Economics focus: What kind of Budget can we expect?

On 18 March, George Osborne will deliver the final Budget of
this parliament and, depending on what happens a few weeks later on 7 May, possibly his final Budget as chancellor. Will he go out with a bang or a whimper?

There is a convention, which is not always observed, that Budgets immediately before general elections are holding operations, housekeeping exercises rather than bold fiscal moves. Alistair Darling’s March 2010 Budget was a textbook example. There were some modest measures, mainly around the housing market, but not too much else. Labour had begun the task of repairing the public finances and did not want to be accused of resorting to unaffordable giveaways.

The convention of housekeeping pre-election Budgets arises partly from the restricted parliamentary timetable. There is no time between a March Budget and an early May election to get a complicated Finance Bill through, not least because for much of the time MPs will be on the campaign trail. Modest measures can be nodded through, but controversial ones will struggle.

As I say, the convention is not always observed. Pre-election niceties did not prevent Nigel Lawson announcing a 2p cut in the basic rate of income tax in his March 1987 Budget, three months before the election that year, though he did hold back until the following year before reducing the top rate from 60% to 40%. The dilemma did not arise for a few years in the 1990s. Kenneth Clarke cut the basic rate of income tax twice in the run-up to the 1997 election; but at the time there was a single annual Budget in November, so he could not be accused of blatant pre-election sweeteners.

What about this time? The clearest messages Osborne wants to get over are that the economy is safe in his hands and that a Labour government would threaten his ‘hard-won stability’. That means two things: presenting a forecast that shows the recovery remains strong and is being accompanied by rising living standards; and demonstrating that – while there is work still to be done – his deficit reduction strategy remains on track. Neither should prevent the chancellor with any difficulties.

Forecasters suggest growth of at least 2.5% this year is in prospect and the sharp drop in inflation, alongside a recovery in earnings, is producing a decisive rise in disposable incomes. Consumer confidence is strong, as are households’ expectations about the economy and their own personal finances.

As for the deficit, I wrote last month about the importance of the January public finance data, and self-assessment proceeds. In the event, the numbers came through, though not quite in the way that was expected. Self-assessment receipts were indeed up, to £12.3bn, a rise of £1.7bn compared with January 2014. Some self-assessment receipts have yet to come through, though – 31 January was a Saturday – and the biggest improvement came from revisions to the figures for earlier months. Even so, with the running total for the first ten months of £74bn, £6bn down on the corresponding period of 2013/14, Osborne will be able to point to further progress on deficit reduction.

What about the detail of the Budget?

We know, not least because of the HSBC affair, that there will be action on tax avoidance and evasion. The Treasury insists it was planning action anyway, and it remains to be seen what will happen. Danny Alexander, the Liberal Democrat Treasury chief secretary, has talked about creating a new offence of ‘corporate failure to avoid preventing an economic crime’. Because the Budget will be fundamentally a political event, Osborne will be keen to show coalition action on tax avoidance and evasion.

Will there be tax cuts? The sharp fall in oil prices and the low inflation that has resulted should produce a medium-term improvement in the public finances, though on what scale it is difficult to say, without second guessing the Office for Budget Responsibility. That could, at the margin, reduce the need for spending cuts beyond the election, though the chancellor will still want to convey the message that the job is far from done.

Will he want to make a down payment on some of the pledges the Tories have made for the next parliament? The personal allowance is to rise from £10,000 to £10,600 in April and the higher rate threshold from £41,866 to £42,386. Osborne may want to announce yet higher figures for April 2016, to demonstrate that the target of £12,500 (for the personal allowance) can be achieved within the context of deficit reduction. The inheritance tax threshold, stuck since 2009 at £325,000 (£650,000 for couples), has been the subject of broad hints from David Cameron. Could Osborne start to put those hints into something more concrete?

What he will not want to do is go out with a whimper, just a few weeks before the election. The Tories need to reinvigorate their election campaign – so far the recovery is not showing through in a significant poll improvement for the party – and the Budget, though it would be wrong to overstate the impact of any Budget, may be integral to that.

Osborne will not want to be too flashy. His flashiest Budget was in 2012, when he cut the top rate of tax and hit pasties and caravans, and it came badly unstuck. He will not want to risk his reputation as a responsible custodian of the public finances.

He will not, as I say, want to do nothing either. Osborne is a political chancellor, and this will be a political Budget. For that reason if no other, it promises to be interesting.