29/11/2011 04:26 GMT | Updated 28/01/2012 05:12 GMT

Autumn Statement: The Chancellor Needs to Pull Off an Impossible Trick

The Chancellor needs to pull off an impossible trick in the Autumn Statement today. On the one hand, he must maintain confidence among the financial markets that he's sticking to a credible deficit reduction plan. If he doesn't, we could be punished with higher costs of borrowing, making paying down the debt even harder.

On the other hand, he desperately needs to give UK consumers and businesses more confidence to spend and invest - or growth will continue to stall, and again the debt will be harder to pay off.

The drivers of confidence among markets on one side and businesses and consumers on the other have been set up as diametrically opposed: one is about debt reduction, the other is about directly stimulating growth. Of course, not everyone buys into this - only yesterday the OECD suggested that some slackening in the pace of deficit reduction could be seen as a viable option in the markets. But it's clear that the Chancellor doesn't yet want to take that risk.

And a lot of the public have, reluctantly, accepted the Chancellor's view that we need to keep that tight hold on spending. In countries across Europe we've seen huge increases in the proportions of people who think public debt needs to be dealt with quickly. Only a year ago there were significant proportions of 'deficit deniers' in high debt countries who didn't think any action was needed: the majority in each country has now fallen into line.

Even the once obscure auditors of financial systems - credit rating agencies - are now well known and feared: half of Europeans are aware of credit rating agencies, and two thirds of those think they've played a significant role in the crisis. More specifically, the majority in the UK believe it's important to show the world we can live within our means, even if it means big cuts to public services.

But business and consumer confidence are vital too. This isn't just a theoretical or political point - the transmission of confidence to direct economic outcomes can be measured. Our analysis shows that a simple survey question on economic optimism has been a better predictor of actual UK growth in recent years than economists' forecasts.

This isn't because the public are studying the markets, drawing on their internal algorithms and accurately predicting what will happen. It's simply because our feelings about the future influence our spending and investment decisions now. The OECD also said yesterday that a "mild" recession looks likely next year; consumer sentiment told us that months ago.

So the key question is will the measures announced later today actually do much to improve consumer and business confidence?

Some of the schemes are ingenious, given the restrictions the Chancellor is working under - and they will appeal to the public. The use of British pension funds to pay for investment in British infrastructure plays to our beliefs that we haven't spent enough generally on such things and that our own money should be used for tangible British benefit rather than invested abroad.

It also appears that some of the support for businesses and employment programmes for young people will be paid for by squeezing welfare benefits further.

Again, this is something that is more popular than we might expect; even quite drastic measures, such as capping benefits for people who have lots of children are supported by the majority of the public. Of course, it will depend on exactly who is affected and how - but any expectation that there will be widespread outrage at the poor being asked to pay to protect our bond yields is likely to be wide of the mark.

But this relative popularity is not the same as actually increasing confidence to spend more now or in the coming few months. Here the Chancellor has virtually no levers to pull and is working against powerful trends. In particular, there has been enormous pressure on living standards among the now famously 'squeezed middle': wages for those on average salaries are stagnant, and have been since the early 2000s. This year is likely to see an actual drop in real terms, and that pattern will continue next year and probably beyond. In that context, a 6% rise in rail fares in 2012 instead of 8% is likely to look pretty feeble.

And the importance of this is seen in an interesting contrast in public opinion. When we ask about the most important issue facing countries across Europe, it is unemployment that comes out on top. But when we ask what is the most important issue for you personally, it is rising prices.

Youth unemployment is a tragedy for those affected, a huge loss for society and politically damaging. But the Chancellor knows that the real driver of economic recovery or stagnation is how confident the vast bulk in the middle feel. The problem is he has nothing up his sleeves for them.