The coalition government has announced a staggering £81bn in spending cuts, but can the economy take them?
Today's cuts, which will shape the course of the economy over the next four years, are the deepest since the early 1920s and follow the longest and deepest slump in output since WWII.
"It is a hard road," the Chancellor said, "but it leads to a better future."
Bulls - like the MPC's Andrew Sentance - argue the 1.2% GDP jump in the spring, the strongest quarterly rise in nine years, shows the economy is responding to the stimulus provided by the BoE's historically-low base rate, a budget deficit of 11% of GDP, a £200bn QE programme and a 25% depreciation in the value of the pound.
But Osborne's plans rely totally on the economy becoming less dependent on consumer and public spending for growth, and higher investment and a better export performance.
However, companies will only invest if they expect strong demand for their goods and services, and falling house prices, rising unemployment and public spending cuts are likely to suppress consumer spending.
Without rising capital spending by the private sector and an improvement in the UK trade balance, growth will be lower than the benchmark forecast of about 1-2% a year and the deficit higher than the Treasury expects.
Osborne's cuts and Treasury plans assume investment (including from the public sector, which has been squeezed in the Spending Review) will rise by 44% between 2010 and 2015, to 19.3% of GDP, far higher than the 16.8% average during the past decade.
Similarly, Osborne is forecasting export growth at twice import rates and yearly growth higher than the 4% average between 1999 and 2008. For Osborne's books to balance, imports must rise more slowly each year than the 4.9% average between 1999 and 2008. A weak pound will help UK exporters, but tightening fiscal policy elsewhere will not.
Osborne could offset the fiscal pinch with more monetary easing. But there is no room for the Bank of England to cut the base rate from 0.5%, and the pound has already seen a sharp drop since the crisis began in the summer of 2007. However, Osborne has given Mervyn King room for further QE.
The government will hope this will keep long-term interest rates low and lead to a further fall in the value of sterling.
Most analysts believe the economy will report subdued levels of growth for the next two or three years, but will avoid a double-dip recession. They say fiscal tightening will hinder activity, but accept Osborne's cuts are needed to lower the deficit.
For the bears, the risk is a double-dip recession and a long, painful recovery. Looking at the four main components of demand they would say consumption is going to be weak so investment will disappoint.
Government spending has been slashed, leaving a massive burden on exports at a time of slower growth and currency wars.
Rumblings from the bears, currently a small group, are likely to get louder after today's Spending Review.
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From June 2019