Clarke or Cable could beat Osborne to the Treasury

The chances of George Osborne being the next Chancellor of the Exchequer are fast diminishing. Unless the Tories can pull up their socks and get ahead in the opinion polls, Osborne is looking increasingly likely to become the new Tory government's first sacrificial lamb, despite his friendship - going all the way back to Oxford - with Tory leader David Cameron.

First, there's the growing argument that Osborne should be replaced by Ken Clarke. On this front, the Mole is intrigued to see that the Independent on Sunday's business editor Margareta Pagano has picked up on the growing rumours that Cameron has seen the light and will soon give Ol' Hush Puppies the keys to the Treasury.

As the Mole has been arguing for some time, Osborne is a weakness, unliked for his strange mix of arrogance and lack of clarity. Within the Square Mile, they're nothing short of contemptuous. Says Pagano: "Many of those I talk to [in the City] say it's the only way the Tories can win back some economic credibility after recent U-turns."

Pagano claims that Cameron will either do the deed now or wait until shortly after the election.

Putting it off for the moment makes the most sense because so much depends on whether the Tories can do a deal with the LibDems in the event of a hung parliament, still the most likely outcome if recent polls are reasonably accurate.

If the LibDems find themselves able to form a coalition with the Conservatives, then the price they will demand is that Vince Cable is made Chancellor. Very simple, end of Osborne.

But there are increasing signs that the LibDems under Nick Clegg will never enter a coalition with Cameron's Tories. They are too far apart on key issues - Europe especially and, at home, public expenditure.

However, Clegg doesn't want to see Labour remain in power any more than Cameron and what he will probably agree to is a pact with the Tories: we won't vote you down as long as you deliver on various key policies.

A report in today's Guardian supports this scenario, with the LibDems' key demands including extra funds for education; taking 4m low earners out of tax and raising taxes on the rich by increasing the CGT rtate; and, of course, political reform, including changes to the voting system and a democratically elected House of Lords.

The Guardian doesn't say this, but the Mole's sources claim that while Clegg may not want seats at the Cabinet table, he will have demands about personnel - specifically a replacement for Osborne. And Ken Clarke would be the acceptable candidate.

Apart from the brown suede shoes and the ready smile, what will Ken bring to the job? Well, at least we have an inkling because he's done it before. He was John Major's Chancellor from 1993 to 1997.

As Pagano put it in the Sindie, Clarke's 1993 Budget is a good indicator. Taking over as Chancellor from Norman Lamont at a time of deep recession and high public borrowing, he cut the basic rate of tax, then phased in tax increases and put a cap on public spending, generally calming the markets. Just the sort of Budget we need now, says Pagano. ·