InvestmentsMar 17 2014

Low-key Budget expected from ‘hamstrung’ chancellor

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The chancellor is set to deliver the Budget on Wednesday from Westminster, but economists say the statement will not be peppered with tax giveaways and other incentives, unlike previous Budgets.

Last year, the chancellor raised the income tax threshold to £10,000 a year earlier than planned, and also outlined the Help to Buy Scheme aimed at supporting first-time buyers onto the property ladder.

However, economists expect a low-key affair this year as the chancellor seeks to cement his position as the man who is leading the economy to recovery.

Ian Kernohan, economist at Royal London Asset Management, said any announcement would sound more impressive than it would be in reality.

“George Osborne doesn’t have more room for manoeuvre, but the government is facing an election in just over 12 months’ time,” he said.

“There may be a few headline-grabbing measures – such as something on the tax side, or raising the income tax threshold further – that sound quite big when presented in the media but don’t add up to much.”

Mr Kernohan said that while Mr Osborne has succeeded in reducing the country’s budget deficit, it remains at more than 6 per cent of GDP – roughly £111bn – which he described as “one of the highest in the western world”.

“Growth is improving and the deficit is coming down, but we have had four years of austerity, and the pace [of budget deficit reduction] compared to other countries has been quite modest,” he said.

The economist added that Mr Osborne “[does] not have much to play with”, given his initial plan when elected was to rid the country of the deficit by the end of the Parliament.

“In 2010, the plan was by the end of the Parliament to balance the books, but that has been postponed,” he said.

Stewart Robertson, economist at Aviva Investors, said the chancellor would “not take any risks”.

“It will be a steady-as-she-goes Budget, with no large spending or important tax decisions. I don’t think they will go down the pre-election route now in terms of announcing giveaways,” he said.

Mr Robertson said he thought there may be small tax breaks or modest policy changes, but mostly it will be “implicit promises” around further reducing the budget deficit.

“The budget deficit was 11-12 per cent of GDP and now it is closer to 7 per cent, so we have several more years of [austerity] to come.”

Simon Ward, chief economist at Henderson Global Investors, said the recent data showing the state of public finances was “not really as good as one might have hoped”.

“The chancellor does seem to be constrained in what he can do,” Mr Ward said.

“The public sector borrowing numbers outlined in the forecast by the Office for Budget Responsibility (OBR) in December looked about right.

“The figures have not been any better than expected, in spite of the economy outperforming the OBR forecast for economic growth, which is a bit disappointing.”

Mr Ward said the fact the budget deficit has not been meaningfully reduced means it will be “difficult” for Mr Osborne to announce “anything significant”. He said the chancellor would just “play up the improving economy rather than try to pull a rabbit out of the hat”.

However, he conceded that tax receipts often lag economic growth, and that these may have improved but not yet visibly in data.

Can the deficit be eradicated?

T

he OBR produced a relatively positive outlook in its Economic and Fiscal Outlook Report in December 2013, predicting a pick-up in GDP growth and anticipating that the output gap – the difference in actual and potential GDP – would narrow.

But it highlighted that the level of potential output in the third quarter of 2013 was roughly 12 per cent below the level the Treasury’s March 2008 Budget forecast, with the difference widening to more than 15 per cent by the first quarter of 2019.

“This reflects our view that much of the loss of productivity over the recession was structural and will not return even as the economy recovers and the financial system returns to full health,” the report said.

“Since it is difficult to explain the abrupt fall and persistent weakness of productivity in the past, it is also hard to judge when or if productivity growth will return to the rate consistent with historical trends.”

This could be a major hurdle for George Osborne (pictured), or any future chancellor. To remove the deficit, the economy needs to grow and create an environment where more is being earned than spent. But if the OBR thinks the economy has fundamentally changed since the crisis, there might be a question mark as to how exactly one rids the country of debt.