George Osborne has a tricky task in front of Parliament on Tuesday. He will have to admit to a much gloomier outlook, while sticking to the multi-year deficit reduction plan that he laid out last spring. His challenge is to square this circle credibly.
The new OBR forecast is certain to show a lower growth profile for the economy than that of the March budget. Quarterly outputs have been weaker and employment growth has stalled. Banks are rebuilding their balance sheets but lending to small businesses is still weak. The eurozone crisis has deepened, with a resolution not yet in sight. With such an unrelentingly negative backdrop, it is no wonder that business and consumer confidence are sinking.
Restoring confidence and reassuring the markets should be Mr Osborne’s twin objectives. A two-pronged approach will be necessary. Confidence can be built by laying out a medium-term growth strategy based on an investment revival. The markets can be reassured by stressing fiscal policy stability in the UK, which contrasts so strikingly with the policy uncertainty and political turbulence abroad.
Policy stability means sticking to the announced public expenditure cuts and pension reforms that will have a big cumulative impact on curbing government debt. It does not mean inaction or callousness in the face of slower growth. A tight fiscal stance provides the space for the Bank of England to continue with a loose monetary policy. It will help cushion the effects of the downturn. But just as Gordon Brown’s watchword while he was chancellor was ‘prudence’, Mr Osborne’s should be ‘stability’. Only time will tell if he lives up to his word better than Mr Brown did.