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."