After a phoney election campaign, no clear result and a compromise government, the hard business of sorting out the UK’s budget deficit really started properly this week. The previous £6bn of cuts were nice, but not that big compared with a £155bn deficit this year. So, this week we had further cuts, and next week’s Budget will doubtless have even more.

However, one of the Chancellor’s initiatives came good in the past week, namely the Office for Budget Responsibility (OBR). This new entity, set up swiftly after the election, published its first report on Monday, and by all accounts did a pretty good job. Sir Alan Budd and his two colleagues presented a far more realistic forecast for GDP growth over the next few years – with growth running below 3% a year, rather than above it, as the previous government had assumed – but at the same time took on board the fact that tax receipts had been a bit higher, and spending a bit lower, than previously feared. All told, the OBR thinks that, based on unchanged fiscal policies, the cumulative deficit (in pounds at least) might even be a bit smaller than the old Labour government thought back in March.

However, the devil, as always, was in the detail. While overall borrowing may be marginally lower, the OBR thinks that more of the deficit is structural – that is, unrelated to the economic cycle and the recession. That means that growth, by itself, will wipe out less of the deficit. So Osborne and Alexander now face the challenge of where to cut, and how quickly.

To my relief – and admittedly surprise – they don’t seem to be doing too bad a job so far. The government has grasped the fact that, to have any chance of keeping the economy growing, the deficit has to be closed mainly via spending cuts instead of tax rises. And while the total cuts announced to date are relatively small – and we will see more of them – they are in the form that financial markets like: specific spending plans or projects that are clearly identified and costed. I have said before that a credible fiscal plan without details is an oxymoron – and the Treasury, at least, seems to agree.

The government hasn’t been perfect, by any means – cutting the job support programmes, in particular, looks like a mistake to me. There is so much slack in the labour market right now that anything the government can do to help people into jobs should be welcomed, in order to minimise the long-term damage from this recession. And I am still slightly concerned that Osborne will be unable to resist the temptation to cut too many projects too quickly, risking a double dip. The clear message that financial markets are sending the UK is that we are not in the same boat as Greece, or Spain – we do have some time to get our fiscal house in order. My hope is that the Chancellor is aware of this – and, beyond detailing some further cuts, sets out a moderately tighter envelope for spending on 22 June, with the Spending Review in the autumn ear-marked as the main event. Of course, that would mean that the economic reality did not match the political rhetoric – but that shouldn’t be high on Osborne’s list of priorities.

So far then – a good start, but the big challenges lie ahead. Will Osborne resist the temptation to wield the axe too vigorously or swiftly? I hope so. On a related note, will the OBR build on its strong start? That may, in part, depend on what Sir Alan asks for in terms of resources – I for one would prefer to see five people, not three, overseeing the forecasts. But, for the first time in a while, politicians have managed to pleasantly surprise me. Long may it continue.

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