Will the coalition deliver on the economy?

Chancellor George Osborne and Business Secretary Vince Cable
Image caption Chancellor Osborne and Business Secretary Cable are eager to make radical changes quickly

Every new Government likes to give the impression of hitting the ground running.

And the coalition has succeeded in that when it comes to economic policy.

Even the critics would concede that Chancellor George Osborne has embarked on a rapid and ambitious programme of change.

The need to reduce government borrowing was an over-riding and urgent priority for the new administration.

Within days of the coalition being formed, Mr Osborne gave away an important power much cherished by previous chancellors.

The right to come up with forecasts for growth and government borrowing had been guarded for generations in the chancellor's office at the Treasury.

Officials would present a range of scenarios and the chancellor could choose the one that best suited the Government's political aims.

Revised growth forecast

Mr Osborne announced the creation of an Office for Budget Responsibility (OBR).

It was to be an independent provider of forecasts that would be adopted by the Treasury.

Sir Alan Budd, a former Bank of England policymaker, was appointed to head the OBR, assisted by two well-respected economists, Geoffrey Dicks and Graham Parker.

The chancellor argued that there could be no more fiddling of figures and that a new transparency was the order of the day.

In just a few months the OBR put together an 80-page report on the public finances.

The Labour government's growth forecast was revised down for 2011, but former Chancellor Alistair Darling was quick to point out that the OBR's borrowing predictions were a little less grim than what he had come up with in the Budget.

The figures were designed to inform the coalition government of the scale of the fiscal problem it faced in the run-up to the first Budget.

'Not leaned on'

So far so good.

Image caption Sir Alan's departure from the OBR created waves

But the new structure was to come under heavy scrutiny and some of the shine would come off the coalition's reform programme.

The OBR became embroiled in political controversy when it allowed the Treasury to rush out forecasts of public sector job losses minutes before Prime Minister's Questions.

Critics alleged that the timing suited Prime Minister David Cameron in his attempt to demonstrate that cuts would be little different from what would have happened under Labour.

When it emerged that Sir Alan would quit his post as head of the OBR after just three months, the conspiracy theories began to take off.

Had Sir Alan quit because the OBR's was not sufficiently independent?

Lord Eatwell alleged a "disagreement" had led to Sir Alan's departure.

Lord Myners, the former Treasury minister, said the OBR was staffed by people seconded from the government and Sir Alan reported to the Treasury's head of forecasting.

Whitehall sources argued that there was no question of Sir Alan being leaned on and that he had always made clear he would leave after a few months.

Facing robust questioning from MPs on the Treasury Select Committee, Sir Alan admitted that he might have been "naive" about the release of public sector job figures.

He said the timing, just before Prime Minister's Questions, was simply an unfortunate coincidence.

He did argue that the OBR needed to demonstrate its independence more forcefully and being housed away from the Treasury was a necessity.

Cuts and tax rises

Mr Osborne delivered his first Budget not much more than a month after taking office.

Any new boss inheriting a difficult situation at a company will want to "throw the kitchen sink at it", in other words, take the tough action fast, get the bad news out of the way and blame the predecessor.

Mr Osborne took a similar line.

Image caption Chancellor Osborne delivered his first Budget soon after taking office

Alongside him was Danny Alexander, the Liberal Democrat Treasury Chief Secretary.

The new chancellor set out an ambitious plan to slash government borrowing by the 2014 financial year.

The previous forecast was £71bn of borrowing that year.

Mr Osborne cut that to £37bn.

His plan was made up of 77% spending cuts, the rest tax increases.

And all that was to be on top of the policy tightening announced by Labour.

Specific measures included a VAT increase to 20%, taking effect in January 2011, and a higher rate of capital gains tax.

Millions of taxpayers would gain from a move to raise the tax free allowance by £1,000.

But the chancellor also announced an attack on benefits, with cuts to tax credits and a freeze in child benefits.

The deficit-cutting plans were given the thumbs up by investors and, crucially, the ratings agencies that assess whether the UK will retain its gold-plated triple-A rating.

But indicators of confidence on the High Street and in the housing market began to wobble within weeks of the Budget.

That may be coincidence or it might be the reaction of consumers to a harsh austerity message.

Success or failure?

The Treasury would not deny that the hardest challenges are still ahead.

The detailed spending review, to be unveiled on 20 October, will contain some nasty shocks for voters as talk of spending cuts will give way to the reality.

Perhaps the biggest unanswered question for the coalition is the future direction of the economy.

Will growth falter in the wake of fiscal tightening and will the international recovery run out of steam?

The answers will go a long way towards determining the success of the coalition in office.

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