Osborne to change role and downplay green taxes as Tories lose economic battle

• Shadow chancellor to step back from party strategy• Change in language over recession planned
Nicholas Watt, chief political correspondent

The Guardian, Friday November 14 2008

George Osborne presents Lord Mandelson with the Newcomer of the Year prize yesterday's parliamentary awards in London. Photograph: Alan Davidson/The Spectator/PA
A chastened George Osborne is to step back from his frontline party political role over the coming months to focus his attention on reviewing Tory economic policy amid growing fears among senior Conservatives that the shadow chancellor is being comprehensively outmanoeuvred by Labour.
Days after a major Tory initiative on the economy - a £2.6bn tax break for companies - was panned by business leaders, senior Tories have made clear that Osborne will spend the next four months working on his response to the recession.
Amid a whispering campaign against Osborne by MPs on right of the party, who are suggesting that he could be replaced by William Hague, authoritative sources said that Osborne will retain his twin roles as shadow chancellor and general election coordinator. But he will step back from his party role between now and March as the Tories try to regain the initiative on the economy.
In a sign of the depth of Tory soul-searching, senior figures said that Osborne has embarked on a wholesale review of his approach to the economy and has already made two key decisions:
• To downgrade green taxes in response to growing unease that these could be punitive in a recession. This will raise questions about David Cameron's commitment to the environment, a signature theme in his rebranding of the Tories since he became leader in 2005.
• To abandon the language of Osborne's landmark economic policy of sharing the proceeds of economic growth between tax cuts and public spending increases. Tory strategists believe that this jars with voters - and will be misrepresented - at a time when the Bank of England is saying there is no economic growth.
The rethink comes as Osborne admits in private that he is being bested by Gordon Brown and Alistair Darling after months in which the Tories dominated the political agenda.

Critics say he has made major mistakes in recent weeks. The flagship announcement to hand a £2.6bn tax break to businesses that hire unemployed people was criticised by the British Chambers of Commerce. The Social Market Foundation identified a £1.9bn black hole in the figures, though this is disputed by the Tories who say their calculations were endorsed by the Institute for Fiscal Studies.
Osborne has also come under fire for declaring in a speech last month that Brown had left hardly any room for interest rate cuts. Within weeks they were cut by 1.5% to their lowest level since 1954.
Osborne is understood to be deeply frustrated that he has lost the political initiative in the last month. He puts this down to two factors: the fallout from his Corfu holiday, in which he admitted visiting Oleg Deripaska's 238ft yacht and discussing a donation from the Russian billionaire; and the drama of the financial crisis which has seen Brown hailed by the Nobel prize-winning economist Paul Krugman as the saviour of the world economy.
The dismay was outlined by a senior Tory. "George is frustrated because we have not been making the political weather at all. It is very difficult for the opposition to be making the weather at a time like this. But Gordon Brown is making the running. It looks like we do not have a saleable, bankable economic strategy."
Osborne is particularly irritated because he believes that his fundamental economic strategy and his response to the recession are right - and that he will be vindicated. "We believe that Gordon Brown is laying out policies that will bite us if we come into office," one figure said.
The difference between Brown and Osborne over the recession boils down to their views on borrowing. Osborne accepts that it should increase to fill the gap between the fall in tax receipts and an increase in benefit payments. But the issue is whether it is right to increase borrowing beyond that amount to fund extra spending or tax cuts, known as a "fiscal stimulus". "We can't do that because the cupboard is bare," the Tory source said.
Osborne believes his overall economic strategy - to share the proceeds of economic growth between tax cuts and spending increases - is also right. But he accepts that he must change the way he describes this policy because it sounds strange to talk of economic growth amid such gloomy economic forecasts.
"When the Bank of England says there is no growth you can't really say you're going to share the proceeds of growth," one senior party figure said. "That will be misunderstood and misrepresented."
But Osborne believes that his general approach is right because his "sharing the proceeds" formula is designed to apply over the whole economic cycle, which covers both downturns and periods of growth. He outlined his thinking on this in an interview with the Guardian in September in which he said: "If there was no growth in the British economy over an economic cycle we'd be back to the middle ages."
The second major change in economic policy will come on green taxes, which are to be downgraded. Osborne believes that two factors have made it more difficult to sell them: the row over the government's plan to increase car tax on gas-guzzling vehicles, which he believes has given such taxes a bad name because these are to apply retrospectively; and the overall economic downturn.
The change on green taxes will have a major impact on Cameron's approach to the environment and his theme of supporting the family. A "family fund" to support tax breaks for couples - gay and straight - is meant to be created from green taxes.
Michael Fallon, the most senior Conservative on the Commons treasury select committee, said Tory thinking had to change in the new economic climate. "Sharing the proceeds of growth is right for growth times. We are not in growth times so obviously it is necessary to think differently."
Osborne has agreed to match government spending until 2011 but is keeping an open mind on the years after that. "The formula is for the current spending period. The government has not outlined its plans for the next period. This will allow George Osborne to move away from matching Labour. He has political scope to nuance the policy."
The rethink by Osborne comes as Tories on the right of the party attempt to exploit his weakened position. At a dinner of the Thatcherite No Turning Back group on Monday night, some Tory MPs said they hoped that a damaged Osborne would deliver their key demand: upfront tax cuts at the next election.
That will not happen, not least because two former ministers admired on the right - Fallon and John Redwood - are being supportive. Fallon said: "Shadow chancellors always take the flak. Geoffrey Howe used to before the 1979 election. They are a lightning conductor. You do not chop and change your shadow chancellor."
Backstory
• Osborne's proposal for a tax break for firms that hire the unemployed met with scepticism this week from business leaders, who said suffering firms were not in a position to recruit.
• He claimed in a speech last month that the prime minister had left hardly any room for interest rate cuts, but within weeks they were cut by 1.5%.
• He was caught on the back foot weeks earlier when he was forced to admit discussing whether to take a loan from Russian billionaire Oleg Deripaska, whose yacht he visited.
• Labour MPs seeking to portray the shadow chancellor as out of touch with voters pounced on the emergence of a new picture showing him in plus fours during his time at Oxford University, where he was a member of the exclusive Bullingdon Club.