9425135's blog: "A simple world"

The chancellor said he had been following a "hard and difficult road" as he sought to eliminate Britain's structural budget deficit mainly through spending cuts.

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But he said that Labour's campaign on the cost of living, to be highlighted in Ed Miliband's speech to the TUC on Tuesday, did not amount to an economic policy. Osborne said: "You don't solve the pressure on the cost of living with simply a shopping list of interventions and government regulation."

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The chancellor said he acknowledged the impact of rising utility bills and the costs of financial services. He is to address these later this year.

Osborne said: "We know every penny counts for hard-working people. But by themselves these changes don't amount to an economic policy. And to focus exclusively on these things alone, important as they are, is to miss the wood for the trees.

"I know times are tough and that family budgets are squeezed. But fundamentally Britain is poorer than it was not because government didn't intervene enough, or rail regulation wasn't tough enough or rental policies weren't fair enough. Britain is poorer because of a massive failure of economic policy in the last decade."

The chancellor said he was targeting the cost of living through tax-free childcare, low mortgage rates and raising the tax-free personal allowance to £10,000. Labour's plan would increase the cost of living, he maintained.

"The alternative plan still being presented is a return to higher borrowing, more debt, more instability, lost jobs, rising interest rates and higher taxes. These will all add hugely to the cost of living."

Balls is likely to counter that the economy has gone through three years of lost growth, and even now is underperforming. He may also suggest that the recovery is based on job insecurity, social division and falling living standards for most people.

Osborne said: "The only sustainable path to prosperity is to reject the old quick fixes and stick to the course we have set."

He admitted there had been controversy as to whether GDP growth had been lower than he and the Office for Budget Responsibility (OBR) forecast, saying there were two competing analyses: "The first is a simple – some would say simplistic – story that lays the blame mainly or sometimes entirely on fiscal consolidation by the government."

These fiscalist advocates of plan B, Osborne says, claim that with interest rates at their lower bound, the fiscal multipliers – the impact of spending cuts and tax rises on output – have been much higher than anticipated, and the resulting impact of the consolidation on GDP growth far greater than forecast.

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The counteranalysis advanced by supporters of Osborne's plan A is that fiscal consolidation has not had any greater impact than originally allowed for in the OBR's June 2010 forecasts.

Osborne argues that plan A led to lower than expected growth not because of spending cuts, but mainly due to "external inflation shocks, the eurozone crisis and the ongoing impact of the financial crisis on financial conditions".

Osborne said the OBR agreed with the Treasury that the effect of multipliers on UK growth had not been bigger than its original estimates. "Proponents of the fiscalist story cannot explain why the UK recovery has strengthened rapidly over the last six months. The pace of fiscal consolidation has not changed, government spending cuts have continued as planned, and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.

"If the fiscal multipliers were much higher than the OBR estimates, as the fiscalist story requires, this should not be possible. Indeed, proponents of the fiscalist analysis predicted that stronger growth would only return if the government changed course and reduced the structural pace of consolidation".

The chancellor argues that the impact of cuts is likely to be relatively low in an open economy with a floating exchange rate and independent monetary policy. He also asserts that the UK's pace of fiscal consolidation, at around 1% of GDP per annum, is line with the G7 and G20 average and the IMF's guidance for developed economies.

The main remaining external risks to recovery are "the slowdown in emerging markets, the possibility of further turbulence in the eurozone, and the risk that instability in the Middle East will push up oil prices".