The continuing sharp turndown in the monthly purchasing managers indices (PMIs) across the core eurozone countries makes a double-dip, another further recession next year, much more likely.   For the UK it indicates a second successive month of contraction in manufacturing, the very sector that Osborne was boasting about would produce the ‘march of the makers’ which would lift the country out of recession.   It also raises an even more fundamental question: where then is the growth to come from?   If a plausible answer is not found quickly, Osborne’s ‘expansionary fiscal contraction’ collapses.   What is so ironic is that there is one genuine source of growth, the only one that will work in these circumstances as the private sector contracts further, but that is the one that Osborne will not touch at any price.

As the eurozone sovereign debt crisis deepens further, there is no hope of UK export growth reviving there.   The US sub-prime fiasco, with no less than a quarter of American homeowners now in negative equity, continues to drag down the US economy.   A third option, that UK households would increase their borrowing to maintain their living standards, raising personal indebtedness from the present already astronomic level of £1.5 trillions to £2.1 trillions by 2015 (according to OBR forecasts), has now closed off as households start deleveraging to reduce their debts.   And quantitative easing (QE), electronically printing money, is unlikely to stimulate demand much when £200bn has already been pumped into the economy through this channel without much effect.

That leaves the generation of aggregate demand by public sector investment in house-building, infrastructure expansion and upgrading, the rapid development of green energy, and the dissemination of digital technology.   This of course would be a wholesale rebuttal of Osborne’s strategy of (i) private sector revival on the back of breakneck deficit reduction  and (ii) privatisation of whatever still remains in the public sector.   Whilst he will never publicly admit to that, his actual response is that it cannot be paid for without a rise in gilt yields which ratchets up the public deficit again.

But that is simply not true.   A public sector stimulation of growth and jobs would not aggravate the public deficit when  what the markets are concerned about is not the level of debt per se, but whether the economy has been set on a sustainable course to cut the debt.   An increase in jobs would greatly reduce the cost of the automatic stabilisers (unemployment benefit and income support) and increase tax revenues, thus steadily pulling down the deficit.   Taxes could be increased on the rich, notably through a Financial Activities Tax.   Even the feeble growth forecast for this year of 1.4% would yield a growth dividend of £21bn, reducing the budget deficit from its current level of about £140bn.   Best of all would be, not just a retraction of the 2.5% increase in VAT to 20%, but a dramatic lowering of it to 15% to kickstart demand, using it as a regulator according to the economic cycle.   Osborne won’t do that because it’s too much loss of face.   But in the absence of that, it’s checkmate.

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