Chancellor George Osborne will deliver his sixth Budget on March 18, with only weeks to go until an election that seems too close to call.
Economists have therefore predicted that ‘blockbuster’ announcements would be thin on the ground and Mr Osborne would focus on pre-election giveaways and outlining intended policies if the Conservatives remained in power.
Stewart Robertson, senior economist for UK and Europe at Aviva Investors, said: “This Budget could be much more political than economic in the same way that the Autumn Statement was, because it is leading into what is projected to be a very tight election.”
Mr Robertson said the Budget “is not likely to move the dial economically”, but would instead be mostly populated with “headline-grabbing” policies that would be targeted towards increasing support for the Conservatives at the general election.
Anna Stupnytska, global economist at Fidelity Worldwide Investments, agreed that any pre-election policies would “not have a lot of macroeconomic impact”, and that the Budget would be broadly “neutral” without any major changes.
Ms Stupnytska said the focus of the market would remain on the election in May and that investors were likely to look past the Budget.
However, Mr Osborne and the Office for Budget Responsibility (OBR) are expected to announce upgrades to the OBR’s forecasts for economic growth and the Budget deficit, as well as a reduction in inflation expectations.
Since the previous forecasts for growth, inflation and the fiscal situation were made in the Autumn Statement, the falling price of oil has led to widespread revisions to expectations.
The fall in the oil price has not only resulted in a rise in growth expectations – as lower fuel costs are expected to boost consumers’ disposable income and therefore increase spending – but in reducing inflation it has meant the country is experiencing real wage growth for the first time in years.
Azad Zangana, senior European economist and strategist at Schroders, said even if Mr Osborne and the OBR move their forecasts into line with current consensus, then that would result in an improved picture than the one presented in the Autumn Statement. The current official forecast, delivered in December, was for the UK to grow by 2.4 per cent in 2015, but consensus expectations had moved up to 2.6 per cent, Ms Stupnytska said.
But Mr Robertson said an improvement in the forecast for the UK’s fiscal deficit, from around 4.5 per cent down to roughly 4 per cent, would be welcome but “is not hugely noteworthy” yet.
Mr Zangana said the improved forecasts could be “purely because of the oil price”.
But the higher growth and lower inflation meant the outlook for the UK would be rosier and would give Mr Osborne the flexibility to announce some spending increases or tax cuts.
The chancellor is widely expected to raise the tax-free allowance – the point at which people start paying tax – up to £11,500 and he may also increase the level at which the 40 per cent rate of tax kicks in.
The economists said that while Mr Osborne had become known for pulling ‘a rabbit out of his hat’ with a surprise blockbuster announcement, they could not see what sort of thing he could reveal that would make much economic impact.
POTENTIAL BUDGET POLICIES
Raising tax-free allowance and 40% tax threshold
George Osborne is widely reported to be set to raise the minimum level at which people start paying national insurance, which will effectively result in a
tax cut for every taxpayer. The government may also raise the threshold at which people start paying 40 per cent tax, which has been a key demand from core Conservative voters.
‘Google tax’
More correctly termed the Diverted Profits Tax, the legislation dubbed the ‘Google tax’ is designed to close loopholes in the tax system. The tax should ensure multinational companies that generate large amounts of profit in the UK, actually pay tax on that profit rather than diverting it through tax havens. It would be very popular but hard to implement.
Increased homebuilding
The shortage of affordable homes has been a burning political topic for some time, and Schroders’ European economist Azad Zangana said he expected Mr Osborne to introduce new measures to help tackle the issue. Rather than providing direct support to help people on to the housing ladder, Mr Zangana said Mr Osborne would instead try to stimulate housebuilding.
Allowing pensioners to cash out annuities
This is likely to be more of an intended policy than anything concrete, but it has been reported that the government is looking into giving pensioners the option of cashing out their annuity or changing the terms of it. It is likely to appeal to the ‘grey vote’ – the biggest electoral influence in the country – but actual legislation on the issue is a long way off.
Support for technology start-up companies
Most Budgets under the current government have contained some measures to boost start-up companies and Mr Zangana expects further such measures this week. The idea has been lent added weight by the news in Investment Adviser earlier this month that government officials have been talking to Neil Woodford, as the manager prepares to launch an investment trust with a skew towards small companies.
