up to the real world.


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For his next trick, Mr Osborne must offer us a bold new world | Will Hutton

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The government is showing a new readiness to cross an ideological Rubicon

It is hard not to despair at the gravity of our economic plight. The forecasts to be released this week are expected to confirm that Britain's output will not recover to 2008 levels until 2014, representing the deepest recession and slowest recovery since the 19th century and even that prediction may prove too optimistic. The money supply is barely growing; new credit advanced to small and medium-size entreprises (SMEs) is still falling. This should not be happening more than two years into recovery.

Some figures dramatise the grim picture. Business investment grew just 0.1% in the past three months. In the past six months, construction began on a mere 1,746 social homes – with zero starts in the north-west and 12 in the north-east. The £2.5bn business growth fund, created by the banks, has made only two investments – worth a total of £8m – since its launch in April. Only four companies have signed up for an enterprise capital fund to support the exports of SMEs. It is beyond pitiful. The early 1930s were a boom by comparison.

Yet no significant improvement is in prospect. The government's mounting desperation about the crisis its policies have wished on us is obvious; already changes are afoot that reveal a new readiness to cross an ideological Rubicon – that is, using the state to act. Last week, David Cameron and Nick Clegg launched a new-build indemnity scheme under which the government will underwrite a percentage of the loan, allowing buyers to have as little as 5% deposit – a first, even if the impact will be trivial. On Friday, Clegg announced a three-year, £1bn programme to alleviate youth unemployment, the centrepiece of which was a six-month wage subsidy for employers hiring young unemployed under 24.

They are small moves but in the right direction. The Conservatives are under intense pressure from their Lib Dem partners and the force of events is modifying their misguided belief that market economies should be left to their own devices. The private sector's problem is not government: it is lack of demand, existential risk, overstretched balance sheets and the embedded volatility of unconstrained markets. There is, and always has been, a co-dependence between the public and private sectors. The private sector needs the public sector to mitigate risk, plug the gaps left by its many mistakes, manage demand and ensure social stability and opportunity. In turn, the public sector needs the private sector's dynamism and readiness to experiment. But, having begun its change by subsidising wages and guaranteeing mortgages, the government now has to follow through. It has to think and act big.

It has to lift demand and address the business credit crisis and also lay the foundations for more innovation, a better capitalism and a 21st-century social contract. They are interconnected propositions – success in one will feed through to another. For example, banks say business won't borrow because of lack of demand; business says banks are too risk-averse. Both propositions are true; both have to be solved.

The means to break the logjam is at hand and the government is showing some movement, but again with too little conviction. What it will propose, it appears, is a £10bn loan underwriting programme for which it will charge a hefty insurance premium: however, the take-up, like its other schemes, will be trivial. The anxiety is to minimise exposure to the chance of assuming some real risk, but that is exactly what is needed. Instead, it should announce a generous multibillion-pound business loan purchase scheme using the funds created by the Bank of England's quantitative easing programme, so directly incentivising banks to make what would become very profitable lending. Because it is banks that have the relationships with tens of thousands of businesses, it is through them that new money can flow fastest. But banks have to see the prospect of profit in making loans that under current conditions will almost certainly go sour.

Here is how. The Treasury should offer to buy part of every new loan made to an SME as long as the originating bank accepts a small proportion of any loss and holds part of the loan itself to show its confidence in its lending decision. The Treasury should then merge these thousands of loan fractions into big bonds that it would indemnify, turning them into a security that the Bank of England – or private buyers – could buy.

In our paper, Credit Where It's Due, Lancaster's Professor Ken Peasnell and I estimate that this measure could lift SME lending by at least 10% a year, so that in 2013/14 the cumulative stimulus would represent up to £15bn a year. Banks can put up less capital, run less risk and access cheap finance. Triggering collective action by all banks and bringing forward investment by many SMEs will improve the economic climate, so the Treasury need not charge an insurance premium for its guarantee because the loan loss rate should be small – and high take-up at this stage in the cycle is highly desirable.

To ensure the loan loss rate will be low, the government needs simultaneously to boost demand. It should get serious about infrastructure spending. Pension funds will not invest directly in infrastructure, as the government hopes they will: it is too risky. But they would buy bonds issued by an infrastructure bank capitalised by the government. In its absence, the government should plug the gap, but that would mean breaking the taboo that it cannot and should not borrow. And, last, the government should slash employers' national insurance contributions until unemployment falls below 2 million, while cutting taxes on the low-paid.

The combination of these three measures – the loan purchase programme, infrastructure spending and national insurance/tax cuts for the low-paid – would be decisive. They would guarantee growth, lift business spirits and show our "lost generation" that we collectively cared.

Nor would I stop there. Britain should avert the risk of the euro collapsing by saying that, along with the rest of the G20, we will contribute to a European monetary fund, conditional on Germany making a hefty contribution and lifting its prohibition on the European Central Bank buying euro debt. A chance to lead in Europe and secure a full-throated economic recovery is in our hands. What it demands is nerve.


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Recovery depends on healing a divided nation | Observer editorial

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Massive disparities in levels of pay and a lack of clarity about wage levels for the financial and business elite are divisive

On Tuesday, George Osborne will deliver his autumn statement. Unemployment is at a 17-year high; the numbers of young people not in work, training or education has risen to more than a million. Five people pursue each vacancy. No work means low tax revenue, increased benefits bill and next to no growth.

And the eurozone crisis rolls on.

Tomorrow, to add to the chancellor's woes, the Organisation for Economic Co-operation and Development publishes its forecasts of a British double-dip recession, information that has apparently sent "a lightning bolt" through the Treasury. No matter how robust Mr Osborne's rhetoric on Tuesday, the House of Commons will echo to the death rattle of Plan A.

In these circumstances, detailed probing of Mr Osborne's growth strategy and how he proposes to address the accelerating polarisation in society – a 0.1% increase for the poorest 10% of earners against a 49% increase last year for FTSE 100 chief executives – is definitely in order. Unfortunately, however, on Wednesday, some of the answers to these highly pertinent questions will be obscured by what could be the largest industrial action in Britain for a generation. A tidal wave of headlines will tell us not to put the bins out, send our children to school or take a plane as more than 2 million public sector workers from 33 unions hold a one-day strike over the government's proposed changes to public sector pensions. The action is understandable, the timing is abysmal.

As a result, scrutiny of Mr Osborne's plans will be temporarily curtailed by polemics about the alleged munificence awaiting public sector retirees. Both events this week, the autumn statement and the public sector strike, illustrate a disturbingly divisive and potentially dangerous fragmentation in our society that threatens the country's civic health. This divisiveness is driven by a mix of political will and long-term structural fractures that are stoking regional, gender and generational wars. For example, the youth contract announced last week may be subsidised by reducing the working family tax credit of families where many are working on the breadline, a move described by Tony Wilson of the Centre for Economic and Social Inclusion as "robbing Peter to pay Paul".

Again, the cuts are exacting a higher price from women, already traditionally on lower incomes. Yet, even in a time of austerity, Goldman Sachs reports that ending the long-standing pay gap between men and women could boost GDP in Europe by 13%. This national fragmentation is also seen in a regional imbalance. The north, during its heyday of heavy industry and manufacturing, was the country's engine of prosperity. It is now the south's poor cousin, with pockets of very high unemployment that are devoid of hope. Average earnings in Westminster are £39,745; average earnings in Blackpool in 2011 are £15,481.

Such rents in the social fabric makes it clearer every day that, far from being "all in it together", the coalition's mantra, we are heading for the vast income disparities that marked Victorian times. In this destructive direction of travel, citizen is pitched against citizen and facts become fogged by confusion. On the issue of public sector pensions, for instance, Francis Maude, the cabinet office minister involved in ongoing negotiations, says the current offer is "pretty bloody reasonable". The unions counter that their members will have to pay more, work longer and receive less. Calculations are complex but, according to the GMB union, a dinner lady, for instance, who has worked part time since the age of 40 on a salary of £8,000 will pay an extra £5,000 in contributions, retire at 68 and see her pension reduced by £672 to £3,879.

The average public sector pension is around £7,800. However, in the private sector more than 65% have no pension at all.

In March, the Hutton commission into public pensions insisted that provision should be affordable and sustainable, adequate and fair. The narrative, none the less, is now crude: why should the public sector enjoy a "generous" pension while the private sector has seen the demise of defined benefit schemes?

One possible response might be to frame the question differently: why are pensions in the private sector for those on low to middle incomes so desperately inadequate? The answer may be found in the rigorous final report of the High Pay Commission published last week. It pointed out that we have "a winner-takes-all system…" that is "deeply damaging to the UK as a whole". In 2011, top pay at Barclays is 75 times that of the average worker. In 1979, it was 14.5 times. In that period, the lead executive's pay has risen by a staggering 4,899.4% – from £87,323 to more than £4m.

While public sector pensions have been examined in forensic detail, it galls many that the demands for transparency and equity have not been more firmly applied to those who sit at the top of finance and business. On Thursday evening, David Dimbleby, chair of BBC 1's Question Time, had Justin King, chief executive of Sainsbury's, as a member of the panel. He is paid £920,000 a year, 40 times that of his average employee. "What exactly is it that you do," Mr Dimbleby asked, "that is so special?"

The government has rightly called for a rebalancing of the economy. That aim is not assisted when, as the union Unite points out, a typical public sector worker would have to work three lifetimes to earn Francis Maude's pension. The government needs to take heed – these disparities matter.

They matter because they sour trust and reduce the base of support that allows for the structural reform that is necessary to effect an economic transformation in which everyone makes sacrifices. In Germany less than a decade ago, trust between management and workforce, faith in the government's ability to plan long term, proper workers' representation in decision-making, sound apprenticeships and a far narrower gap between the top and bottom earners in society allowed the country to recover from its position as "the sick man of Europe". In contrast, research tells us, disengaged, distrustful citizens mean lower productivity, more sickness and poor growth.

So how to move forward? Unions are already negotiating trade-offs: no overtime, reduced hours means more jobs saved. Employees on remuneration panels might help. Legislation to address the poverty of pensions in the private sector is vital as is further effort in public sector pension negotiations. Ending avarice at the top is imperative.

Pitting one group of citizens against another not only displays weak political leadership, it wastes the most powerful asset available to government in difficult times. Namely, that men and women, young and old, private and public sector workers who genuinely have reason to believe that they are truly "all in it together", also see a mutual gain in collectively building a way out.


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Martin Rowson on Osborne and Alexander's desperate measures – cartoonMartin Rowson on Osborne and Alexander's desperate measures – cartoon

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Chancellor and Treasury sidekick plan package of measures seeking to boost the economy after conceding the UK is on brink of another recession


George Osborne – the man who would be prime minister

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The chancellor will have to eliminate Britain's structural deficit and stimulate growth if he is to succeed David Cameron

Britain's smartest political salon has been enlivened in recent weeks as its leader has taken to comparing himself to a young chancellor of the exchequer from the 18th century.

Fans of George Osborne have been careful to control their sniggers as he draws comparison with the era of his namesake – King George III – at weekend parties at Dorneywood, his grace and favour Buckinghamshire home.

A protege of William Hague, Osborne is well versed in the career of William Pitt the Younger who became chancellor in 1782 at the age of 23. There are parallels, though Osborne is not doubling up as prime minister as Pitt did in his second year as chancellor.

Osborne, who became chancellor at 38, used to be known as Boy George while Pitt was mocked in a popular ditty that said the kingdom had been "trusted to a schoolboy's care".

But Osborne, in common with Pitt, is having to take drastic fiscal action to cope with a collapse in trade. Pitt introduced Britain's first income tax and in 1786 established a sinking fund – an early version of Osborne's deficit reduction plan – to pay off the national debt racked up in response to the rebellion in the American colonies.

An important milestone in Osborne's deficit reduction plan will be passed on Tuesday when he acknowledges in his autumn statement that things are not quite going to plan.

The Office for Budget Responsibility (OBR), the body established by Osborne to deliver independent forecasts, will downgrade its growth projections yet again this week, and it is clear that Britain faces a much tougher fight to restore stability to the public finances than he previously thought.

Allies know that this week is a decisive moment for Osborne, who needs to show that his much vaunted plan A – the elimination of the structural deficit within his original timetable – is on course and that he has a credible plan to help stimulate growth.

Failure will mean Osborne's hopes of succeeding David Cameron towards the end of his second term as prime minister will crumble. Osborne's great rival, London's mayor Boris Johnson – dubbed "bonking Boris" by Osborne's allies – would then become the favourite.

But the chancellor enters this week utterly convinced that he set the right course in his emergency budget in June 2010 and confident that the growth forecasts by the OBR will vindicate his original judgment.

"The autumn statement will correct the idea that we are off course," one ally said. "The growth path is being slowed by what is happening in the eurozone. But the Labour party is the only mainstream party in the EU which believes the response to that is to spend more and therefore borrow more."

Members of the Osborne circle are allowing themselves a little chuckle, as they say that what is being dubbed the chancellor's "flexible friend" – his fiscal mandate – is proving a great help. This was portrayed after last year's emergency budget as a pledge to eliminate the structural deficit, the gap between tax revenue and public spending that can only be tackled by tax increases and spending cuts, by the time of the next election.

But Osborne showed that he is a supreme political operator by making it much more elastic than commentators have appreciated. The plan has two goals. First, to ensure that the structural current deficit is in balance by 2015-16, which is, crucially, after the next general election. This excludes capital investment and is a "rolling five-year judgment" which means there will be no fixed point when a definitive judgment can be made.

The second goal, to ensure that debt is falling as share of GDP by 2015-16, is a fixed target. But it simply means that debt in 2015-16 must be lower than the previous year, however high the figure in 2014-15.

One member of the Osborne camp smiled as he said: "Perhaps we did not fully spell out the flexibility in the timing in George's fiscal mandate. But the autumn statement will make clear that this is an all-weather fiscal strategy. It works in the good times as well as the bad times."

Osborne will hark back to his emergency budget to deliver his central message: that he crafted a credible deficit reduction plan which reassured the markets. Britain has the highest fiscal deficit of any major economy in the industrialised world but is able to borrow at rates which dipped below Germany's this week. Osborne knows, however, that he must set out a vision of how he will stimulate growth. This will break down into three areas.

First, his plan to increase lending to business through a multibillion pound programme of credit easing in which the Treasury will buy up the corporate bonds of small firms.

Second, encouraging infrastructure projects. An aide said: "It is a misnomer to talk about shovel-ready projects. It doesn't work like that because planning is so complicated. So this is about streamlining planning and bringing on projects that don't need any extra money."

Third, supply side reforms such as liberalising employment laws. A proposal by the venture capitalist Adrian Beecroft to allow employers to fire workers at will has been watered down under pressure from the Liberal Democrats and the Treasury.

Allies say that Osborne is taking great care to craft his central theme because he believes that a list of growth measures will not wash.

"We have a plan, the right plan and we are sticking to it," the aide said.

"But there is no growth or slow growth in our main export markets. We did a lot on growth in the budget in March. But this was not really noticed because Libya overshadowed everything and there has been no growth.

"There will be measures on growth. But it would be wrong simply to have a list. That would not amount to a vision."

The chancellor will be attacked by his Labour shadow, Ed Balls, for jeopardising the recovery by setting out a deficit reduction plan that involved raising taxes too far – the VAT increase in January – and cutting public spending too far and too fast. But Osborne will be more concerned by a growing debate within the Conservative party over the wisdom of his plans.

Rebel voices

The Old Library at All Souls College, Oxford is an unlikely place for an Osborne rebel to pop up. But on Friday afternoon one of the college's most famous former doctoral students appeared in the library to give a lecture on the future of the euro.

John Redwood, the former Tory leadership contender who is now chairman of the Conservative economic affairs committee, shot back into the Tory political debate with a carefully timed blog last week which said Osborne's deficit reduction plan was too timid.

His blog, in which he said that Osborne should have imposed more drastic cuts in the first two years, is attracting attention because Kenneth Clarke is letting it be known that he agrees with some of the analysis.

"Ken says you have to be prepared to be unpopular in government for the first two years," one Tory said. "Instead we hear this rather weak: 'Oh, it is so much harder than we thought'." Redwood said: "The deficit reduction plan was the wrong way round. It was rear-end loaded instead of front-end loaded. When you do these things you have to do the reductions, or the freeze, up front. They decided to have the easy year the first year. The longer you leave it the more difficult it is, because the more it is your problem rather than an inherited problem."

Redwood's view is echoed by David Ruffley, a Conservative member of the Commons Treasury select committee, who served as a special adviser when Clarke was chancellor. "The chancellor should seriously consider having a new spending review to bring forward cuts due for later in this parliament to this year. We need tax cuts to increase aggregate demand and to get the economy moving."

Osborne's circle have noted the criticism from the right and are sending out warm signals. "George had to negotiate his deficit reduction plan with the Liberal Democrats who had to toughen their proposals just as we toughened ours," one ally said. "They were lambs in those negotiations." There is also another message for the right. Osborne has an excellent working relationship with his Lib Dem Treasury deputy, Danny Alexander. But he has gladly accepted the invitation from the Lib Dems for the coalition parties to differentiate themselves. This was noticed by the right when Osborne announced in his speech to the Conservative conference that Britain would cut its carbon emissions "no slower but also no faster than our fellow countries in Europe".

One veteran Tory said: "It is a curious situation that George is joined at the hip to David. But No 10 hasn't yet reconciled itself to this change of course on the supply side. You could see it at the party conference on climate change – on credit easing he went further than he was intending to."

One former cabinet minister said: "George recognises that dear energy prices, which is what the climate change strategy is all about in a single country, are bad news for industry, inflation and disposable income. It hits all three things."

Osborne hopes the change of tack will not just help growth but also shore up his position within the Conservative party.

Nobody in the Osborne circle is vulgar enough to talk openly about his leadership ambitions. But one ally confirms it is on his mind. "Michael Howard did encourage him to go for the leadership in 2005. But George has no agenda. I have never heard any talk of a timetable. But the unspoken assumption is that the party would be a lot safer in George's hands than with bonking Boris."

A veteran Tory was blunter. "For George everything is about preparing for the political armageddon of the return of Boris in 2015. Boris will win re-election as mayor [of London] next year and then sail back into parliament in his last year as mayor at the 2015 general election.

"Cameron will probably stand down in 2018-19. George has to ensure that Boris does not reach the final two in the leadership contest because there is no way he can beat him in the country.

"It will be Boris unless George achieves something that he certainly has not done up until now, and that is to connect with people. He is haughty and that shows."

Osborne has started taking discreet steps towards the Tory leadership, which could be vacant in just over six years' time if Cameron decides to retire in 2018, by building up a court of George. Members of the 2010 intake of MPs, who account for 49% of the parliamentary party, are invited for discreet drinks at No 11. The favourites are invited to bibulous soirees at Dorneywood.

Gordon Brown embarked on a similar process after the 1997 election. But unlike Brown's rancorous relationship with Tony Blair, Cameron sees Osborne as a key ally and friend.

"David is supremely relaxed," one ally said. "You never see any edge to their relationship."

Another veteran member of their circle said: "Dave and George are joined at the hip. It goes back to opposition when they were in and out of each other's offices."

One supporter said: "Prime ministers and chancellors are bound to clash because every prime minister is a would be chancellor. But George and Dave's relationship is staggering. It is unlike any other previous Tory relationship between Nos 10 and 11. Margaret Thatcher and Geoffery Howe were on the same page during the difficult period of the 1981 budget. But they were never that close."

Osborne may have guaranteed the backing of Cameron and may be working assiduously to court MPs. But he has his enemies.

One MP said: "George Osborne is a Marmite politician. You either really like him, think he is the commanding presence and is bound to be our next leader. Or you simply can't stand him. I know people who dislike him so much they will stand against him, just to damage him in any contest."

Osborne did himself no favours, MPs say, when he acted as the "hard cop" during two crucial votes over the past year – on university tuition fees and on whether to hold a referendum on British membership of the EU. The referendum vote last month prompted the largest rebellion of the parliament, when 81 Tory MPs defied a three-line whip to vote against the government.

In meetings with moderate rebels before both votes Osborne delivered a clear message: defy the government and you will destroy your chances of becoming a minister in this parliament. The tactics prompted criticisms that Osborne was out of touch.

A loyalist said: "Of course George is the commanding presence in the government. But he does need to be careful. He needs to widen his tent and take care not to be too remote."

One government supporter believes Osborne has a problem. "George is in for a shock. The right don't like him. They think he is too SDP. They can't really get a hold on him. They don't really know what he thinks.

"George is Macavity. He only does newspaper interviews, he never takes questions. He is never around when there are problems. But these are his cuts. Every department that is imposing cuts is imposing George's will."

Even his critics acknowledge that Osborne is tough, which will serve him well, as one said. "George has an incredible strength. Perhaps this is down to the way he made it into the Bullingdon and survived. They were a bit sniffy about George. The Bullingdon is basically for Etonians. But they let him in even though he went to St Paul's, though they did insist on him reverting to his original name of Gideon."

Fans say this toughness explains how Osborne will be served well by another comparison with Pitt the Younger: as he grew in office nobody made jokes about his age.

"There was all that criticism in the City about George being too young," one ally said. "But the City's [attitude] changed dramatically as they watched the speed with which he delivered the emergency budget. You haven't seen the best of George Osborne yet."


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George Osborne's £5bn gamble to stave off recession

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Extra £5bn of capital investment to form centrepiece of national infrastructure programme in chancellor's autumn statement

An extra £5bn of capital investment, funded by spending cuts elsewhere, will form the centrepiece of an overall £30bn national infrastructure programme due to be announced by George Osborne on Tuesday as part of an attempt to prevent the country from sliding back into recession.

The chancellor will unveil nearly 500 public sector projects, many of them to be funded by commercial pension fund investments.

Danny Alexander, the chief secretary to the Treasury, said the public money made available was being re-allocated from the spending review to a "more productive purpose" to ensure "the very best use" is made of the limited resources.

He told BBC Radio 4's Today programme thar areas of departmental "underspends" were being identified along with areas where project deadlines have slipped.

"We are very much sticking to the plan that we've set out," he said. "If anything, the case for that is reinforced by the problems we are seeing in the eurozone and elsewhere."

Some of the £5bn extra capital investment over the next three years will go to a £600m schools programme to fund an extra 40,000 places by 2014. In what is rapidly turning into a full scale "game-changer" budget to stave off the impact of collapsing European economies, Osborne will also announce plans to:

• Help energy-intensive industries.

• Increase the bank levy to maintain an annual income from banks of £2.5bn.

• Place a cap on announced rail fare rises.

• Defer a 3p rise in fuel duty which was due to be introduced in January

• Remove health and safety bureaucracy from 1 million self-employed people as the next stage of labour market deregulation.

He is also expected to announce a deal designed to unlock £40bn of bank lending for small businesses in which the government will underwrite the lending.

Alexander told Today: "Investment in infrastructure is one of the most productive ways that you can use both public money and indeed private money too to deliver both of those objectives, and so we'll be allocating some government money in this spending review, we'll be signalling some longer-term projects that we're going to fund in the future, and crucially through working with British pension funds, we are identifying ways to unlock around £20bn of pension fund investment to go into privately-funded infrastructure in this country."

On the public funding being made available, Alexander said: "Part of my job as chief secretary is to look at departmental budgets around government to identify areas where there are underspends or where projects haven't come to fruition on the right time scale.

"For example, the carbon capture and storage programme has been delayed because the original project couldn't be delivered and so we are committed to providing the money for that but it is more likely the majority of that money will be needed in the next parliament and so we can release the funds in this parliament for this sort of programme.

"So there are a few decisions we have made - obviously the chancellor will set those out tomorrow. Some of those are difficult decisions."

The Treasury is disgorging its growth strategy before the autumn statement since it knows the day itself will be dominated by the Office for Budget Responsibility's new forecasts for growth, borrowing, unemployment and their consequences for its goal of eradicating the structural deficit by 2015-16.

Speaking on the BBC's Andrew Marr Show on Sunday, Osborne admitted the OBR forecasts would be downgraded, saying: "This is an exceptionally difficult time. We have a slowing economy, a slowing world economy, we have this financial crisis brewing in Europe."

But he insisted he would stick to his deficit reduction target, saying: "I am absolutely clear the government will do what it takes to meet its fiscal mandate, to meet its debt target." He has until 2015-16 to meet this target.

With the autumn statement due to be fiscally neutral, Osborne has had to find nearly £8bn in savings to fund the additional £5bn capital investment, as well as the delay in the fuel duty rise and the higher than expected costs of benefit upratings. Some of that will come from lower than projected spending across Whitehall and higher corporate tax receipts, but he is also planning to freeze some working tax credits at the higher income end.

The chancellor may also be able to garner funds for the investment from overseas. China Investment Corporation is considering investing in the infrastructure of the UK, according to Lou Jiwei, the fund's chairman. The $410bn Chinese fund "is keen to team up with fund managers or participate through a public-private partnership in the UK infrastructure sector as an equity investor," Lou writes in today's Financial Times.

In an attempt to start winning the political argument on the economy, Labour plans to seize on Tuesday's higher projected public sector borrowing figures to claim the government will be borrowing to fund recession through higher welfare bills, while Labour would borrow to fund growth and ultimately higher tax receipts.

Government sources said ministers want to focus resources on protecting the "squeezed middle" and on finding job-creating capital investment in schools, roads, railways, high-speed broadband and energy projects.

The National Infrastructure Plan will draw on £5bn extra capital spending in the current spending period to 2014-15, £5bn extra spending in the following spending period and up to £20bn from a deal with pension funds. It will need guaranteed income streams for the risk-averse pension funds, such as tolls for new roads, or guaranteed income from power stations.

The government has signed a memorandum of understanding with the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) to develop a new pension infrastructure platform, and make it easier for pension funds to invest in projects such as renewable energy, power stations and ports.

The scheme is in some ways a substitute for Labour's private finance initiative that the government has declared has provided poor value for taxpayers money.

The National Infrastructure Plan will set out 40 top priority schemes among a longer list of 500 projects.

Joanne Segars, chief executive of the NAPF, said: "We're excited by the government's commitment to try to make it easier for pension funds to back major infrastructural projects.

"This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments.

"Pension funds hold over a trillion pounds in assets, but only around 2% of that is invested in infrastructure. There's the potential for that to be much higher".

Pension fund investment in infrastructure has been pioneered in Canada, Australia and was embraced by the former business secretary Lord Mandelson in 2010.

Osborne hopes to conclude negotiations within the next three or four months.

Ministers have also responded to lobbying from energy-intensive industries about the cost of the government's climate change levy and the European emissions trading scheme. Osborne will announce a £250m package of support, which will include increasing relief from the climate change levy from 65% to 90% in April 2013 for industries that sign agreements with Whitehall to cut their use of carbon.

Osborne refused to be drawn on the latest economic and financial forecasts from the Office for Budget Responsibility, the independent body set up by the chancellor in the aftermath of the last election.

However, the OBR is expected to say that the UK will grow by around 1% both this year and in 2012, down from 1.7% and 2.5% in March. Lower growth will result in higher borrowing, but Osborne insisted that sticking to the plans for budget austerity was vital in ensuring that market interest rates in the UK stayed low.

Osborne said that credit easing would involve the government underwriting commercial banks so that they could borrow more cheaply in the financial markets, with the benefits passed on to companies in the form of lower interest rates.

"The government will underwrite the loans the banks make to small businesses in order to cut the interest rates the small businesses pay," Osborne said.

"We are making available £20bn for the national loan guarantee scheme; however, it sits within an envelope that could be as large as £40bn.

"These are guarantees. We are not borrowing this money; we are underwriting the loans that are being made."

It is understood that the second £20bn of loan guarantees is being held in reserve for the moment but could be made available in the next two years.

A third scheme would offer an alternative to traditional bank loans by encouraging firms to sell bonds – or company IOUs – to the market.


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UK on the brink of double-dip recession, warns OECD

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Thinktank cuts growth forecast for UK following austerity measures and says unemployment could rise to 9.1% by 2013

The west's leading economic thinktank has warned that Britain faces sliding into a double-dip recession this winter.

In disappointing news for George Osborne as he puts the finishing touches to Tuesday's autumn statement, the Organisation for Economic Co-operation and Development (OECD) said output would fall in the final three months of 2011 and the first quarter of 2012.

The Paris-based OECD said it expected the UK to grow by 0.5% in 2012 as a whole but the two consecutive quarters of contraction fulfil the technical definition of a recession. In its half-yearly healthcheck on the global economy, the thinktank cut its growth forecasts for all the west's major economies and urged policymakers to take urgent action to prevent the contagion spreading from Europe's sovereign debt crisis.

The OECD said in May that it expected the UK to grow by 1.8% next year, but said on Monday that it was sharply downgrading its forecast because public spending cuts, the squeeze on household incomes and a more difficult climate for exporters had weakened the economy.

"More support is needed urgently as headwinds are strong," the OECD report said. It warned that unemployment would rise to 9.1% by 2013, exacerbating social problems and leading to a rise in homelessness.

The OECD has been supportive of the chancellor's austerity programme and said the onus for boosting growth should be on the Bank of England – suggesting that Threadneedle Street should expand the money supply through its quantitative easing (QE) programme next year.

The Bank announced in October that it was increasing its purchases of government gilts from commercial banks to £275bn over the coming months, but the OECD said growth would be even weaker than it expected unless the total amount of QE was raised to £400bn. That would leave the Bank with almost 40% of the total stock of outstanding government bonds.

The OECD said Osborne should stick to his budget strategy unless the economy deteriorates more than expected. Were that to happen, the thinktank said the government would be justified in softening planned public investment cuts

"Credibility will demand that the medium-term fiscal targets be retained and achieved, implying greater tightening later on," the OECD report said.

If things turn out to be worse than feared, banks may need to be recapitalised, preferably with private money. However, governments must be prepared to step in, the OECD said.

David Tinsley, UK economist at BNP Paribas, said: "With the domestic demand in the UK already very weak heading into the crisis, it is hard to see where any growth next year will come from."

The OECD said it was now forecasting just 0.2% growth in the eurozone next year and added that concerns about sovereign debt sustainability were becoming increasingly widespread. Unless the problem was addressed, the contagion could spread to countries thought to have sound public finances, causing a massive escalation in economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.


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Politics Live blog: Monday 28 November

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• Lunchtime summary
• Afternoon summary

4.06pm: Here's an afternoon summary.

• David Cameron has chaired a meeting of ministers to discuss plans for Wednesday's strike. "Part of that contingency planning is working with different bits of the public sector to make sure people are aware of likely disruption," the prime minister's official spokesman said.

Dave Prentis, the Unison general secretary, has said that there could be a "rolling programme" of strikes going into the new year if the government does not back down over public sector pension reform.

• Sir Mervyn King, the governor of the Bank of England, has told MPs that the eurozone crisis is largely to blame for the Bank downgrading its growth forecast for this year and next year. "The bulk of the downward revision can be attributed to news since August about what is happening in the eurozone," he said. "It is the bulk of it. Beyond the one year horizon we have not made significant changes to our growth rates."

Steve Webb, the pensions minister, has announced that automatic pensions enrolment for small businesses will be delayed by a year until 2015.

• John Bercow, the Speaker, has said that he is "gravely concerned" about the way so many details of the autumn statement have already been released. When Labour's Angela Eagle raised this on a point of order in the Commons, Bercow said: "I have been gravely concerned about these matters and I can tell the House I have had conversations with senior members of the government on the subject. I would like at this stage to await events. The House will look forward with interest and respect to hearing the statement by the chancellor tomorrow, but I remain alert to the concerns raised and I shall be looking further into the matter." Government announcements are supposed to be made to the Commons before they are made to the press.

That's it for today. Thanks for the comments.

3.48pm: Here's a short afternoon reading list.

• Katharine Birbalsingh at the Telegraph writes about David Lammy's new book about the summer riots, and quotes from the passage where Lammy describes what happened when he raised knife crime with Gordon Brown.

It was at the end of the session that Gordon came over to ask if there was anything in particular that I would like to raise. "Actually, there is," I said, noticing him look alarmed that I might be about to launch into a long speech. "I'm really worried about knife crime." It was still a big concern in Tottenham and was showing the signs of morphing from an inner city problem to a nationwide concern. More and more mothers were turning up at my weekly advice surgeries and telling me that they felt scared and helpless to stop their sons drifting into trouble. "What are we doing for these women?" I asked. "Often the father isn't around, and their own parents might be on the other side of the world. They're not coping and we've got to find a way of helping them." Gordon looked at me quizzically while I spoke, as if I was missing something obvious. "Tax credits," he responded, as soon as I finished. "If they're single parents and they're working, they'll be entitled to them." With that there was a pat on the arm. "Thanks, David." On to the next conversation.

• John Rentoul on his blog posts the full transcript of Ed Balls' interview with the Independent on Sunday, which includes Balls' thoughts on Friday evening TV and his account of how he tried to get on Jim'll Fix It.

When I was young, the ideal Friday night was Pot Black, 9 til 9.25, One Man and His Dog, Pro Celeb golf and then HSB. It was just top TV. Jim'll Fix It was great in the early evening slot. Final Score; Doctor Who or Jim'll Fix It, but after 7, 7.30 it really fell apart. Strictly is more in the teatime slot. X Factor: that's filled a slot which has been pretty awful over the last 20, 30 years. It was good fun. I wrote to Jim [Jimmy Savile] many times. I wanted to conduct an orchestra; never got that. Can I be a drummer? Probably "Can I be the mascot for the England football team?" More or less the same as everybody else. I didn't think I was ever quite quirky or innovative enough. Never occurred to me to be. I never got it, I never got the call. My sister did get a Blue Peter badge. For a picture. A very exciting moment. I was very, very jealous.



• Luke Akehurst at LabourList says Labour campaigners should read Lord Ashcroft's research about public opinion and the economy.


Given [what Ashcroft's report says], the economic themes articulated by Ed Miliband in his recent speeches make a lot of sense: avoiding any suggestion of increasing public spending but instead talking about changing the economic rules to make the system work for the hard-working majority and ensuring we don't have another financial crisis; criticising top pay abuses and excessive energy company profits as well as benefit fraud; speaking up for the "squeezed middle" who are hit by stagnant pay and rising prices.

This report says to me that as a party we need to be campaigning as hard on prices and pay as on cuts.

3.22pm: Ed Miliband is not supporting the public sector strike on Wednesday, but he's not condemning it either. (See 1.20pm.) Lady Warsi, the Conserative co-chairman, isn't happy about that.

She's put out this statement.

If Ed Miliband doesn't back this irresponsible strike, then he should do the right thing for our economy and tell his union paymasters to accept the government's generous pensions offer and call it off.

3.20pm: Sir Mervyn King, governor of the Bank of England, is giving evidence to the Commons Treasury committee now. My colleague Graeme Wearden is covering it on his eurozone debt crisis live blog.

2.31pm: Michael Gove's speech this morning about "militants" organising Wednesday's strike (see 10.00am) has not gone down very well with the teaching unions.

This is from Christine Blower, general secretary of the National of Teachers

This dispute has been created by a government which is determined to steamroller through pension reform that will irreparably damage teachers' pensions. The issue has united the teaching profession, as will be demonstrated on November 30.

This strike has nothing to with 'militants' but everything to do with teachers and headteachers who do not believe the government is being fair or reasonable.

And this is from Mary Bousted, general secretary of the Association of Teachers and Lecturers

ATL members are among the least militant union members in the country. They don't want to strike, and they have never wanted to strike.

We have been asking the government to negotiate a fair deal for teachers for over 10 months and are desperately keen to resolve the dispute. But the government has been dragging its heels. Instead of engaging in megaphone diplomacy, which is likely to annoy teachers even more than they are already, Mr Gove must be prepared for a bit more give and take in the ongoing talks with us and the other education unions.

2.11pm: The Lib Dems have appointed a new chief executive. He's Tim Gordon, a former researcher to David Steel who has done various jobs in business management, including, most recently, working as as group development director at European Directories, a large European media company.

1.20pm: Here's a lunchtime summary.

• The Organisation for Economic Co-operation and Development (OECD) has said that Britain will slip back into recession.
As Larry Elliott reports, the OECD said output would fall in the final three months of 2011 and the first quarter of 2012. It said it expected the UK to grow by 0.6% in 2012 as a whole but the two consecutive quarters of contraction fulfil the technical definition of a recession. In its half-yearly healthcheck on the global economy, the thinktank cut its growth forecasts for all the west's major economies and urged policymakers to take urgent action to prevent the contagion spreading from Europe's sovereign debt crisis. George Osborne claimed that, although Britain faced "a challenge", the public supported the government's economic strategy. "They have had enough of politicians who think there is a quick fix solution who say you can borrow a bit more to get us out of debt," he said. "They know, the public, that this is not the answer for Britain and as a result actually I think the public is behind what the Government is doing." Ed Balls said: "The OECD remains diplomatic in its language, but both the OECD and the IMF were clear this summer that if the economy continues to underperform with slow growth then the pace of spending cuts and tax rises should be slowed down to support the economy."

The inquiry into the summer riots has said rioting will break out again if urgent action is not taken to address Britain's underlying social problems. The warning came from Darra Singh, chairman of the Riots Communities and Victims Panel.

It is 30 years since the publication of the Scarman report. The panel is clear that the riots in August were very different disturbances to those in 1981. However, it is a sad fact that in some respects, the underlying challenges are strikingly similar. While deprivation is not an excuse for criminal behaviour we must seek to tackle the underlying causes of the riots or they will happen again.

The interim report, which also criticises the police's response to the riots, is available on the panel's website.

• Ed Miliband has indicated that he does not support Wednesday's public sector strike. "Strikes are always a sign of failure but I'm not going to demonise the people who are taking the action," he said on a visit to an Asda branch in south London. "I don't support strikes because they are always a sign of failure."

• Michael Gove, the education secretary, has urged public sector workes to ignore the "militants itching for a strike" who want them to stop work on Wednesday. In one of the strongest attacks from a cabinet minister on the union leaders organising the strike, he said in a speech: "They want families to be inconvenienced. They want mothers to give up a day's work, or pay for expensive childcare, because schools will be closed." Answering questions later, he named some of the "militants" he was referring to. "You have only got to look at the words of Len McCluskey in the Guardian today, consider the conduct of Mark Serwotka throughout this dispute or look at the political record of Mr Andrew Murray, who is a lead official in Unite, to recognise that 'militant' is a badge that fits for all those three," he said. Dave Prentis, the Unison general secretary, said Wednesday's strike could be "the biggest action since the 1926 General Strike".

A poll for the BBC suggests 61% of people think public sector workers are entitled to go on strike on Wednesday over cuts to their pensions.

Christopher Jefferies, the retired school teacher caught up in the Joanna Yeates murder case, has told the Leveson inquiry that he was forced into a "hole-in-the-corner existence" by the hostile press coverage that followed his arrest at the end of 2010. At this morning's hearing, Leveson has also expressed concern about the fact that a draft of Alastair Campbell's witness statement was leaked to Paul Staines, who writes the Guido Fawkes blog. All the details are available on our Leveson live blog.

Chris Grayling, the employment minister, has announced plans to exempt one million self-employed people from health and safety legislation.


Official figures have revealed that the number of UK-born students who have applied to start university next year has fallen by 15%.

Mike Penning, the shipping minister, has announced plans to end the Ministry of Defence's involvement in the provision of search and rescue services. He said the government was buying a new fleet of search and rescue helicopters, to be operated by civilians.

12.40pm: If the public do support the government over the economy (see 12.22pm), that might be because Labour is now perceived as a party that is anti-business. At least, that's one theory set out in a high-powered 90-page collection of essays published today called Labour's business: Why entreprise must be at the the heart of Labour politics in the 21st century. Edited by Alex Smith (a former adviser to Ed Miliband) and Luke Bozier, it has already received plaudits from John Rentoul. Here's an extract from the introduction.

In the end New Labour was considered too cosy to big business in particular ...

Under Ed Miliband's leadership, that perception has swung too far back the other way. The Labour Party has once again gained a reputation, fairly or unfairly, for being anti-business. After Miliband's 2011 party conference speech, in which he made a distinction between "predatory" and "productive" enterprise, the Labour leader found it necessary to explain and re-explain his remarks to the national media after criticism from the Confederation of British Industry and the Federation of Small Businesses that he was "kicking" and "clobbering" business. A few weeks later, some Labour MPs jeered as one Conservative MP spoke about her success in the private sector during Prime Minister's Questions, allowing David Cameron to go on the attack ...

Labour has so far been unable to communicate an effective counter-argument. If it is to be the party of government again in the coming years, it needs urgently to do so. Developing a more cohesive, more central offer on enterprise, and improving the relationship with business, will be a vital step in the right direction.

12.22pm: George Osborne, the chancellor, claims the public supports the government's economic strategy. According to PoliticsHome, this is what he said in a TV interview at a building site.

I think the public understand that Britain has huge debts that it has built up. Those debts need to be dealt with. The public also understand that the eurozone makes that more difficult, but what they want the Government to do is stick to the plan that will take us safely through the storm and invest for the long-term future.

They have had enough of politicians who think there is a quick-fix solution, who say you can borrow a bit more to get us out of debt. As a result, actually I think the public is behind what the government is doing.

Is he right? Only up to a point. If you look at these YouGov figures (pdf), you'll see that a majority of voters believe that cutting spending to reduce the defict is necessary rather than unnecessary. But on other measures, such as whether the cuts are too deep, whether they are being imposed unfairly and whether they are bad for the economy, the polling numbers are against the government. On the overall question as to whether the coalition is handling the economy well or badly, some 57% say badly and only 34% say well.

Incidentally, I see that Osborne was wearing a workman's fluorescent top when he gave his interview. That's the second time he's appeared in Bob the Builder garb recently to speak about the economy. Presumably he thinks it conveys the impression that Britain is awash with construction.

12.09pm: Chris Grayling, the employment minister, has announced that around one million self-employed people will be excluded from health and safety legislation. He has published a report from Professor Ragnar Löfstedt called "Reclaiming health and safety for all: An independent review of health and safety legislation" (pdf) and, in a news release, he says he is accepting its recommendations.

Grayling also says that he is going to cut the number of health and safety regulations by a third over three years and that he is going to make it easier for businesses to challenge the decisions taken by health and safety inspectors.

From the beginning we said getting the regulation of health and safety right is important to everyone. By accepting the recommendations of Professor Löfstedt we are putting common sense back at the heart of health and safety. Our reforms will root out needless bureaucracy and be a significant boost to the million self employed people who will be moved out of health and safety regulation altogether.

We will also ensure our reforms put an emphasis on personal responsibility. It cannot be right that employers are responsible for damages when they have done all they can to manage the risk. Fundamentally we will ensure the health and safety system is fit for purpose through streamlining the maze of regulations and ensuring consistency across the board.

11.46am: I'm back from the lobby briefing. Here are the main points.

• Downing Street have welcomed the OECD's call for Britain to stick to its deficit reduction plan. Asked about today's OECD report predicting a double-dip recession, the prime minister's official spokesman said: "It's a forecast. There are lots of forecasts. There will be another forecast [from the Office for Budget Responsibility] tomorrow." But he said the OECD was backing the government's approach to deficit reduction. "They are very clear that it's important that the UK sticks to the approach it has taken on fiscal consolidation." He went on: "We are doing everything we can to protect the UK from the eurozone debt crisis and that includes sticking to our plans to deal with our debts and it also means taking some decisions on structural reforms to to ensure that we are laying the foundations for economic growth." Asked about a line in the OECD report suggesting that the OECD expects quantitative easing (QE) to be extended beyond the levels formally announced, he said ultimately decisions about QE were a matter for the Bank of England's monetary policy committee.

• An Anglo-French summit planned for this Friday has been cancelled. David Cameron will still be going to Paris, but he will just be having a bilateral meeting with President Sarkozy. Other joint ministerial meetings have been cancelled. Cameron and Sarkozy want to focus on the eurozone, the prime minister's spokesman said.

• EU ambassadors in Iran will be meeting today to discuss Iran's decision to expel the British ambassador, the prime minister's spokesman said. EU foreign ministers will also discuss this at a meeting on Thursday.

• The spokesman would not say whether any Downing Street staff would covering for border agency staff going on strike on Wednesday.

10.48am: You can read all today's Guardian politics stories here. And all the politics stories filed yesterday, including some in today's paper, are here.

As for the rest of the papers, here are some stories and articles that are particularly interesting.

• Wolfgang Munchau in the Financial Times (subscription) says EU leaders only have 10 days to rescue the the eurozone.

[Angela] Merkel can get her fiscal union, but in return she will now have to accept a eurobond. If both can be agreed, the problem is solved. It is the first intelligent official proposal I have seen in the entire crisis.

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets' enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy's disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

• Jeff Randall in the Daily Telegraph says George Osborne is pulling off "a brilliant confidence trick".

At the moment, the Chancellor is pulling off a brilliant confidence trick: persuading the markets that Britain remains a triple-A creditor, able to borrow on the same terms as Germany, while managing an economy with an inflation rate 66 per cent higher than the eurozone's average, and a national debt that is forecast to hit £1.32 trillion in 2015, nearly 40 per cent greater than today.

Common sense suggests that this will not go on indefinitely. As Mr Osborne puts the finishing touches to his Autumn Statement, he knows that he must deliver much more than illusory savings. With Britain's debt interest forecast to rise by 13 per cent in this financial year to £50 billion (25 per cent more than the defence budget), there is no scope for a loss of nerve.

• Michael Savage in the Times (paywall) says the government has had to hire 80 more judges to deal with benefit appeals.

Ministers have been forced to spend millions of pounds hiring more than 80 new judges to tackle a costly backlog of welfare claimants appealing against the loss of their benefits.

The bottleneck threatens the Government's pledge to reduce the welfare bill, because thousands of claimants continue to receive their payments — in some cases for more than a year — until a ruling is made on whether the removal of their benefits was fair. It is the first time that extra posts have been needed since 2007, when only ten Social Entitlement Chamber judges were recruited to oversee welfare appeals. In recent months 84 have been hired to help to deal with the caseload, at a pro-rata salary of £101,000 per year.

• Oliver Wright in the Independent says most government departments are missing up to a quarter of their key performance targets.

David Cameron has called in senior ministers to Downing Street
to ask them to explain why their departments missed key performance
targets – which they themselves had set.

An analysis of departmental "business plans", which outline what Whitehall bodies will do and by when they will do it, reveals that most failed to achieve almost a quarter of their targets. Embarrassingly it was the Cabinet Office – which has responsibility for the scheme – which missed the most goals overall with 38 actions overdue for a month or more.

Now The Independent understands that Mr Cameron has spoken to ministers from the worst-performing departments to press them on why they were unable to meet their self-imposed deadlines and how they intend to improve their performance.



• Brian Groom in the Financial Times (subscription) says high-paid public sector workers seem to be more keen to strike on Wednesday than their low-paid counterparts.

Unions won majorities of three or four to one for strikes. But those such as the FDA (formerly the First Division Association), representing senior civil servants, the National Association of Head Teachers and Prospect, another traditionally moderate union representing professionals, achieved turnouts of 53 or 54 per cent – well above the 29 to 33 per cent for big unions representing lower grades.

I'm off to the Number 10 lobby briefing now. I'll post again after 11.30am.

10.38am: I haven't seen the report from the Riots Communities and Victims Panel yet, but Sky News have just posted this on Twitter.

Report says riots would not have spread across country if police response in Tottenham had been more robust

10.18am: The OECD has published its new forecast for the UK economy. As reported over the weekend, it is saying that the UK economy will slip back into recession. Here's the top of the Press Association story.

The economic think-tank said the UK's GDP will shrink in the final quarter of 2011 and the first quarter of 2012 - the first time it has predicted a double-dip recession for the UK.
It believes the UK's faltering economy will grow by just 0.5% in 2012, down from its previous estimate of 1.8% in May, as it is hit by weak demand for exports, the Government's austerity measures and the squeeze in consumer spending.
The OECD also said unemployment, which currently stands at 8.3% - its highest since 1996 - will rise to 9% in 2013 as jobs figures take a worse hit than in the recession following the banking crisis.
It said more economy-boosting quantitative easing measures from the Bank of England are "warranted", adding that it expects the stock of asset purchases to rise to £400 billion early next year from £275 billion currently.

10.09am: The Leveson inquiry is now underway. You can follow all the action on our media live blog.

10.00am: Michael Gove, the education secretary, is accusing some union leaders of being militants "itching for a fight". I've just seen an extract from the speech he's giving this morning and, although he makes it clear that he is not attacking all union leaders, he accuses some of them of wanting to spread misery on Wednesday.

Here's the key extract.

On Wednesday, TUC leaders will call on their members to bring Britain to a halt. Among those union leaders are people who fight hard for their members and whom I respect. But there are also hardliners - militants itching for a fight.

They want families to be inconvenienced. They want mothers to give up a day's work, or pay for expensive childcare, because schools will be closed. They want teachers and other public sector workers to lose a day's pay in the run-up to Christmas. They want scenes of industrial strife on our TV screens, they want to make economic recovery harder, they want to provide a platform for confrontation just when we all need to pull together.

Gove also says that his own experience of strike action - he manned an NUJ picket line when he was a trainee journalist on the Aberdeen Press and Journal - taught him that strikes could be counter-productive.


I lost my job. So did more than 100 others. I was lucky - young, unmarried, without a mortgage. I got another job soon enough.

Many others didn't. They never worked again in the profession they loved. And the deal we were offered before the strike never improved.

So today I want to appeal directly to teachers - and other public sector workers - please, even now, think again.

9.32am: Labour have released some extracts from the speech that Ed Miliband is going to give when he visits an Asda store later this morning to hold a Q&A with members of staff. He is going to accuse George Osborne of making the "wrong choices" in his autumn statement tomorrow.

George Osborne's duty tomorrow is to make sure he doesn't squeeze even further.

Instead he must try and make the burden on families easier.

There are reports he is going to pay for youth jobs not with a bank bonus tax as we recommend but by freezing tax credits for families in work.

What a symbol that would be of the wrong choices this government is making.

Finally waking up to the problem of youth unemployment and paying for it by hitting the lowest paid working families.

Robbing Peter to pay Paul.

Instead, he needs to make choices to help ordinary families and help our economy.

9.19am: Danny Alexander, the chief secretary to the Treasury, has given at least four interviews this morning. PoliticsHome have been monitoring them all.

Here are the main points.

• Alexander renewed his claim that most public sector workers will get a better pension when they retire under the government's proposals than they do now. This is contested by the unions, as the Observer reported yesterday. But Alexander said: "For most people, particularly on middle incomes, particularly for female workers, they will get a better pension at retirement than that which they can expect now."

• He said that the fact that the China Investment Corporation was considering investing in infrastructure projects did not mean China was buying the UK.


Just like British firms invest in infrastructure overseas, we're encouraging overseas organisations to invest in infrastructure in this country, and if the Chinese sovereign wealth fund is going to join that, then that is potentially a very significant boost to the British economy. This programme of infrastructure investment is immensely important; it's something that can make a difference in the short and the long-term.

8.49am: It's a big week for the government, with the autumn statement tomorrow and a massive public sector strike taking place on Wednesday. I say the autumn statement is coming tomorrow, but it seems as if we have had it already, because so much has been trailed in advance. The Treasury has been briefing overnight on its £30bn national infrastructure programme and Danny Alexander, the chief secretary to the Treasury, has been giving interviews this morning about it. He said the decision to get pension funds to invest in infrastructure projects was partly inspired by Australian miners.

One of the things that I have found surprising in my time as a minister is that you visit, I visited Birmingham airport for example, a few weeks ago. Their runway extension is being paid for by the pension fund of Canadian teachers and Australian miners. We think that British pension funds should be able to invest and by signing the agreement that we are today, that will unlock £20bn of pension fund money.

I'll post more from his interviews shortly.

Otherwise, here's the diary for the day.

9.45am: The TaxPayers' Alliance and the Institute of Economic Affairs hold a briefing on the autumn statement.

10am: Michael Gove, the education secretary, gives a speech on industrial relations.

10am: The Riots Communities and Victims Panel, which has been investigating the August riots, publishes its interim report.

10am: The Leveson inquiry resumes. Today's witnesses are Charlotte Church, Anne Diamond, Christopher Jefferies, who was wrongly arrested on suspicion of murdering Joanna Yeates, former British Army intelligence officer Ian Hurst and Northern Ireland human rights campaigner Jane Winter. Paul Staines, who blogs under the name Guido Fawkes, has also been summoned to appear to answer questions about how he came to publish a draft of Alastair Campbell's witness statement on his blog.

11.30am: Ed Miliband holds a Q&A with members of staff at the Asda store in Clapham Junction, south London.

3pm: Sir Mervyn King, the governor of the Bank of England, gives evidence to the Commons Treasury committee about the Bank's inflation report.

3.15pm: Richard Desmond, owner of the Express newspapers, gives evidence to the joint committee on privacy and injunctions.

As usual, I'll be covering all the breaking politcal news, as well as looking at the papers and bringing you the best politics from the web. I'll post a lunchtime summary at around 1pm, and an afternoon one at about 4pm.

If you want to follow me on Twitter, I'm on @AndrewSparrow.


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The real George Osborne

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He is the unashamedly privileged chancellor who convinced the country of the need for austerity cuts. But with his poll ratings sinking and the public-sector in revolt, is George Osborne's credit running out?

A lot of people don't like George Osborne. "He looks permanently pink and facetious, as though life is one big public-school prank," writes the former Labour MP Chris Mullin, usually quite forgiving towards Tories, in his diaries for December 2010. In October 2008, he finds Osborne "perpetually smirking"; in November 2007, "as ever... obnoxious".

Three years ago, the rightwing columnist Simon Heffer wrote of the future chancellor: "George has poor judgment. George is unreliable... untrustworthy... to coin a phrase, a dolt." The same year, Alistair Darling, the mild-mannered then chancellor, described Osborne as "someone who conceals cynical opportunism with a pretty thin veneer of abuse". In 2009 Vince Cable, now the business secretary and, however hard he strains to hide it, an uncomfortable colleague of Osborne's, included a memorably double-edged portrait in his memoirs: "I have never rated George's understanding of financial and economic matters, but he is a political operator of some substance."

Osborne's biographer, Janan Ganesh, political correspondent of the Economist, says: "A lot of Tories haven't forgiven him for not cutting taxes." The prominent Tory activist and blogger Tim Montgomerie says: "There are probably only three or four columnists in the whole of Fleet Street who are Osbornites."

Over the past 12 months, the chancellor's poll ratings have sunk, as Britain has slipped from tentative recovery back to stagnation and probable slump, a deterioration confirmed yesterday by the Organisation for Economic Cooperation and Development, which predicted that the British economy will shrink in the current quarter and again in the first three months of 2012. According to Ipsos-Mori, they are already almost as low as those of chancellors Brown and Darling at the fag end of the last Labour government. On the internet, on anti-government demonstrations, wherever opponents of the coalition gather, the mere mention of Osborne gets an instant reaction. His face, his voice, his manner, his background, his political methods, his policies: he provokes in ways that David Cameron, so far at least, does not.

Today, when he delivers his exhaustively trailed autumn statement on the economy, and tomorrow, when possibly the biggest strike since the 20s is expected in response to his public-spending cuts, there should be plenty of opportunities for the Osborne-haters. The architect of our current austerity is, as Ganesh puts it, "conspicuously privileged": heir to the Anglo-Irish baronetcy of Ballintaylor and Ballylemon, created by Charles I in 1629; holder of a 15% stake in the upmarket wallpaper family firm Osborne & Little, a company worth – press estimates vary – between £15m and more than £30m; and son-in-law of the Tory peer, Lord Howell.

Other provocative CV details include: recommending Andy Coulson as his party's director of communications; membership of the infamous Bullingdon Club at Oxford; an unashamedly prosperous private life including the use of an elite private bank, private primary school for his children, and the regal Swiss ski resort of Klosters; and, most notoriously, a murky 2008 episode in Corfu, involving Osborne, the even more sharp-clawed, Labour politician Peter Mandelson, the tycoons Nathaniel Rothschild and Oleg Deripaska, and allegations of malicious gossip and the soliciting of an illegal donation to the Conservatives.

Osborne denied the latter. But he admitted afterwards that the Corfu incident "didn't look very good". Yet unlike his fellow ex-Bullingdon men and Tory patricians, Cameron and London mayor Boris Johnson, Osborne does not make a consistent effort to play down his privilege or make it endearing. "He is very reluctant to ever compromise his life for the sake of his image," says Ganesh. At least in public, Osborne is always confident, often to the point of arrogance; frequently dismissive and taunting towards opponents; and sometimes openly cruel and pleased with himself. Interviewed about the cuts and the economic outlook on the Andrew Marr Show on BBC1 on Sunday, Osborne looked grim and statesmanlike in repose – he has grown fleshier in office – but every time he began to speak his dimpled mouth formed a half-smile and his quick eyes were almost merry. Like a debating society star who thinks he is winning an argument, Osborne was transparently enjoying himself.

In the Commons, he is often highly effective. But sometimes he "crosses a line," says a frequent Labour adversary. "The unnecessarily harsh put-down – people remember that." Ganesh says: "Osborne thinks that if you are magnanimous, if you give your opponent credit, there are no rewards."

Since 2005, when he became shadow chancellor at the precocious age of 33, he has given more hostages to fortune than perhaps any other current British politician. "Under a Conservative government there will be real increases in spending on public services, year after year," he wrote in the Times in September 2007. "The charge from our opponents that we will cut services [is] transparently false." Last April he told the same paper, "We have no plans to increase VAT." Last October, he told the Commons that "fairness" would be a central principle of his spending cuts: "We are all in this together." In the same speech, he promised "to eliminate the structural deficit... [and set] national debt falling as a proportion of national income... We will achieve both these objectives... in 2014-15." After only five months in office, he concluded: "The action we have taken... has taken Britain out of the financial danger zone."

This year, as VAT has risen and the cuts have bitten; as unemployment has surged and growth has dwindled; as inflation has swelled and real incomes have shrivelled; as the FTSE index has shuddered and a fog of financial anxiety has settled; as the banks have failed to lend and the euro crisis has deepened; as the City of London has continued to lord it over manufacturing despite Osborne's talk of economic "rebalancing"; as historians have had to look further and further back – to the early 80s, the mid-70s, the 30s, the 1870s – to find a comparably grim economic era; so his cockiness and large claims have come to look more and more misplaced. Last week, an editorial in the Financial Times, while still broadly supportive of his cuts, concluded that his structural deficit reduction target "now look[s] impossible. Meeting this target in the fallback year of 2015-6 also now looks improbable. Most likely, the target will be reached only in 2016-17." In an accompanying article ranking the performances this year of the EU's 19 finance ministers – not exactly the stiffest competition – Osborne was placed seventh, and fifteenth for his economic achievements. "His reputation," concluded the FT, "has teetered."

Other critics are less equivocal. "He's cornered," says the former Bank of England economist David Blanchflower. "The government's growth strategy is in disarray. They just haven't realised it yet. Look at their excuses for the collapse in growth: it was Labour's fault. It was the weather [last winter]. It was the royal wedding – all the extra bank holidays then. Now it's the euro crisis. There comes a point at which you have to own the crisis. It becomes yours [as chancellor]." Last month, 100 other economists – some, but not all of them, left-leaning like Blanchflower – signed a letter to this paper urging Osborne to abandon his cuts strategy.

A rightwing critique of his policies has also been crystallising. Montgomerie calls Osborne's approach "all goalkeeper and no striker": deficit reduction requires growth, to generate tax revenue, as well as cuts. Last month the Spectator, usually strongly loyal to the government, announced a competition: "A bottle of Pol Roger, our house champagne, to whoever can explain George Osborne's growth strategy."

And yet, for all the mockery and fury he attracts, Osborne has a grip on British politics. "He is the dominant figure in the government," says Montgomerie. "He takes the big decisions, and the government works to his timetable." Cameron, like Tony Blair as prime minister, might be the administration's more charismatic, more public face; but Osborne, some Tories whisper, is like chancellor Gordon Brown, minus the rivalrous instincts and burning prime ministerial ambitions: roaming across Whitehall, disciplining government departments, worrying about the long term.

In the so-called "quad" of ministers that steers the coalition – Cameron, Osborne, Nick Clegg and the Lib Dem chief secretary to the treasury Danny Alexander – "Most of the political thinking is done by Osborne," says Ganesh. "His gift is for being able to see round corners. He is very vigilant of any political danger. He has a fascination with newspapers – he is probably better than anyone in Tory circles at knowing how to pitch a story – and he is a very assiduous student of other parties." As shadow chancellor, while many commentators were patronising him as "Boy George", he used this feel for the game of politics, and his needling, nimble Commons style, to steadily undermine chancellor Brown, who had previously seemed impregnable to Tory attack. Seven months before Cameron became leader, Osborne was already changing the political weather.

In important ways, he still sets the national agenda. Despite 18 months of his misfiring policies, most polls show the public continue to accept his relentless argument that the last Labour government, more than anything else, is responsible for Britain's economic troubles. More voters than not still agree with another key claim of his, that drastic public-sector cuts are an immediate necessity; and rank the Conservatives ahead of Labour for economic competence.

Carl Emmerson, of the Institute for Fiscal Studies, says: "Quite a bit of what Osborne wants to do, he's already pulled it off. Spending cuts in all the government departments are running slightly ahead of schedule. Public-sector job cuts are ahead of schedule. His tax rises are in the bank." Last week, the British government's borrowing costs even briefly fell below Germany's, providing useful backing for Osborne's other favourite assertion, that in the current global storm Britain is seen by investors a "safe haven".

Geoffrey Howe, another radical rightwing chancellor in challenging times under Margaret Thatcher between 1979 and 1983, says: "George has handled the Treasury well." And unlike then, Howe points out, Osborne has broad cabinet backing for his policies. Howe's successor Nigel Lawson, also a pivotal Tory chancellor, says: "George has grown enormously in stature. He has a clear sense of direction. He is very political. He's being pulled both ways, by those who say he must have a slower, Keynesian approach to the deficit, and those who want a tougher squeeze. But that puts him in a politically quite convenient middle position."

British chancellors are rarely popular for long. Some argue that they have responsibility without real power: "Governments no longer control economies," says Denis Healey, Labour chancellor in the 70s when the financial markets and the International Monetary Fund forced the Callaghan government to tack abruptly rightwards. How does he rate Osborne's performance? "I think he does it quite well. He's not outstanding."

Osborne sometimes meets with Howe and Lawson. But Lawson retains a certain objectivity: "The deficit reduction falling behind schedule – it's not good news for him," he says. "It is politically difficult. I don't think we're looking at the economy falling off a cliff. What we're looking at is a prolonged period of very low growth indeed." Professor Nicholas Crafts of Warwick University, one of the foremost historians of the British economy, is even bleaker: "The British economy is entering unknown territory for the modern democratic era."

Born Gideon Oliver Osborne

As with Cameron, Osborne's preparation for these perilous times has been patchy. He was born Gideon Oliver Osborne in 1971, and grew up in Notting Hill in west London, as the famous stucco inner suburb steadily metamorphosed from rundown immigrant quarter and squatters' paradise into a sloane heartland. Sympathetic profile-writers, and Osborne himself, play up his family's urban bohemianism and political adventurousness: his mother supported Amnesty International and opposed the Vietnam war, his father voted for several parties, and set up his wallpaper business in their kitchen, designing fabrics that were part aristocratic, part psychedelic.

But the contrast with more predictably grand Tory upbringings – "There was no family stately home," Osborne told the Times in 2006 – can be exaggerated. His mother switched to supporting the Conservatives in 1975. From the start, he went to private school. And away from Notting Hill's buffed-up crescents and private communal gardens – a self-contained world Osborne has lived in ever since – his family also had a large country property in Berkshire, the Vinnicks, with swimming pool and tennis court, which they sold in 2003, reportedly for £3m. Cameron, supposedly a very different sort of Tory, grew up in similar circumstances close by.

Osborne was the oldest and most sensible of four brothers. At St Paul's, his cosmopolitan London secondary school, "He was a bit of a swot and unusually grown up," says Ganesh. At 14, he changed his first name to George: "I couldn't think of anyone who I liked or who was successful who was called Gideon," he told the London Evening Standard in 2005.

At Oxford, similarly, his behaviour was more sober than his Bullingdon membership suggests: present for beery high jinks, but not necessarily an enthusiastic participant. "He's quite straight," says Ganesh. "His natural setting is to be a bit reserved. Whenever anything outrageous is taking place [in his Oxford years], he's a bit cowed by it." A contemporary at his then left-leaning Oxford college, Magdalen, remembers him as "a Tory Boy – you could just tell", who grew his hair long in the early-90s rave style, and "really wanted to be part of the gang that liked the Happy Mondays", but ended up sitting in a corner of the college bar with a group of other, slightly marginalised Tory Boys from smart families. "They used to sneer at us, and we at them."

Osborne studied modern history, not economics, and got a 2:1. He was not very active politically, but "current affairs", as he more dispassionately called it, had come to fascinate him and he left university with "a hunger to be involved in the game in some way," Ganesh says. The Conservatives had just won the 1992 general election and seemed as if they would be in power for ever, but Osborne tried journalism first instead. In 1993, he just failed to get a sought-after place on the Times's trainee scheme, and settled instead for freelance work on the Daily Telegraph's Peterborough diary column, a famous nursery for well-connected young journalists.

He did not stay there long. A friend who had been working at Conservative central office alerted him to a vacancy for a researcher there. Over the next four years, Osborne experienced the collapse of the Tory ascendancy first hand: "I joined the party the week Back to Basics fell apart," he told the Times in 2005. "I worked in the ministry of agriculture when BSE hit. I was on John Major's [general election] campaign team in 1997." Struggling institutions are often good places for able apprentices, and Osborne was given tasks that were increasingly high-status and formative. One was to go the Labour conference as an observer in 1994, with Blair newly elected leader. Osborne was dazzled, and remains an admirer of the peaktime Blair's mixture of adroit political positioning, free-market reform at home and muscular liberalism abroad.

'He's an extreme pragmatist'

"The perception of the public and of many journalists is that Osborne is the most ideological member of the government. I think the exact opposite," says Ganesh. "He's an extreme pragmatist, less ideological even than David Cameron." After the Tories' 1997 election disaster, he considered journalism again, approaching the Times to be a leader writer. Nothing came of it, and instead he became an aide and speechwriter for the beleaguered new Tory leader William Hague. To prepare Hague for prime minister's questions, Osborne played the part of Blair. The aggression and relentlessness with which Blair and Brown harried the Conservatives during the 90s left a lasting impression on Osborne. He would adopt their methods – and he would get even.

In 1999, he was selected as Tory candidate for Tatton, a glossy piece of Cheshire commuter belt that was usually one of the safest Conservative seats in the country. The anti-sleaze independent Martin Bell had won it in 1997, but had pledged to stand down after one term. Osborne lunched Bell at regular intervals to make sure he intended to keep his promise. Bell remembers Osborne exuding charm and just a hint of menace: "George had a lovely word. He said if he stood against me, it would be 'messy'."

Again like Brown, Osborne was for a period the sharp-elbowed young frontrunner for party leader, before a more decisive, more voter-friendly close ally took the prize. Cameron and Osborne had become friends as rising new MPs: "We used to bicycle back home [together] from the House of Commons," Cameron told the author Dylan Jones in 2007. Their favourite topic was "what was wrong with the party". Osborne, more socially liberal and with more understanding of the Tories' struggles in the late 90s (when Cameron had largely left politics to work in public relations), had become a party "moderniser" several years before Cameron. In 2005, Osborne was the then party leader Michael Howard's preferred successor. But after 10 days' deliberation and consultation with colleagues and conversations with Cameron – the content of all of which may one day be as closely raked over as the famous Blair-Brown deal – Osborne announced he would not run for leader. At 33, five years younger than Cameron, he reportedly felt he was too young.

Or it may be that Osborne is not quite as confident as he looks. "He understands that the public see him as privileged, aloof, that they don't like him as a person," says Ganesh. "One of the ways he handles it is by not being very visible. He enjoys the big set-piece occasions when he totally controls the terms of the debate, but he avoids more spontaneous appearances." On Andrew Marr on Sunday, when the shadow chancellor Ed Balls joined Osborne on the sofa and paid him some unexpected, possibly mischievous minor compliments, the chancellor sat stiff and suddenly tongue-tied. For someone talked up as a future Tory leader and prime minister, succeeding Cameron some time before the 2020 general election, Osborne's interpersonal skills can seem ominously Brown-like.

In less public situations, Osborne relates to people better. "He's a temperate personality," says Ganesh. "He's never very angry, or sad or euphoric." Montgomerie says: "I've always found George easier and more interesting to talk to than Cameron. He listens. He's got a court. George does decide that if you're one of his people, he'll go the extra mile to look after you, and people who have worked for him have extraordinary devotion. The public would find this startling." A former Labour minister says: "Within the Treasury he is well regarded: as someone who knows his mind, as a good operator."

That has not always been the case, though. For much of his time as shadow chancellor, Osborne was widely thought to be out of his depth. Until December 2008, well into the financial crisis, he made almost no criticism of Labour's public spending increases – "He and David Cameron got it completely wrong," says Lawson – then abruptly announced they were unsustainable. On other occasions, Osborne seemed partisan to a fault, opposing the nationalisation of Northern Rock, for example, as a "back to the 1970s" leftwing Labour policy, when commentators of all persuasions supported it as a pragmatic emergency measure. The 2009 appointment of the worldly former chancellor Ken Clarke as shadow business secretary was a humiliation of sorts: an admission by the Conservatives, it seemed, that Osborne lacked a certain experience and judgment.

The Corfu affair also fed that impression. Osborne, it appeared, had been outmanoeuvred by Mandelson (who denied the allegation that he had "dripped pure poison" about Brown into the ear of the shadow chancellor), and by Rothschild (furious that Osborne had used their private gatherings for public political advantage, and who made his fundraising allegations against the Tories in response). Back in blustery England, a windswept Osborne was mobbed by reporters in the car park of Conservative headquarters, and gave a less than composed interview, eyes bulging and head lunging. For several days, his whole career seemed in danger.

He survived. But a sense remains that, as a former Labour minister puts it, "Sometimes he can be too clever for his own good." In 2009, despite the financial crisis, he reportedly told a private meeting in the city of London that only "40% of my time is spent on economics".

"Economics is not his love," Montgomerie says. "His love is politics." Blanchflower says: "We've got a part-time chancellor facing a once-in-a-hundred years economic event." Osborne, it increasingly seems, has the same strengths and weaknesses as the government as a whole: a flair for presentation, and for framing issues, while vital in opposition, is less of a trump card in office, especially in hard times, when concrete achievements can be measured, sometimes by the voters themselves. A shut-down library is a shut-down library, however you spin it.

And unlike previous radical chancellors, Osborne does not have a strong intellectual tide running in his favour. "What we did was a revolution," says Lawson, referring to the decades of new rightwing thought that flowed into Thatcherism. "George hasn't had to do that." The government austerity currently in fashion around the world feels more like a panicked response than an international movement.

Deep down, does Osborne even believe in the cuts himself? "If you said to him, 'Design your ideal country,'" says Ganesh, "He would say, 'Small state. Low taxation'." But Ganesh also points out Osborne's enthusiasm for high-speed trains and other large state-connected infrastructure projects. Osborne's sudden turn against public spending three years ago, says Ganesh, was driven more by a desire to "save the country" than by any personal philosophy. Faced with the realities of Britain's rickety finances, chancellors and shadow chancellors of all parties have frequently turned parsimonious.

Some City figures who used to mock "Boy George" revere him now. David Buik of the brokers BGC Partners says: "He's a fast learner. His arrogance, his slightly sneering look, gives him the aura that is required. He doesn't give a damn about being liked. For him, it's just politics and the kids."

Osborne has two children, aged eight and 10, whom he does not show off in public. His off-duty interests – opera, galleries – have less of a populist tinge than Cameron's. Osborne's wife, Frances Osborne, is a successful biographer, and soon-to-be novelist, who writes about her racy ancestors and aristocratic life in general without much critical distance.

Could her husband really be prime minister? He is not much of an orator yet, with his rigid onstage posture and ponderous catchphrases – "Together. We. Will. Ride. Out. The. Storm," he told this year's Tory conference. But he is a lucky politician: lucky that Nick Clegg is even more disliked, that Labour are still tentative, that the euro crisis came along just as his cuts rationale was starting to unravel. None of these will divert attention from his policies for ever, though, and in the case of the euro crisis, will ultimately make his job harder, by stunting demand for British exports.

If, as seems highly likely, Osborne does not meet his deficit targets by the general election, remaining chancellor may be a difficult prospect. "The government haven't prepared the public for what happens if [in a second term] they have to come back for more cuts," says Emmerson. Osborne is said to have organised the more effective parts of the Conservatives' last general election effort, such as the orchestrated attack by business leaders on Labour, but a cuts-based campaign for 2015 as well would tax even his presentational powers.

Were the Conservatives to lose in 2015, as few commentators expect but the polls suggest is quite possible, Osborne may do something surprising. His professional life so far has been punctuated by swerves and U-turns, and he will only be 43. "He is part of the first generation of politicians who see politics as just one stage in their careers," says Ganesh. "He can walk away, make money. Or one of his interests is ultimately to go to America: be a political consultant, or teach politics."

"Early life can be gilded not just by overt privilege," wrote Frances in a book review for Vogue in 2008, "But simply by the possibilities with which it burgeons, and which, as we age, slip through our fingers."


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Britain's economy needs a big push but the Tories can only nudge | John Harris

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Osborne's grand plan to boost growth is a dogma-ridden hybrid that will squeeze the low-paid and rebound on the economy

Until the OECD officially predicted a double-dip British recession today, the spurt of hype and guesswork preceding George Osborne's autumn statement was just about doing its work. The airwaves crackled with news of the £30bn jump-leads to be attached to the national infrastructure plan, to be part-funded by pension funds, and coalition high-ups talked up 500 projects, including 50 or so "top priority" schemes that will get their money as soon as possible: electrification of the TransPennine rail line between Manchester and Leeds; upgrades to the M25, M3 and M56; work on the good old Kingskerswell bypass. All was sweat, cement and national renewal: a vision worthy of Stalin's Russia – without quite so much death.

It is easy to get lost in the midst of what seems to be a fit of grand-scale creative accounting but as I understand it, £10bn of the new plan's funds will be stumped up by the government. Some £5bn of that – a sum which looks likely to be snatched from millions of the low-paid, more of which in a moment – will have been spent by 2015, with the other half to follow later. The total, it should be noted, is a mere fraction of what is already being cut from capital spending.

Moreover, the details of the £20bn supposedly to be provided by non-government sources are very unclear: last week, there were reported noises from Whitehall insiders suggesting that the sum amounted to an "aspiration", while pension funds confirmed they were only in the foothills of talks with government, and the odd sceptical voice wondered whether such risk-averse interests would actually want to get involved.

This much we know. Pension schemes will not be the only big investors involved; there will also be a sizable role for sovereign wealth funds. On the FT's website on Sunday there was a piece by Lou Jiwei, the chairman and chief executive of the China Investment Corporation, which punts around a reasonable share of China's foreign exchange reserves. His set-up, he said, is collectively "keen to team up with fund managers or participate in public-private partnerships in the UK infrastructure sector as an equity investor". Here was what you might think of as nationalisation at a distance, whereby for all that the political class bigs up the dynamic wonders of Anglo-American capitalism, your local branch line, school gym or toll road will soon be a source of revenue for the state capitalists of Beijing. Interesting times, and all that.

PPP, you may recall, was what the last government intended to call the private finance initiative when it scented trouble; PFI's serial insanities were again pointed out by BBC Panorama this week, in a programme titled Who's Getting Rich On Your Money?. Since Osborne came to office he has signed off on 61 PFI deals which will eventually cost us about £33bn: but he has now affected to repent. Last month, he announced PFI was being reviewed, and the Treasury was aiming at a new approach which would mean "a lower cost to the taxpayer" and "better value for public services". The arrangements behind the national infrastructure plan seem to be the answer.

But here's the problem. The most important point is simple. Even if they don't involve the heights of lunacy scraped by PFI, the returns on the new scheme will have to be higher than those on government bonds in order to pull in investors. For Osborne, though, this has one big advantage: as with PFI, what amounts to borrowing to fund capital spending can be put off-balance sheet. Such are the wages of deficit fetishism: if the funds were earmarked for investment rather than consumption, he could raise the money by orthodox borrowing, but at that point the school play titled The Greek Defence would be over. Instead, he takes the circuitous and more expensive route. As one sage on Twitter put it, "China applies its vast surpluses by lending to the UK above prevailing gilt rates, securing future revenue. Snake-eats-own-tail."

This week I spoke to Richard Murphy, the economist and tax expert, whose new book has the self-explanatory title The Courageous State and brims with imaginative thinking. Using pension funds for national investment, he told me, could be done much more efficiently than the Osborne plan. In exchange for the vast sums granted in pension tax relief – £38bn at the last count – we could be compelling funds to put money into the very infrastructure projects the government is so keen on – and with no need for a mouthwatering rate of return to draw them in. The same logic, he says, applies to credit easing, the roundabout method Osborne is using to persuade banks to supply businesses with money. Again, were we to insist on a quid pro quo for pension tax relief we could channel funds into a national investment bank and send credit directly to those businesses. But that's all surely too ambitious for Whitehall, and far too dirigiste for the free-marketeers at the top of government. In its present state, Britain needs big push after big push; their approach remains limited to nudge economics.

And so to one other likely aspect of the autumn statement. According to several sources, some or all of the first £5bn for the infrastructure plan will come from squeezing tax credits for the low-paid. Here's a simple point, but it needs making: if that happens it'll represent another knock to demand. Though it's not been pointed out nearly enough, much the same applies to the money being demanded from millions of people in the public sector who will be out on strike on Wednesday. If nurses, teachers and firefighters have to find hefty amounts of money for increased pensions contributions the shock to the economy will amount to billions. From the VAT hike to Iain Duncan Smith's mad £500 benefit cap, this keeps happening. Why?

The coalition seems to be locked into an economic tragedy. Well aware of the speed at which things are going south, unable to pursue the right remedies thanks to its own dogmatic constraints and therefore tumbling into incoherence: giving with one hand and snatching with the other; extolling the wonders of the doughty British spirit while selling England by the pound. Osborne appeared on TV today, dressed in his now customary fluorescent building-site jacket, as if to suggest that even if it took financial chicanery and robbing the poor, Britain would soon be working again. "I think the public is behind what the government is doing," he said. He didn't sound that convincing.


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Britain will be back in recession this winter, warns OECD

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Longer dole queues in prospect, says thinktank, as Bank governor speaks of 'enormous challenges'

Britain will go back into recession this winter because of a fresh increase in unemployment, a squeeze on family budgets, government spending cuts and the eurozone crisis, the west's leading thinktank has warned.

Rejecting George Osborne's argument that an expanding private sector could soak up public sector job losses, the Organisation for Economic Co-operation and Development said on Monday that dole queues would lengthen to more than 9% of the working population as growth slowed.

The Paris-based thinktank said the new setback to the economy would lead to social problems that would require targeted support for the weakest and measures to combat fast-rising homelessness.

In its half-yearly Economic Outlook, the OECD, which advises more than 30 developed countries, cut its forecast for global growth in both 2011 and 2012, predicting the eurozone would contract by 0.2% and the UK would expand by just 0.5%.

However, it said output would fall in the final quarter of this year and in the first three months of next year, sending the UK economy into recession. Pier Carlo Padoan, the organisation's chief economist, said: "The global economy has deteriorated significantly since our previous Economic Outlook. Advanced economies are slowing down and the euro area appears to be in mild recession. Concerns about sovereign debt sustainability in the European monetary union are becoming increasingly widespread.

"Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed. Unemployment remains very high in many OECD economies and long-term unemployment is becoming increasingly common."

The OECD study said global growth this year was now expected to be 3.4% compared with the 4.6% predicted in May, but it stressed that the outcome would be worse if the eurozone failed to tackle its sovereign debt crisis.

Mervyn King, governor of the Bank of England, raised the same concerns in evidence to the Commons Treasury select committee on Threadneedle Street's latest Inflation Report, which also sharply reduced growth forecasts for next year.

"The rise in energy and food prices, which brought about a squeeze on real take-home pay, dampened consumption more than we had expected," he said. He added that problems within the euro area raised concerns about the health of banking systems around the industrialised world. "And that's raised the cost to banks of obtaining funding and hence the cost of borrowing to companies and households. These are enormous challenges and it will not be easy to get through this, and there will I think need to be a significant amount of rationalisation of debts and credits in the world before we are finally to emerge from the end of this."

Adam Posen, a colleague of the governor's on the Bank's monetary policy committee, said he was more worried about economic stagnation than inflation or deflation, and that central bankers needed to guard against repeating the mistakes of the 1930s. "If we repeat the mistakes of the past and prematurely tighten or insufficiently loosen, whatever you do on fiscal policy, whatever you do on financial regulation, will be overwhelmed by that mistake," he said.

The gloomy predictions from the OECD came as the chancellor put the finishing touches to Tuesday's autumn statement, in which he will be forced to admit that borrowing will be higher and growth slower than he expected at the time of his March budget.

High street spending is weak in the runup to Christmas, according to the CBI, which said sales activity had dipped for a sixth successive month. The employers' organisation said retailers were shedding jobs in the worst business climate since the recession two and a half years ago.

Commenting on the UK, the OECD said the Bank would need to increase its quantitative easing programme – electronic money creation through the purchase of government gilts from commercial banks – from the current level of £275bn to £400bn next year to avoid even slower growth. It urged Osborne to stick to his tough budget strategy unless the economy performed even less well than expected. Were that to happen, the OECD said the government would be justified in softening planned public investment cuts

The OECD report said: "Retrenchment by the household and public sectors continues to be a drag on the economy. Further headwinds come from a weakening global economy, lower asset prices and rising uncertainty related to the euro area debt crisis. With household consumption falling, government spending shrinking and export growth slowing, the economy is weakening.

"Employment is falling and unemployment is already higher than during the 2008-09 recession. Government employment will continue to fall, while the business sector will further decrease hiring in response to flagging demand. The weakening of the economy is likely to have a proportionally bigger impact on employment than in the recent recession, as real wages and shorter working hours may adjust less this time."

Ed Balls, the shadow chancellor, said: "Hard-pressed families and pensioners, young people out of work and businesses on the edge will be extremely concerned by these forecasts. They suggest our economy will continue to flatline, or worse, well into next year and that unemployment will rise even higher."

World economy
Africa leads the way in growth

As the OECD mapped out a path of sluggish growth for the world's richest nations, it was easy to be feel pessimistic about the world economy. But the thinktank points to the developing nations' bigger and bigger contribution to global GDP as a source of optimism.

African nations head the list of the fastest growing economies, with Zambia out in front. Copper mining, agriculture, chemicals and textiles, have pushed the nation to 48.7% GDP  growth. Zambia is the continent's biggest copper producer and has strong links with China.

Like many African countries Zambia can claim a strong growth rate because it starts from a low base. Tackling Aids has also played a part in recovery over recent years.

Qatar ranks second, with 30% growth. Oil and gas exports have propelled it above Liechtenstein and Luxembourg to top the poll of nations with the highest per capita GDP. Jordan and Lebanon are next in the growth league, with 11% and 19% respectively.

China is the first of the large nations to gain a high ranking, at 9.1%. Next is Argentina, which famously defaulted on its debts in 2001. Rich in resources, it has benefited from the decade-long boom in commodity prices and now matches China's growth rate.

India, Egypt and Indonesia rank in the top 15 nations for 2011 in a Bloomberg ranking, but may suffer from the global slowdown more than most, and in Egypt's case following its own internal unrest.

The two fastest growing nations of the last 15 years are Equatorial Guinea and Azerbaijan, which sits on the Caspian Sea between Russia to the north and Iran to the south. Both have grown rich on oil and gas.

Phillip Inman


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George Osborne exploits fall in borrowing costs to boost growth

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Chancellor to move to reassure markets be declaring he is still on course to eliminate structural budget deficit

George Osborne will on Tuesday move to reassure the markets that he remains in control of the British economy when he declares that he is still on course to eliminate the structural budget deficit after a projected £21.5bn fall in Britain's borrowing costs.

Amid warnings from the Organisation for Economic Co-operation and Development (OECD) that Britain faces a slide into a double-dip recession this winter, the chancellor will say in his long-awaited autumn statement that he expects to meet his "fiscal mandate" after a fall in 10-year gilt rates.

He will hail the lower borrowing costs as a sign of how he has protected Britain from the global sovereign debt storm that is currently focused on the eurozone.

The chancellor will give his most difficult financial statement to parliament since he outlined his "fiscal mandate" – the elimination of the structural deficit by 2015-16 – in his emergency budget in June 2010.

In a bid to show the coalition has not lost sight of its ambitions to promote social mobility, Osborne will unveil a series of measures designed to promote growth, including:

• An extra £380m a year by the end of the spending review period 2014-15 to extend free childcare for disadvantaged two-year-olds. This will mean 260,000 disadvantaged two-year-olds will have access to 15 hours of free education and care a week. This will add £650m to the £1bn already earmarked over the spending period.

• A £300m-plus package of tax breaks to promote investment in small businesses.

• An additional £50m to help save the overnight sleeper service between Scotland and London after it was threatened with deep and unpopular cuts.

• A new seed enterprise investment scheme for business startups. Business angels will be offered the carrot of 50% income tax relief on investments of up to £100,000 in new enterprises, with each company eligible for £150,000 of investment in total.

Osborne will say that his emergency budget of June 2010 has reassured the markets and led to a fall in gilt rates. He will say that 10-year gilt rates have fallen by 1.3 percentage points, from 3.6% to 2.3%, since the last forecast by the Office for Budget Responsibility at the time of the budget in March. This means that Britain will borrow £21.5bn less than previously forecast between 2011-12 and the end of the current spending period in 2015-16.

Osborne is braced for yet another downgrading of its growth forecast by the Office for Budget Responsibility, the independent forecasters established by the Treasury after the election.

The OBR is also expected to say that some of Britain's slow economic growth over the last year is structural, indicating that Britain has suffered a more permanent dent to the economy than previously forecast.

The chancellor will tell MPs that the UK's recovery has been slowed by the sovereign debt crisis in the eurozone. This point was illustrated by Sir Mervyn King, the Bank of England governor, who told the Commons Treasury select committee: "None of us can really know the scale of shocks that could come from the euro area and no banking system can withstand shocks that are sufficiently large so there is certainly no room for complacency.

"Over the last quarter I think all banks have become less safe because our banking system is exposed to the euro area. There is no question about it."

"There are many things that could happen if developments in the euro area get worse and I honestly don't think it makes sense to pretend that we know precisely how this will play out.

"What we have to do is to be ready and prepared with contingency plans and to make sure that as far as possible that our banking system is as robust as possible to withstand whatever shocks that could come from the euro area."

Under Osborne's tax breaks plan, small companies will see the one-year holiday on business rates – due to expire in October 2012 – extended for a further six months at an estimated cost to the Treasury of £210m.

Osborne believes 500,000 companies will benefit from the tax break, with 330,000 not paying any business rates in 2012-13.

The holiday offers 100% relief on business rates up to £6,000, with progressively smaller rebates on amounts up to a cap of £12,000.

The chancellor is also expected to unveil a new seed enterprise investment scheme for business startups.

Business angels will be offered the carrot of 50% income tax relief on investments of up to £100,000 in new enterprises, with each company eligible for £150,000 of investment in total.

The scheme will start in April next year and for its first year will be accompanied by a capital gains tax holiday to encourage those sitting on profits from previous investment to plough their money back into startup companies.

Government sources said the two schemes were likely to cost the exchequer £50m and were intended to help raise capital for those companies seen as potentially risky in the current environment.

Help for slightly larger businesses operating in those regions of the UK particularly hard hit by government spending cuts will also be earmarked for assistance through a business angel co-investment fund.

Small- and medium-sized companies with turnovers of between £200,000 and £2m a year and seen as having high growth potential will be eligible for help using £50m from the regional growth fund.

Osborne is expected to assist the cashflow of construction companies working on government projects by the setting up of new bank account arrangements to pay companies within five days or less of the due date. At present some companies have to wait up to 100 days for payment.

The £20bn that the chancellor is announcing for "credit easing" is money that will be channelled from existing promises that had been made by the Treasury to the Bank of England to enable Threadneedle Street to buy corporate bonds.

The Bank has not purchased many corporate bonds and some of the £50bn of guarantees will now be used, instead, to help banks raise money more cheaply on the markets – and in turn reduce the price of loans to small businesses.

The banks are waiting to learn the size of any fee they will be charged to benefit from the government's top-notch, triple A rated guarantee that, theoretically, should reduce the price they pay to borrow money on the markets – either directly from other banks or buy issuing bonds.

Will Hutton, co-author of a report on how to revive small business lending, said: "As it is structured, this won't add £1 extra of new credit."

His report, along with Ken Peasnell, argues that the government would have been more effective if it had created a vehicle to buy up small business loans from banks, freeing up their balance sheets.

Under the government's scheme, the cost of loans to small businesses should fall by one percentage point, according to the Treasury's projections, although this may be less if the government does decide to levy a fee for the guarantee.

Banks paid for the benefit of the government's triple A rating in October 2008 when Labour introduced the credit guarantee scheme to help them borrow money from lenders that were otherwise reluctant to lend.

According to analysis by Credit Suisse, as of 27 October there was £34bn of such loans outstanding.

An earlier scheme to help banks raise funds was known as the special liquidity scheme and is due to expire at the end of January 2012.

Analysts at Credit Suisse believe that these existing schemes still have a purpose. "We think that the current liquidity schemes will be extended in the UK to help ease the first quarter funding burden," they said.

Osborne will promise a one-off payment of £50m as a downpayment towards buying new sleeper carriages or to significantly upgrade the existing carriages for services travelling between Scotland and London.

But he will challenge the Scottish government to provide similar levels of funding and a guarantee that commissioning the new carriages will be underway before the end of this financial year before releasing the money, as a condition of the grant.

The Treasury offer follows the announcement on 15 November by Transport Scotland, the devolved government agency responsible for Scottish rail services, that it is considering significant cuts in sleeper services in a review of all train services.


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David Cameron threatens veto if EU fails to protect City

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Prime minister warns he will block any revision of the Lisbon treaty that does not safeguard Britain's financial services

David Cameron has threatened to wield Britain's veto to block a revision of the Lisbon treaty if fellow European leaders refuse to protect the position of the City of London at the EU summit in Brussels .

In a marked hardening of his rhetoric, as eurosceptic Tories called for a recasting of Britain's relationship with the EU, the prime minister said he would not sign any treaty that failed to provide safeguards for Britain's financial services.

"I will not sign a treaty that does not have those safeguards in it, around things like the importance of the single market and financial services," he told the BBC.

"If they choose to go ahead with a separate treaty then clearly that's not a treaty Britain would be signing or amending. But if they want to use the European institutions then Britain will be insisting on the safeguards and the protections that Britain needs.

"What I'm saying is that if – and eurozone countries do need to come together – if they choose to use the European treaty to do that then Britain will be insisting on some safeguards too. As long as we get those then that treaty can go ahead. If we can't get those, then it won't."

The prime minister spoke after reportedly telling the cabinet on Monday that a referendum on a revised EU treaty would divide the coalition. Tim Montgomerie, the editor of the ConservativeHome website, wrote: "He told his cabinet colleagues that a referendum would tear the coalition apart and couldn't be countenanced."

Eurosceptic Tories, who are demanding a referendum, expressed fears that Cameron would fail to use this week's summit to recast Britain's relationship with the EU. The eurosceptics raised their concerns after Downing Street indicated on Monday that Cameron would use the summit to try to protect the position of the City of London rather than to demand the repatriation of social and employment laws.

Stewart Jackson, the Conservative MP who resigned as a ministerial aide after rebelling against the government in a commons vote on the EU in October, wrote on ConservativeHome: "People will not understand if our prime minister fails to take advantage of the unique generational opportunity and congruence of events to press British interests and, more specifically, recast a whole new more mature and looser relationship with the European Union, in the event that the eurozone countries head off towards a children's crusade of 'fiscal discipline' – which it never has been and never will be in this country's long-term political and economic interests to support. The idea that the solution to a sovereign debt crisis is financial and political union flies in the face of reality and the withering verdict of the money markets."

EU leaders are expected to agree a limited treaty change to place tough new fiscal rules for the eurozone on a legal basis. Nicolas Sarkozy and Angela Merkel, who outlined their plans for treaty change in Paris on Monday, would like the Lisbon treaty to be revised by all 27 members of the EU. But in remarks aimed at Britain they indicated that they would be prepared to agree a treaty among the 17 members of the eurozone if they cannot reach agreement among all EU members. This means that Cameron is highly unlikely to be able to wield the British veto even if he wanted to.

Cameron spoke out after Brussels hit out at international credit rating agencies for "systematically" downgrading the forecasts of eurozone countries in the days leading up to European summits. Amid anger in EU capitals over the decision of Standard & Poor's to place 15 eurozone members – including France and Germany – on credit watch, EU sources said they had started to detect a pattern of behaviour by the agencies.

"It is interesting to look at the downgradings and the timings of the downgradings," one EU source said. "You will see systematically there are downgrades in the week of European Councils...It is strange that we have so many downgrades in the weeks of summits."

Jean Claude-Juncker, the prime minister of Luxembourg who chairs the eurogroup of finance ministers, dismissed the downgrade as a "wild exaggeration and also unfair".

The move by S&P caused particular anger because the announcement was made on Monday shortly after Angela Merkel and Nicolas Sarkozy had outlined their plans for EU treaty change to try and stabilise the euro. Merkel was dismissive of the move.

S&P followed its warning to 15 members of the eurozone by indicating that it may lower the triple-A rating of the eurozone bailout fund, the European Financial Stability Facility.


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OBR attacked by MPs over economic forecasts

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Office for Budget Responsibility criticised after admitting forecast for size of UK economy in 2015 was out by £65bn

The credibility of the Office for Budget Responsibility was attacked by MPs , after the government economics watchdog was forced to admit its previous forecast of the economy's size in 2015 was out by a margin of £65bn. The government's aim of eliminating the structural deficit "by the end of a rolling, five-year forecast period" was also criticised.

Robert Chote, the OBR director, was asked by the Treasury select committee if he thought the fiscal mandate he had been asked to police was wise, and replied that he had been debarred under the OBR's mandate to comment on the target's value.

Chote said: "You are right in saying, having chosen a rolling mandate, the government is moving forward the end point at which they are aiming each year."

Pat McFadden, the former Labour business minister, asked: "The chancellor could, if you like, keep rolling this forward, and this would be consistent with the rule that he's set himself ... Is this fiscal mandate meaningful if the carrot is always five years ahead?"

Chote was also repeatedly challenged to explain the big change in the OBR's forecast of the "output gap", the amount by which the economy could expand without hitting capacity constraints.

The output gap is crucial to determining the forecast size of the structural deficit, and the consequent need for further spending cuts.

McFadden accused the OBR of making massive changes to its forecast, and asked if it had got it so wrong this time, how could it be trusted in the future.

Jesse Norman, a Conservative MP on the committee, said many committee members "were worried about the whole illusion of technocratic expertise surrounding the OBR".

He added: "We are in condition of such uncertainty at the moment there are very high levels of guesswork." The trouble is that there are certain planks of the forecast which are actually theoretically dubious ... There are so many different variables that might affect whether or not the thing exists or how large it is, that it is not just a question of how it is calculated but whether or not there is a genuine piece of economic thought here at all."

Tory MP David Ruffely warned the OBR members that the chancellor's reputation was riding on their accuracy, adding: "You got it horribly wrong last time."

Chote defended himself by saying his task was to provide clarity and transparency.

He added: "All economic policy has to be set up in a forward-looking basis. The fact that it's extremely hard to predict what actual potential GDP is going to be in five years' time is certainly true.

"We've been asked to police a target to a cyclically adjusted measure of the budget balance in five years' time, so we have to reach judgments on those things."

Speaking in a debate on the economy, the chancellor, George Osborne, announced plans to force 15 banks, including foreign-based banks, to reveal the bonuses of the eight highest-paid executives who do not sit on their boards.

He said: "Limiting distribution includes restricting bonuses. Excessive pay in the financial sector is a concern at any time because of the perverse incentives it creates, but when it comes to linking pay to performance and being transparent we are implementing the most comprehensive regime of any financial centre anywhere in the world."

Osborne echoed the calls of the governor of the Bank of England, Mervyn King, for the banks to limit bonuses at a time when the priority is to raise bank capital.

The shadow chancellor, Ed Balls, called on Osborne to enact legislation requiring publication of the bonuses of all bank employees in banks earning more than £1m.


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Ed Balls is right on the economy – but the public aren't ready for Keynes | Jonathan Freedland

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As recession bites, the shadow chancellor's economic approach will gain admirers. Political reward will surely follow

I heard it first from a senior aide to the prime minister. But I've heard it a dozen times since. Confronted with the argument that the best way to breathe life into an economy gasping for air is not to strangle it tighter but to give it oxygen – that the way to boost growth is a jump-start stimulus rather than more austerity – there comes this reply: "Even if that's right economically, it will never fly politically."

That has become the automatic response to any suggestion that the coalition's plan A should be ditched and replaced with a Keynesian plan B, one that includes spending for growth. Some government spokesmen still cling to the line that "No credible economist in the world believes that" – although it becomes ever harder to sustain when a clutch of Nobel laureates, along with Martin Wolf of the Financial Times and the crossbench peer Robert Skidelsky, are lined up in the opposite camp.

Others are shifting ground, conceding that Keynes might have been right after all – that, paradoxical as it may seem, the best deficit-shrinking machine is a growing economy, even if it takes some initial borrowing to get the machine started – before hastily insisting that the politics makes it irrelevant. That man in Downing Street declared himself agnostic on the economic rights and wrongs of the question, preferring to cite the poll numbers that show "the electorate is in a different place", with voters agreeing by an 80-20 margin with the simple proposition that we are in a debt crisis to which the solution cannot be more debt. Daniel Finkelstein of the Times, a commentator very close to George Osborne's thinking, put it succinctly after last week's autumn statement. "Ed Balls ended up arguing that we are borrowing too much and that the way to borrow less is to borrow more … I promise you, this is never going to work politically. Ever."

But is he right? Is the opposition fated to watch powerless as the government pulls the national belt ever tighter, even as growth tumbles further towards the zero mark and recession, because the voters won't back any other course of action? Support for that view came in the weekend polls, suggesting that far from taking a hit after last week's recitation of gloom and doom, Osborne's ratings had either held firm or increased, putting the Tories a nose ahead of Labour. It is a remarkable thought, one that reverses all political conventional wisdom, which normally insists that when the economy tanks, so do the fortunes of the incumbent government.

The starting point for the anti-Keynesians – including those within Labour's own ranks – is that the idea is simply too hard to grasp. As Finkelstein argued, when the remedy to a debt crisis is framed as borrowing more to borrow less, it sounds like a paradox too far. Yet this might be no more than a problem of communication. Note the metaphor deployed by the Nobel prizewinner Paul Krugman, suggesting it was Osborne's austerity programme that was perverse, and comparing the chancellor to "a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding". That single image conveys instantly both the folly of government policy and the logic of a Keynesian blood transfusion, vital to get the body economic back on its feet.

Persistent, empirical argument is essential too. A quick look at the record of British debt going back to 1830 shows that, by historical standards, our current indebtedness is no more than a modest uptick compared with, say, the late 1940s, when debt was five times as great as it is now – and yet it was precisely then, when the country really was drowning in red ink, that Keynes was advocating a fiscal stimulus.

Still, the problem is that Balls is right on the economics but not getting the political reward. As Adam Lent, the co-author of In the Black Labour – a new paper much discussed in opposition circles – argues, elections are not rounds of Mastermind, with victory awarded to "the smartest guy in the room". Labour can wave all the charts it likes, but it won't work if it runs counter to what the public regard as common sense.

What will shift public sentiment is not Labour speeches but time and events. In his first appearance before Labour MPs as shadow chancellor in January 2011, Ed Balls told his colleagues it would take until October before it was apparent whether the government's plan A was working economically and until mid-2012 before it was clear whether the situation could be turned in Labour's favour politically. He's already been vindicated on the first prediction. As for the politics, Balls believes there is a natural sequence that can't be accelerated. First, the public has to conclude that the current approach is not working. That is not as simple a step as it might seem: even consistently low growth and high unemployment figures will not settle it overnight. For voters who switched to the Tories or Lib Dems to declare that the government got it wrong will be to concede that they themselves got it wrong, and people are always reluctant to do that.

Even once they've made that critical shift, the public will need to make another – by wondering if there is an alternative. As one senior Labour figure puts it: "Before you're the answer, people have to ask the question." Current polling suggests we're not there yet. But Balls is surely right to believe that once cuts and job losses really hit home they will feel infinitely more real than the inherently abstract notion that is the deficit. At that point, voters will be looking for another way – and the question will then be: "Does Labour offer it?"

Which brings us to the problem that cannot be ducked: Labour's credibility. It doesn't matter if Keynesianism makes logical sense, and if people are crying out for answers: it will all be for nought if they simply don't trust Labour with the country's money. Some propose extreme remedies for that problem, ranging from a wholesale apology for excessive spending in the Blair-Brown years to the sacking of Ed Balls, hurled overboard as a living embodiment of the Labour economic record (an outcome that would delight the Tories).

Others offer less drastic solutions. The In the Black authors argued on these pages that Labour has to show it understands we now live in an age of austerity, that there is no longer "cash to splash" around, and that social justice will be pursued through reform rather than spending. It urges the party to be fiscally conservative to its core; not to pay lip-service to prudence while simultaneously opposing every coalition cut; and to devise a serious deficit-shrinking programme of its own. Only then will it be trusted enough to be heard.

You can see why that works as a political fix. But it is no rebuttal of the economic rightness of the Keynesian position. It is, in fact, fully compatible with a call now for a plan B, Britain's urgent need for which grows more apparent by the day. The key is in the timing. There is no contradiction in saying that the patient who lies bleeding needs a transfusion now, but that once he's back to good health he'll have to go on a diet. Keynes himself was no deficit-denier; he called for short-term stimulus in the bad times, fiscal prudence in the good times.

Right now it may seem a hard, complex case to make. But no matter how awkward the current politics, Labour's analysis remains the right one, a truth that will become clearer as the economy deteriorates further. Where the economics leads, the politics will surely follow.


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Manufacturing struggles again as City takes up the slack

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The travails of manufacturing and the decline in oil and gas output have made the UK even more dependent on financial services as it tries to pay its way in the world

The industrial strategy of the coalition government in late 2011 is the same as it was when Gordon Brown was about to become prime minister in June 2007. When David Cameron says that his red line for Thursday's European summit is that no harm should come to the City of London, it is like watching the clock being turned back to the heady days before the crisis. Brown ended his long stint at the Treasury with a Mansion House speech in which he said Britain needed "more of the vigour, ingenuity and aspiration that you already demonstrate that is the hallmark of your success".

That model of the economy went down the tubes six weeks later, and it became plain as Britain sank into its most grievous recession since the 1930s just how dependent the economy had become on its over-leveraged financial services sector. The new coalition government promised change. It pledged itself not just to austerity but to a rebalancing of the economy that would make the City less pivotal to the country's well-being.

George Osborne got quite carried away by this prospect in his 2011 budget. "We want the words: made in Britain, created in Britain, designed in Britain, invented in Britain, to drive our nation forward," the chancellor said at the climax of his speech.

Politicians say this sort of stuff all the time, of course, but there were some grounds for optimism. In early 2011, the global economy looked set for robust growth and British exporters had a competitive advantage over their rivals of a 25% drop in the value of sterling since 2007.

There has, however, been no march of the makers. Wednesday's manufacturing data shows that, far from being in the vanguard of economic revival, Britain's factories are leading the retreat. Manufacturing output has been sliding since the spring, and fell by 0.7% in October, the latest month for which data is available. There are one or two bright spots: production of capital goods is still growing, which suggests that some hi-tech firms are still prospering; output from food and drink companies is up, because even when the overall economy is struggling people still have to eat.

But the underlying state of manufacturing is poor. Output is 7% below where it was at its most recent peak in 2007, and would presumably have been lower still had it not been for the falling pound. The UK's trade deficit in goods continues to widen as it has done inexorably since the early 1980s, only this time without the cushioning effect of North Sea oil and gas production. Wednesday's data from the Office for National Statistics shows that the fields are rapidly running dry: North Sea output is down by 30% since 2008.

The travails of manufacturing and the decline in oil and gas output has made the UK even more dependent on financial services as it tries to pay its way in the world. Britain's surplus in its trade in services – of which financial services makes up a big component – offsets more than half the deficit in trade in goods. This is the argument used by the City when it lobbies ministers for help in blocking things it doesn't want – an FTT, a splitting up of banks into retail and investment arms, more European regulations. The message is simple: there is only one goose capable of laying any golden eggs, so do you really want to kill it?

We have been here before. In the 1920s, Winston Churchill said he wanted "finance less proud and industry more content", but hobbled manufacturing by bowing to the City's insistence that Britain should be put back on the gold standard. Likewise Cameron and Osborne can see the dangers in having all the nation's economic eggs in one basket, but as manufacturing continues to head south expend large amounts of political energy ensuring there is no diminution in a sector they say they want to see become relatively less important. Nothing has changed.


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A three-step programme to re-civilise capitalism | Michael Lipton, Stephany Griffith-Jones and Robert Wade

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Before the big bang, banking served the 99% well. Here's a way to return to a fairer economy

What should protesters protest for? They rightly oppose the many faults of the current economic system, but what is the alternative? What ground should occupiers occupy? What can politicians who reject corporatist politics-as-usual, and economists who reject wrong economic thinking do in response to justified protest? How can the economy be transformed to serve the 99%, instead of the 1%?

Capitalism can work if reformed, and history can teach us much. In the period 1940-80, the Keynesian, mixed-economic models of north-west Europe, North America and many developing regions delivered to the poor and weak, while not frightening the strong. The financial sector was fairly small, well-regulated and simple; it financed the real economy, as it is supposed to. Growth, employment and security were high, poverty was reduced and liberty preserved, partly because social democracy helped both to moderate capitalism and to oppose communism.

From this experience, we know that reversing the huge growth of inequality can raise fiscal revenues, for use in job creation and investment, helping the many countries now needing to create employment without excessive government deficits. We also learned in that period that smart, accountable financial regulation impedes re-creation of crises. When in the 1980s finance was deregulated, both nationally and internationally, crises became the new normal, first in much of the developing world and then in the developed countries. The process of extreme liberalisation also contributed to growing inequality.

The mentality for re-civilising capitalism must be created, and we know how. The collapse of communism and the rise of unfettered finance were accompanied by the triumph of a dogma: "new-classical" economics. This new "opium of the intellectuals" captured first the economics profession, then opinion-formers, media and politicians; first the traditional right, then liberals and even much of social democracy.

The crisis has exposed as worthless the predictions of new-classical economics – and, with them, its "state can do nothing" dogmas (efficient markets, rational expectations). But that will not suffice to get the new-classical rot out of economics, philosophy and politics. We must turn to first principles – drawing on history of thought as well as of facts – to replace the new-classical edifice and provide a better, more equalitarian and sustainable alternative. Marxism has a role, but a modest one: the key economists include classical ones (like David Ricardo), liberals and social democrats (like Alfred Marshall, Keynes and Hyman Minsky) and modern successors (Nobel laureates Paul Krugman, Amartya Sen, Joseph Stiglitz and James Tobin).

With that in mind, here is a short-run programme for effective protesters, economists, and progressive political parties.

1. In the next few months, restrict tax loopholes for the rich and the financial sector, including via tax havens. Tax evasion and insufficient tax on the rich, as well as on large corporations, prevent equalisation, impoverish welfare states, and contribute to unsustainable debt. Tax havens not only facilitate tax evasion but, more important, regulatory avoidance. Britain controls havens with over half this money and can lead on this. Increasing taxes on the wealthy in general, and spending them on job creation, will be valuable.

2. In the next year properly regulate, nationalise or break up large systemic banks. This is not socialism. It is saving capitalism from crisis by returning to the 1930-80 "Bagehot Glass-Steagall compact" that private banks, if big, can secure themselves from illiquidity crises by a lender of last resort, only by accepting strict regulation in exchange. Then they cannot bet our money on rescue from insolvency at public expense.

This earlier compact had prevented the emergence of banks "too big to fail", which maximised short-term profits and bonuses in boom, feeding off taxpayers in recession. Thus banking served the real economy fairly well in 1940-80, and still does where undestroyed, in China, India, Brazil and much of the developing world. However, the OECD cannot just go back to pre-1985 banking. The big bang made big banksters.

Large banks – fat on asymmetric risk and herd incentives – are strong and uncontrolled. They try to limit, or kick into the long grass, relatively modest efforts at re-regulation. Such efforts are limited, because path-dependent on power structures destroyed in the 1980s as a result of financial deregulation. Systemic banks should be brought into public control, if they cannot be properly regulated. For most large banks that may imply a long period of public ownership – facilitating lending to small job-creating and innovating enterprises, and financing major green infrastructure, to support sustainable growth. The even larger shadow banking sector must be regulated in an equivalent way to banks, to limit systemic risk and reduce speculation as much as possible.

3. In the next five years, raise by half the income share of the poorest 10% (via labour income, not benefits), and reduce by a quarter the income share of the richest 10% (while shifting tax away from enterprise and labour, towards "churning" financial transactions, land, and inherited wealth). This will only partly restore income distribution as in the 1970s, but it is feasible politics and economics. Also, cut inequality and we need not cut health and education: as the very rich are taxed, government income revives and the deficit falls. Meanwhile, the poor spend extra income, demand revives and slump is escaped. Reducing inequality cuts deficits and raises demand.

On these points Britain should co-ordinate – with the EU, US, Japan and increasingly with developing countries – but not delay.

In the long run our ills are traceable to the monster of new-classical economics, as well as the power of vested interests. Economists, by putting these ideas in historical perspective, can show how they have been proved wrong again and again. By curbing unfettered finance and making it support, instead of undermine, the real economy, politicians can lay the foundation for more stable and inclusive growth.


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