Before the election, George Osborne flirted with the idea of moving to the Foreign Office, a change of job that David Cameron would have granted to his friend had he insisted upon it. He ultimately concluded that staying put in the counting house better served his ambitions. The calculation was that his desire to be the next tenant of Number 10 was more likely to be advanced by maintaining his grip on the mighty tentacles of the Treasury rather than being the person put on the plane when the prime minister can’t be bothered.

I wonder if he now has the occasional twinge of regret that he didn’t take the chance to make his escape. In just over a fortnight, he delivers his winter financial statement, a budget in all but name. This is a big moment. I’m not sure everyone has yet grasped just how big. The chancellor must not only release himself from the perilous snare he is in over tax credits; he will also be unveiling a spending squeeze of extraordinarily severe proportions. And he must somehow do both in a way that doesn’t so alarm or anger the voters that his backbenchers revolt and his reputation is shredded.

Contemplating this challenge, one senior Tory goes so far as to predict: “If he doesn’t get it right, he’s dead.” It is fair to say that the author of that prediction is not one of Mr Osborne’s greatest fans. The chancellor will shrug off forecasts that this could be terminal for his ambitions. Previous rumours of his demise, notably after his 2012 omnishambles budget, proved to be exaggerated.

The rollercoaster ride of this chancellor’s reputation tells us a lot about the fickleness of political fashion. Just a few months ago, when he unveiled his July budget to roars of delight from Tory MPs and a stunned silence from the Labour benches, he was being lauded by colleagues and much of the media as the master of the universe. What a clever fellow was George. He had dished Labour by raising the minimum wage and re-badging it as a living wage. He had shafted Boris, too. He was waxing so large that even the prime minister was in his shadow. Never had he looked more powerful. Nor more popular with this party. In Conservative Home’s regular poll of Tory activists that asks them to rate their leading politicians, he toppled Boris from the top slot.

Since then, everyone has woken up to what the cuts to tax credits will do to the incomes of more than 3 million poorer workers and the chancellor’s claim to be the champion of the strivers. In the latest Conservative Home poll, he has taken a tumble. You may be amused to learn that this was brought to my attention by one of his cabinet colleagues. “George has fallen to eighth,” he remarked with ill-disguised relish.

For the obverse of Osborne the Octopus’s great power is the commensurate resentment that it breeds in others. He has built a formidable network across government by promoting his favourites to influential positions and created a considerable powerbase. But it also means that he is not much liked by those who feel excluded from the magic circle. One minister who has enjoyed a rapid ascent under his patronage remarked to me recently: “There are many of my intake still sitting on the backbenches and they blame George for it.”

His real problem with tax credits is that the chancellor has lost his majority in the Commons

So there’s the personal bound up with the political in his dilemma over tax credits. It was the defiant vote in the Lords that compelled him to have a rethink, but the leaping lords are not the real source of his troubles. Since the 1909-10 clash over the People’s Budget between David Lloyd George and the then entirely hereditary peers, a determined government has always ultimately prevailed over the unelected chamber.

That is why all the blustering about a constitutional crisis was so much hot air. His real problem with tax credits is not that the Tories lack a majority in the Lords; his real problem is that the chancellor has lost his majority in the Commons. Ten days ago, Frank Field, the Labour chairman of the work and pensions select committee, tabled a motion demanding a pause to the “terrifying” cuts. That attracted the support of 20 Conservative MPs in the voting lobby. Not a single Tory backbencher who spoke in the preceding debate gave unqualified support to the chancellor. The size of the Tory mutiny would have been much larger had Mr Osborne not been very busy trying to buy off rebellious-minded Tory backbenchers with promises to favour their constituencies – do you need a bridge or a bypass? – and issuing general reassurances that he would fix the tax credit problem.

Yet the more his options are examined, the trickier it looks. When I asked a person close to events what he thought Mr Osborne would do, he replied: “I literally don’t know. I don’t think he knows either.” One idea much discussed within the Treasury, and hinted at in the chancellor’s statements since his reversal in the Lords, is “transitional protection”: stretching out the implementation of the cuts to soften their immediate impact. But some members of the cabinet don’t like the sound of that. They fear that shifting the pain to later into the parliament would be no fix at all. “That could be worse,” says one minister. All sorts of other schemes for easing the blow to poorer workers are being floated, from imposing the cuts only on new claimants to making adjustments to tax bands to give additional compensation to the losers. But all these tweaks and fudges suffer the same handicap. They would still leave substantial numbers of people worse off.

The chancellor’s calculations are further complicated because they have become entangled with the parallel battle he is fighting with cabinet colleagues over their departmental budgets. The primary purpose of the winter statement is supposed to be his announcement of where he will be squeezing public spending in the years up to 2020. The run-up to the event is being accompanied by a loud drum roll of protest from those who will face the brunt of the cuts. Chief constables are waving furious truncheons. The care sector is warning that further cuts to local government budgets, combined with the costs of implementing the living wage, will be a catastrophe for the elderly. Junior doctors are heading towards strike action and school budgets are feeling the pinch, an illustration of the mounting financial pressure even in areas such as the NHS that have some protection from the squeeze.

On the non-protected departments, these cuts are going to be of a severity that is not yet fully appreciated either by the public or MPs. The Institute for Fiscal Studies reckons that areas such as transport and policing are looking at overall cuts to their day-to-day spending of more than 25% by the end of this parliament, bringing the total cuts since 2010 to more than 50%. Cuts of that magnitude are without precedent.

When I asked one member of the cabinet about the state of her negotiations with the Treasury, she gave me the sort of horrified grimace that you would have seen on the face of someone who witnessed the handiwork of Jack the Ripper. I asked another member of the cabinet whether the spending ministers were screaming blue murder. He laughed: “They are screaming every colour of murder.” Friends of Iain Duncan Smith, a veteran of many previous cage fights with the chancellor, are putting it about that he will resign if the budget for universal credit is raided.

These battles with the spending ministers are a large part of the explanation for why the chancellor has been so stubborn about tax credits. He did not want colleagues to think he could be pushed into retreat because that would encourage the cabinet to resist him.

It is this that prevents him from embracing the cleanest way out of his tax credit trouble. That would be to forget about trying to tweak this or fudge that. The simplest fire escape would be to abandon the cuts to tax credits altogether. That is the course being urged on him by thinktanks such as the Resolution Foundation and influential voices like that of Frank Field. The MP for Birkenhead is not only regarded as a great sage on these issues, he is also the Labour parliamentarian most widely admired and respected by Tories. It would be sensible of the chancellor to open a channel of communication with Mr Field. I would not be entirely surprised to find that he has done so already.

I’ve written previously that a chancellor can always find some money when he is in a real jam. This chancellor has U-turned before. And plenty of people have come forward with suggestions about where he could find savings to fund a retreat on tax credits. So why not? Because abandoning the cut altogether would be the mother of all U-turns. He will fear that it would involve such a colossal loss of face that his authority would be irretrievably corroded.

The foundation of George Osborne’s reputation with his party is the belief that he is politically smart. He’s going to have to be very clever indeed to find his way out of this one.