It’s only two months ago – on December 3rd – that Chancellor of the Exchequer George Osborne delivered his Autumn Statement. But we’re now just a few weeks away from his last Budget before the General Election, which will be held on May 7th.
When Osborne delivered his Autumn Statement he was relatively optimistic. Britain was recovering from the financial recession faster than any other major economy. “We will stay the course,” he declared, “And stay on course for prosperity.”
He revised his Budget forecast of growth for 2014 upwards from 2.7% to 3%, which would be followed by growth of 2.4% in 2015 and 2.2% in 2016. This would – so the theory went – lead to a gradual fall in Government borrowing.
Some commentators were quick to question the Chancellor’s figures and assumptions, and later in December the Office for National Statistics did its best to dampen the Chancellor’s festive cheer by revising its growth estimate for the year down to 2.6%. Well, we now have the accurate figures: growth in the final quarter of 2014 was 0.5% (as opposed to analyst expectations of 0.6%) and the full year figure was 2.6%, in line with the ONS prediction.
So what now for the Chancellor as he starts to prepare for the Budget on March 18th? On the one hand the UK is growing faster and recovering better than any other major economy. On the other, there are worrying clouds on the horizon. The victory of the left-wing, anti-austerity party Syriza in the Greek elections has created more confusion in European economies already threatened by deflation and about to embark on a massive quantitative easing programme. Some of the latest data coming out of the US is not encouraging – and there’s the perennial problem of a possible escalation in the simmering Russia-Ukraine dispute.
As the Chancellor himself said in December, the UK cannot be immune to what is happening in the rest of the world. But there’s an election to win – and who knows, if David Cameron’s performance doesn’t inspire the Tory backbenchers, possibly even a move next door…
So George Osborne faces a difficult balancing act in the Budget: he must seek to keep the country on course for recovery – and try to win an election.
There are two themes that may well run through his speech. Firstly, he may seek to address the North-South divide. Osborne is after all, the MP for Tatton, in Cheshire. He has already made moves in this direction with the ‘northern powerhouse’ initiative in the Autumn Statement, but expect him to go further.
In mid-January the Independent quoted a Centre for Cities report, stating for every 12 private sector jobs created in the South East, one was lost in the North. The South East, it said, was continuing to suck in jobs, investment and talent. So there will undoubtedly be plans to boost infrastructure in the North, alongside those already announced for the HS2 rail line.
We should also expect to see moves to promote the manufacturing sector. There may have been growth in the UK in the fourth quarter, but it was wholly reliant on the service sector, which grew by 0.8%. In a blow to George Osborne’s desire to rebalance the economy, construction output shrank by 1.8% and manufacturing fell by 0.1%. As the chief economist at the Engineering Employers Federation said, “The UK has an enviable performance compared with most other developed economies, but there was some notable weakening, not least in parts of manufacturing, through the second half of 2014.”
Not only the Budget, but the next three months of election campaigning will see business growth, investment and job creation as themes very much to the fore.
What will apparently not be to the fore is pre-election giveaways. “Anyone expecting unaffordable giveaways will be disappointed,” the Chancellor told a House of Commons cross-party committee. “We will stay on course for prosperity.”
That said, George Osborne does have some scope for generosity: the falling cost of borrowing will cut the UK debt interest bill by more than £30bn by 2019 – giving the Chancellor scope for reducing tax bills, or the chance to reduce the scale of the planned departmental cuts. “Lower borrowing costs will allow the Chancellor to take some of the squeeze off departmental budgets and it will insulate him against further bad news on falling tax receipts,” said Jamie Murray, senior economist at Bloomberg Intelligence and a former analyst at the Office for Budget Responsibility.
One measure we are likely to see in the Budget is tax cuts for the oil and gas industry. This is ostensibly being done to offset the fall in global oil prices – but the Chancellor will take the chance to point out that a ‘yes’ vote in the referendum would have left an independent Scotland highly vulnerable to the recent fall in oil prices.
The Budget will take place a little over five weeks from now – and less than two months before the General Election. We can expect to see plenty of claims and counter-claims in the run up to March 18th, but our belief is that George Osborne will – above all – want to be seen as a highly competent Chancellor who has led Britain’s recovery from the global economic crisis. There will be plenty of figures and a good deal of pre-election rhetoric, but we expect the overarching message on March 18th to be that, ‘Britain will stay on course for a sustainable recovery.’
Sources: Reduction in cost of borrowing http://www.telegraph.co.uk/finance/economics/11383171/Britain-nets-30bn-as-borrowing-costs-fall-that-could-fund-pre-election-giveaways.html, Budget surplus to fund tax cuts http://www.theguardian.com/politics/2015/jan/08/george-osborne-budget-surplus-cut-taxes-2020 tax cuts for oil and gas industry, http://www.theguardian.com/politics/2015/jan/20/george-osborne-tax-cuts-oil-gas-industry-budget-united-kingdom-independent-scotland