13/09/2012 12:08 BST | Updated 13/11/2012 05:12 GMT

George Osborne Has Four Options - Three Are Suicide, The Fourth is Merely Political Masochism

Down at the Dog and Duck, the arcana of macroeconomic policy generally pass most patrons by. But this autumn the Chancellor's obscure fiscal rules are set to wreak havoc for the coalition and create some very real political pain.

Down at the Dog and Duck, the arcana of macroeconomic policy generally pass most patrons by. But this autumn the Chancellor's obscure fiscal rules are set to wreak havoc for the coalition and create some very real political pain.

Independent growth forecasts have tanked since the Budget. That's not all the government's fault. Interminable Eurowoes, rising commodity prices and the state of our banking system have probably had a comparable impact on growth to the cuts imposed over the past two years. But however the blame is apportioned, Plan A is partly responsible for the fact that the government's tax take won't rise quickly enough to stop the public debt mounting for some years yet.

As a result, the Chancellor's self-imposed debt rule - to have the public debt falling by 2015-16 - looks almost certain to be broken when the Office for Budget Responsibility issues its judgement at the Autumn Statement on 5 December.

Faced with that prospect, the Chancellor has four options. Three of them are suicide. The fourth is merely political masochism. How he chooses to act could seal the fate of the Coalition.

First he could review his spending plans and quicken the pace of cuts in the run-up to 2015 in order to try to stay within the rule. But, ideologues apart, nobody thinks that such a 'Plan A+' represents any kind of growth strategy. Quite the opposite. Despite positive figures on Wednesday, unemployment remains around a million higher than normal, suggesting that there is no private demand that could immediately replace a retrenching state. Further cuts now would tip the economy deeper into recession undermining bondholders' confidence in the Government's strategy to close the deficit.

The second option is for the government to sacrifice the fiscal rule and leave current spending plans unchanged. This is the 'do nothing option' and avoids short-term political pain. But more of the same won't do anything to drag the economy out of the slump. It will only defer and exacerbate the problem. Politically, too, doing nothing would have profound implications for the Chancellor. Where would it leave the Government's much vaunted credibility to be forced into a redesign of their fiscal framework by the failure of their own plan?

The most commonly discussed alternative to doing nothing is, of course, for the Government to ditch Plan A and adopt a plan B by borrowing more and slowing the pace of the cuts. Although this would break the debt rule, a judicious investment boost would raise demand and strengthen confidence. That in turn could get companies to start investing some of the piles of cash they're hoarding.

But while the economics of a deficit-funded fiscal stimulus might be sound, the politics are hideous. If the Chancellor was suddenly to become a convert to Plan B after all the rhetoric about the need to 'cut in order to grow' and the ignominious failure of Plan A, his credibility would be questioned. Labour would make hay. Indeed, it is hard to see how such a volte-face could ever occur without the coalition collapsing.

So is there a growth option that doesn't involve a career-stopping U-turn for the Chancellor? There is. The Chancellor can stick to his spending plans and boost growth through altering the composition of government taxation and spending - a neat, and perhaps career-saving trick. By axing measures that have little impact on output and recycling the cash into infrastructure investment that can boost GDP directly, he can create employment and increase the long-term capacity of the economy.

The obvious candidates to fund such an investment spree would be cutting give-aways to people who tend to save the money. Axing give-aways to better-off pensioners, capping total ISA holdings and ending higher rate tax relief on pension contribution would all be good places to start, raising billions each year. Similarly, some kind of property tax of the type regularly mooted by the Liberal Democrats would enable a fiscal stimulus without letting up on the pace of deficit reduction.

Since further tax rises or spending cuts are on the way from 2015, such tough decisions will have to be taken sooner or later, whatever the Chancellor does this autumn. Bringing those decisions forward and redirecting the cash in the interim would therefore be a wise move.

The problem, of course, is that taking such painful decisions that affect his core voters will be politically very hard for the Chancellor. So hamstrung by short-term politics, the Coalition is most likely to take the 'do nothing' option of sticking to Plan A and ignoring its debt rule. As a result that plan will look increasingly bereft of credibility and devoid of purpose.

The Government has the power to act. But making the right decision later this year will entail a greater degree of statesmanship and political courage than has been evident to date. The results will probably be messy. Whatever the Chancellor does, they'll be talking about it down the Dog and Duck before the year is out.