The economy is improving but the chancellor cannot afford to be too generous on budget day – and political concerns over the 2015 election also play a part
The clock is ticking towards the 2015 general election, with only two more budgets before polling day in May next year. The chancellor, George Osborne, has a big decision to make: does he use the improving state of the economy to cut taxes in this week's budget, or does he wait until closer to the election?
Here are some of the themes to look out for on Wednesday.
Growth
The state of the economy has improved since the 2013 budget. Growth has returned since last spring and forecasts for 2014 and 2015 have been revised upwards. In the last autumn statement, the independent Office for Budget Responsibility (OBR) predicted expansion of 2.4% this year. Now the Bank of England believes the economy will grow by almost 3.5% this year, while the consensus of City and academic economists is for 2.7%.
Expect the OBR to raise its growth forecast to just under 3% for 2014, though that may mean that the economy's spare capacity is used up more rapidly. If so, growth in future years may be revised down, with knock-on implications for the public finances.
The deficit
Government austerity measures aim to eradicate the "structural" budget – the bit that remains even when the economy has fully recovered from the deep recession of 2008-09.
Osborne must decide whether the pickup in activity represents a permanent improvement or just a belated turn of the economic cycle.
Rob Wood, chief UK economist at Berenberg bank, says: "The underlying fiscal position, which is what really matters, is not improving faster than expected."
It has two implications for the chancellor. The first is to limit his scope for giveaways on Wednesday. The second is to limit his largesse in future budgets, since austerity will need to continue well into the next parliament.
Politics
Osborne's view is that the public has been unwavering in its support for deficit reduction since 2010. The shadow chancellor, Ed Balls, wants to make living standards the key electoral battle, but the chancellor thinks that he can win on the basis of economic competence. Opinion polls show Labour trailing when voters are asked which party can be best trusted to run the economy.
For the past four years, the chancellor has relied on monetary policy – 0.5% interest rates, £375bn of quantitative easing – to keep the economy moving and the Bank will continue to do most of the heavy lifting.
Indeed, one potential drawback of a budget giveaway is that it would put pressure on Threadneedle Street to bring forward the date when borrowing costs will rise, expected to be in the spring of next year.
Business
Osborne gave a hint of his strategy last month: "I want to deliver a budget that supports a Britain that invests and that exports," he said.
John Cridland, director general of the Confederation of British Industry, said: "There are two big issues. The first is the energy costs facing business; the second is to do more on capital allowances to encourage investment."
Cridland said he was hopeful that Osborne would help energy-intensive manufacturers by rolling forward their compensation package into 2015, with the possibility of changes to the carbon-pricing regime.
The CBI would be disappointed if the chancellor failed to extend the annual £250,000 capital allowance beyond January 2015.
Personal taxation
Osborne will still find time for some headline-grabbing measures on Wednesday. The chancellor is under pressure to announce an increase to £10,500 in the personal income tax allowance from 2015 and will probably find the temptation to freeze excise duty on petrol and diesel too strong to resist.
He is also being urged to prevent more people being dragged into the 40% tax bracket – something that would be popular with middle Britain, but relatively costly.
Two other possible changes worth looking out for are the bringing forward of the exemption of under-25s from employers' national insurance from 2015 to 2014 and a tweak to stamp duty on house sales. The average house price is now around £250,000, the point at which stamp duty rises from 1% to 3%. Raising the threshold to £300,000 would cost Osborne £800m, but win him a few friends in the marginals of the south-east.
Read more here >> The Guardian
