Steve Richards: Time for a new plan or a new Chancellor

George Osborne's economic experiment has failed. Future historians will struggle to explain how fashionable orthodoxy insisted briefly that it was bound to succeed. Look back at the press cuttings after Osborne's calamitous spending review in the autumn of 2010 and the Chancellor was widely hailed as a hero, the politician who had grown most in government, a titan coming to Britain's rescue. Now the young Chancellor in his first ministerial job is increasingly isolated as unexpectedly dire figures confirm that the UK is in a deep, prolonged recession, bleaker than many of the countries in the eurozone that occasionally receive patronising lectures from British ministers about how they need to get their act together.

The reason historians will be baffled is that what is obvious now was obvious then. By the time of the 2010 election, the British economy had started to grow again, but the growth was fragile and dependent largely on government activity. No incoming government could rely on the immediate revival of the private sector when consumer confidence was low and made worse by overblown ministerial claims that the UK was as precarious as Greece. Businesses could not persuade suddenly neurotic banks to lend, and if they could, nearby markets in Europe were moribund. In the early 1980s, a liberated private sector in the UK could export to a booming Europe. While in opposition, Osborne showed considerable misguided interest in the public spending cuts imposed by the Canadian government in the mid-1990s, but they took effect as the US economy soared, a giant ready to make fruitful demands on the private sector in Canada. In 2010, the UK had no giant on its doorstep, only a sleeping one in the form of the eurozone, yet Osborne implemented his austerity package on the basis that the private sector would somehow leap into life.

His close allies have always emphatically insisted he responded pragmatically to a debt crisis by seeking to cut debt. That is too simplistic an interpretation. Part of the explanation relates to ideology rather than pragmatism. As the restrained, forensic Nick Timmins wrote in his must-read book on the NHS reforms, serialised in The Independent two weeks ago, this is the most radical government since the Labour administration formed in 1945. The radicalism is based on a deep wariness of the state.

There was no will from within the new government to challenge Osborne's determined inactivity from the centre when it chimed so closely with the public service reforms unveiled with such haste in the months after the election.

In a way that often happens in politics, Osborne also became trapped by a narrative that had been adopted for electorally partisan reasons. The crisis was the sole responsibility of Brown and Co! They spent too much when the sun was shining! We will cut so much that the sun will be shining again by the time of the next election!

Instead of making more objective calculations about what government can do to generate growth, an assumption was formed for many reasons that it had no role other than to get smaller very quickly. There was little interest from within the Treasury in an active growth strategy, a gap noted by Richard Lambert in his final speech as Director General of the CBI last year and then by Vince Cable in a leaked memo that was published earlier this year. At best there was a theoretical interest but no substantial policies to back it up, no equivalent of the "bazooka" David Cameron wants to see in the eurozone.

A greater mystery is why Cable, and other senior Liberal Democrats, signed up to an approach that was doomed to failure, given that they were making an alternative case before the election.

Part of the answer is that their pre-election pitch was confused. They supported the Brown/Darling fiscal stimulus that had been opposed by Osborne, although they argued, with some justification, that the investment should be spent on infrastructure rather than tax cuts. But at the same time Clegg warned of "savage" spending cuts to come, although he later modified the term.

One of Clegg's close allies tells me that, in the exhausted frenzy that followed the election, the Governor of the Bank of England, Mervyn King, conveyed messages to Clegg via the then Cabinet Secretary, Gus O'Donnell, that Osborne's austerity package was required. The role of both King and O'Donnell in the formation of the Coalition merits further study. Irrespective of their contribution, the highly influential David Laws supported the policy. Cable was won round, even though he had made outstanding speeches in the Commons before the election arguing that Churchill did not order cuts to military spending during the war in spite of the UK's colossal debts at the time and that we were now in an economic war where cuts would be similarly counter-productive.

The origins of the disastrous economic policy matter because they make the required flexibility required in the immediate future much harder to bring about. I find it increasingly difficult to see how the Conservatives can win an overall majority next time if Osborne is still Chancellor. But Cameron will not move him. It would be an act of great personal betrayal if he were to do so, as the Prime Minister, as well as being a close and admiring friend, has been as committed to the economic policy as his Chancellor.

As long as Osborne stays in the Treasury, a sharp move away from his self-defined Plan A is near impossible. Yesterday, in what must have been an uneasy sequence for him, Osborne reiterated his commitment to the same economic policies in a series of interviews. Of course there will be changes and have been already, from the uncosted U-turn on fuel duty to a belated, but still inadequate, focus on much-needed infrastructure projects. Yet a more fundamental review of the spending review is urgently required, and that is hard for Osborne to undertake without losing whatever credibility he still possesses.

Meanwhile, from the beginning, the Liberal Democrats have described the main purpose of the Coalition as "rescuing the economy". As a result it is almost as hard for them to accept that the economic basis of their original partnership is causing more harm than good.

We have reached the strangest point yet in the Coalition's bizarre life. Its political survival depends on a very big leap away from Plan A – yet its origins make it almost impossible for such a leap to be made.

s.richards@independent.co.uk; twitter.com/steverichards14