Will Osborne alter course? And how should Labour respond?

To describe the economic recovery as “choppy” is almost too kind a word to use for the expansionary fiscal contraction lunacy conducted by the Tory-led government.

Unemployment soaring, the trade deficit increasing, household income falling, business investments dipping below expectations, growth repeatedly downgraded – and yet Osborne is publicly still adamant about sticking to his too fast, too furious cuts.

Behind the scenes, Osborne is steadily shifting gear. Over the coming months, the government is expected to respond to the recent dire figures and gradually announce (or leak) various growth policies it hopes will restore confidence in its handling of the economy.

Instead of presenting them all at once in order to avoid the impression of doing a U-turn and implementing a Plan B, the change will manifest itself in a trickledown of confused fiscal measures.

Likely to build upon Obama’s jobs plan that focused on infrastructure and cutting unemployment, we will also be hearing more talk of a Plan A+ that is necessary not because of the overzealous cuts, but due to the global economic situation.

After having successfully blamed the recession of this country on the previous government’s public spending, their explanation behind the need for a Plan A+ will be based on the dire state of the Western world. The reason behind this is simple: the public will not be fooled in believing the current economic conditions can be blamed on Labour.

Instead, as claimed by Nick Clegg yesterday, “the unprecedented pressures in the global economy” are solely responsible instead of the government’s cuts. Amidst the confusion, Labour needs to now step in, present a different explanation and, most importantly, begin coming up with the Plan B the country needs.

As proposed previously, and something advanced increasingly by economists and politicians, a major economic policy that could restore Labour’s economic credibility – at least partly – is a publicly-funded investment bank with the powers of providing small- and medium-sized enterprises (SMEs) with much-needed capital.

As suggested (pdf) by Adam Posen, a member of the Bank of England’s Monetary Policy Committee, Osborne should set up a British Investment Bank in order to:

“…address the investment gap by increasing the availability of credit to SMEs and new firms.”

In a similar tone, Clegg is beginning to warm to the idea of a public bank that focuses on infrastructure projects, whilst Vince Cable inadvertently admits that the Green Investment Bank will be too ineffective to boost economic growth.

With the crumbling of market fundamentalism and the bailout of RBS, Lloyds and Northern Rock, the idea of a public investment bank has become less alien to the public.

Its most important attribute is that by being able to raise its own finance in the private capital markets, a British Investment Bank would channel much-needed capital to those businesses and sectors from which traditional banks are shirking away from due to their traditionalist, short-termist, speculative profit-seeking business model.

Other state-owned investment banks throughout the global financial system have become self-financing and are now considered central to economic growth.

Since it has been tried and tested over a lengthy period of time in similar economies to that of the UK, and is now gathering an increasing number of proponents, there is no palpable reason why Labour should not begin clawing back its economic credibility by supporting the establishment of a British Investment Bank.

The Tory-led government is in disarray – the chance for Ed Miliband to convince the public of his suitability as PM has never been better.