Greek tragedy casts a dark cloud over George Osborne's first Conservative-only Budget

In theory, George Osborne’s preparations for the first Conservative-only Budget since 1996 should have been easier than the six he delivered under the Coalition, because they involved a lot of frustrating horse-trading with the Liberal Democrats.

But as he finalises next Wednesday’s package, the Chancellor is not yet a free man. A dark cloud called Greece provides the backdrop. Even though we are not in the eurozone, the turmoil from a Greek exit could easily affect us too. Lower than expected growth on the Continent would slow ours. The Office for Budget Responsibility (OBR), the fiscal watchdog, had to finalise its new growth forecasts before Sunday's referendum in Greece, and so has already factored in the uncertainty. Even if the Greek people reject the Syriza-led Government’s advice and vote Yes to the bailout offered by the country’s creditors, that would not bring the crisis to an end. It could run on for months.

Indeed, the Greek tragedy has already lasted five years: as Mr Osborne recalls, the country received its first bailout in the week he became Chancellor in 2010.

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On Wednesday, he will try to turn the latest twists in Athens to his advantage. He is bound to remind us that Greece illustrates what happens if a country does not balance its books, arguing that is why he must set out some painful measures to finish the job. He rehearsed some of his Budget lines in a Commons statement on the Greek crisis on Monday. “We have made the UK much more secure to deal with these sort of shocks, but the job is not finished,” he said. “Ultimately countries have to live within their means….If we ever needed a reminder of why we must continue working through our plan to deliver economic security at home, we have it today.” Inevitably, he deployed his favourite line, saying the Greek crisis shows “why you should fix the roof when the sun is shining.” If that’s not in the Budget speech, I’ll eat my copy of it.

As the Conservatives won the economic argument in the May general election, we can allow Mr Osborne a little crowing. Yet his Budget task is far from easy. Greece may pose an economic risk to Britain but we are no longer anywhere near the brink, as we were in 2010. The political challenge for the Chancellor is more threatening: he must somehow square £12bn of welfare cuts with the Conservatives’ post-election positioning as the party of One Nation and the workers. Although some of the £12bn savings will not be achieved until a government-wide spending review in the autumn, it is an open Budget secret that Mr Osborne will cut the tax credits which top up the earnings of those on low incomes. The problem is that this will hit the “strivers” the Tories champion, rather than the “shirkers” on benefits they do not, and could deepen the already serious problem of in-work poverty.

The Chancellor will have a powerful argument about the “merry-go-round” on which the state taxes people with one hand and hands them tax credits with the other to subsidise employers paying low wages. But that might not cut much ice with struggling families who find their budgets stretched to breaking point.

So Mr Osborne will be under pressure to produce a rabbit from his Budget hat to alleviate the pain on the “strivers.” One way would be to encourage employers to pay the Living Wage which, at £7.85 an hour and £9.15 an hour in London, is higher than the £6.50-an-hour national minimum wage. Mr Osborne would not be human if he did not want to steal a march on his rival for the Tory leadership crown Boris Johnson, a strong advocate of the Living Wage. For example, he could offer cuts in employers’ national insurance contributions for companies who introduce the Living Wage.

Another route would be to bring national insurance contributions for workers, which bite on those earning £8,000 a year, into line with the £10,500 personal tax allowance. That would take half a million low earners out of tax. But it would be expensive and so would probably have to be phased in.

Mr Osborne has another dilemma: whether to press on with what the OBR called his “rollercoaster” ride of deep spending cuts in the early years of this parliament, which would allow him to spend more in the run-up to the 2020 election. He could administer the pain more slowly. However, he could argue that it is the national interest to clear the deficit quickly as possible. As he might well be leading the Tories into the election, he has a personal interest in getting the nasty stuff out of the way. A clue to his instincts came last month when he announced £4.5bn of in-year cuts to Whitehall departments. He does not look like a man who wants to hang about. “I am not very impressed with anti-austerity crusaders who promise the earth and cannot deliver,” he told MPs this week.

The Chancellor is taking Britain in the opposite direction. His proposed law saying that the Government should always run a budget surplus in “good times” may be a gimmick but the election result suggests that voters won’t see it that way. Liz Kendall, the Blairite candidate in Labour’s leadership election, endorsed his plan for surpluses this week, giving another push to Mr Osborne’s drive to shift the centre of political gravity. To the right, of course. Indeed, he sees his mission as nothing less than changing the terms of trade in British politics.